ANNUAL REPORT 2018
A
GovernanceFinancial StatementsStrategic ReportOverview INTERSERVE IS ONE OF THE WORLD’S FOREMOST SUPPORT
SERVICES, CONSTRUCTION AND EQUIPMENT COMPANIES.
WE OFFER ADVICE, DESIGN, CONSTRUCTION, EQUIPMENT,
FACILITIES MANAGEMENT AND FRONTLINE SERVICES TO PUBLIC
AND PRIVATE-SECTOR CLIENTS IN MORE THAN 40 COUNTRIES.
WE ARE A LEADER IN DEVELOPING AND DELIVERING DESIRABLE
OUTCOMES FOR OUR CLIENTS AND A GREAT PLACE TO WORK
FOR OUR PEOPLE.
HEADQUARTERED IN THE UK AND FTSE LISTED, WE HAVE
CONSOLIDATED REVENUES OF £2.9 BILLION AND A WORKFORCE
OF MORE THAN 68,000 PEOPLE WORLDWIDE.
Contents
Overview
Strategic Report
Governance
Financial Statements
Who we are
Our proud history
Chairman’s statement
02
04
06
Strategic objectives
Fit for Growth
Divisional strategies
Chief Executive Officer’s statement 08
Business model
Results in summary
Our markets
12
13
What we have achieved
Performance
Operational review
Principal risks and uncertainties
Financial review
Board of directors
Advisers
Corporate governance
Audit Committee report
Directors’ remuneration report
Directors’ report
42
43
44
52
58
80
Directors’ responsibility statement 87
16
17
18
19
20
22
24
31
35
Independent auditor’s report
88
Consolidated financial statements 100
Notes to the consolidated
financial statements
Company financial statements
Notes to the Company
financial statements
Related undertakings
Five-year analysis
Shareholder information
106
159
161
175
181
183
The purpose of this report
This Annual Report and Accounts provides shareholders and interested parties with an insight
into how we create value. It contains details on our Company, strategy, markets and how we
manage risk, as well as a comprehensive report on the Company’s activities this financial year.
FOR FURTHER INVESTOR
INFORMATION:
www.interserve.com/investors
0101
GovernanceFinancial StatementsStrategic ReportOverview OVERVIEW
Who we are
230
Offices
worldwide
BUSINESSES BY OPERATING PROFIT*
SUPPORT
SERVICES
EQUIPMENT
SERVICES
CONSTRUCTION
51%
35%
14%
* Excluding non-underlying
02
7,500
Clients
3
Core
business lines:
SUPPORT SERVICES,
CONSTRUCTION &
EQUIPMENT SERVICES
150
Services
68,380
Employees
03
GovernanceFinancial StatementsStrategic ReportOverview Our proud history
OUR HISTORY
Interserve’s origins date back to 1884 when brothers Edmund and
Augustus Hughes formed London and Tilbury Lighterage Company
Limited, which specialised in transferring cargo between vessels.
At the beginning of the 20th century the Company launched a
successful dredging business, securing a contract from the Port of
London.
Between 1930 and 1950, the business diversified by moving into
waste disposal and purchasing a civil engineering firm. Further
growth occurred after the Company bought a construction and
engineering arm following the acquisition of RM Douglas Holdings,
which included expansion into the Middle East in the 1990s.
A further acquisition involved Kwikform, a UK market leader in
non-industrial access scaffolding, which was merged with RMD to
create RMD Kwikform.
In 2001 the Tilbury Group was renamed Interserve Plc and entered
the FTSE 250, transferring from the construction sector to Support
Services.
Interserve now employs 68,380 people worldwide who provide a
wide range of services to more than 7,500 clients.
04
OVERVIEW THE CHRISTIE PROTON BEAM THERAPY CENTRE CASE STUDY
Interserve has delivered the UK’s first NHS high-energy
Proton Beam Therapy Centre in the North West on time and
under budget.
The Christie NHS Foundation Trust was selected by the
Department of Health as one of two providers of the Proton
Beam Therapy (PBT) service. They worked in partnership with
Interserve, together with University College London Hospitals
NHS Trust to successfully deliver this scheme.
The state of the art 15,000m2 five-storey building includes:
three treatment rooms; a patient reception; consultation
rooms and public space. The building is designed to be future
proof with additional space for the Trust to grow into, along
with a dedicated research room for the University
of Manchester.
Patients have already begun receiving treatment at the PBT,
and once fully operational it will treat around 750 people
a year. This life-changing facility will also prevent families
from enduring expensive, stressful and potentially dangerous
travel abroad for treatment.
Though there are other centres internationally which offer
this treatment, the facility is the first high-energy NHS
facility in the UK. As such, we had no blueprint to follow,
so our team travelled extensively to learn from foreign
expertise so that the world-class facility could be delivered.
PBT is an advanced form of radiotherapy used for the
treatment of complex and hard-to-treat cancers in children
and adults. It uses a high-energy beam of protons rather than
high-energy X-rays to deliver a dose of radiotherapy. It directs
the radiation treatment to precisely where it is needed with
minimal damage to surrounding tissue.
To contain the radiation, the concrete walls are up to six
metres thick. The building incorporates 20,000m³ of concrete
and 1,700 tonnes of reinforcement, including steel bars up to
100mm in diameter. Through this, 10km of services pipework
has been carefully threaded. The concrete itself weighs
48,000 tonnes, the equivalent of two aircraft carriers.
The building is the first PBT Centre to target BREEAM excellent
rating. The contract built on our pre-existing relationship with
The Christie which dates back a decade. We are committed to
further collaborative working to deliver the new multi-tiered
carpark and fit-out of the PBT Outpatient facility.
George Franks, Managing Director of Interserve Construction,
said, “Our work on the Proton Beam Therapy Centre
underscores the close partnership we have established with
The Christie and our track record for delivering award-winning
and life-changing healthcare facilities across the UK.
“Our strategic focus is to create a sustainable, manageable
and profitable business based on construction, engineering
and infrastructure work and this project underscores that
commitment, particularly in the UK health sector.”
05
GovernanceFinancial StatementsStrategic ReportOverview Chairman’s statement
Glyn Barker
Chairman
FINANCIAL PERFORMANCE
The business has traded robustly in some challenging markets
and continued to win significant new contracts. This has been
achieved in an environment which is challenging for the sector and
particularly so for Interserve. The Fit for Growth programme is
delivering material cost savings and a simpler and more effective
business structure.
The Board remains focused on positioning the Group for long-
term, sustainable success. This means continuing the operational
progress we are making to put legacy issues behind us, particularly
in closing out and exiting the Energy from Waste business.
It also means reducing debt and putting a strong long-term
capital structure in place through the proposed Deleveraging Plan.
MANAGEMENT CHANGES
There were three senior management changes in the year, with
the departure of Robin O’Kelly, Director of Communications,
Yvonne Thomas, Managing Director Citizen Services and
Gordon Kew, UK Construction Director.
BOARD AND GOVERNANCE
The Company now runs through clear business structures and
accountabilities in its three operating divisions: Support Services,
Construction and Equipment Services.
Following the departure of Keith Ludeman from the Board in May,
Nick Salmon has taken on the chairmanship of the Remuneration
Committee. We also welcomed Nicholas Pollard as a non-executive
director to the Board in June. Dougie Sutherland also left the
Board in February 2019.
OUR PEOPLE
I have highlighted the challenges that the leadership team have
faced in recent months, but inevitably the impact of those
changes has been felt by people throughout the business. These
are difficult times for the Company and the sectors it operates
in. Dealing with these challenges will necessitate changes for all
staff. Across Interserve, our people have shown great resilience
and loyalty. They have embraced the need for change and I thank
them for this and their continued support.
My comments will cover the previous fiscal year and the first few
months of 2019 in view of the significant events which have taken
place in that period. The period has been the most difficult in
Interserve’s history since the Group was established in 1884.
The resulting stress and uncertainty have led to anxiety amongst
our staff, suppliers and customers and significant loss of value for
our shareholders from the fall in our share price. I would like to
thank them for their support during this challenging period.
Interserve remains one of the world’s foremost support services,
construction and equipment companies delivering a range of
services for our clients, helping them to improve their efficiency
and productivity. It is a business with a strong purpose, providing
important and valued services that enhance people’s lives on a
daily basis.
However, over the years, the business lost its operating and
financial discipline, became too federated and inefficient, lacked
a coherent approach and entered some businesses it shouldn’t
have done.
Debbie White and her management team have made excellent
progress over the last eighteen months addressing the problems.
The proposed Deleveraging Plan and the continuing progress of the
Fit for Growth programme are significant steps towards restoring
stability, future financial success and underlying resilience in
Interserve and to rebuilding trust with all our stakeholders.
I comment on each of these points in more detail below.
DELEVERAGING PLAN
The Board believes the Deleveraging Plan will provide Interserve
with a strong balance sheet and the platform to deliver on its
strategy. Agreeing the key commercial terms of the Deleveraging
Plan with our lenders, bonding providers and Pension Trustee was
a significant step forward in our plans to strengthen the balance
sheet. The Board believes that this agreement will secure a strong
future for Interserve. This proposal has been achieved following
a long period of intensive negotiation and has the support of our
financial stakeholders and UK Government. The Deleveraging Plan
is subject to approval by Interserve’s shareholders.
Its successful implementation is critical to the Interserve
Group’s future and all of its stakeholders. Without its successful
implementation there will be significant disruption to the business.
The Deleveraging Plan will, alongside our Fit for Growth
programme, place us in a strong position to deliver our strategy,
be competitive in the marketplace and provide a secure future for
the Interserve Group’s employees, customers and suppliers and
the Board recommends that shareholders vote in favour of it.
06
OVERVIEW LOOKING AHEAD
Following the challenges of 2017, this year has been about creating
a stable platform for the future growth of the Group. Major
progress has been made, but we recognise there is still much to
do, and the leadership remain focused on the job in hand.
Once again, I would like to thank our staff, customers and
suppliers for their support during this difficult period. I would also
like to express my appreciation to those shareholders and lenders
who have continued to support us.
The successful handover of all its remaining Energy from Waste
projects remains a core priority for the Group.
The proposed Deleveraging Plan will, if implemented, restore
financial resilience to our balance sheet, but the process of
rebuilding trust with, and value for, our shareholders is just
beginning.
Glyn Barker
Chairman
8 March 2019
INTERSERVE HELPING CMS DELIVER
Interserve has supported top international law firm,
CMS, since being awarded their property and facilities
management contract in 2013, including helping the firm
during its expansion following a major merger.
CMS, which won the coveted ‘Law Firm of the Year’ title in
the 2018 British Legal Awards, has 73 offices globally.
As CMS has grown, we have expanded our team to support
their needs. A total of 130 Interserve colleagues work across
CMS’s UK offices, and undertake roles ranging from client
reception, security, cleaning, building services and some
maintenance projects.
Because of Interserve’s expertise in national facilities
management contracts and focus on improving the customer
experience, the Company was uniquely placed to deliver
this contact.
the UK by revenue and the sixth largest in the world by lawyer
headcount. Preparing for the merger, the Interserve facilities
and property team worked closely with CMS to project manage
the on-boarding of three new UK locations in Reading, Sheffield
and Manchester, as well as two additional floors and a larger
client area at Cannon Place in London.
Chris Trim, Head of Outsourcing for CMS, said, “The
practicalities of delivering the merger just would not have
happened without you and your team’s help. So, a massive
thanks from CMS for the work that was undertaken by
Interserve.”
Iain Shorthose, Interserve’s Customer Experience Director,
said, “Our work with CMS illustrates how we view our clients
more as partners than as customers. We have worked with CMS
to meet their needs, ensuring there is a relentless focus on
delivering the best customer experience.
In 2017, CMS merged with Olswang LLP and Nabarro LLP to
create a new global firm with more than a thousand partners
and 5,000 lawyers, making it the sixth largest law firm in
“I believe this approach sets Interserve apart from our
competitors.”
07
GovernanceFinancial StatementsStrategic ReportOverview Chief Executive
Officer’s statement
Debbie White
Chief Executive Officer
Throughout 2018 and the early months of 2019 it has been an
extremely difficult time for Interserve and the Group has faced
an unprecedented level of challenges. However, it has also been
a period of considerable progress. The Group has benefited
enormously from its hard-working employees who are our
greatest source of competitive advantage, the depth of our client
relationships, the underlying business strategy, and the strong
support of our stakeholders.
Our most important priority remains the health and safety of our
employees. I am pleased to say the Group’s performance improved
in the year. While there will always be more that can be achieved
through ongoing actions, our Lost Time Injury Rate improved by
25 per cent falling to 0.98 in 2018.
Whilst the majority of my first 18 months as Chief Executive
Officer has been spent establishing the long-term financial stability
of the Group, I have had the opportunity to spend time visiting
our UK and international operations. There is a lot to be excited
about: it is very clear we have extremely strong delivery capability
and client relationships. Interserve has significant opportunities as
a best-in-class partner to the public and private sector, and we are
working with all stakeholders to put in place the right standards,
services, governance and financing to deliver a stronger future for
Interserve’s customers and our 68,000 people.
PROGRESS ON DELEVERAGING PLAN
On 6 February 2019, Interserve announced that the key
commercial terms of the proposed Deleveraging Plan, which the
directors believe will provide the Group with sufficient liquidity
to service its short-term cash obligations, create a strong balance
sheet and a competitive financial structure from which the Group
can improve its business and deliver on its long-term strategy.
The Deleveraging Plan is a consensual restructuring of Interserve,
which is urgently required to avoid a default in the existing
financing arrangements and to provide sufficient liquidity, cash
and bonding facilities to allow the Group to service short-term
obligations and secure a stable platform. Such a default, were it to
occur, would be expected to have material adverse consequences
for all stakeholders and, in particular, for existing shareholders.
The Board considers the Deleveraging Plan to be in the best
interests of the Group and its shareholders as a whole. The
Deleveraging Plan preserves fully the pre-emption rights of
existing shareholders. If shareholders take up their entitlements
in the equity raise their ownership will not be diluted.
The Board believes that the Deleveraging Plan will secure a strong
future for Interserve. This proposal has been achieved following
a long period of intensive negotiation and has the support
of our financial stakeholders and Government. Its successful
implementation is critical to Interserve’s future and all the
Company’s stakeholders. The Deleveraging Plan will, alongside our
Fit for Growth programme, place us in a strong position to deliver
our strategy, be competitive in the marketplace and provide a
secure future for the Interserve Group’s employees, customers and
suppliers.
The Deleveraging Plan will be subject to approval by Interserve’s
shareholders.
BUILDING A BETTER INTERSERVE – STRATEGIC PRIORITIES
Strategic review and transformation programme
In April 2018, Interserve announced that it had completed a
Group-wide strategic review and launched a strategic plan, based
on four priorities:
1. Fit for Growth – improving cost efficiency and effectiveness;
2. Strengthening Interserve’s competitive value proposition;
3. Standardising operational delivery; and
4. Developing its people and a consistent, ‘One Interserve’
culture.
PROGRESS AGAINST OUR FOUR STRATEGIC PRIORITIES
Fit for Growth
The three-phase Fit for Growth programme was designed to
ensure that the Group has the right strength, depth and level of
resources to consistently win and consistently deliver services for
our customers. The programme is delivering material cost savings
and a simpler and more effective business and operating structure.
The programme over delivered its target of £15 million savings by
33 per cent to £20 million in 2018 and is on track to deliver at least
£40-50 million annual benefit to Group performance by 2021.
Phases one and two of the programme have now been successfully
completed. An initial cost-out programme was undertaken in
late 2017 and a Group-wide organisational design project was
implemented in 2018 and completed in early 2019. In addition,
Interserve has focused on improving governance, key processes
and efficiency across the Group.
Phase three of the programme is about continuing to deliver on
our promises to achieve our savings targets for both cash and the
P&L. Key objectives include simplifying our technology, standards
and processes to improve efficiency as well as driving one way of
doing things across Interserve. Improving the performance of our
business and our culture remains a key priority across the Group.
Competitive value proposition
The Group’s second strategic priority is to have competitive
customer value propositions in each of the markets the Group
chooses to operate in. A key component of a competitive value
proposition is the strength of our balance sheet; our proposed
Deleveraging Plan will deliver us this.
Interserve is focused on bringing the depth of our expertise and
knowledge to its customers, enabling them to deliver strategic
goals. We have made progress toward achieving this objective,
such as in Support Services, developing our customer experience
08
OVERVIEW proposition to ensure we add value for our customers and we
have developed the interchange model to improve how our
rehabilitative companies support our service users. We also realise
that more needs to be done. There will be a greater focus on
where these propositions best meet the needs of Interserve’s
customers; a major aspect of this approach is the deepening
of relationships with our clients. We are moving away from our
traditional reliance on single-service operations to the provision of
a broader, deeper span of services which have an emphasis on the
formation of long-term relationships.
Operational delivery
In order to achieve this within Support Services, Interserve
has successfully reorganised its business teams to align to
the four focus segments of Government and Defence, Private
Sector, Communities and Citizen Services. The Group has also
completed a review of its service offerings to ensure that they
are appropriate for these customer segments and that it is best
positioned to offer and deliver consistent integrated facilities
management services. Interserve has started to wind down service
offerings that are not core to its future offering and will continue
to do this proactively and as contracts end. In UK Construction we
have developed a focused approach to the market which will be
rolled out during 2019.
One Interserve
Our Fit for Growth programme involves creating a One Interserve
culture. The aim of One Interserve is to enable our colleagues to work
and collaborate together to deliver better services for our customers.
One Interserve addresses the fact that historically Interserve was
fragmented and federalised, which frustrated the business’s ability
to develop and realise opportunities for growth. Unlocking these
aspects and building a common company culture is our fourth
strategic priority and will enable Interserve to bring the very best
of the Group’s capabilities and service expertise to customers in
its three sectors. A key component of the culture will be strong
governance and accountability.
The plan includes a focus on the self-delivery of services - which is
an important part of margin development and control.
A final aspect of One Interserve involves following a standard
approach to leadership, to performance management, to training
and development and to reward and recognition in order to
streamline the business and ensure we are in the best possible
shape to serve our customers.
The key to the delivery of the strategy and the business plan is
Interserve’s people. Our most recent staff survey elicited a strong
and positive engagement score of 72 per cent. More than 78 per cent
of our colleagues said that their manager cared about them, while
almost 80 per cent said that what they do matters. Action planning
around feedback is helping us drive continuous improvement.
2018 FINANCIAL RESULTS
Despite challenging market conditions, the directors believe that
Interserve has made significant operational progress in 2018.
Following the successful completion of the refinancing in April,
the business has traded robustly in some challenging markets and
continued to win significant new contracts. The Fit for Growth
programme is delivering material cost savings and a simpler and
more effective business structure.
The implementation of the Group’s strategy remains on track and
we have delivered a significantly improved operating profit up
9.7 per cent to £92.7 million, driven by cost savings and increased
margins. Net debt increased to £631.2 million and was within the
expected range of £625-650 million as revised in November. This
was driven by UK Construction, Energy from Waste outflows, non-
underlying charges and delayed payments on certain Middle East
projects.
Since 31 December 2018 the Group’s net debt position has
increased, partly in line with expected seasonality, but also as
a consequence of the recognition of costs associated with the
deleveraging transaction, a further deterioration in the Middle
East relating to receivables for Support Services and RMDK and
further working capital unwind in the construction business
which, in aggregate, represent a deterioration of approximately
£107 million above the expected increase in net debt due to
seasonality. These items, as well as an updated expectation
with respect to the Energy from Waste projects, have driven the
requirement for new liquidity within the Group and the lenders
agreeing to provide a further facility of £110 million as part of
the Deleveraging Plan. If the Deleveraging Plan is not passed on
15 March 2019, the Group will have an immediate working capital
shortfall, regardless of whether the lenders have demanded the
repayment of the Group’s borrowings under the Existing Cash
Financing Arrangements.
Our transformation programme is delivering strong operational
momentum. The Group has a future workload of £7.1 billion as
of 31 December 2018, with steady growth particularly in
Support Services.
The Board remains focused on positioning the Group for long-
term, sustainable success. This means continuing the operational
progress we are making to put legacy issues behind us, particularly
in closing out and exiting the Energy from Waste business.
The Group remains over-leveraged and the successful
implementation of the Deleveraging Plan is critical to our future.
The Board considers the Deleveraging Plan to be in the best
interests of Interserve and will preserve maximum value for
employees, pensioners, lenders, suppliers, customers and
shareholders. Alongside the Company-wide Fit for Growth
programme, it will provide a strong platform for Interserve’s
future growth.
09
GovernanceFinancial StatementsStrategic ReportOverview Chief Executive Officer’s statement continued
Whilst the order book for the International construction business,
particularly in Qatar, continues to be lower than expected,
the business secured a number of contract wins in the period,
particularly in the UAE where a strengthened oil price provides a
more favourable backdrop for this competitive market.
Equipment Services
Challenging market conditions in several of our core markets
through 2018 as well as supply-chain challenges have slowed
our overall rate of growth. Through 2018 we have seen the UK
construction sector hit by the uncertainty of the Brexit talks with
the consequence of investment and work on major infrastructure
projects being delayed. RMDK remains a highly profitable business
and has strengthened its competitive position during the period
with the roll-out of new product ranges in the UK.
ENERGY FROM WASTE
Interserve is continuing to pursue its strategy to exit from
unprofitable businesses as rapidly as possible. The construction of
all of our Energy from Waste projects was substantially completed
during 2018, but while the Company expects to fully exit its
Energy from Waste business during the first half of 2019, significant
uncertainty remains on the timing of those remaining projects.
Interserve continues to expect to benefit from significant further
insurance proceeds arising from these projects in 2019. The receipt
of further insurance income remains a key focus for the Group.
OUTLOOK
Interserve’s ability to deliver its strategy and business plan will be
significantly influenced by our ability to successfully implement the
Deleveraging Plan, thereby providing it with sufficient liquidity and
giving it a foundation for financial stability.
Interserve will continue to implement its multi-year Fit for Growth
programme and 2019 will be the second year of the overall
transformation programme. This will be a transitional year for
the three operational divisions as Interserve continues to focus
on exiting non-core areas and implementing the Group’s cost and
efficiency programme.
This year, through the outstanding expertise of our people, we will
continue to deliver projects safely and ensure that we are best placed
to serve our customers. The significant improvements we have made
as part of our Fit for Growth programme will ensure we continue to
make progress in 2019 with the transformation of Interserve.
Debbie White
Chief Executive Officer
8 March 2019
CONTRACT WINS
Despite challenging market conditions and concerns arising out
of our financial condition, we still continued to make progress
winning new work in the year. In our Support Services division we
secured the following contracts: AENA (£37 million), King George
Hospital (£35 million), Ministry of Justice (£25 million) and the
Foreign and Commonwealth Office (£67 million), among others.
In our Construction division major contracts included: Durham
University (£78 million), Liverpool Women’s NHS Foundation Trust
(£15 million) and Prince Charles Hospital, Merthyr (£25 million).
In our Equipment Services division, contract wins included: Royal
Atlantis Residences in Dubai (£5 million) and the Las Vegas Raiders
Stadium (£1 million).
DIVISIONAL PERFORMANCE
Considerable work has been put into focusing Interserve’s core
capabilities to create value for its customers. Following the strategic
review in 2018, the Company completed the streamlining of its
divisional structure from more than 40 to three divisions in
December 2018, replacing the federated entity that existed up until
the end of 2017. This reorganisation is helping us to be leaner and
better aligned to our customers, increasing leadership accountability
and importantly making Interserve even more competitive.
Support Services
Support Services UK delivered a robust performance over the
year as it continued to implement the Fit for Growth programme
and had excellent client retention in the UK. A decrease in
revenue was counterbalanced by increased margins and profits.
This included leveraging the Group-wide back office systems
and processes, implementing a clearly defined market strategy
leading to the divestment of non-core operations, exiting poorly
performing market sectors, increasing self-delivery, and laying
the foundations for greater operational standardisation across
the business. As we outlined in our 2017 Annual Report, we have
focused on cost reduction and stronger discipline on contract
management governance, helping us realise the benefits in 2018
and ensuring we enter 2019 with a solid platform for growth.
Revenue increased in target sectors following key contract
retentions, organic contract growth, and successful delivery of
key contract mobilisations. Interserve’s international support
services business was negatively impacted by a debtor balance
of £36 million by one of its clients.
Construction
2018 was a challenging year for our UK construction business with
a decrease in revenues being counterbalanced by higher margins.
Progress has been made in closing out some complex projects
and legacy accounts. We have successfully exited the London
Construction market as part of our strategy to focus on our core
sectors. Our regional building business, infrastructure business
and engineering services business all made solid returns, which
resulted in a return to profit for the division.
We continue to focus on core sectors and activities and ensure
that the risk profile of work that we take on is commensurate with
levels of return. Revenue is expected to fall in 2019 as some of the
larger legacy contracts complete and due to some of the wider
financial challenges the Group faced in 2018. Whilst we expect the
division to be a smaller business by revenue in 2019, we believe
it will be one which is more agile and capable of consistent profit
margins in line with industry norms going forward.
10
OVERVIEW BUILDING OUR HOME – INGENUITY HOUSE
Our new regional hub, Ingenuity House, showcases the very
best of what we can do.
In 2018, we moved 1,600 colleagues from four of our existing
offices in the region; having finished the construction of the
award-winning building. Complete with 1,350 workstations,
Ingenuity House is a highly-sustainable, energy efficient
12,000m2 building which demonstrates Interserve’s
construction and facilities management expertise.
Ingenuity House represents our drive to create a collaborative
and modern working environment for employees.
Sally Cabrini, Director of Transformation, IT and People,
said, “Our vision was to create a workplace that enables our
colleagues to work more closely together in a sustainable,
healthy and inspirational working environment. Ingenuity
House provides a working environment that is safe, vibrant,
and dynamic, that meets the specific needs of the business.
“Ingenuity House reflects key aspects of our strategy, because
the work practices that the building supports will enable us to
strengthen our competitive value proposition and help us foster
our One Interserve culture.”
Triangular on plan, Ingenuity House stands at 22m high
and is set over five storeys, with 3,000m2 floorplates around
the atrium which features the restaurant at the heart of the
space to enable colleagues and clients to meet, greet, gather
and work.
Specialists from across Interserve came together to
connect the various elements of Ingenuity House:
• Interserve Construction built the physical structure
• RMD Kwikform supplied the plant equipment for
ground works
• Site Services provided the eco cabins as temporary
offices for the project team
• Interserve Retail and Interiors created bespoke furniture
and joinery
• Interserve Support Services provided the onsite
catering, cleaning and security and are now operationally
managing the building
• Our IT teams put in place infrastructure and network
technology supporting our colleagues in smarter working
• BREEAM Excellent rating achieved.
11
GovernanceFinancial StatementsStrategic ReportOverview Results in summary
CONSOLIDATED REVENUE
LOSS BEFORE TAX
2018
2017
£2,904.0m
£3,250.8m
2018
£(111.3)m
2017
£(244.4)m
CASH GENERATED BY OPERATIONS -
ONGOING BUSINESS
UNDERLYING EBITDA1
2018
£11.3m
2017
£32.9m
2018
£134.5m
2017
£125.7m
FUTURE ORDER BOOK
HEADLINE EARNINGS PER SHARE 2
2018
£7.1bn
2017
£7.6bn
2018
1.1p
2017
35.6p
1 Underlying EBITDA comprises underlying operating profit for 2018 of £92.7 million (2017: £84.5 million) plus depreciation and amortisation for 2018 of £41.8 million (2017: £41.2 million).
2 See note 11 for calculation of earnings per share.
2017 comparatives as restated
12
OVERVIEW Our markets
WHAT WE DO
SUPPORT SERVICES
MARKET THEMES
• The management and delivery of outsourced
• The UK outsourced FM market was £90 billion in 2017 and we expect
operational activities across a range of sectors
in both public and private markets
fastest areas of growth to be in bundled and total FM services
• The outsourcing market continues to grow at around two per cent
• Provision of citizen services in the Justice, Health
per annum
and Training and Employment sectors
• Our UK Government outsourcing contracts are exceptionally well
• Services provided in the UK and the Middle East
developed
• Growth opportunities in the Justice market from prison renewal and
privatisation, together with the retendering of second generation
probation (Community Rehabilitation Company) contracts
• Training and employment opportunities resulting from
Apprenticeship Levy
CONSTRUCTION
• Provision of advice, design, construction and fit-out
• Fragmented market
services for buildings and infrastructure across a range
of sectors in both public and private markets
• Focused on creating and maintaining long-term
relationships and delivering repeat business through
lower risk commercial structures such as frameworks
• Infrastructure and private housing are forecast to grow faster
than the market as a whole
• Infrastructure market driven by the structural growth in global
infrastructure spend
EQUIPMENT SERVICES
• Provision of engineering solutions for the construction
industry in the specialist field of temporary structures,
i.e. formwork, falsework and shoring
• Operating in over 20 countries around the world
• Global presence in infrastructure and buildings markets
• Short-term headwinds from project delays in key markets and
increasing regional and local competition
• Interserve’s subsidiary, RMDK, is a global market leader, whose
markets are driven by growth in infrastructure and buildings sectors
13
GovernanceFinancial StatementsStrategic ReportOverview OVERVIEW
VISUALISING HOW TO
CREATE A VENTILATION FACILITY
Interserve’s global formwork, falsework and ground shoring
solutions business has helped build a multi-million pound
ventilation system for a section of the M4 motorway near
Sydney, south eastern Australia.
Interserve’s equipment business, RMD Kwikform, was hired
to support work on the Parramatta Road Ventilation Facility
(PRVF), a project that will provide tunnel ventilation for
WestConnex, the country’s largest road infrastructure scheme.
Due to the stringent timescales and the project’s logistical
complexity, RMD Kwikform worked closely with the main
contractor to provide a formwork and shoring solution that
would allow for the safe and efficient construction of the
PRVF’s suspended concrete slabs and beams. Using LocusEye,
an in-house designed visualisation software, RMD Kwikform
generated highly realistic 3D rendered models of the temporary
works solution. This meant that the client was able to visualise,
interrogate and truly understand the solution in order to drive
productivity gains during construction.
1414
14
The structure has a series of suspended concrete slabs and
beams, varying in depth from 300mm to 1,700mm throughout
the 50m deep shaft and 20m above ground level. The initial
suspended slab varies to a maximum height of up to 19m.
Due to the depths of the concrete slabs, the client required
a solution that would withstand high loads, which is why RMD
Kwikform’s Rapidshor shoring was selected as a preferred
solution.
Robert Novak, Senior Account Manager at RMD Kwikform,
said, “This was an incredible project to be involved in and
really highlights the quality of our products, our engineering
expertise and digital capabilities. With each facet combined,
we ensured the site team remained safe, efficient, and the
project remained on schedule.”
1515
GovernanceFinancial StatementsStrategic ReportOverview STRATEGIC REPORT
INTERSERVE HAS DEVELOPED
A COHERENT AND CONSISTENT
FOUR-POINT STRATEGY TO DRIVE THE
OVERALL DIRECTION OF THE BUSINESS:
DEFINE AND
DELIVER A VALUE
PROPOSITION
FOR CUSTOMERS,
focused on growth in
markets where Interserve
is best placed to
win business.
STANDARDISE
OPERATIONAL
DELIVERY,
with increased
self-delivery where
appropriate, to increase
efficiency and reduce
operational risk.
DELIVER THE FIT
FOR GROWTH
TRANSFORMATION PLAN,
expected to deliver at
least £40-50 million annual
benefit to Group operating
profit by 2020.
DEVELOP A
ONE INTERSERVE
CULTURE AND
APPROACH,
creating a strong sense
of ownership and openness
to change and a compelling
proposition to attract
the best talent in
the market.
1616
Fit for Growth
The Company launched the Fit for Growth programme in 2018, a Group-wide initiative that has the objective of laying the foundations
for the Company’s future growth.
Fit for Growth is underpinned by strong governance, reporting and auditing practices. Our good governance practices mean the
Company can provide a high level of assurance to our customers and investor community that we are achieving our objectives.
The first half of the year was an important period for Interserve as the new management team took actions to bring stability to the
business and agree the direction of the Company’s future strategy. The Fit for Growth initiatives we are implementing are delivering
material cost savings and will result in a simpler, more focused and more effective Interserve. The refinancing we completed in
April 2018 provides a firmer financial footing from which to execute these plans.
We now have a strategy that provides a clear direction, leveraging our areas of strength, where we can provide compelling customer
propositions, delivered with rigorous operational and financial discipline. While there remains significant work to do, we have energy and
momentum in the business as evidenced by new contract wins as we make further progress with the implementation of our strategy and
the Fit for Growth programme.
PHASE ONE:
rapid implementation of
‘quick win’ cost savings
initiatives
PHASE TWO:
significant restructure,
procurement savings and
other smaller initiatives
PHASE THREE:
Further organisation design
changes delivering savings
through investment in
technology and/or outsourcing
The aim of Fit for Growth is to create an efficient organisation equipped with the right structure to achieve long-term growth. Fit for
Growth underpins our approach towards stabilising the business, and consists of three phases.
Phases One and Two were successfully completed last year and have both over-achieved the required savings for our 2018 forecast. We had
targeted savings of £65 million but achieved £67 million.
FIT FOR GROWTH – WHAT WE HAVE DELIVERED SO FAR
Phase One consisted of:
• rapidly reducing headcount and vacant roles
• stopping all internal projects and non-critical discretionary spend
• strengthening our management processes and controls
• achieving savings through leveraging our purchasing activities
and negotiating improved deals with our suppliers.
Phase Two consisted of:
• removing more roles through changes of reporting lines
• removing functions duplicated across the business
• implementing stronger governance, controls and processes
• freezing recruitment.
We consolidated our property portfolio and introduced smaller
changes such as reducing our travel and simplifying our technology.
Fit for Growth was accompanied by a strong engagement plan
to ensure change was driven through all levels of the business.
Processes have also been implemented to ensure the risk of costs
creeping back into the organisation has been mitigated.
We firmly believe our current activities will deliver all of the
required target benefit by 2020.
FIT FOR GROWTH – MORE THAN JUST COST SAVINGS
Following a root and branch analysis of the business, we are
progressing well with delivery of a new organisational design that is
more efficient, has reduced overheads and offers improved working
practices and processes. As part of this process, we have simplified
the divisional structure and now – as described on page 18 – have
three divisions to carry forward our business.
We are creating an environment in which skilled and engaged
employees can thrive and we are focused on retaining and attracting
talented people who are motivated to deliver for the future.
Phase Three: One Interserve
The aim of Phase Three is to create a ‘One Interserve’ culture
while continuing to deliver savings. One Interserve’s aim is to
enable our colleagues to work and collaborate together to deliver
better services for our customers. One Interserve includes five
elements, which are:
Organisational design: savings created by a switch to Shared
Service Centres, process simplification, supplier rationalisation
and removal of divisional overheads.
Procurement: savings will continue through rebates and unit cost
reductions. Work is ongoing to shape our procurement operating
model for delivery in the second half of 2019.
Information technology: we have designed our IT strategy
which includes how we will embrace modern technology to help
us drive improvements in performance. Implementation of the
two-year strategy is progressing well as we continue to simplify
and standardise the current technology estate.
People and culture: our annual colleague survey – Your Voice –
was issued across the Company in December last year and elicited
a strong and positive engagement score of 72 per cent. More
than 78 per cent said they felt their manager cared about them
and almost 80 per cent said they feel like what they do matters.
Action planning around issues raised is underway so we can drive
improvements based on what our colleagues are telling us.
Strategy: each division is implementing our four strategic
objectives to deliver a solid platform for future profitable growth.
1717
GovernanceFinancial StatementsStrategic ReportOverview Divisional strategies
Considerable work has been put into focusing Interserve’s core offering. The Company now has three service divisions,
replacing the federated entity that existed up until the end of 2017.
CONSTRUCTION SERVICES
Provides advice, design,
construction and fit-out services
for buildings and infrastructure
across a range of sectors in both
the public and private markets in
the UK and the Middle East.
Construction Services strategy:
creating and maintaining long-
term relationships and delivering
repeat business through the
provision of lower risk commercial
structures such as frameworks
and project-financed schemes.
We offer design and construction
services to create whole-life,
sustainable solutions for building
and infrastructure projects.
SUPPORT SERVICES
Manages and delivers outsourced
operational activities, including
facilities management, citizen
services and training and
employment services, across
a range of sectors in both the
public and private markets,
predominantly in the UK and the
Middle East.
Support Services strategy:
has focused on the divestment
of non-core operations, exiting
poorly performing market
sectors, increasing self-delivery
and laying the foundations for
operational standardisation
across the business. Our work-
winning strategy has focused on
large complex integrated service
opportunities. We are seeing
steady growth in our bid pipeline,
particularly in the defence,
healthcare and regulated sectors.
EQUIPMENT SERVICES
RMD Kwikform (RMDK) provides
engineering solutions in the
specialist field of temporary
structures needed to deliver
major infrastructure and building
projects. RMDK designs, hires
and sells formwork, falsework
and shoring solutions to the
construction industry. It is one of
the global market leaders and its
engineers solve complex problems
for customers through the
application of world-class design
and logistics capabilities, backed
by technology and an extensive
fleet of specialist equipment.
RMDK’s markets are driven by
the structural growth in global
infrastructure spend.
Equipment Services strategy:
to develop and maintain activities
that have a broad geographic
spread, and to combine our scale
and expertise with agility and
responsiveness so that we can meet
our customers’ needs and safeguard
our operational efficiency.
JOINT VENTURE GETS UNIVERSITY HONOURS
Interserve is delivering a total facilities management service
to the University of Sussex as part of a joint venture that is
recognised as the largest of its kind in higher education.
Sussex Estates and Facilities (SEF) LLP is a pioneering
partnership between the University of Sussex and Interserve
that has achieved considerable successes during 2018.
The joint venture has grown significantly since being launched
three years ago, with an annual turnover of circa £35 million,
extending across 90 properties and stretching over 2.3 million
square feet in and around Brighton. It generates more than
1,500 service requests and a hundred cleaning audits per month.
A total of 280 full-time employees are involved in delivering the
services for the contract.
Tim Westlake, Chief Operating Officer at the University of
Sussex, said, “Our driving belief at the University of Sussex
is that our people are our greatest asset – and our Sussex Estates
and Facilities partnership perfectly embodies this.
“The entire team is dedicated to creating and maintaining a
high-quality estate and services.
“By continuing to work closely together on our unique campus,
we are focused on delivering the best possible student and
staff experience whilst meeting our ambitious goals around
environmental sustainability.”
1818
Dan Hore, SEF’s Partnership Director, said, “Our sole focus is to
deliver an excellent campus environment for students, staff and
the public. We do this by focusing on our customers’ needs and
aspirations, our people and the enabling processes – this allows us to
continually improve what we do while adding value for our client.
“What sets us apart from other service providers is the fact that
we are part of a genuine partnership with our customer. We
meet on a regular basis, setting and adhering to a joint strategy
and proactively considering how we can support each other –
rather than getting distracted by contractual details.”
Built-in savings to the contract over five years stands at
£1.8 million. In 2018 an agreement was made to earmark
£575,000 for SEF’s reactive maintenance budget, scrapping the
need to raise separate purchase orders for each job.
Dan said, “This is indicative of our approach. It’s created
substantial efficiencies and means the jobs that matter to our
customer are completed quickly. It also saves on administration
and ultimately helps build trust.
“It perfectly illustrates our partnership approach to FM,
an approach that marks us out from our competitors.”
STRATEGIC REPORT Business model
WHAT WE DO
Interserve provides world-class
support services, construction and
equipment services to private and
public clients in the UK and over
40 international markets.
We provide our clients with
innovative and compelling solutions
to complex challenges, delivered
with rigorous operational discipline.
This helps to create improved
customer and public services for
the end-user and adds value to
local economies.
EVERYTHING WE DO IS SHAPED BY OUR CORE VALUES
OUR VALUES
We listen and
encourage openness.
Whatever the task in
hand, everybody can
and should take pride
in a job well done.
We ask questions,
think differently, seek
solutions and create
ideas to support
our customers and
add value.
We strive to always
work in a safe and
sustainable way.
HOW WE CREATE VALUE
SUPPLY CHAIN
MANAGEMENT
We manage and work with our extensive
supply chain to ensure we get the best
value to meet our clients’ needs safely
and sustainably. We manage risk by
ensuring our supply chain complies with
our policies and consider the cost of
ownership, quality, service and delivery
when selecting our suppliers. We treat
our supply chain in a consistent manner
from selection to contract agreement
and ongoing management.
SYSTEMS
AND PROCESSES
Interserve’s proven expertise over many
years lies in the evolution of systems
and processes to maximise impact
and manage resources. Through the
innovative use of technology and thanks
to our years of experience, we are
constantly looking at ways to enhance
process management. As our case studies
illustrate, Interserve strives to improve
systems and processes in partnership
with our customers in order to deliver
the right result.
PROJECT MANAGEMENT
AND DELIVERY
We use proven programme management
tools and draw from our vast experience
of delivering complex projects for both
public and private-sector organisations.
This includes mobilising, transitioning
and transforming large-scale contracts
across a range of sectors.
We recognise the importance of using
proven systems to assure our readiness
for service commencement, allowing us
to deliver the best service possible to
our customers.
> See page 22 for our safety record
> See pages 14 and 15 – Visualising how
> See page 5 – Christie Proton Beam facility
to create a ventilation facility
1919
OUR EXPERTISEGovernanceFinancial StatementsStrategic ReportOverview
What we have achieved
Considerable progress has been made towards achieving the Company’s four strategic aims as outlined on page 16.
We have:
• refinanced the Group
• greatly simplified our previously federated structure, reducing it from more than 40 different business units to three:
Support Services; Construction and Equipment Services
• created efficient systems and management processes so performance can be constantly reviewed
• improved our safety performance
• worked towards an exit from unprofitable businesses, such as Energy from Waste
• listened to our customers, suppliers and employees to drive continuous improvement
• defined divisional strategies
• completed Phases One and Two of our Fit for Growth strategy
• delivered what we were contracted to deliver profitably.
ONE INTERSERVE
At Interserve our people are at the heart of our business. To ensure
that we can deliver on our promise to deliver the right solutions
for our customers at the right price and to help drive our Company
forward, we have developed a One Interserve culture. One
Interserve has the two-fold aim of making the Company a better
place to work while also ensuring we deliver the best possible
services to our customers and partners.
Objectives achieved in adopting a One Interserve culture during
2018 include:
• making improvements to our organisational design so it is more
efficient and effective
• improving how we plan and prioritise by adopting a clear strategy
which is delivered by adhering to consistent processes
• adopting strong governance and accountability
• adopting strong and clear management processes and
ensuring our leaders have good internal visibility
• consistent and robust reporting of operational performance
• implementing standard and effective review processes.
EXITED BUSINESSES
Interserve is delivering on its strategy to exit from unprofitable
businesses. The construction of all of our Energy from Waste
projects – namely Derby, Dunbar, Margam and Templeborough –
was substantially completed during 2018. Dunbar has been handed
over, while Derby, Templeborough and Margam are operating and
generating energy and are in the final stages of commissioning.
While the Company expects to fully exit its Energy from Waste
business and to substantially complete its role in the construction
of each of the remaining projects by the first half of 2019,
significant uncertainty remains on the timing of completion of
commissioning of those remaining projects.
Earlier in the year, we also agreed the sale of Haymarket
development in Edinburgh for net proceeds of £47.0 million,
completing the exit from the property development business.
This has enabled the Company to give greater focus to our
core activities.
OUR PLANS FOR THE FUTURE
Interserve is now focused on core markets where we have
competitive advantages. This will help us to provide the best
service to our customers and drive the growth of the Company.
2020
STRATEGIC REPORT INTERSERVE HEALTHCARE DELIGHTS BEN’S MUM
Ben Uttley is one of several hundred people with complex care
needs currently being cared for by Interserve Healthcare’s
dedicated team of nurses and care staff.
The 27-year-old, from Burnley, has received round the clock
care managed by Interserve Healthcare for six years.
Interserve Healthcare currently supports 1,450 adult and
child patients. Services ranges from respite care through to
live-in support; from brain and spinal injuries care to tending
to clients with dementia; and from complex, round the clock
life-sustaining support to social care and companionship.
Ben has a range of clinical conditions including cerebral palsy
and sleep apnoea. The care he requires includes receiving
food and water via a tube, regular medicine and oxygen at
night, as well as general requirements, such as showering and
getting dressed.
A team of seven provide the care package, overseen by client
manager Hayley Connor. The team also take Ben out to social
activities, such as watching Burnley F.C., shopping, going to
the park, music lessons and karaoke.
Denise, Ben’s mum, said, “We’ve always been happy with the
care. I have no worries when I go off to work, even if Ben’s not
100 per cent we know he is in good hands – and that means so
much to us as parents.
“Ben needs stability, he will also let people know when he
doesn’t like them, and it takes him a while to build up a rapport.
However, his carers are absolutely fantastic. They have a really
close relationship with him and he likes all of them.”
Deb Cahill (pictured above), and Patrick Walls, who are both
senior healthcare assistants, are two of Ben’s daytime carers.
Patrick, who has been involved in the care industry for
27 years, said, “I really love working with Ben. All the staff have
different things they bring to the job, Ben is happiest getting out
of the house and we do that whenever possible. He is a people
watcher, and he loves going out to the football.”
Deb added, “I want joy out of what I do, and I get that working
with Ben. He interacts more with people he is used to, he really
likes getting out and nursery rhymes.”
2121
GovernanceFinancial StatementsStrategic ReportOverview Performance
KPIs
We use a scorecard 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
• The Group’s key behavioural goals, specifically regarding
substantial future workload and generating strong earnings
growth and cash conversion.
our employees and the health and safety of everyone working
both directly and indirectly for Interserve.
INVESTORS
HEADLINE EARNINGS PER SHARE1
FUTURE WORKLOAD2
CLIENT RETENTION
(UK Support Services)
2018
1.1p
2017
35.6p
REVENUE
RECOGNISED IN
2019 FROM FUTURE
WORKLOAD
£1,948m
2017
£2,229m
2018
97%
2017
82%
EMPLOYEES
ACCIDENT INCIDENT RATE3
EMPLOYEE ENGAGEMENT INDEX SCORE4
2018
82
2017
86
TARGET
HALVE THE RATE BY 2020
FROM A 2010 BASE OF 379
2018
72%
2016
75%
APPRENTICES
AND GRADUATES5
2018
868
2017
535
TRAINING
DAYS
2018
77,303
2017
82,713
1 See note 11 for calculation of earnings per share.
2 Future workload comprises forward orders and pipeline. Forward orders are those for which we have secured contracts in place and pipeline covers contracts for which we are in
bilateral negotiations and on which final terms are being agreed.
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 Figures for 2017 not available.
5 Number of apprentices, trainees and graduates on programme.
2222
STRATEGIC REPORT
ENVIRONMENT
Natural Capital
Water consumption (m3)
(relative metric: m3/£m)1
Construction waste (tonnes)
(relative metric: tonnes/£m)1
Total carbon emissions (tonnes CO2e)
(relative metric: tonnes CO2e/£m)1
1 £m revenue.
UK
ROW
Total
UK
ROW
Total
UK
ROW
Total
2018 Performance vs. 2013
Yr on Yr Change 2018 vs. 2017
Absolute
Relative
Absolute
Relative
8.9%
-2.5%
-2.1%
-39.7%
-56.4%
-53.5%
-23.6%
-21.0%
-21.6%
5.6%
27.4%
0.8%
-41.5%
-43.0%
-52.1%
-25.9%
3.2%
-19.2%
19.5%
-4.1%
-3.4%
-40.3%
-27.7%
-31.0%
-2.8%
-13.1%
-11.1%
35.4%
75%
-21.4%
-32.4%
31.8%
-13.3%
10.1%
58.6%
11.7%
We recognise the natural environment plays a significant role
in the economy and society. Our approach to managing natural
capital includes minimising our impacts, focusing on responsible
sourcing and improving resources efficiency, and protecting the
services the natural environment provides.
The following key environmental issues are addressed through
our aim to generate a positive environmental impact as part of
our sustainability programme:
• Mitigating climate change through reducing carbon emissions
associated with our use of energy, fuel and travel.
• Waste management – generation, treatment and disposal.
• Water use and scarcity.
• Responsible sourcing and efficient use of natural resources.
During 2018 we have made considerable progress towards
achieving our aim of making a positive contribution through
both our own operations and those we undertake on behalf
of clients. This includes reducing our carbon emissions by
22 per cent (on an absolute basis over the past five years).
This has been driven primarily by a focus on fuel use in our
fleet and a focus on energy use across our estate and estate
transformation.
These performance metrics will be revisited as our strategy
evolves.
2323
GovernanceFinancial StatementsStrategic ReportOverview Operational review
The Operational Review refers to a number of alternative
performance metrics; it is considered that these better reflect
the underlying performance of the business. See note 32 to the
consolidated financial statements for the basis of calculation.
Additional disclosure is made in the Financial Review of non-
underlying items and why the directors believe it is appropriate
to exclude these in considering operating performance. Certain
comparatives are restated within these statements (see note 1).
SUPPORT SERVICES
Support Services focus on the management and delivery of facilities
management services for both public and private-sector clients in
the UK and internationally.
2018
2017
Change
launched by the new management team in October 2017 focused
on increasing the Group’s organisational efficiency and increased
ownership and accountability, improving Group-wide procurement
processes and ensuring greater standardisation and simplification
across the business. These actions contributed to a margin increase
of 30 per cent.
The UK Government has been our largest customer for many years,
and we continue to be one of its largest suppliers, retaining our
pan European contract with the Foreign and Commonwealth Office
which we have held for over 10 years. We have also successfully
mobilised key new accounts such as the UK-wide contracts for the
Department for Work and Pensions, the Department of Transport
and the Ministry of Justice (MOJ). These new and retained accounts
demonstrate the Government’s ongoing faith in our ability to
continue to mobilise and deliver large-scale contracts.
Results summary
Revenue
– UK
– International1
Contribution to total
operating profit
– UK
– International1
Operating margin
– UK
– International2
Future workload3
– UK
– International1
£1,597.7m £1,642.3m
£172.1m
£193.9m
-3%
-11%
£58.6m
£42.2m
+39%
£51.4m
£7.2m
£39.4m
£2.8m
+30%
+157%
We had major wins in our other key market sectors including a
large long-term multi-service contract with Barking, Havering and
Redbridge University Hospitals Trust, a full facilities management
contract with Westgate Shopping Alliance, a national facilities
management contract for Thomas Cook and major extensions to our
ongoing relationships with British Airways, Phillips 66/Pepsico and
the Metropolitan Police amongst others.
3.2%
4.2%
2.4%
1.4%
£5.8bn
£6.1bn
£168.0m
£225.0m
These figures exclude non-underlying items.
1 Including share of associates.
2 Operating margin is calculated based on the underlying operating margin of associates
and the reported operating margin of subsidiaries.
3 Future workload comprises forward orders and pipeline. Forward orders are those for
which we have secured contracts in place and pipeline covers contracts for which we
are in bilateral negotiations and on which final terms are being agreed.
UK
Support Services UK delivered a robust performance, successfully
delivering its plans for Fit for Growth, leveraging the Group-wide
back-office systems and processes, formulating and beginning the
implementation of a clearly defined market strategy leading to
the divestment of non-core operations, exiting poorly performing
market sectors, increasing self-delivery and laying the foundations
for operational standardisation across the business. As we outlined
in our 2017 Annual Report we have focused on cost reduction and
stronger discipline on contract management governance helping us
realise the benefits in 2018 and ensuring we enter 2019 on a sound
platform for growth.
Interserve’s Citizen Services delivers vocational training, healthcare
at home, probation services and support into employment in the UK
and Saudi Arabia (KSA). Quality standards have remained high during
2018 with Interserve Learning and Employment (ILE), Healthcare
and ILE International achieving “good” ratings from their respective
inspectorates. Our Apprenticeship Levy business has achieved a
forward order book of £35 million, and in Healthcare we retained a
major client contract renewal against keen competition. In our Justice
division, we renegotiated our probation contracts with the MOJ, and
mobilised a new contract for prison industries in HMP Berwyn.
International
The oil price recovery earlier in the year has renewed enquiry levels
particularly in the UAE (Abu Dhabi); however, the political situation
in Qatar has prevented this from improving activity levels in this
market. We recorded reduced turnover because of the actions
taken previously to right size the business and diversify into other
industrial markets. As a result, the division delivered revenues of
£172.1 million and a total operating profit of £7.2 million.
With oil price levels above $60pb many of the oil companies have
made firm commitments to field development and/or enhancements
so the outlook is more promising.
Our Middle East facilities management businesses are now aligned
with our UK Support Services teams and have begun working closely
together to further develop our market strategies and capabilities,
leveraging our UK expertise and ensuring consistently high standards
of service delivery.
Revenue was £1,597.7 million, following key contract retentions,
organic contract growth, solid work winning and successful
delivery of key contract mobilisations. We divested ourselves of
our Industrial Access and Hard Services business and continued to
successfully deliver our planned withdrawal from the High Street
Retail market. We have concentrated our work-winning strategy
around large complex integrated service opportunities in our chosen
market sectors and are seeing steady growth in our bid pipeline
particularly in Defence, Healthcare and Regulated Sectors.
Savings of £20 million were achieved through Fit for Growth across
Support Services and Construction. The three-year programme
During 2018, we were pleased to secure a number of new awards
including an integrated facilities management services contract for
the prestigious five-star Serenia Residences on the Palm, Jumeirah,
technical maintenance services for the Qatar National Convention
Centre and their National Theatre, together with a mobile
maintenance service account for Alshaya, a leading retailer, for
all of their retail stores in the UAE and Qatar.
We continue to enjoy strong sales pipeline opportunities in the UAE
and KSA and remain optimistic that our focus on the region, increasing
capabilities and customer satisfaction will lead to an ever increasing
presence in the Middle East faculties management (FM) market.
2424
STRATEGIC REPORT EQUIPMENT SERVICES
Equipment Services, which trades globally as RMD Kwikform
(RMDK), provides engineering solutions in the specialist field of
temporary structures needed to deliver major infrastructure and
building projects. It is a global market leader and our engineers
solve complex problems for our customers, through the application
of world-class design and logistics capabilities, backed up by
technology and an extensive fleet of specialist equipment. Our
activities have a broad geographic spread, the mix of which can
change quickly, hence we manage our equipment fleet globally,
combining our scale and expertise with agility and responsiveness to
meet customers’ needs and safeguard our operational efficiency.
Results summary
Revenue
– UK1
– International2
Contribution to total
operating profit
– UK1
– International2
Operating margin
– UK1
Results summary1
Revenue
Contribution to total
operating profit
2018
2017
Change
– International3
£195.5m
£229.0m
£39.6m
£54.4m
-15%
-27%
Future workload
– UK1
– International2
1 Excludes Exited Business.
2 Includes share of associates.
2018
2017
Change
£756.6m
£972.8m
£246.6m
£290.5m
-22%
-15%
£15.5m
£8.9m
£2.2m
(£10.3m)
£13.3m
£19.2m
0.3%
5.4%
-1.1%
6.6%
£0.9bn
£1.0bn
£233.0m
£236.0m
Operating margin
20.3%
23.8%
1 Excludes Exited Business.
Challenging market conditions in several of our core markets
through 2018 have slowed our overall rate of growth.
Through 2018 we have seen the UK construction sector hit by the
uncertainty of the Brexit talks with the consequence of investment
and work on major infrastructure projects being delayed.
Across Asia-Pacific we have seen a strong recovery in our Australian
business, where we have won work across a significant spread
of sectors, including infrastructure and commercial building.
Hong Kong, which saw the completion of two huge infrastructure
projects in 2017, now awaits the mobilisation of the next wave of
infrastructure spending. The performance in the Middle East has
been hampered by the trade blockade placed on Qatar by other
GCC countries and delays to project announcements in KSA. The
UAE continues to be a strong market although due to weakening
of other Middle Eastern markets has become significantly more
competitive.
Our investment in ground shoring products continues, with a launch
into Hong Kong and the Middle East regions. Products landed in
country in the final quarter of 2018 and this continues to be a focus
of our expansion plans. The year also saw the RMDK exit Spain and
Panama, as a consequence of our recent strategic review.
The directors believe that the next 12 months will continue to see
the expansion of the ground shoring products into new markets,
and the further development of our product offering into the
commercial building sector which will help us reduce the impact of
project delays in the infrastructure sector.
CONSTRUCTION
We offer design 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-financed schemes.
Our presence in the Middle East (in UAE, Qatar and Oman) 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.
3 Operating margin is calculated based on the underlying operating margin of associates
and subsidiaries.
International
Construction in the Middle East continues to be impacted by
macroeconomic challenges and, in particular, the trade blockade
by surrounding GCC countries of Qatar, which has delayed contract
awards, created supply pressures and increased costs there. Our
construction business in the UAE had a strong second half and our
business in Oman continues to have a healthy forward workload.
In the UAE, we have successfully completed the refurbishment of
Jumeirah Beach Hotel for the Jumeirah Group, we have commenced
the construction of Leader Sports Mall (a dynamic new landmark in
Dubai worth circa £64 million) and recent contract awards include
repeat business with Easa Saleh Al Gurg for a residential project
to build 78 villas, a fitness centre, outdoor swimming pool, tennis
courts and community centre (circa £41 million). Development plans
such as Expo 2020 continue to drive growth.
In Oman, we have completed a successful fast-tracked 100-day
renovation of the Crowne Plaza in Muscat, including a remodelled
lobby, lounge and arrival area and a revamped all day-dining
restaurant and pool bar. We continue to make good progress on
our Liwa Plastics project, which is part funded with the support
of UK Export Finance. We have also seen our first win in Duqm to
deliver the civil works for the process units at the new refinery
(a flagship development in Oman) expanding our portfolio of
supporting international EPC contractors to deliver industrial
projects in the country.
In Qatar, we have completed the construction of Doha Festival
City (with our joint-venture partner). We continue to deliver a
£102-million contract to build a range of sub-stations across Doha
to further support development. Our interior fit-out business
continues to establish a good reputation and is being awarded
more repeat business. The trade blockade has, however, meant
that the building construction market has remained depressed
during 2018, although we expect preparations for the World Cup in
2022 to provide impetus and further opportunities going forward.
Our International Construction division remains a well-performing
business and our experience in the Middle East region continues to
stand us in good stead, with upcoming events such as Expo 2020
in Dubai and the ongoing need for infrastructure development
continuing to support work winning in 2019.
2525
GovernanceFinancial StatementsStrategic ReportOverview Operational review continued
UK
Interserve’s construction business offers design and construction
services to create whole-life solutions including client needs
analysis, business case support, design, construction and FM
(provided though Support Services), maintenance, remodel, refurb
and eventual demolition and estates planning sustainable solutions
for building and infrastructure projects.
The UK construction market, while benefiting from major
infrastructure improvements and housing investment, remains
volatile at a macro level from Brexit, resources and associated
headwinds but also construction confidence generally,
post-Carillion.
The construction business strategy to focus on low risk, principally
government assets and infrastructure is a partial hedge against
economic downturn, post Brexit. Growth in government
infrastructure is driven by policy and demographic changes
in the UK with expected long-term investments from the UK
Government in order to support economic growth as described
in the Government Construction Sector Deal. In addition, digital
technology and long-term trends in travel and freight are creating
demand for the construction of transport infrastructure such as
logistics centres and airports. Similarly, demographic changes are
expected to create demand for schools and universities as well as
medical services facilities. Across the sectors, there has been a
movement in recent years towards the increased use of modern
methods of construction, which offer faster, more reliable and
more efficient production.
The construction business’s focus is on forming long-term
relationships and delivering repeat business through commercial
structures such as framework agreements.
2018 was a better year for our UK Construction business despite
the ongoing period of challenging market conditions. Good
progress has been made in closing out some challenging projects
and legacy accounts. Our regional building business, infrastructure
business and engineering services business all made solid returns,
which resulted in a return to profit for the division.
We continue to focus on core sectors and activities and ensure
that the risk profile of work that we take on is commensurate with
levels of return. Revenue is expected to fall in 2019 as some of the
larger legacy contracts complete and also due partly to some of
the wider challenges the Group faced in 2018. Whilst we expect
the division to be a smaller business by revenue in 2019 it will be
capable of consistent profit margins in line with industry norms
and capable of steady growth going forward.
During the year we continued to focus on cost, pricing and bidding
controls, establishing a narrow strategic focus and restricting
work-winning activity to select sectors, regions and activities.
Our operating model continues to combine a strong regional
presence and exposure to framework agreements with
infrastructure and public-sector customers, in core sectors such as
the defence, education, healthcare and fit-out markets.
In the last 12 months, UK Construction has also secured further
new construction frameworks including the Department for Work
and Pensions, the Department of Education, Crown Commercial
(Government Property Unit Framework) and Welsh Government
Healthcare framework, adding to the existing portfolio of
customers.
This gives a combined forward opportunity pipeline in excess
of £1.2 billion per annum from which tender opportunities are
carefully selected through a PLC governed selection process.
Revenue is 70 per cent with public or arm’s length public bodies
aligned to the lower risk defensive strategy.
Plans are in place to improve organisational structure and
capability to support future profitability and performance and will
be rolled out in early 2019. Our focus remains on quality contracts,
targeting profits and not revenue.
ENERGY FROM WASTE
Revenue – UK Exited Business
(consolidated revenue)
2018
2017
£32.5m
£48.6m
Total pre-tax non-underlying loss
(£12.6m)
(£35.1m)
Further details relating to the Energy from Waste business are
included in the Financial Review on page 35.
FINANCIAL CONDUCT AUTHORITY INVESTIGATION UPDATE
As notified to the market on 11 May 2018, Interserve is the subject
of an investigation by the Enforcement Division of the Financial
Conduct Authority (FCA) in connection with the Company’s
handling of inside information and its market disclosures in
relation to its exited Energy from Waste business during the period
from 15 July 2016 to 20 February 2017.
The Company is co-operating fully with the investigation. As with
any regulatory investigation of this nature it is difficult to predict
when the investigation will be completed or its outcome. If the
FCA takes further action, members of the Group and/or their
current or former directors or employees could face regulatory or
compensatory sanctions, which could result in adverse publicity
and/or reputational damage and which could have a material
adverse effect on the Group’s business, results of operations and
financial condition.
OUR PEOPLE
Employee consultation and participation
We believe in involving our people in matters affecting them as
employees and keeping them informed of all relevant factors
concerning the Group’s performance, strategy, financial status,
charitable activities and other issues. We achieve this through
formal and informal briefings and via our internal communication
channels, including our intranet.
We continued to grow our web-based employee portal,
www.MyInterserve.com, specifically aimed at reaching our
thousands of frontline employees. The portal, which now has
around 25,000 regular users, is accessible on mobile devices,
giving staff access to e-pay slips, 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 also measure employee
engagement through our Your Voice Engagement Survey. In 2018 we
saw an overall engagement score of 72 per cent for the business.
We will work with our teams to act upon the results, demonstrating
that we have listened to their feedback. As part of our wider
workforce engagement the Board will meet a cross section of our
workforce twice a year with the opportunity for them to receive
feedback and to run question and answer sessions.
2626
STRATEGIC REPORT ALLAM MEDICAL BUILDING CASE STUDY
Interserve Construction built the stunning five-storey Allam
Medical Building at the University of Hull which was opened
by the Her Majesty the Queen in 2018.
The specialist medical teaching facility includes a full mock
ward, operating theatre and intensive care nursing areas.
It also boasts a large lecture theatre with a fully flexible
layout and collaborative working areas for researchers and
students, as well as fully-equipped meeting rooms.
The building, which represented a £19 million construction
cost and £25 million capital cost, was designed to attract and
develop students and staff who will shape the healthcare
workforce of the future.
In April 2018 the Allam Medical Building won the Buildings
that Inspire category at the Guardian University Awards.
John Gittins, Divisional Director at Interserve Construction
in Yorkshire and the North-East, said, “The building
has transformed the way the university teaches the next
generation of health professionals. It provides a collaborative
environment that enables doctors, nurses and midwives to
train together, preparing them more effectively for their
future careers.
“The Allam Medical Building neatly showcases Interserve
Construction’s strategy to create a sustainable, manageable
and profitable business based on construction, engineering and
infrastructure work in key sectors like health and education.”
The concrete framed building features innovative precast
concrete cladding panels which provide the building’s stunning
façade. Targeting BREEAM Very Good building standards, the
new building also incorporated sustainable design elements
such as green roofs.
We used 4D BIM technology, linking the construction
programme to the model so that progress at any given stage
could be viewed.
2727
GovernanceFinancial StatementsStrategic ReportOverview Operational review continued
Apprentices
Interserve continued to make a strong investment in its workforce
via its apprenticeship scheme during 2018 and invested £1.8 million
to support apprenticeship programme delivery. At any given time
during the year the Company had between 720-780 apprentices
undertaking a diverse range of programmes. Apprenticeships, a
key pillar of Interserve’s early career strategy, provided a range of
entry point roles to individuals taking their first step into careers
such as engineering, construction management, IT and finance.
Another aspect of the strategy included upskilling colleagues
already with the Company and unlocking opportunities for their
career progression.
Looking forward to 2019, Interserve will be focusing on creating
more apprenticeship entry points to attract those starting or
returning to the world of work to join the business and develop
their career.
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
be justifiable, on the grounds of gender (including sex, marital or
civil-partner status, gender reassignment), 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, training
or any other benefit will be taken solely on merit and 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.
Diversity and inclusion
Following our award of the National Equality Standard (NES)
for equality, diversity and inclusion in 2016, our work to develop
and promote equality, diversity and inclusion across the business
continues.
During the year Interserve worked with a variety of different
organisations that helped us put in place programmes and
practices that improve the diversity of our talent pipeline and
build our culture of inclusion. These include BITC (Business in the
Community), Investors in Diversity (IiD), The Prince’s Trust, WISE,
Ban the Box, Leonard Cheshire and Two Ticks (for disability).
The NES is the consolidating standard that binds all our activities
together and through their process will help our selection of
partner organisations moving forward.
At Interserve we are committed to creating a diverse and inclusive
workplace where all of our people feel at ease and can progress.
We take this commitment extremely seriously and have a range
of programmes underway and more initiatives planned to ensure
this happens.
We welcome the UK Government’s requirement for large companies
to be more transparent on gender pay and we have published our
data. The organisation is currently in the process of aligning all of
our central functions together under the One Interserve vision with
the aim to provide a more cohesive and joined-up approach to our
diversity and inclusion agenda, as well as opportunities to address
our gender balance and representation issues.
Due to having a multifaceted business, the entities we have
reported on display diverse statistics as the employees they
traditionally attract vary across the divisions. It should also be
noted that the Company-wide annual bonus scheme payments
that were awarded this year were delayed and therefore fell
outside of the ‘relevant bonus period’ (6 April 2017 – 5 April 2018).
As a result, the Company’s annual bonus payments were
not included in this year’s gender pay gap reporting figures.
The bonus data displayed throughout this year’s results relate to
the other local and smaller bonus arrangements that continue to
be awarded.
This year we have captured the wider picture, bringing together
all of the data from our divisional entities as part of our One
Interserve approach. Within the UK Interserve has a 51 per cent
– 49 per cent male-female split. These figures display a median
gender pay gap of 26.3 per cent and a median bonus gender pay
gap of 61.9 per cent.
The gender pay gap at Interserve highlights a gender balance
issue particularly in more senior roles and sectors traditionally
dominated by males, it is not an equal pay issue. The 61.9 per
cent median bonus gender pay gap is present due to the majority
of the payments made were to male operatives and engineers.
These roles attract a higher base salary than the roles where we
have paid bonuses to women in predominantly administrative and
cleaning roles. Where we made bonus payments to administrators
and cleaners, payments to men and women were comparable.
As previously mentioned, the Company-wide annual bonus scheme
payments fell outside of the ‘relevant bonus period’ this year. The
timing of these payments means that, as a Company, we will not
be able to compare on a like-for-like basis in regards to the One
Interserve bonus figures this year or next.
We are committed to redressing the balance. Our One Interserve
strategy will assist us as we drive the standardisation and
simplification of our talent processes across the Group and
leverage our expertise.
To improve the gender split of our talent pipeline during the year
we continued to audit recruitment and training practices across
the divisions to ensure they are free of bias and to seek equal
gender balance in general recruitment, apprentice and graduate
applications. We are also introducing measures to address gender
imbalances in those training for management roles and to ensure
that mentoring and coaching programmes are provided by trained
coaches who are sensitive to gender specific matters.
As at 31 December 2018, 27,078 of our global workforce of 50,278
were male and 23,200 were female.
2828
STRATEGIC REPORT Further information is provided in the table below.
Number of persons who were directors of the Company1
Number of persons who were senior managers of the Group2
Gender
Male
Female
2018
7
72
2017
7
98
2018
2017
2
5
2
8
Total
2018
9
77
Total
2017
9
106
Number of persons who were employees of the Group3
27,071
29,660
23,198
25,575
50,269
55,235
Total
27,078
29,765
23,200
25,585
50,278
55,350
1 Plc Board directors at year end.
2 Subsidiary directors and Persons Discharging Managerial Responsibility (PDMRs) at year end.
3 Employees of wholly-owned subsidiaries included within Group consolidation at year end, excluding senior managers.
HUMAN RIGHTS
We have a Group-wide Human Rights Policy, which is available to
download from our intranet. The policy states that the upholding
of human rights is wholly aligned with our values, and forms part
of our decision-making and the delivery of our strategy. As a large
employer with global operations, Interserve aims to make a positive
difference in the communities where we operate. This is the
intention behind our sustainability plan, designed to deliver social,
economic and environmental benefits. We respect internationally-
recognised human rights, aiming to work within the principles
set out by the UN Declaration of Human Rights as well as the
International Labour Organisation’s Declaration on Fundamental
Principles and Rights at Work, and work hard to ensure that in all
areas of interaction with our employees, clients, suppliers, third
parties, interviewees and joint-venture partners, everyone is
protected and treated fairly.
Our commitment means that we seek to identify, prevent or
mitigate potential human rights risks, and address any shortcomings
which actions within our control may have caused. In implementing
this policy we are subject to the laws of the many countries in
which we operate. We are committed to comply with all such
applicable laws. The policy sets out the core principles we respect
and promote and is a reference point for employees, suppliers,
sub-contractors, customers and joint-venture partners. These
principles apply to Group subsidiaries and joint ventures where we
have management control and will be championed and promoted
where we don’t. The principles are applied in conjunction with our
other policies on the ethical standards we expect in our business
activities, which include:
• Conducting Business with Interserve
• Health and Safety Policy
• Conflicts of Interest Policy
• Code of Conduct and Competition Law Compliance Policy
• Anti Bribery and Corruption Policy
• Fraud Policy
• Whistleblowing Policy
• Sustainable Procurement Policies
• Supplier Codes of Conduct
Our Human Rights Policy is supplemented by policies relating to
Modern Slavery and Business Practices, which are also available to
download from our intranet.
HEALTH AND SAFETY
Summary
Above all else, our number one value and priority is the health, safety
and well-being of our colleagues and contractors who work for us.
The Group’s health and safety performance improved in the year
with our Lost Time Injury Rate falling by 25 per cent from 1.3 in 2017
to 0.98. Our active health and well-being programme for 2018 has
been a great success, with the focused campaigns on musculoskeletal
disorders, healthy eating and mental heath and well-being achieving
over 375,000 hits on social media, and over 35,000 video views.
There is always more to be done with respect to colleagues’ health,
safety and well-being, and Interserve is committed fully to deliver a
continued and sustained year-on-year improvement.
Proactive approach
Interserve adopts a formal and proactive approach to the
management of health and safety throughout our operations.
To ensure Board-level visibility, an Executive Team member is
designated as Safety Champion and senior directors are appointed
with responsibility for health and safety in each operational
division. These directors, together with the Heads of Safety from
each of the divisions, met six times during the year to review
performance and the various health and safety initiatives being
undertaken to facilitate the spread of best practice. Our standard
is for all operating businesses to implement safety management
systems that meet OHSAS 18001/ISO 45001. Across Interserve’s
global operations, 97 per cent of our employees work under safety
management systems certified to this standard.
Safety performance is clearly defined as a line-management
responsibility and together with formal management systems, we
provide appropriate training and professional support to ensure
managers effectively discharge their duties. Proactive site visits
and safety inspections are carried out by directors, management
teams and safety advisers. Members of the Executive Team carried
out a total of 102 site-safety visits during the year and across the
Group over 5,850 management safety tours were recorded. As a
result of these and other inspections 119,775 unsafe conditions
were identified and corrected, preventing potential incidents. In
addition, 137,392 safe conditions were observed.
Our employee Lost Time Injury Rate (LTIFR), 0.98, has reduced by
25 per cent in 2018 and 46 per cent over the last two years. The
employee Accident Incident Rate (RIDDOR AIR), 82, has reduced by
five per cent in 2018 and 38 per cent over the last two years.
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GovernanceFinancial StatementsStrategic ReportOverview Operational review continued
Our All-Labour (employees and contractors) LTIFR, 1.05, has
reduced by 20 per cent in 2018 and 48 per cent over the last two
years. The All-Labour (RIDDOR AIR), 98, has increased slightly
by three per cent in 2018 but shows a two-year reduction of
28 per cent. We are regularly recognised for our contributions to
delivering high standards of health and safety and in 2018 received
14 awards in the Royal Society for the Prevention of Accidents
(RoSPA) Occupational Health and Safety Awards, taking the
Group’s total RoSPA honours over the last decade to more
than 255.
Achievements in 2018 included:
Construction and Engineering were awarded:
• RoSPA’s prestigious Order of Distinction, which is presented
to companies that have received 15 or more consecutive Gold
Awards. Construction has now won 18 consecutive Gold Awards
and Interserve Engineering Services has won 17 consecutive
Gold Awards.
Support Services won a range of honours, including:
• Interserve FM
– RoSPA Gold Medal Award (for six consecutive Gold Awards)
• Interserve Defence
– PJOB Gibraltar RoSPA Gold
– Achievement Award (third consecutive achievement)
– Project Armada - RoSPA President’s Award (for 12 consecutive
Gold Awards)
– PJOB ISP (Cyprus) RoSPA Gold Medal Award (for seven
consecutive Gold Awards)
• Interserve Commercial
– RoSPA President’s Award (for 12 consecutive Gold Awards)
– Russell Hall, RoSPA President’s Award (for 14 consecutive
Gold Awards)
RMD Kwikform received:
• Five RoSPA President’s Awards
• RoSPA Gold Medal Award for head office.
ANTI-BRIBERY AND CORRUPTION, AND WHISTLEBLOWING
We have in place an Anti-Bribery and Corruption Policy, and
associated procedures and training. The policy sets out that every
individual with whom we work will comply with any anti-bribery
and corruption laws that apply to our business.
The policy (and associated procedures and training) is reviewed
annually and signed-off by the Chief Executive Officer and Group
General Counsel.
Moreover, as part of Fit for Growth, we have instituted a review of
each of those core policies and procedures (identified above) which
embody and drive the ethical standards we expect in our business.
In doing so, we have established a resilient and repeatable approach
in relation to each, which drives continual engagement and the
application of ethical standards in our business.
In relation to Anti-Bribery and Corruption matters, after a policy
review and engagement with stakeholders in our business, we
have updated our policy and our associated procedures. In
addition, a communications and training plan has been established
to ensure such matters are further engrained in our business.
Furthermore, a working group has been established, comprised
of leaders from each of our business units and functions, to meet
regularly, and to drive policy, procedure, training and the sharing
of best practice.
Indeed, the same approach to reviewing, updating and driving
ethical standards is being applied to each of our policies and
associated procedures. In relation thereto, we have also reviewed
and updated our whistleblowing policy, procedures and training.
This allows individuals to make protected disclosures without fear
of retribution where they become aware of behaviour that does
not meet the legal and ethical standards we uphold.
3030
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 preservation and 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. The table below details the principal risks
and uncertainties which the Group addresses through its risk-management measures. The changes to these risks relative to the last
bi-annual review undertaken by the Board in August 2018 are depicted in the column entitled “Risk Environment”.
RISK
POTENTIAL IMPACT
RISK ENVIRONMENT MITIGATION AND MONITORING
DELEVERAGING
PLAN
On 6 February 2019, Interserve announced the key
commercial terms of the proposed Deleveraging Plan.
The Deleveraging Plan is a consensual restructuring
of Interserve, which is urgently required to avoid a
default in the existing financing arrangements and to
provide sufficient liquidity, cash and bonding facilities
to allow the Group to service short-term obligations
and secure a stable platform.
Such a default, were it to occur, would be
expected to have material adverse consequences
for all stakeholders and, in particular, for existing
shareholders.
BUSINESS,
ECONOMIC
AND POLITICAL
ENVIRONMENT
Among the changes which could affect our business are:
• risk of the Company not achieving its strategic
objectives to focus on core profitable services,
completing its Fit for Growth transitional
programme and disposal of non-core assets, which
may not result in the expected anticipated benefits;
• shifts in the economic climate both in the UK and
internationally;
• changes in the UK Government’s policy with
regard to employment costs, expenditure on
improving public infrastructure, buildings,
services and modes of service delivery (including
appetite to outsource services) and delays in or
cancellation of the procurement of Government-
related projects;
• Changing market practices following the Carillion
liquidation and resulting attitudes towards the sector;
• Brexit, in particular our reliance on the large
number of EU nationals within our workforce,
as well as its impact on the economy and public
spending;
• the imposition of unusually onerous contract
conditions by major clients;
• changes in the behaviour of our suppliers, sub-
contractors and our competitors’ behaviour;
• a deterioration in the profile of our counterparty
risk; 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 or sufficiently profitable contracts in
our chosen markets or to deliver contracts with
sufficient profitability.
The Board considers the Deleveraging Plan to
be in the best interests of the Group and its
shareholders as a whole. The Deleveraging
Plan preserves fully the pre-emption rights
of existing shareholders. If shareholders take
up their entitlements in the equity raise their
ownership will not be diluted.
The Board believes that the Deleveraging Plan
will secure a strong future for Interserve.
This proposal has been achieved following a
long period of intensive negotiation and has
the support of our financial stakeholders and
Government. Its successful implementation is
critical to Interserve’s future.
The Deleveraging Plan will be subject to approval
by Interserve’s shareholders. Failure to secure
shareholder approval represents a material
uncertainty that may cast significant doubt over
the Group’s ability to continue as a going concern.
We seek to mitigate these risks in a number of
ways. These include:
• fostering long-term relationships with our
clients and partners;
• the development of additional capabilities to
meet anticipated demand in new growth areas;
• maintaining a flexible cost base;
• effective supply-chain management; and
• strong management and leadership with
our Fit for Growth and other transitional
programmes.
We have continued to maintain strong dialogue
with our key clients and partners in relation to
our delivery of services and the status of our
transformation programmes to help maintain
confidence with our business.
As part of our competitive assessment, we
assess our success rate in competitive situations.
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. Our major
transformation programme, Fit for Growth,
remains on track to deliver the savings required
to ensure that our cost base is appropriate for
the services we offer and to enable us to be
cost competitive.
We monitor and assess levels of political risk
and have contingency plans to mitigate some of
these risks.
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GovernanceFinancial StatementsStrategic ReportOverview Principal risks and uncertainties continued
RISK
POTENTIAL IMPACT
RISK ENVIRONMENT MITIGATION AND MONITORING
IT SYSTEMS/
SECURITY
As our IT systems become ever more critical
to business success and to meet customer
expectations, there is an increasing need to:
• prevent service failures;
• ensure confidentiality, availability and
integrity of data;
• protect our staff and systems from cyber-
attack; and
• recover critical systems in a timely and
effective manner.
DATA
MANAGEMENT
OPERATING
SYSTEM
FINANCIAL
RISKS
As we continue to onboard new customers,
increasingly collaborate across our
organisation and its supply chain and enable
mobility for our diverse workforce, there
is an increasing need to ensure that our
customer, supplier and employee data is:
• classified appropriately;
• processed securely; and
• stored in accordance with legal and
contractual requirements.
The increasing reliance on our data to
provide commercial opportunity and
enhanced risk management is driving more
diverse use of our data across the Group.
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 of our profits and cash flow being
generated from businesses in which we do
not have overall control. The alignment of
the Group’s interests and the interests of
our partners is critical to that success. Any
weakening of our strong relationships with
these business partners could have an effect
on our profits and cash flow.
The Group, due to a number of factors, has
found itself with very high levels of debt
relative to its earnings and cash flow. This
has necessitated the refinancing of the
existing debt structure and the injection
of further additional debt funding. This is
discussed in the Financial Review. The Group
has agreed to meet a number of covenants
as part of its refinancing arrangements,
including commitments on repayment of
debts, disposals of assets, savings associated
with transformation programmes and the
provision of information to its lenders.
3232
We are committed to ensuring that our IT applications
and infrastructure and the IT organisation that manages
them are provided with the necessary skills and tools
to maintain the health of our IT services.
We are currently undertaking a review of our IT
infrastructure and processes to ensure we can operate
best practice, cost effective solutions across our Group.
We have launched an IT Investment Committee to
provide greater governance over our IT infrastructure
expenditure, with committee approval required for
expenditure.
We operate robust monitoring and preventative
maintenance regimes to minimise the potential impact
of IT failures or security incidents in accordance with
good industry practice.
Where necessary, we also ensure that both ISO 27001
and CES certifications are obtained for key contracts.
Our Group-wide information security programme
continues to improve our staff’s awareness of the need
for effective data management activity.
Initiatives include management and end-user training,
contingency planning and detailed risk-management
activities that address many difference types of data loss.
We implemented a broad programme to address the
General Data Protection Regulation which came into
force in May 2018. This has been supported by an
extensive internal training programme.
In addition, a working group has been established to
meet regularly to drive policy, procedure, training and
the sharing of best practice.
We have a proven track record of developing and
re-enforcing such relationships in a mutually beneficial
way over a long 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.
The Group has put into place additional policies and
resources to monitor the effective management of
working capital, including the production of daily
balances, weekly cash reports and forecasts together
with monthly management reporting.
The Contract and Investment Committee (as discussed
under ‘Major Contracts’ overleaf) considers the
implications of new business opportunities relative to
the financial constraints as part of its assessment and
review process.
STRATEGIC REPORT RISK
POTENTIAL IMPACT
RISK ENVIRONMENT MITIGATION AND MONITORING
MAJOR
CONTRACTS
KEY PEOPLE
In Support Services our strategy is to focus
on offering a broad range of services to
large-scale customers whilst our Construction
business focuses on lower risk infrastructure
and assets. Termination of large contracts
which account for a significant portion of
our revenue would be likely to reduce our
revenue and profit.
In addition, the management of contracts
entails a range of potential risks. These
include: mis-pricing; inaccurate specification;
poor mobilisation of new contracts leading to
non-delivery of promised cost or efficiency
improvements; poor control of costs or of
service delivery; sub-contractor performance
and/or insolvency, under-delivery of
performance, any of which could have
adverse financial implications.
In relation to Energy from Waste, the
construction of all projects has now reached
physical completion, although risks remain
on further delays with the completion of the
contractual programme and associated costs.
In PFI/PPP contracts, which can last for
periods of around 30 years, there may be
increases in costs, including wage inflation,
beyond those anticipated or clients under
financial pressure seeking to implement
alternative interpretations of the contract in
order to reduce payments.
Risk of recoveries of payments from material
debtors of major contracts.
The success of our business is dependent on
recruiting, retaining, developing, motivating
and communicating with sufficient numbers
of appropriately skilled, competent people
of integrity at all levels of the organisation.
This is particularly relevant during
periods of financial instability and change
when improvement to profitability and
competitiveness is required.
Risks with the high number of shareholdings by
lenders following a successful implementation
of the de-leveraging plan and their potential
influence on management.
Among our mitigation strategies are targeting work
within, or complementary to, our existing competencies,
engagement of experts to effectively deploy both
business and cultural change requirements, 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.
We monitor the risk on contractual counterparties to
avoid over-dependency on any one customer or sub-
contractor.
The Group is focused on the completion of the Energy from
Waste programme with dedicated resources to manage
the delivery of the contracts, recoveries from insurers and
ongoing dialogue to resolve outstanding issues.
As part of our Fit for Growth programme all new
tenders requiring bonding or other security instruments
are referred to the Contract and Investment Committee
(CIC), comprising the CEO, CFO and General Counsel,
who deliberate and consider approval based on
assessment of commercial terms, profitability and risk.
Our Fit for Growth programme will ensure we are fit
to compete in increasingly challenging environments
and markets by focusing on how we can improve our
governance and processes, simplify our structures and
improve efficiency across the whole Group.
The Group continues to monitor the repayment of
material debtors. In relation to the Middle East, the
Company is focused on repayment of material debts
outstanding in the region.
We are focused on engaging with all of our people at
all levels and wherever they work in the organisation
to ensure that they continue to deliver great customer
service for our clients.
As part of our Fit for Growth programme we will design
and build a more effective and efficient organisation in
which skilled and engaged employees can thrive.
We have various incentive schemes and run a broad
range of training courses for people at all stages in
their careers. With active people management and
Investors in People accreditation in many parts of
the Group, we manage our people professionally and
encourage them to develop and fulfil their maximum
potential with the Group.
As part of our commitment to a diverse and inclusive
workforce we are keen to offer ‘Opportunities for All’
and our approach focuses on how we can deliver, and
work with others, to provide disadvantaged groups with
the skills and employment opportunities that will help
to turn their lives around.
Strong governance will be maintained by the Board on
its responsibilities as directors to shareholders.
3333
GovernanceFinancial StatementsStrategic ReportOverview Principal risks and uncertainties continued
RISK
POTENTIAL IMPACT
RISK ENVIRONMENT MITIGATION AND MONITORING
DAMAGE TO
REPUTATION
HEALTH AND
SAFETY REGIME
Challenges with the market’s perception of
our Group and sector because of the Carillion
liquidation, as well as negative publicity about
the Group’s financial condition, impacting the
Group’s ability to trade normally.
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
frontline services being delivered, some of which
are high profile and/or politically sensitive.
Risks that our clients and suppliers will
modify their behaviour as a result of negative
publicity surrounding the financial condition
of the Group; for example, tightening of
credit terms, cancellation or deferral of
projects and failing to qualify or not being
invited to bid for contracts.
See Financial Conduct Authority Investigation
Update on page 26. There is a risk of adverse
publicity and reputational damage to the
Group should the FCA impose regulatory or
compensatory sanctions on members of the
Group and/or their current or former directors
or employees which could have a material
adverse effect on the Group’s business,
results of operations and financial condition.
The nature of the businesses conducted by
the Group means that employees and third
parties are exposed to potential health and
safety risks. Management of these risks is
critical to the success of the business and
they are addressed through the adoption
and maintenance of occupational health and
safety procedures and operating standards
setting out ‘ways of working’.
We have maintained dialogue with our key clients and
partners in relation to our delivery of services and
the status of our transformation programmes to help
maintain confidence with our business.
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 frontline services there is even more
emphasis placed upon assessing reputational risk before
entering into such contracts, having proper procedures
in place to monitor performance, escalate issues and
monitor our response, promoting a good understanding
of our brand amongst stakeholders through timely,
clear and consistent communications.
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.
The Company is co-operating fully with the FCA and
continually monitors its disclosure obligations under the
Market Abuse Regulation.
A commitment to Health, Safety & Environment
(HS&E) is embedded in all our core values and the
subject leads every Board meeting both at Group and
divisional level. Group and Divisional HS&E Governance
committees meet quarterly to evaluate current risks
for relevance and conduct independent reviews of
high potential HS&E events and investigations. Each
member of the Executive Team undertakes dedicated
visits to review health and safety measures in place
at our operational sites and we have ongoing training
and communication campaigns across the Group
emphasising its importance.
The move in 2018 to leading based and common
reporting metrics has resulted in our employee Lost
Time Injury Rate reducing by 25 per cent during 2018.
The employee Accident Incident Rate has also reduced
by five per cent during the same period.
The Group is exposed to operational currency risk in its International and Equipment Services businesses. These are not material on a net
basis. In addition, the Group has foreign currency exposure in relation to its historical US Private Placement borrowings and the interest cost
of servicing those borrowings. 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.
3434
STRATEGIC REPORT Financial review
2018 has seen an improved operating performance for the Group
as we have focused on executing our Fit for Growth programme
and delivered savings from the simplification of our businesses.
This is despite the decline in revenue and reflects the focus on
quality of work within our UK Construction business.
GOODWILL AND OTHER ASSET IMPAIRMENTS
During 2018 the carrying value of the Industrial Services business
was impaired by £15.0 million and a further £7.1 million loss
incurred on its final disposal.
Net debt increased in the year as we have continued to address
the Energy from Waste (EfW) contracts as well as the exiting of
London and South East regional building business. This has also
been impacted by the £43.0 million of adviser fees related to the
April 2018 refinancing as well as the £42.8 million cash interest
cost in the year resulting from the higher finance costs and
increased debt levels.
The Financial Review does not deal with the underlying operating
profit and revenue of each individual trading division. For
commentary on these underlying operational results please refer
to the Operational Review section of the Strategic Report.
As part of the Group’s 31 December 2018 annual goodwill and
intangible assets impairment review, further write-downs were
made of the carrying values of its Support Services Private-Sector
cash generating unit (£26.9 million), principally related to the
acquisition of Initial Facilities in 2014 and a further £6.2 million on
its Learning and Education business.
CONTRACT REVIEW AND BALANCE SHEET REVIEW
During 2018 a further net £5.2 million of contract review provisions
were made being largely £13.7 million on the CRC Transforming
Rehabilitation contracts, partly offset by an £8.0 million release of
provisions against the US Prime Forces onerous contract.
REPORTED FINANCIAL PERFORMANCE
£million
Consolidated revenue
Total operating profit pre-amortisation
and non-underlying items
Amortisation of acquired intangible assets
Goodwill and other asset impairments
Contract and balance sheet review charges
Energy from Waste
Property development
London Construction
Restructuring costs
Professional adviser fees
Strategic review of Equipment Services
Exit from Site Services and Power
businesses
Pension indexation gain
Total operating (loss)
2018
2017
2,904.0
3,250.8
92.7
84.5
(18.7)
(55.2)
(5.2)
(12.6)
17.0
(24.8)
(20.0)
(43.0)
-
(6.7)
70.6
(5.9)
(21.6)
(76.7)
(86.1)
(35.1)
(26.0)
(10.3)
(33.2)
(13.9)
(7.1)
0.7
-
(224.8)
2018 consolidated revenue of £2,904.0 million was 10.7 per cent
lower than in 2017 (£3,250.8 million) with a substantial reduction
(£216.2 million) in UK Construction driven by lower activity
levels as we have struggled to win new work and EfW projects
completing. After amortisation of acquired intangible assets,
goodwill impairment and other non-underlying items, analysed in
further detail in note 5 to the consolidated financial statements
and discussed further below, the total operating loss was
£5.9 million (2017: loss £224.8 million).
AMORTISATION OF ACQUIRED INTANGIBLE ASSETS
Intangible assets acquired as part of historic acquisitions of
businesses are amortised over their useful economic life and
during 2018 £18.7 million of amortisation was charged to the
income statement (2017: £21.6 million).
ENERGY FROM WASTE
A further net £12.6 million of provision for losses from our EfW
facilities has been made during 2018 which relates principally
to further costs to complete our Derby City and County Councils
facilities. Insurance proceeds totalling £35 million were received
during 2018 on EfW contracts.
PROPERTY DEVELOPMENT
As announced in the 2017 year-end results, we took the decision
at the end of last year to exit from the business of Property
Development. During 2018 we have sold our one remaining
development asset (the Haymarket site in Edinburgh) for net
proceeds of £47.0 million and realised a gain of £17.0 million
on disposal.
LONDON CONSTRUCTION
We took the decision during 2018 to exit from activities in the
London construction market but will continue to offer fit-out
but not building projects in the London region. Costs associated
with this exit and anticipated losses on the close out of contracts
within this business amounted to £24.8 million. We anticipate that
this exit and the associated cash outflows will conclude in 2019.
RESTRUCTURING COSTS
The Group has embarked on a three-year plan, Fit for Growth, to
increase the Group’s organisational efficiency, improve Group-
wide procurement processes and ensure greater standardisation
and simplification across the business. During the year it incurred
termination costs in respect of former employees and directors,
property rationalisation expenses and other business closure costs
amounting to £20.0 million.
PROFESSIONAL ADVISER FEES
Professional fees incurred in connection with our refinancing
totalled £43.0 million during the year. We anticipate that we will
incur a further circa £33 million of fees in connection with the
Deleveraging Plan.
3535
GovernanceFinancial StatementsStrategic ReportOverview Financial review continued
EXIT FROM SITE SERVICES AND POWER BUSINESSES
During the year we took the decision to exit from the Power business in Support Services and the Site Services business in Construction
at a cost of £4.2 million and £2.5 million respectively.
PENSION INDEXATION GAIN
During 2018, following discussions in recent years between the Company and the Trustee of the Interserve Pension Scheme, the Trustee
agreed to change scheme terms relating to the inflation reference index used to calculate increases to some members benefits in the
scheme from RPI to CPI. The gain arising from this change in inflation index during 2018 amounted to £70.6 million.
NET FINANCE COSTS
The net finance cost for the year of £105.4 million can be analysed as follows:
£million
Net interest on Group debt
Foreign exchange (loss)/gain on US private placement loan
Pension finance credit (charge)
Group net interest charge
2018
(79.4)
(26.4)
0.4
(105.4)
2017
(21.4)
2.9
(1.1)
(19.6)
Higher net interest on Group debt of £79.4 million (2017: £21.4 million) reflects the much higher average prevailing net debt levels
during 2018 and the substantially higher interest rates on Group debt following the April 2018 refinancing.
Within net debt the Group carries $348.3 million of US private placement notes. On 13 December 2017 the Group disposed of all
hedging instruments resulting in the free float of the borrowings with all subsequent retranslation gains or losses on the value of this
debt being recognised through the income statement as a non-underlying item. During 2018 this resulted in a loss of £26.4 million (2017:
gain of £2.9 million). The $348.3 million private placement has a GBP value of £272.3 million as at the balance sheet date, reflecting the
closing rate of 1.28 USD : 1 GBP.
The IAS 19 pension credit position results in a non-cash pension finance income of £0.4 million (2017: £1.1 million cost). See notes 7/8 to
the consolidated financial statements for further details.
TAXATION
The underlying tax charge for the year of £8.7 million on the headline profit before tax represents an effective rate of 63.5 per cent.
£million
Subsidiary companies
Joint ventures and associates1
Headline profit before tax
Amortisation of intangible assets
Goodwill impairment
Exited business and non-underlying items
Effective tax charge and rate
Profit
(3.6)
17.3
13.7
(18.7)
(33.1)
(73.2)
(111.3)
2018
2017
Tax
8.7
-
8.7
(3.1)
-
12.0
17.6
Rate
0.0%
0.0%
63.5%
16.6%
-
(16.4%)
(15.8%)
Profit
36.5
25.5
62.0
(21.6)
(60.0)
(224.8)
(244.4)
Tax
8.1
–
8.1
(3.6)
–
5.5
10.0
Rate
22.2%
0.0%
13.1%
16.7%
–
(2.4%)
(4.1%)
1 The Group’s share of the post-tax results of joint ventures and associates is included in profit before tax in accordance with IFRS.
The subsidiary companies’ tax is considerably higher than the UK rate of 19 per cent, principally driven by the impact of unrelieved UK
losses. For further disclosure of the non-underlying items and amortisation see note 5 to the consolidated financial statements. See
note 9 for further tax disclosures.
DIVIDEND
The dividend remains suspended with no interim or final dividend due to be paid. Under the terms of our existing financing facilities,
no dividend is payable until historical net debt to EBITDA is below 2.5 times. This will change under the Deleveraging Plan which will
require more than two-thirds of the new money lenders and more than two-thirds of the new money bonders to approve any dividend.
3636
STRATEGIC REPORT CASH FLOW
Year-end net debt stands at £631.2 million (2017: £502.6 million),
an increase of £128.6 million.
which reflects a more normalised year-end payment process
compared to the prior year and the close out of a number of large
projects in Construction during 2018.
£million
Operating cash flows before movements
in working capital
Movements in working capital
Net capital expenditure - hire fleet
Cash generated by operations
Taxes paid
Net cash from operating activities
Net interest paid
Dividends received from associates
and joint ventures
Dividends paid to non-controlling interests
Proceeds from issue of warrants and shares
Proceeds on disposal of non-hire fleet
plant and equipment
Capital expenditure - non-hire fleet
Net investments in joint-venture entities
Proceeds from disposal of subsidiary
Proceeds from disposal of derivatives
Foreign exchange
(Increase) in net debt
Opening net debt
Movement in net debt above
Unwinding of discount on debt
Capitalised PIK interest
Closing net debt
2018
17.6
(77.5)
(0.3)
(60.2)
(11.4)
(71.6)
(39.6)
11.8
(3.7)
35.7
8.9
(19.6)
(0.8)
2.5
-
(13.7)
(90.1)
2017
(111.3)
(37.0)
12.4
(135.9)
(8.6)
(144.5)
(21.4)
17.2
-
-
1.6
(39.3)
(32.0)
-
44.1
(53.9)
(228.2)
(502.6)
(90.1)
(13.8)
(24.7)
(631.2)
In 2018 there has been a much stronger operating cash flow
performance (before movements in working capital) than in 2017
(+£17.6 million versus -£111.3 million) driven to a large extent by a
reduction in the EfW cash outflows in the current year versus 2017
of £66.2 million.
Net interest paid in 2018 of £39.6 million has increased significantly
compared to 2017 (£21.4 million) in line with much higher average
Group borrowings during the year and significant increases in the
interest rates charged post the debt re-financing in April 2018.
As part of the refinancing of the Group’s borrowings in April 2018
we issued warrants to the providers of debt and bonding facilities
with fair-value proceeds of £35.7 million including £0.4 million
from the exercise of warrants.
Capital expenditure on non-hire fleet of £19.6 million principally
relating to spend on Ingenuity House and vehicles, was significantly
lower in 2018 compared to £39.3 million in 2017 as the Group
exercised investment restraint in a cash constrained climate.
Net working capital outflows of £77.5 million (2017: £37.0 million
outflow) are largely made up of the following: a favourable
movement in receivables of £59.2 million being mainly improved
cash management in Support Services and the unwinding of
debtors in Construction as a result of a reduction in the size of
their business; and a £135.0 million decrease in trade payables
PENSIONS
At 31 December 2018 the Group had an IAS 19 pension surplus of
£93.9 million (2017: £48.0 million net deficit).
£million
Gross liabilities
Gross assets
Total surplus/(deficit)
2018
2017
(844.8)
(1,064.1)
938.7
93.9
1,016.1
(48.0)
The IAS 19 accounting position on the Group’s defined benefit
pension scheme increased from a deficit of £48.0 million to
a surplus of £93.9 million largely due to a change in the basis
of indexation on future pension increases from RPI to CPI
(£70.6 million) together with an actuarial valuation gain of
£54.0 million.
NEW ACCOUNTING STANDARDS
IFRS 9 Financial instruments
We have adopted IFRS 9 Financial instruments from the beginning
of this period. During the period we concluded our review of
the implications of the adoption of IFRS 9 Financial instruments.
The review included a consideration of the classification of
assets previously held as available-for-sale under IAS 39, and the
application of an expected credit loss model under IFRS 9. The
review, comprising the assessment of amounts receivable from
the sale of goods and services and amounts due from construction
contract customers, concluded that the adoption of IFRS 9 did
not result in any material change. As disclosed in the 2017 Annual
Report, there was no quantitative impact on the Group upon
adoption.
IFRS 15 Revenue from contracts with customers
During the period we concluded our review of the implications of
the adoption of IFRS 15 Revenue from contracts with customers
which we adopted from the beginning of this period. As disclosed
in the 2017 Annual Report, we identified no material change in the
way that we recognise revenue on contracts with customers.
However, we did identify an issue with the transition from
IAS 11 Construction contracts whereby costs that we had
previously capitalised under that standard on contracts that
were ultimately onerous, where future recovery was anticipated
from a third party other than the customer, are not covered by
similar provisions in IFRS 15. As such, the recognition of an asset
in these circumstances falls to the more restrictive requirements
of IAS 37 Provisions, contingent liabilities and contingent assets.
In order to recognise the asset, IAS 37 requires recovery to
be virtually certain rather than expected, otherwise it falls
to be treated as a contingent asset and disclosed rather than
recognised. Whilst we remain confident of recovery and our
ultimate expectation is unchanged, we are not able to meet
the requirement of virtually certain which we have interpreted
as being as close to 100 per cent as to make any remaining
uncertainty insignificant.
We have adopted IFRS 15 through the ‘modified retrospective
adoption’ approach and, as such, have booked a cumulative catch-
up adjustment to the opening balance sheet (charge to equity and
increase in provisions) of £37.5 million without altering comparatives.
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GovernanceFinancial StatementsStrategic ReportOverview Financial review continued
These recoveries will now flow through the income statement
as received (in effect the £37.5 million became an unrecognised
contingent asset). Had IFRS 15 not been adopted, 2018 revenue
would have increased by approximately £32.5 million.
We have made a number of other immaterial adjustments as a
result of the application of IFRS 15, including minor amendments
to revenue recognition where we believe that it is not highly
probable that amounts will not be reversed.
At the date of authorisation of these financial statements the
following standards and interpretations were in issue but not yet
effective, and therefore have not been applied in these year-end
financial statements.
IFRS 16 Leases
The new standard will replace IAS 17 Leases. It will become
effective for accounting periods on or after 1 January 2019, at the
earliest. It will require nearly all leases to be recognised on the
balance sheet as liabilities, including those currently recognised as
operating leases, with corresponding assets being created.
The Group has assessed the estimated impact that initial
application of IFRS 16 will have on its consolidated financial
statements, as described below. The actual impacts of adopting
the standard may change because:
• the Group has not finalised the testing and assessment of
controls over its new IT systems; and
• the new accounting policies are subject to change until the
Group presents its first financial statements that include the
date of initial application.
IFRS 16 introduces a single, on-balance sheet lease accounting
model for lessees. A lessee recognises a right-of-use asset
representing its right to use the underlying asset and a lease
liability representing its obligation to make lease payments. There
are recognition exemptions for short-term leases and leases of
low-value items. Lessor accounting remains similar to the current
standard – i.e. lessors continue to classify leases as finance or
operating leases.
Based on the information currently available, the Group
estimates that it will recognise additional lease liabilities of
between £125 million and £150 million as at 1 January 2019 and
that IFRS 16 will increase the Group’s EBITDA by approximately
£30 million and reduce profits before tax by around £2 million.
Except for IFRS 16 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.
TAX STRATEGY AND RISK MANAGEMENT
Governance
The Group seeks constantly to evolve its systems, processes and
procedures as they relate to taxation to ensure that confidence
is maintained in the Group’s ability to process and deal with its
taxation affairs. All tax decisions and considerations are routed
through the specialist Group Tax Department prior to being
considered further and, when appropriate, put forward for
approval at Board level. All tax disclosures and errors are reported
to the Group Tax Department which also forms the principal point
of contact between the Group and HMRC.
The Group has a robust system of documented controls which are
regularly reviewed to ensure they remain fit for their intended
purpose and which ensure that we are able to meet our taxation
obligations and the requirements of the Senior Accounting Officer
(SAO) reporting obligations. A comprehensive review is undertaken
each year of adherence to SAO requirements before considering
whether it is necessary to draw attention to errors which may have
affected the Group’s ability to account for the correct amount
of tax.
Responsibility for the execution of the Group’s tax strategy rests
with the Chief Financial Officer and the Head of Tax and Treasury.
Planning
Efficient management of the tax base of the Group involves
structuring the Group’s affairs efficiently for tax and conducting
the Group’s affairs in accordance with tax legislation but does
not involve or permit the use of risky or aggressive tax structures
or schemes.
The Group’s tax strategy is determined by the Board and is
summarised in the following statement:
“The Group will seek to manage the tax it pays (i) by abiding by
legal and regulatory principles, (ii) by considering acceptability to
stakeholders, and (iii) by avoiding any acts inconsistent with the
Group’s reputation.”
The Group seeks to create value for its shareholders and efficient
management of the tax base of the Group is an integral part of
that value creation, subject to the principles outlined above.
Relationship with UK tax authorities
Interserve seeks to maintain an open dialogue in the UK with
HMRC regarding its plans and tax affairs, discussing potential
tax issues which may arise in the business as well as initiating
discussion around the suitability of the systems and controls in
place to control and manage its tax position.
TREASURY RISK MANAGEMENT
We operate a centralised Treasury function whose primary role
is to manage interest rate, liquidity and foreign exchange risks.
The Treasury function is not a profit centre and it does not enter
into speculative transactions. Where possible it aims to reduce
financial risk by the use of hedging instruments, operating within a
framework of policies and guidelines approved by the Board.
Liquidity risk
We seek to maintain sufficient facilities to ensure access to
funding for our current and anticipated future requirements,
determined from budgets and medium-term plans.
During 2018 the Group had access to committed debt facilities
comprising a $350 million US private placement and £583 million
of committed bank facilities. The US private placement was
translated into GBP at the prevailing exchange rate at
31 December 2018 (£272.3 million). During the year £33.2 million
of committed facilities were prepaid and cancelled. The aggregate
facilities of £824.3 million at the year-end date had a weighted
average expiry date of September 2021.
3838
STRATEGIC REPORT On 27 April 2018 the Group secured new financing from its
lenders. The additional facilities, totalling £196.5 million,
comprised a term loan of £175 million and £21.5 million of money
market lines and committed bonding facilities of £95 million.
These facilities are scheduled to expire in September 2021.
Additionally, as part of the proposed deal terms, the Company
issued warrants to the providers of the new cash and bonding
facilities to buy shares at 10 pence per share (the nominal price
of each share). If exercised, this would provide the warrant
holders with an interest of up to 20 per cent of the post-issue
share capital.
The agreement by the lenders to provide new facilities contains
provisions to charge interest on the facilities which does not
become payable until the maturity of the facilities. The interest
is capitalised on each quarter-end date and forms part of the
debt balance at the balance sheet date. The value of interest
capitalised on loan facilities in 2018 was £24.7 million. The value
of interest accrued in respect of issued instruments drawn on the
committed facilities was £4.3 million.
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.
Foreign currency risk
Transactional currency translation
The revenues and costs of our trading entities are typically
denominated in their functional currency. 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.
As at the balance sheet date the $348.3 million of debt relating to
the US private placement was unhedged.
The impact of changes in the 31 December 2018 year-end
exchange rates, compared to the rates used in preparing the 2017
consolidated financial statements, has been an increase in net
assets attributable to equity holders of £14.0 million (2017:
£35.2 million decrease).
VIABILITY STATEMENT
This statement is made against a background of challenging
market conditions in the UK support services and construction
sectors and the collapse into liquidation of a major competitor,
Carillion, in early 2018. In the face of adverse media speculation,
Interserve, Capita, Kier and others in similar markets have taken
steps to improve balance sheet strength and resilience.
The directors have reviewed the viability of the Group over a
three-year period to December 2021. The choice of a three-year
period reflects the secured nature of the Group’s revenues with
£7.1 billion (of which £5.5 billion is secured) of work in the order
book. There is a negligible amount of secured work outside of this
timeframe in the Construction division and only 35 per cent in the
Support Services division. The viability period chosen aligns with
the annual planning process.
Strategy and key judgements
In April 2018 the Group announced a multi-year strategy with four
key priorities:
1. Fit for Growth – a simplified organisation that will deliver
reduced overhead costs.
2. A competitive customer value proposition.
3. Standardised operational delivery.
4. One Interserve – a consistent approach to leadership,
performance management, reward and recognition.
In creating its plan, the Board has considered the principal risks
and uncertainties in the implementation of the Group strategy
as well as those inherent in the business. The key planning
assumptions are outlined below:
1. The new financing structure is concluded with necessary
consent obtained from lenders and shareholders.
2. No significant political changes in the UK or overseas that will
impact public-sector outsourcing.
3. Continued progress in improving margins and operating profit
driven by targeted cost savings and selective contract bidding.
4. Success in recovering professional indemnity insurance claims
relating to the construction of the Derby EfW plant. This
follows a successful outcome in relation to similar claims in
2018 in respect of the Glasgow EfW plant.
5. Termination account payments on the Glasgow EfW plant will
be within the allowance made, a sum that is materially lower
than amounts claimed by the client. This is considered in
further detail in this statement.
6. Trade debt with Saudi colleges will be fully recoverable in line
with previous debt recovery experience in the region.
7.
The plans for dealing with loss-making contracts within the
profitable PFI portfolio in the Support Services division will be
successful in reducing any future losses.
8. Both customer and supplier payment terms will improve
following the refinancing.
As part of the planned refinancing, the Group and/or its
subsidiaries will be making undertakings to its lenders which
are summarised below. Plans have been made to meet all the
requirements but it is noted that non-compliance would be an
event of default under the terms of these financing arrangements
and would potentially impact on the ability of the Group and/or its
subsidiaries to continue trading as going concerns.
A condition of the additional lending are financial covenants,
starting in December 2019 for the Interserve Group excluding
RMDK, and in June 2019 for RMDK.
For the Interserve Group, excluding RMDK, there is a proposed
minimum EBITDA covenant: December 2019: £50 million,
June 2020: £60 million, December 2020: £60 million, June 2021:
£70 million, December 2021: £70 million. Also, a minimum cash
flow available for debt service December 2019: £(145) million,
June 2020: £20 million, December 2020: £45 million, June 2021:
£50 million, December 2021: £50 million. The loan maturity is 2022.
For the RMDK facility (non-recourse to the rest of the Interserve
Group) there is a maximum leverage covenant being multiples of
EBITDA: December 2019: 3.1, March 2020: 2.6, June 2020: 2.6,
September 2020: 2.3 and December 2020: 2.0. Also a minimum
liquidity requirement of £3 million from September 2019. The loan
maturity is 2023.
3939
GovernanceFinancial StatementsStrategic ReportOverview Financial review continued
In addition, the Group has committed to provide a funding
proposal in respect of any EfW settlements greater than those
currently forecast in the business plan.
It is also required to engage with lenders within three weeks of
submitting two consecutive short-term cash flow forecasts that
predict a cash requirement not covered by the debt facility.
The output is a full set of income statement, cash flow and balance
sheet projections for each of the reporting entities of the Group.
These exist at monthly frequency for the first two years of the
strategic plan (2019 and 2020) and annually for the final year (2021).
This year, the outputs were reviewed and reported on by advisers
acting on behalf of the Group’s lenders.
As discussed in note 1 to the consolidated financial statements,
significant judgements have also been taken with respect to the
outcome of other contracts and there is an assumption that costs
will fall within anticipated and provided levels. This relies upon,
as yet, unsecured negotiations to settle or de-scope contracts.
Conclusion of these negotiations is, at least, partially outside the
control of the directors and could have a sizeable adverse impact
on the Group.
It is management’s view that the Deleveraging Plan, if approved
by shareholders on 15 March 2019, will place the Group in a strong
position to deliver the strategy, be competitive in the marketplace
and provide a secure future for the Group’s employees, customers
and suppliers.
Prior to successful conclusion of the Deleveraging Plan, the level
of uncertainty around the Group’s financial position has been
adversely impacting customer and supplier confidence as well as
influencing employee morale and credit ratings. If confidence is
slow to return it will be detrimental to the Group’s recovery plans
in 2019.
Looking beyond the 12-month timeframe, to the remainder of
2020 and 2021, there are additional assumptions about market
stability in the UK and overseas which are outside the control of
the directors. A significant deterioration in these markets would
impact the Group’s long-term viability.
The Group has carried out a comprehensive business planning
exercise on all other aspects of its business. The approach that
has been adopted and the sensitivities considered are discussed
further below.
Assessment process
The future prospects of the Group are assessed primarily through
the annual planning process. This entails a series of detailed
operational reviews culminating with divisional reviews involving
the Chief Executive Officer, Chief Financial Officer and divisional
management team. The results of these reviews are then
submitted to the Board in the form of a plan summary document
for debate and approval.
Progress against this plan is monitored, on a monthly basis, via
monthly divisional business reviews with the Chief Executive
Officer and Chief Financial Officer and management accounts
which are submitted to the Board.
Subsequent to December 2018 the plan was amended to reflect the
deleveraging proposal presented to the Group’s debt holders and
the approximately £33 million of adviser fees associated with this.
Following these amendments, the plan reflects a reduction in
Interserve Group’s pro forma net debt from the issuance of
£480 million of new equity. £350 million of existing debt is
allocated to RMDK, of which £169 million is cash-pay and
£181 million has been converted into a subordinated non-cash pay
debt instrument. The debt allocated to RMDK is non-recourse to
the rest of Interserve Group and has maturities extended to 2023.
Following the refinancing, Interserve Group, excluding RMDK,
will have a £110 million committed debt facility which matures
in 2022.
Net cash-pay leverage of the Interserve Group (excluding the
RMDK non-cash pay debt instrument) is expected to reduce to less
than 1 x EBITDA and total net leverage (including the RMDK non-
cash pay debt instrument) reduces to less than 2 x EBITDA.
Assessment of viability
Although they consider that the output of the annual strategic
planning process represents the best estimate of future prospects
of the Group, the directors have also stress tested the future
viability of the Group by considering a number of sensitivities to
the plan.
These scenarios have been informed with reference to both
the Principal Risks and Uncertainties of the Group and the key
strategic planning assumptions on page 39. All scenarios assume
the successful completion of the proposed Deleveraging Plan.
The scenarios are:
4040
STRATEGIC REPORT Linkage to the key judgements
and the principal risks or uncertainties
Sensitivity modelled
Scenario
1. Significantly reduced work winning from
a combination of a downturn in market
conditions, changes in the political
appetite for outsourcing, political
pressures in the Middle East or from
reduced overall customer confidence in
Interserve.
Key strategic planning assumption: 2
Principal risks and uncertainties:
business, economic and political
environment, damage to the Company’s
reputation
2. Cost reductions that form part of the
Key strategic planning assumption: 3
Fit for Growth programme are not fully
realised or are offset by other cost
increases.
Principal risks and uncertainties:
operating system, key people, financial risks
3. Increase in working capital requirement.
Key strategic planning assumption: 4, 8
Principal risks and uncertainties:
financial risks
4. Energy from Waste – insurance proceeds
Key strategic planning assumption: 5, 6
delayed at Derby and final account
settlement higher than assumed at
Glasgow.
Principal risks and uncertainties:
major contracts
5. Poor recovery of debts in the Middle East.
Key strategic planning assumption: 2, 6
Principal risks and uncertainties:
financial risks
A shortfall in 2019 forecast revenue from future
contract wins leading to reduced revenue and
profits in the Support Services division over
a three-year period. A 25 per cent reduction
in the revenue in the Construction division
resulting in reduced profits and increased
working capital outflows impacting 2019 to
2021.
Costs of change incurred as planned but
with reduced benefits. Impact of mandatory
increases in UK and Spanish pay rates.
Planned disposals of non-core businesses are
assumed to be delayed by three to six months.
The expected improvement in day sales
outstanding in the Support Services and RMDK
divisions does not occur.
Derby professional indemnity proceeds are
delayed by six months during which time
additional costs of £1.4 million per month
are incurred.
Glasgow final account settlement is higher
than assumed.
There are no further receipts from education
contracts in Saudi Arabia.
With the anticipated Deleveraging Plan in place, the Company
would be able to sustain all of these scenarios in combination
and still remain within the proposed committed facility limits and
comply with the covenant tests. However, additional unmodelled
scenarios exist that could cause breaches of either the absolute
committed facilities or covenants. These principally involve a
failure to secure the proposed financing, a significant worsening
in the cost to complete or final account settlements within the
EfW business or significant adverse macroeconomic events. The
directors have applied the assumption that unmodelled scenarios
will not occur.
The Group faces a number of uncertainties in relation to the
final outcomes on its EfW contracts and political uncertainties in
the Middle East which are detailed in this statement and in the
Deleveraging Plan Prospectus. It has plans in place that have been
stress tested with a number of reasonable worst case scenarios;
however, there can be no certainty that it will remain viable.
The directors have a plan which they are implementing but they
acknowledge the inherent risks of delivery, some of which are
outside their control.
While the directors have every expectation of successful
completion of the financial restructuring, this is contingent
on approval of the detailed transaction by 50 per cent of
shareholders. The Group has been in discussion with lenders
and there is every indication that the detail will be agreed and
confirmed by 15 March but there is no certainty. The transactions
will be put to shareholder vote on this date. Failure to conclude
the Deleveraging Plan may cast significant doubt over the Group’s
ability to continue as a going concern, and consequently may cast
significant doubt over its viability.
GOING CONCERN STATEMENT
The directors have carried out a detailed review of the viability
of the Group over the period to December 2021. This review
has involved stress testing of the current strategic plan of the
Group under a number of scenarios and has considered risks and
uncertainties to both the near and medium term.
Based on this analysis, with no unforeseen deterioration in the
remaining EfW projects and approval of the Deleveraging Plan by
shareholders, the directors have a reasonable expectation that
the Group has adequate resources to continue as a going concern
for the foreseeable future, representing a period of at least a
year from the date of this statement. The Board of Directors has
considered the length of going concern period for this assessment
and, taking into account the terms of the replacement financing
facilities and proposed Deleveraging Plan, has concluded that a
going concern period of 12 months remains appropriate.
In making this assessment the directors recognise that there
is a material uncertainty in relation to the approval of the
Deleveraging Plan by shareholders and failure to secure
shareholder approval represents a material uncertainty that may
cast significant doubt over the Group’s ability to continue as a
going concern.
Based on current expectations, and on the basis that the directors
have every expectation of successful completion of the financial
restructuring, the directors consider it appropriate to continue to
adopt the going concern basis in preparing the financial statements.
Debbie White
Chief Executive Officer
Mark Whiteling
Chief Financial Officer
4141
GovernanceFinancial StatementsStrategic ReportOverview
GOVERNANCE
Board of directors
DEBBIE WHITE
Chief Executive Officer
Joined the Board in September 2017
MARK WHITELING
Chief Financial Officer
Joined the Board in October 2017
RUSSELL KING
Senior Independent Director
Joined the Board in September 2014
GLYN BARKER
Chairman
Joined the Board in January 2016 and
became Chairman in March 2016
Chairman of the Nomination
Committee and member of the
Remuneration Committee
Skills and experience
Glyn has extensive experience
as a business leader and trusted
adviser to FTSE-100 companies
and their boards on a wide variety
of corporate finance issues. He
previously held a number of senior
positions during his 35-year career
at PricewaterhouseCoopers and
developed and led PwC’s private-
equity focused Transactions
Services business. He has a deep
understanding of accounting and
regulatory issues, together with
comprehensive transactional and
financial services experience. Glyn is
a Fellow of the Institute of Chartered
Accountants in England and Wales
and holds a BSc (Hons) in Economics
and Accountancy from the University
of Bristol.
External appointments
• Senior Independent Non-Executive
Director, Aviva plc
• Senior Independent Non-Executive
Director and Remuneration
Committee Chairman, The
Berkeley Group Holdings plc
Skills and experience
Debbie joined Interserve as Chief
Executive Officer in September 2017
after spending 13 years at Sodexo
where, most recently, she served
as Chief Executive Officer of Global
Healthcare and Government, leading
its business in Justice, Defence
and Government Services and
Healthcare. A Cambridge graduate
who qualified as a chartered
accountant and tax adviser with
Arthur Andersen in the UK, Debbie
spent her early career in finance
roles at Astra Zeneca and in a global
advisory role at PwC Consulting. She
is a member of the Women 1st Top
100 Club.
External appointments
• Non-Executive Director, Howden
Joinery Group Plc
• Trustee and Audit Committee
Chair, Wellbeing of Women
Former key appointments
• Chief Executive Officer, Sodexo
Global Healthcare and Government
• Chief Executive Officer, Sodexo UK
Skills and experience
Mark has considerable financial
and leadership experience in listed
companies, most recently having
spent four years at Premier Farnell
in various roles, including Chief
Financial Officer and Deputy Chief
Executive. Mark started his career
with Coopers and Lybrand in New
Zealand before moving to the USA
where he held a number of finance
roles. A graduate of the University
of Canterbury in Christchurch, New
Zealand, Mark holds a Masters of
Commerce (Hons) degree.
External appointments
• Senior Independent Non-Executive
Director and Audit Committee
Chairman, Connect Group Plc
Former key appointments
• Senior Independent Non-Executive
Director and Audit Committee
Chairman, Hogg Robinson Group
PLC
• Non-Executive Director, Future plc
• Deputy Chief Executive/Interim
Chief Executive/Chief Financial
Officer, Premier Farnell plc
• Non-Executive Chairman, Irwin
and Ireland
Mitchell Holdings Ltd
• Chief Financial Officer, Sodexo Inc
• Chief Financial Officer, Autobar
• Chief Financial Officer, Sodexo UK
Group Ltd
and Ireland
• Finance Director, Communisis plc
• Group Finance Director, Tibbett &
Britten Group Plc
• Chief Financial Officer for the food
equipment division (Europe and
International), Enodis Plc
• Vice President – finance, diversified
pharmaceutical services,
Smithkline Beecham
• Non-Executive Director and Audit
Committee Chairman, Transocean
Ltd (NYSE)
• Adviser, Novalpina Capital LLP
Former key appointments
• Non-Executive Chairman,
Transocean Partners LLC (NYSE)
• Vice Chairman, UK,
PricewaterhouseCoopers LLP
• Managing Partner, UK,
PricewaterhouseCoopers LLP
• Head of Assurance, UK,
PricewaterhouseCoopers LLP
• Deputy Chairman, English National
Opera
42
Member of the Audit, Nomination
and Remuneration Committees
Skills and experience
Following his appointment to the
Board in September 2014, Russell
was appointed as Senior Independent
Director in May 2015. Russell has
extensive board experience as
a Chairman, Senior Independent
Director and Remuneration
Committee Chairman. In addition, he
has broad international experience
especially in business/strategy
development, human resources and
sustainable development acquired
during his career at ICI and Anglo
American plc. Russell holds a BA
(Hons) in Politics from the University
of Durham.
External appointments
• Non-Executive Chairman,
Hummingbird Resources PLC
• Senior Independent Non-Executive
Director and Remuneration
Committee Chairman, Spectris Plc
• Independent Non-Executive,
BDO LLP
Former key appointments
• Senior Independent Non-Executive
Director and Remuneration
Committee Chairman, Aggreko plc
• Senior Adviser, Heidrick &
Struggles
• Chairman, Sepura plc
• Chairman, GeoProMining Ltd
• Senior Adviser, RBC Capital
Markets on Metals and Mining
• Chairman, Bergteamet AB
• Non-Executive Director, Anglo
Platinum Ltd
• Chief Strategy Officer, Anglo
American plc
• Executive Vice President of Group
Human Resources and Business
Development, Anglo American plc
GARETH EDWARDS
Independent Non-Executive
Director
Joined the Board in February 2017
Member of the Audit, Nomination
and Remuneration Committees
Skills and experience
As a former partner at international
law firm, Pinsent Masons, Gareth’s
expertise is in corporate legal
matters, but he also has extensive
experience as an adviser to boards
and CEOs at a range of public,
private and entrepreneurial
companies on their strategy and
wider business and commercial
issues. He has considerable
international experience,
particularly in the Middle East,
and was instrumental in expanding
Pinsent Masons’ offices in
continental Europe and facilitating
business development between its
Asian, Middle Eastern and European
offices. Gareth, a qualified solicitor,
has a BA in French and German from
the University of Keele.
External appointments
• Non-Executive Chairman, Honye
Financial Services Ltd (Cayman
Islands) (LSE)
Former key appointments
• Partner, Global Head of Corporate,
Pinsent Masons LLP
• Non-Executive Director, Positive
Healthcare plc
ANNE FAHY
Independent Non-Executive
Director
Joined the Board in January 2013
Chair of the Audit Committee, and
member of the Nomination and
Remuneration Committees
Skills and experience
During her 27 years at BP, Anne
gained extensive experience
of global business, developing
markets, risk management, internal
control, compliance and strategy
development in the aviation,
petrochemicals, trading and retail
sectors. She is a Fellow of the
Institute of Chartered Accountants in
Ireland and a Bachelor of Commerce
in Economics, Accounting and
Business from University College
Galway, Ireland. Anne has chaired
the Audit Committee since May 2013.
External appointments
• Non-Executive Director and
Audit/Risk Committee Chair,
Coats Group plc
• Non-Executive Director and Audit
Committee Chair, Nystrar NV
(Belgium)
• Non-Executive Director and Audit
• Director/Trustee and Chair
of Finance Committee, Save
the Children
Former key appointments
• Chief Financial Officer, Global
Fuels, BP
• Controller Strategic Businesses, BP
• Controller Petrochemicals, BP
• Senior Audit Manager, KPMG
(Ireland and Australia)
NICHOLAS POLLARD
Independent Non-Executive
Director
Joined the Board in June 2018
Member of the Audit Committee
NICK SALMON
Independent Non-Executive
Director
Joined the Board in August 2014
Chairman of the Remuneration
Committee, and member of the
Audit and Nomination Committees
Skills and experience
Nick has extensive experience as
an advisor to boards at a range of
public and private companies on their
strategy and wider business issues,
particularly in the construction
industry. He also has considerable
international experience, principally
in the Middle East and Asia Pacific.
Nick is a member of the CBI
Infrastructure Board and a board
member of the Environmental
Services Association. Currently CEO
of Cory Riverside Energy, previous
experience has seen him as CEO at
Balfour Beatty Construction Services
(UK), CEO at Bovis Lend Lease (UK),
and a senior private-sector leader at
Navigant Consulting, Railtrack plc,
Network Rail, and Skanska.
Skills and experience
Nick brings a wealth of experience
from a number of senior executive
roles in multinational companies and
several non-executive directorships.
He spent the first 20 years of
his career in the power station
construction industry internationally
before joining Babcock as Chief
Executive in 1993. During his tenure
at Babcock, Alstom and Cookson
over the next 20 years Nick was
responsible for leading several major
restructuring projects and negotiating
complex acquisitions and disposals.
He is a Fellow of the Royal Academy
of Engineering and holds a BSc
(Hons) from the University of Bristol.
Nick has chaired the Remuneration
Committee since June 2018.
External appointments
• Group CEO, Cory Riverside Energy
External appointments
• Non-Executive Chairman, South
• Member, CBI Infrastructure Board
East Water Ltd
Association
Former key appointments
• Chief Executive Officer,
Construction Services UK, Balfour
Beatty plc
• Senior Independent Non-Executive
Director, Elementis plc
Former key appointments
• Senior Independent Non-Executive
Director, United Utilities Group plc
• Chief Executive, Cookson
• Chief Operating Officer, Navigant
Group plc
Consulting, Inc
• Executive Vice President,
• Chief Executive Officer, Bovis Lend
Alstom SA
Lease Ltd
• Executive Vice President, Skanska
UK Plc
• Director, Possessions, Network Rail
• Network Development Director,
Railtrack plc
• Chief Executive, Babcock
International Group plc
Committee Chair, SThree plc
• Director, Environmental Services
ADVISERS
General Counsel
and Company Secretary
Andrew McDonald
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
00088456
Registrar and
share transfer office
Link Asset Services
The Registry
34 Beckenham Road
Beckenham,
Kent BR3 4TU
T +44 (0)371 664 0300
enquiries@linkgroup.co.uk
www.signalshares.com
Auditors
Grant Thornton UK LLP
Stockbrokers
Numis Securities Limited
Lawyers
Ashurst LLP
43
GovernanceFinancial StatementsStrategic ReportOverview Corporate governance
Glyn Barker
Chairman
Dear Shareholder
I reported last year that some of the recent challenges faced
by the Group were, in my view, due in part to weaknesses in
the governance framework. During 2018 we commissioned an
independent review of our systems and processes aimed at
strengthening our internal controls processes and procedures
so that they are effective, robust and an integral part of our
culture. We have also engaged the services of Independent Board
Evaluation Ltd to conduct an external board evaluation on the
effectiveness of the Board. The findings of both reviews will be
concluded during 2019 and we will be in position to report more
fully in next year’s Corporate Governance Report.
The Financial Reporting Council (FRC) published the new UK
Corporate Governance Code in 2018 (the 2018 Code). The 2018
Code puts the relationships between companies and their key
stakeholders at the heart of long-term sustainable growth in the
UK economy, placing emphasis on businesses building trust by
forging strong relationships with key stakeholders. It also calls for
companies to establish a corporate culture that is aligned with
the company purpose, business strategy, promotes integrity and
values diversity.
The 2018 Code will apply to the financial year beginning
1 January 2019, meaning Interserve intends to report against
the 2018 Code in the 2019 Annual Report. However, we are
already engaging with our stakeholders across the Group and
there are various informal engagement processes via town
halls, directors’ tours and site visits, which actively seek to
engage employees. We also recently launched our employee
engagement survey Group-wide, the results of which will help
shape our future Board engagement with our employees. The
Group has continued to engage its shareholders in order to gain
an understanding of their aspirations for the Company and to
afford them the opportunity to give their views.
We have also embarked on a talent review programme, sponsored
by our Nomination Committee, that will address the need to
review our pipeline of talent in the context of diversity and our
need to ensure we have a robust succession plan for the future.
As I have already outlined in my Chairman’s Statement, Interserve
has endured enormous change in 2018 and the new executive
team has brought demonstrable leadership to drive improvement
to the culture and control environment of the organisation
and to guide the Group on its transformation journey. This
is demonstrated by the Deleveraging Plan which will provide
Interserve with a strong balance sheet and platform to deliver
on its strategy, and our Fit for Growth programme which was
launched at the end of 2017 and has delivered on its objectives
which underpin our strategic priorities: to simplify our processes
so that across the Group we can operate in a One Interserve way.
It is my belief that we have the key ingredients in place to
continue our aim, to deliver a sustainable and stable business for
future growth.
As was the case last year, all directors wishing to remain in office
will seek re-election at the AGM.
Glyn Barker
Chairman
44
GOVERNANCE COMPLIANCE WITH THE CODE
The FRC requires the Company to disclose how it has applied
the principles of the UK Corporate Governance Code published
in April 2016 (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 FRC website (www.frc.org.uk).
The directors consider that the Company has complied throughout
the year with all provisions of the Code applicable to it, save for
the following provisions:
• E.2.4 which requires at least 14 working days’ notice in advance
of a general meeting of the Company.
On 11 April 2018 the Company gave notice to shareholders of
a general meeting on 27 April 2018 at which resolutions were
passed increasing the Company’s borrowing limit and ratifying
any possible prior breach of the borrowing limit. Whilst the
length of notice given for this general meeting complied with
the requirements of the Companies Act 2006 and the Company’s
articles of association, it did not comply with the requirement
under provision E.2.4 of the Code that notices of general
meetings and related papers should be sent to shareholders
at least 14 working days before the meeting. In this case,
12 working days’ notice was given.
The reason for the shorter period of notice was the need
for the Company’s borrowing limit to be increased before
the publication, on 27 April 2018, of the Group’s financial
statements for the financial year ended 31 December 2017.
Whilst the increase in the Group’s borrowing limit was not
directly linked to the refinancing undertaken by the Group that
was announced on 27 April 2018 and would have been required
in any case to enable the publication of the Group’s financial
statements for the financial year ended 31 December 2017, the
Company would not have had the necessary authority to allow
for the successful execution of all documentation required for
the refinancing unless the borrowing limit had been increased.
The Board is therefore satisfied that non-compliance with
provision E.2.4 of the Code was, in the circumstances, in the
best interests of the Company’s shareholders as a whole and
was not detrimental to the Group’s overall governance culture
for the reasons explained.
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 Team, as referred to on page 47.
Strategy
• delivering on the objectives of the Group’s Fit for Growth
transformation programme aimed at improving cash and margin
performance. 2018 saw the completion of phases one and two
and the continuation of the final phase of the plan;
• setting the health and safety targets for the Group and
monitoring performance on a monthly basis;
• determining the method and formulating a plan for the
deleveraging of the Group debt;
• regular stakeholder engagement and review of pipeline business
development opportunities presented at each board meeting by
the Chief Executive Officer;
Finance/governance
• ongoing monitoring of key contracts where outcomes could
impact financial performance with particular reference to the
exited Energy from Waste (EfW) business;
• ongoing monitoring of the Group’s working capital, net debt
positions and funding requirements, and related discussions
with the Group’s lenders;
• considering capital investments and requests by the businesses
for approval of significant tenders within the framework of
matters reserved for the Board’s decision;
• approval of capital divestments in accordance with
commitments with the Group’s lenders;
• setting the Group’s annual budget and plan;
• approval of the Annual and Half-Year Reports;
• satisfying itself as to the basis for and appropriateness of the
going concern and viability statements;
Risk management
• reviewing the current system of internal controls and a risk
management and assurance strategy; and
• careful consideration of the risk/reward profile of significant
bids and potential joint ventures.
Division of responsibilities
There is a clear division of responsibilities between the role of
the Group Chairman and Chief Executive Officer which are clearly
defined in written terms of reference, agreed by the Board.
The role of the Chairman
The Group Chairman leads the Board and creates the conditions
for overall Board and individual director effectiveness, both
inside and outside the boardroom. The Group Chairman considers
succession planning and the Board’s composition with the
Nomination Committee and ensures effective communication
with shareholders and other stakeholders.
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.
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.
Board activities in the 2018 financial year
The Board is responsible for reviewing the Group’s strategic
direction, governance, ethics, values and risk management.
Set out below are the 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:
The Group Chairman’s other commitments are set out in his
biography on page 42.
45
GovernanceFinancial StatementsStrategic ReportOverview Corporate governance continued
The role of the Chief Executive Officer
The Chief Executive Officer manages the Group, leading the
formulation of and, once set by the Board, implementing
strategy. She chairs the Executive Team and is responsible for
investor communications and all social and ethical matters
within the Group.
BOARD EFFECTIVENESS
Meetings
The Board held nine pre-scheduled meetings throughout the
year and 17 ad hoc meetings to deal with time-critical matters.
Attendance at Board and committee meetings during the year is
set out in the table below.
The role of the Senior Independent Director
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 acts as a sounding board for the Group
Chairman, serves as an intermediary for the other directors when
necessary, conducts the Group Chairman’s annual performance
evaluation and leads any new Chairman appointment process.
The role of the Company Secretary
The Company Secretary distributes 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, advises on Board procedures and
ensures that 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 Board reviews the independence of its non-executive
directors on an annual basis as part of its nomination for
re-election process. 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. 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 and constructive challenge to bear on matters for
consideration.
As at 31 December 2018 the Board comprised nine members:
the Group Chairman, three 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.
Number of meetings attended
Audit Remuneration
Nomination
6/6
6/6
5/6
2/3
3/3
6/6
7/7
7/7
6/7
7/7
4/4
7/7
1/2
2/2
2/2
2/2
1/2
2/2
G A Barker
G M Edwards
A K Fahy
R J King
K L Ludeman1
C N Pollard2
N R Salmon
D I Sutherland
D J White
M A Whiteling
Board
23/26
23/26
21/26
22/26
10/14
9/10
23/26
22/26
26/26
25/26
1 Keith Ludeman resigned from the Board on 12 June 2018.
2 Nick Pollard was appointed to the Board on 26 June 2018.
Several ad hoc Board meetings relating to the Group refinancing
and deleveraging were convened at short notice during the year,
resulting in certain directors being unable to attend due to other
longstanding commitments. There was full attendance at the nine
scheduled Board meetings, with the exception of Anne Fahy who
was unable to attend the October meeting due to a late change
in timing by the Company as she was overseas on business. Anne
provided input by email on the main topics and met with the
Chief Financial Officer and Company Secretary on her return.
The Group Chairman held a private session with the non-executive
directors at which no executive directors were present plus a
number of informal discussions with the Chief Executive Officer
present. Under the leadership of the Senior Independent Director
a review of the Group Chairman’s performance was conducted
without his involvement and feedback provided to him.
Board induction, training and development
On appointment, new directors receive a tailored induction
programme arranged by the Company Secretary which includes,
for example, refresher training on the duties of a listed company
director, the operation and activities of the Group, meetings with
management and other corporate advisers, and operational 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.
Upon appointment, Nick Pollard undertook a comprehensive
induction programme that included individual sessions with
the Board and Executive Team leaders as well as key site visits
accompanied by an executive director and refresher training on
directors’ duties.
The Group Chairman and non-executive directors took part in
a site visit to our RMDK headquarters during the year to gain
insights and obtain feedback from its employees.
46
GOVERNANCE Performance evaluation
The Board has engaged the services of an external evaluator,
Independent Board Evaluation Ltd (IBE), to evaluate its
performance and effectiveness. IBE has no other connections
with the Company. IBE’s approach is to attend and observe
Board and committee meetings and conduct a series of one-to-
one interviews with Board members and other key executives.
The process with be concluded in 2019 and findings and
recommendations will be reported in next year’s Annual Report.
The overall time commitment of the non-executive directors in
the attendance of Board meetings/visits was in the order of circa
21 days in addition to the time taken to read Board papers and
attendance at six meetings held by the Group Chairman.
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
Nick Pollard, having been appointed since the previous AGM,
will submit himself for election by shareholders at the 2019 AGM
in accordance with the Company’s Articles of Association. All
remaining directors will also submit themselves for re-election.
Biographical details for each of the directors standing for election
or re-election are set out on pages 42 and 43.
EXECUTIVE TEAM
The Executive Team, which, during the year, comprised the
executive directors together with the senior operational
and functional leaders of the Group, is chaired by the
Chief Executive Officer.
The Executive Team, which met 10 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;
• designing, operating and monitoring a suitable system of
internal control embracing the policies adopted by the Board
and providing assurance to the Board that it has done so; and
• conducting monthly Senior Leadership Business Updates
reflecting the Group’s open and collaborative culture and
demonstrating the importance that the Executive Team places
on employee engagement.
The Executive Team 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
The Audit Committee is responsible for carrying out the audit
functions required by paragraph 7.1.3R of the FCA’s Disclosure
Guidance and Transparency Rules, details of which are included
in the Audit Committee Report on pages 52 to 57 and are
incorporated into this Corporate Governance report by reference.
NOMINATION COMMITTEE
The Nomination Committee is chaired by the Group Chairman
and the members are independent non-executive directors.
External consultants are generally 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 composition of the Board will
continue to be reviewed during 2019.
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.
Overview of activities
Business conducted during the year included recommendations
to the Board for the re-election of retiring directors at the AGM,
recruitment of a non-executive director and the membership
composition of the Committee. The effectiveness of the
Committee and its terms of reference were also reviewed.
Re-election of retiring directors at the AGM
In making its recommendation to the Board for the re-election of
directors, the subject of “over-boarding” was considered by the
Committee at the February 2018 Committee meeting. It reached
the conclusion that all directors were sufficiently available to
the Company. Moreover, the Committee considers these other
directorships assist in bringing valuable knowledge and experience
to Board and committee debate.
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 58
to 67.
Effectiveness
The Committee also reviewed its effectiveness against its terms of
reference and concluded that it continued to operate effectively.
The Committee had access to sufficient resources (including
access to the company secretariat) to enable the Committee to
fulfil its duties.
Accordingly, it was concluded that the Committee was performing
satisfactorily against its terms of reference.
Equality, diversity and inclusion
The Group’s Diversity Policy states that diversity in all its forms is
fundamental to the Group’s business. It is available on our 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.
47
GovernanceFinancial StatementsStrategic ReportOverview Corporate governance continued
Succession planning
Succession planning remains a key priority for the Board and,
having established new leadership in 2017, a full talent review
will take place in 2019 under the stewardship of the Committee
to establish the current status of the talent pipeline and make
recommendations to the Board as to how the business will
attract and select candidates for Board and executive positions
referencing a broader commitment to diversity and inclusion as
required under the 2018 Code.
REMUNERATION COMMITTEE
The Remuneration Committee is composed entirely of
independent non-executive directors, details of whom are set out
in the table on page 46. 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 58 to 79 and are incorporated by reference into this
Corporate Governance report.
CONTRACT AND INVESTMENT COMMITTEE
The Contract and Investment Committee (CIC) is composed of
the Chief Executive Officer, the Chief Financial Officer and the
Company Secretary. The CIC is responsible for deliberating and
approving all new tenders involving bond and other security
instruments based on an assessment of commercial terms,
profitability and risk. Divisional managing directors submit
standardised proposals to the CIC for new tenders, setting out
the required credit support.
The Company Secretary and Treasury function maintain an up-
to-date schedule of issued and upcoming instruments approved
by the CIC which ensures an efficient and streamlined instrument
administration process.
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 Officer or,
in her absence, the Chief Financial Officer).
The Inside Information Committee comprises the Group Chairman,
Chief Executive Officer and Chief Financial Officer.
The Private Finance Initiative (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
48
Number of meetings
1
18
20
–
ACCOUNTABILITY
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 87, an Independent Auditor’s
Report about their reporting responsibilities on pages 88 to 99, a
going concern statement on page 41 and a viability statement on
pages 39 to 41. An explanation of the Company’s business model
and strategy for delivering the Company’s objectives is set out on
pages 16 to 20.
The Directors’ Report contained on pages 80 to 86, 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)).
Risk management and internal control
The Board has documented a risk management framework setting
out its objectives in terms of the risk management framework and
risk appetite, risk management policy, risk oversight structures
and accountability, risk identification and assessment, escalation,
monitoring and reporting, and guidance on the application of the
framework, which is included within the Group’s internal controls
manual.
During the period under review, the Board commissioned an
independent law firm to conduct a high-level review of the
corporate governance arrangements of the Group in order to
identify key features and mitigate any potential risks associated
with Interserve’s governance systems, controls and processes in
the context of its listed company obligations. It is intended that
the review will be forward-looking and constructive and will
involve interviews with key personnel from different functions
within the business, in order to get a variety of perspectives.
The outcome of the review is due to be presented to the Board
in Spring 2019 and key findings and recommendations will be
outlined in next year’s Annual Report.
The Board has carried out a robust assessment of the principal
risks facing the Group, as required by the Code, during the period
covered by this report and has not identified nor been advised of
any failings or weaknesses in the operational or financial controls
which it determines to be significant. Further details of the
Group’s Principal Risks and Uncertainties, their potential to affect
the business, how they are being mitigated and changes in the
current risk and environment are set out in the Strategic Report
on pages 31 to 34.
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.
GOVERNANCE Risk management framework
The Board has overall responsibility for the Group’s systems of
risk management and internal controls, together with the ongoing
review of its effectiveness, and sets appropriate policies having
regard to the objectives of the Group.
Key decisions are reserved by the Board to itself. Other decisions
are taken under various delegated authorities down through the
management chain.
The Executive Team, under delegated responsibility from the
Board, identifies, assesses, manages and monitors risk and
operates and monitors the system of internal control and provides
assurance to the Board that it has done so. The Risk Committee
assists the Executive Team in discharging its risk management
responsibilities.
The Risk Committee, comprising the Chief Financial Officer, Group
Health, Safety and Environmental Manager, Group Insurance
Manager, the General Counsel and Company Secretary (who is
its secretary), the Director of Transformation, IT and People,
the Group Information Security Officer and a representative
from each of the Group’s operating divisions, met three times
during the course of the year. 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.
Work undertaken by the Risk Committee included reviewing the
Group’s prime risk areas1 and principal risks and uncertainties,
providing a bi-annual risk and control report to the Executive
Team, a programme of reviewing (on a divisional bottom-up
basis) a selection of the Board’s key risks against the overall
assurance map mapping (on a top-down basis) the three lines of
assurance (management, functional oversight and independent
internal reporting), receiving reports from the Information
Security Forum, regular horizon scanning for risks presented
by legal developments and forthcoming legislation, as well as
changing business environments, reviewing business continuity
planning, reviewing whistleblowing notifications and the results
of subsequent investigations, and reviewing the Group’s readiness
for the General Data Protection Regulation, which came into force
in May 2018.
Risk committees have also been established by most divisions.
These committees review risk at a divisional and business unit
level, providing both reports to and attendance at the Risk
Committee.
A review of the Risk Committee agenda and terms of reference
is underway with the results to be outlined in next year’s
Annual Report.
Risk oversight, structures and accountability
The risk and control framework is predicated on the basis that
line management is best placed to ensure that appropriate
risk management is being exercised to maintain risk within the
constraints of the Board’s risk appetite.
The risk oversight structure mirrors the operating style and
culture of the Group, devolving responsibility for operational risk
mitigation controls to those best placed to supervise and ensure
their proper implementation. Divisional line management exercise
oversight to manage risk appropriately and to ensure that the
Board’s risk appetite is not being exceeded.
The Board’s risk appetite is cascaded throughout the Group
indirectly by defined delegated decision boundaries and authority
matrices. Certain key areas listed on pages 31 to 34 are subject to
central management or control.
Best practice, procedure and, where appropriate, policies in the
areas of information security, business continuity and human
resources, are promulgated by specialist forums comprised of
subject matter experts from across the business.
Risk identification and assessment
As a normal part of Board business, consideration is given to any
emerging or changing risks and whether these affect the strategy.
A thorough risk identification and assessment exercise is
undertaken of the prime risk areas by the Risk Committee on a
six-monthly basis. This review focuses on risks with the potential
for material impact on the Group’s operational, financial or
reputational standing. The review takes into account the latest
divisional updates, actions taken, current performance against
existing and any new key performance indicators and whether, as
a result of the foregoing, the residual (net) risk of the prime risk
area has changed since the last assessment.
The identification of risks associated with new business and
associated risk controls/mitigation is part of the process for
obtaining Board approval.
New and emerging risks are captured by divisional risk committee
bi-annual risk reviews which are consolidated into the risk and
control performance report by the Risk Committee. The Board
also gives consideration to emerging risks as part of its bi-annual
risk review and more generally as part of its ongoing consideration
of the future development of the Group.
Escalating, reporting, monitoring and review
Monthly management accounts, divisional board meetings,
the March, May and September forecast reviews, monthly and
quarterly safety and quarterly legal and insurance reports all
provide an opportunity for emerging risks to be escalated.
Divisional boards are required bi-annually to review their risk
matrices, in January/February and June/July, to facilitate
aggregation ahead of the release of the annual and half-year results.
Divisional management monitor the implementation, operation
and efficacy of the risk management procedures within their
division. Improvements implemented by divisional management
are reported as part of the bi-annual risk reviews.
The Executive Team and the Board monitor risk as part of their
monthly review of trading.
The internal audit function also undertakes a rolling review of
the effectiveness of the internal control and risk management
procedures as part of its annual work programme. Divisional
risk and assurance resources have also been increased to
support this work.
1 The Group’s prime risk areas are sub-sets of and have been mapped to the Principal Risks and Uncertainties set out on pages 31 to 34 of the Strategic Report and
are matters which, if not appropriately managed, may to lead to events which breach the Board’s risk appetite.
49
GovernanceFinancial StatementsStrategic ReportOverview Corporate governance continued
The Board performs a formal assessment of the effectiveness of
the risk management process twice a year prior to publication of
the half-year and annual results, taking into account the risk and
control performance report from the Executive Team.
The Board has an ongoing process for identifying, evaluating and
managing principal risks that the Group faces, together with an
ongoing process to embed internal control and risk management
within the business operations. This process was in place for the
period under review and up to the date of approval of this Annual
Report and Financial Statements and the systems accord with the
FRC’s guidance on Risk Management, Internal Control and Related
Financial and Business Reporting.
Control effectiveness
Divisional boards undertake an ongoing assessment of, and effect
improvements to, the control environment, and report their
actions through the bi-annual risk review process.
The internal audit function assesses the effectiveness of certain
internal control and risk management procedures as part of its
annual work programme.
Enhancements to the risk management process include the
development of an assurance map which identifies the three lines
of assurance (management, functional oversight and independent
internal reporting) over the prime risk areas. This enables the
Board to make an informed assessment of the appropriateness
of assurance.
Financial reporting
Based on submissions from the trading divisions, a budget is
prepared 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 Group Services.
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 Team and
subsequently the Board for review.
The management accounts 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 Team, 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 pages 38 and 39 and a description of how
the Group manages those risks is set out on page 32.
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 the Executive Team.
• Executive Team 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.
• All Group companies operate detailed tendering procedures
designed to ensure effective risk management when tendering
for high-value projects or projects with difficult conditions,
onerous obligations, guarantees, bonds and adverse cash flow
conditions which are monitored by the relevant Executive Team
member and, where appropriate, in conjunction with the Chief
Executive Officer.
• Manuals setting out Group policy and procedures, with which all
Group companies must comply.
• 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, motor fleet and company
secretarial. These functions report to members of the
Executive Team.
• During the course of each year members of the Executive
Team 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 STAKEHOLDERS
The main communications with financial investors are the half-
year and annual results presentations including sessions with
some investors which normally take place after the results are
announced. The results presentations are posted on our website
and are available for all investors to view, along with a recording
of the presentations themselves. A live webcast of the capital
markets day was publicised via the Regulatory News Service
(RNS) and copies of the presentations were made available on the
Company’s website.
The Company also encourages two-way communication with both
institutional and private investors to develop an understanding of
the views of major shareholders about the Company.
The Group Chairman met with eight of the Company’s major
shareholders in order to gain an understanding of their aspirations
for the Company and to afford them the opportunity to give their
views. The key themes emerging from these meetings were then
fed back to the Board.
50
GOVERNANCE During the year ended 31 December 2018 Debbie White and
Mark Whiteling attended 30 meetings with analysts and
institutional investors and, respectively, 16 and 54 individual
meetings, accompanied by other staff members.
One-to-one post-results meetings held with institutional investors
tend to 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. Meetings held with analysts
focus on the foregoing 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.
On 6 February 2019, Interserve announced it had received a
letter from Coltrane Master Fund, L.P., a shareholder holding in
excess of five per cent of the paid-up capital of the Company,
requisitioning a General Meeting of the Company’s shareholders.
On 26 February 2019, Interserve published a shareholder
circular, as required by the Companies Act, giving notice of a
General Meeting convened for 26 March 2019 at 1.00 p.m. at
which the Coltrane resolutions will be proposed. The Board is
recommending unanimously that shareholders vote against the
Coltrane resolutions as they intend to do so in respect of their
own shareholdings accounting for approximately 0.54 per cent of
the issued share capital of the Company.
Engagement with lenders
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 in the
context of the Deleveraging Plan.
The Group’s annual and half-yearly results, trading updates,
presentations given to analysts and all announcements made
through the RNS 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 chairs of the various committees or the Board
generally. The voting results of the AGM are announced through
the RNS 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
8 March 2019 and signed on its behalf by:
Glyn Barker
Chairman
8 March 2019
51
GovernanceFinancial StatementsStrategic ReportOverview Audit Committee report
Anne Fahy
Chair of the Audit Committee
Dear Shareholder
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 2018.
2018 has been another challenging year for the Company with the recognition of difficult trading conditions and refinancing needs.
The Committee was also focused on trading judgements and estimates which underpin our revenue and margin on long-term
construction and service contracts, and the operational management and risk processes which were strengthened during the period,
which included the appointment of a Group Construction Risk Manager to review and report on Construction Contract risks.
A key focus for the Committee in finalising the annual results has been to challenge, test and validate the Company’s going concern and
viability statements and to provide assurance to the Board in making these statements.
In making this assessment the Committee recognises that there is a material uncertainty in relation to the approval of the Deleveraging
Plan by shareholders and failure to secure shareholder approval represents a material uncertainty that may cast significant doubt over
the ability of some or all of the Group to continue as a going concern.
Based on current expectations, and on the basis that the directors continue to expect a successful completion of the financial
restructuring and with no unforeseen deterioration in the remaining EfW projects, the Committee considers it appropriate to continue
to adopt the going concern basis in preparing the financial statements.
In addition to going concern and viability, long-term contracts, and revenue and margin recognition, we also focused on measurement
presentation and disclosure of non-underlying items, carrying value of goodwill and intangibles, retirement benefit accounting and
judgements on borrowings.
Having reviewed the Annual Report, the Committee considers that, taken as a whole, it is fair, balanced and understandable and
provides the information necessary to assess the Group’s strategy, business model, position and performance.
Anne Fahy
Chair of the Audit Committee
52
GOVERNANCE MEMBERSHIP
The Audit Committee is responsible for carrying out the audit
functions required by paragraph 7.1.3R of the FCA’s Disclosure
Guidance and Transparency Rules (DTR). It is composed entirely
of independent non-executive directors, in accordance with the
provisions of the UK Corporate Governance Code published in
April 2016 (the Code) and has been chaired by Anne Fahy since
13 May 2013. The directors who have served on the Committee
during the year are:
Name
A K Fahy (Chair)
G M Edwards
R J King
C N Pollard
N R Salmon
Date of appointment to Committee
1 January 2013
23 June 2017
1 September 2014
26 June 2018
1 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. Keith Ludeman stepped
down from the Committee and Board on 12 June 2018.
Nick Pollard was appointed to the Board and the Committee
on 26 June 2018.
Anne Fahy is a qualified chartered accountant and has significant,
recent and relevant financial experience. The other members
of the Committee all have extensive business and financial
experience in multinational and/or complex organisations and a
good understanding of the Company’s business. The Committee,
as a whole, is therefore considered by the Board to be competent.
The biographies of the Committee members are set out on
pages 42 and 43.
The Company Secretary is secretary to the Committee.
MEETINGS
The Committee met six times during the year. Members’
attendance at the meetings is set out in the table on page 46.
The external auditor was present at all of the meetings and
representatives from PricewaterhouseCoopers LLC (PwC), the
provider of the internal audit function, were present at four of
the meetings. The Group Chairman, Chief Executive Officer, Chief
Financial Officer and Group Financial Controller also attended the
majority of the meetings by invitation.
The Committee has, on two occasions, taken the opportunity
to seek the views of the external auditors in private. 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 frequently with both parties to review audit
and internal control topics and to ensure open and continuous
dialogue with the Committee.
ROLE AND RESPONSIBILITIES
The role and responsibilities of the Committee are set out in its
terms of reference which are available on the Company’s website
at www.interserve.com and on request. These terms of reference,
which include all matters described in the Code and paragraph 7.1.3
of the DTR, are reviewed at least annually by the Committee and
were last updated in December 2017 when no further changes were
considered necessary.
The principal responsibilities of the Committee are to:
• review with management and the external auditor the Group’s
Annual Report and consolidated financial statements 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 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 position and performance, business model and
strategy;
• make recommendations to the Board on the appointment and
re-appointment of the external auditor, take responsibility for
reviewing the scope and effectiveness of the statutory audit
and agreement of the fees in respect of both the statutory
audit and non-audit services provided by the external auditor;
• review and monitor the appropriateness of the provision of
non-audit services by the external auditor in the context of
reviewing the auditor’s independence;
• 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 integrity of the Group’s
systems of internal control, fraud prevention, compliance,
whistleblowing, prevention of bribery and corruption, risk
management and financial reporting processes through the
co-ordination and supervision of the quality, independence and
effectiveness of the internal and external auditors, reviewing
the Company’s financial reporting and making further enquiries
as appropriate; and
• report to the Board on how it has discharged its responsibilities.
The effectiveness of the Company and the Group’s internal
control and risk management systems is reviewed and monitored
throughout the year by the Board, as set out in the Corporate
Governance report on pages 44 to 51.
A full set of Committee papers is provided to all directors and the
Chair of the Committee reports at the subsequent Board meeting
on the Committee’s work. The Board also receives a copy of the
minutes of each meeting.
OVERVIEW OF ACTIVITIES
In relation to the 2018 financial year the Committee:
• continued monitoring the principal elements of management’s
recommendation regarding the EfW cost provision together with
all other items categorised as non-underlying (further details
of which are included under Significant Issues Considered
on pages 54 and 55) ensuring the measurement, presentation
and disclosure were consistent with the Company’s disclosed
accounting policy and with FRC guidance and were clearly
explained, reconciled to statutory measures and consistent
with fair, balanced and understandable principles;
• received an update from the Finance Transformation Manager
on progress being made on the Finance Transformation
workstream under the Fit for Growth transformation
programme;
• requested that the newly-appointed Chief Construction Risk
Executive conduct a review of Construction contracts and
provisions (which is in progress);
53
GovernanceFinancial StatementsStrategic ReportOverview Audit Committee report continued
• requested the Company Secretary conduct a best practice
review of the Group’s whistleblowing process. The review
demonstrated the benefits of an Independent Whistleblowing
System which the Company is now implementing with an
external provider;
• received a report at each meeting on the progress and outcome
of the investigation of the 12 whistleblowing notifications
received during the course of the year, three of which were
upheld and four where investigations continue;
• requested an on-boarding session for Nick Pollard, a newly-
appointed Committee member, with the Internal Audit Partner
at PwC as part of his wider induction programme;
• reviewed a management paper supporting the going
concern and viability statements and satisfied itself as to
the appropriateness of the underlying assumptions, ensuring
consistency with the Group’s longer-term planning and annual
budgeting cycle financing arrangements and any material
contingent risks, as well as ensuring appropriate disclosure of
judgements and uncertainties;
• received a briefing from the Chief Financial Officer on the
principal judgements made in determining the half-yearly
review and Annual Report, reviewed and questioned those
judgements in the light of operational performance and other
evidence 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 both the Half-Year Report and Annual Report and
Financial Statements. As part of each 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 Audit Committee Report,
together with 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 auditor 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 auditor in
respect of the half-yearly review and the Annual Report;
• conducted an assessment of the effectiveness of the external
audit process, as detailed on pages 56 and 57;
• reviewed the independence and objectivity of the external
auditor, as detailed on page 56;
• reviewed and approved the external auditor’s terms of
engagement for the half-yearly review and for the audit of the
Annual Report;
• considered and agreed the scope, focus and fees to be paid to
the external auditor for the half-yearly review and the statutory
audit;
• reviewed and updated the Company’s policy on the provision
of non-audit services by the external auditor and regularly
monitored non-audit fees in comparison to the audit fees in
accordance with this policy (as detailed in Objectivity and
Independence on page 56);
• regularly reviewed both the external and internal audit risk
assessments and satisfied itself that the audit activities
appropriately addressed those risks;
• reviewed both the internal audit programme and the findings
and remediation actions, ensuring an adequate coverage of
risks (as detailed on page 57). A draft 2019 internal audit
plan has been agreed for the first half of the year, with
flexibility maintained to adapt to changes as the Company’s
transformation and Fit for Growth programmes continue to
evolve;
• established the Committee’s calendar of actions for the 2019
financial year; and
• received, considered and reviewed management’s response to
the FRC in respect of correspondence received in connection
with queries raised regarding the 2017 financial statements and
ensured agreed recommendations were implemented.
An independent evaluation of the Committee’s effectiveness is
included within the independent board evaluation process that is
due to report in 2019, as detailed in the Corporate Governance
Report on page 47.
SIGNIFICANT ISSUES CONSIDERED
The Committee 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 106 to 158 as
well as considering the overall quality of earnings. The Committee
received a paper, prepared by management, setting out the key
judgements and reviewed and challenged these in the light of its
own knowledge, taking into account the audit findings and views
of Grant Thornton and further enquiry of executive management,
as appropriate, in relation to the following matters:
Going concern and viability statement
Following the recognition of difficult trading conditions and
refinancing needs, the Board and Committee were vigilant
throughout the period to ensure the Company remained
solvent, was able to meet its liabilities as they fell due and had
sufficient liquidity in place at all times. Management prepared
cash flow forecasts, financing arrangements, covenant tests and
assumptions together with sensitised cases and various stress test
scenarios. These, together with the audit findings, were reviewed
in detail by the Committee. It was noted that the forecasts, which
were reviewed by advisers, were prepared on the assumption that
the Deleveraging Plan would be successfully concluded. This is
contingent on approval of the Plan by 50 per cent of shareholders
on 15 March 2019. Based on the current expectations, and on
the basis that the directors continue to expect a successful
completion of the financial restructuring, the Committee
considers it appropriate to continue to adopt the going concern
basis in preparing the 2018 accounts as disclosed in the Basis of
Preparation section on page 106.
The Company has set out a comprehensive viability statement
in the Strategic Report on pages 39 to 41 and describes very
clearly the principal risks, judgements, uncertainties and planning
assumptions underpinning this statement as well as the key
covenant compliance requirements of the refinancing agreements.
In considering and in support of the viability statement executive
management had overlaid various sensitivities and stress tested
the three-year business plan and compared these outcomes both
in terms of liquidity and covenant compliance headroom.
54
GOVERNANCE Revenue, margin recognition and contract accounting
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 disciplined
governance and control. For construction-type contracts the key
judgement concerns the recognition of profits appropriate to
progress and risk, the recovery of work-in-progress and debtors,
especially with respect to the risks of any non-certified amounts
(including variations and claims) and forecast timescales and
commercial 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
whenever 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.
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 on longer-term contracts. The quality
of earnings and movement in provisions during the course of the
year was also reviewed.
During the year the Committee considered management’s
approach to the adoption of the new IFRS 15 Revenue standard
and satisfied itself that the accounting treatments and the
required financial statement disclosures have been suitably
addressed in the year-end 2018 Group financial statements
(see pages 37 and 38 for further details on IFRS 15 adoption).
As part of this review, the Committee considered the significant
contracts set out in the Key Estimates and Judgements in
note 1(b) to the consolidated financial statements on pages 107 to
111 and assured itself as to the reasonableness of the estimates
and judgements made in respect of these contracts.
Non-underlying items – measurement, presentation and
disclosure
Management, as part of its presentation to the Committee on its
principal judgements and estimates, covered the basis on which
non-underlying items were being accounted for and disclosed
in the year-end 2018 financial statements. The Committee
also reviewed recent recommendations from the FRC on our
accounting definitions and financial statement disclosures of non-
underlying items and has satisfied itself that management have
addressed these points appropriately in the year-end 2018 Group
financial statements. Supported by views, analysis and insights
from our external auditors and taking into account our knowledge
and understanding of the items treated as non-underlying, the
Committee concluded that both the basis of recognition and the
presentation in the financial statements were appropriate. In
addition, the Committee ensured that the disclosures relating
to non-underlying items were fair, balanced and understandable
throughout the financial statements.
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 £373.2 million, which included
goodwill with a value of £342.3 million.
The majority of goodwill and other intangible assets is held within
UK Support Services and arises mainly from private-sector related
acquisitions.
The Committee reviewed management’s determination of its
principal cash generating units, the key assumptions used, such as
the discount rate and future cash flows in light of current business
performance and that future projections were consistent with
medium-term plans, and satisfied itself of the appropriateness
of management’s impairment testing. As a result, goodwill of
£26.9 million relating to the private-sector business in Support
Services was impaired in 2018. This is principally due to an
underperformance against pre-acquisition expectations primarily
due to competitive pricing, impact of regulatory labour cost
increases, customer churn and cost synergies not fully delivered,
together with an increase in its risk-adjusted discount rate from
10.3 per cent in 2017 to 11.8 per cent in 2018. In addition, a
further impairment of £6.2 million was recognised on the Support
Services Learning and Education CGU due to under-performance
of this business against the three-year plan targets and as a result
of the increase in its risk-adjusted discount factor from 10.3 per
cent in 2017 to 11.8 per cent in 2018.
Otherwise, the Committee assured itself that significant
headroom exists on other cash generating units and that any
reasonable sensitivity to the assumptions did not indicate
additional impairment.
Retirement benefit accounting
Calculation of the retirement benefit asset/obligation requires
management to make a number of assumptions including the
selection of an appropriate discount and mortality rate.
The Committee satisfied itself as to the reasonableness of the
assumptions set out in note 29 to the consolidated financial
statements, taking into account the independent third-party
confirmations of the pension assets valuation at the balance sheet
date and that pension balances are accounted for in accordance
with relevant accounting standards and guidance.
Accounting for new long-term borrowings
Accounting for debt restructuring under the new IFRS 9.
On 27 April 2018 the Group re-negotiated its existing credit
facilities which consisted of the renewal of existing Revolving
Credit Facilities (RCF) of £388.6 million and $350 million of
US$ Loan Notes and obtaining £175 million of new Term Loans
(LIBOR + 8.75 per cent) together with £21.5 million of Money
Market lines. These renewals of the RCF and US$ Loan Notes
(together, the April 2018 Refinancing) were at significantly higher
rates of interest than previously (LIBOR + 6.43 per cent for RCF
versus average of LIBOR + 2.8 per cent in 2017) and 7.61 per cent
for the US$ Loan Notes versus average of 5.6 per cent in 2017.
The Committee concluded that, based on the information
provided by management and input from the external auditors,
the changes in the terms of the Override Agreement constituted a
substantial debt modification under IFRS 9 and therefore existing
loans were de-recognised and new loan balances were recognised.
The substantially modified debt was initially recognised at fair
value, calculated based on the expected present value of future
cash flows, discounted at an effective interest rate reflecting the
Group’s cost of borrowing. Management’s view, with which the
Committee concurs, is that the effective rate of interest on the
loan was consistent with the market rates existing in April 2018.
55
GovernanceFinancial StatementsStrategic ReportOverview Audit Committee report continued
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
position and performance, business model and strategy.
In reviewing and conducting our enquiries we, amongst other
activities, challenged the criteria and consistent application in
classifying, measuring and disclosure of non-underlying items,
we focused on the outlook statements to ensure consistency with
our collective understanding and interpretation of the Company’s
recent and anticipated performance and satisfied ourselves that
risks and mitigations were appropriately disclosed.
The Committee was satisfied that, taken as a whole, the
2018 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 87.
EXTERNAL AUDIT
Oversight
The Committee considers and makes recommendations to the
Board as regards audit matters. The Committee manages the
relationship with the Company’s auditor, which includes a review
of the effectiveness of the statutory audit at the end of the audit
cycle, agrees, for and on behalf of the Board, the statutory audit
fees and scope of the statutory audit and makes recommendations
to the Board as to the auditor appointment or re-appointment.
The Committee also seeks to ensure co-ordination between the
activities of the external and internal auditors.
Tenure
Grant Thornton was formally appointed as the Company’s auditor
on 13 June 2014 following a competitive tender exercise involving
four audit firms at the end of the 2013 statutory audit and approval
by shareholders at the 2014 AGM. Based upon the review of audit
effectiveness, the Committee has recommended to the Board that
Grant Thornton be re-appointed for the sixth year as the Company’s
independent auditor to carry out the audit for the 2019 financial
year.
Grant Thornton rotated their Audit Engagement Partner during
the year after Simon Lowe had completed four out of a maximum
of five years in post and to facilitate both continuity and
independence in future years. The new Audit Engagement Partner
is Phil Westerman, who attended his first Committee meeting
in July.
The Committee will continue to review the auditor appointment
and the need to ensure that the Group complies with the
provisions of The Statutory Audit Services for Large Companies
Market Investigation (Mandatory Use of Competitive Tender
Processes and Audit Committee Responsibilities) Order 2014
made by the Competition and Markets Authority (the CMA Order)
relating to mandatory audit tenders every 10 years and rotation
after 20 years.
Objectivity and independence
The Company has an established policy aimed at safeguarding the
independence and objectivity of the Group’s external auditor.
The policy sets out the approach to be taken when considering
engaging the external auditor for non-audit work. There is no
inconsistency between the FRC Revised Ethical Standard 2016 and
the Group’s policy.
The external auditor 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 auditor
with a value not exceeding £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; and
• audit reports required by statute or regulation.
The above policy also prohibits the auditor auditing their own
work or entering into any arrangement in relation to audit work
whereby a joint interest is created between the Company and the
auditor, 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, a minimal amount of non-audit services was
delivered by specialists and advisers who were independent of the
audit team.
Non-audit fees incurred for the year were £0.1 million (3 per cent)
compared to audit fees of £3.0 million (including £1.3 million
of year-end 2017 additional fees billed), the largest element of
which - £0.1 million - related to the interim 2018 review. Further
details of the audit and non-audit fees paid to Grant Thornton
are included in note 4 to the consolidated financial statements
on page 122. In 2019 Grant Thornton were engaged as reporting
accountants to provide services in relation to the Deleveraging
Plan and fees relating to this service are estimated at £1.8 million.
Provision of these services are not prohibited by the Ethical
Standard.
The Committee concluded that the safeguards set out above
were sufficient so as not to compromise auditor objectivity and
independence.
Effectiveness and audit quality
The Committee reviewed Grant Thornton’s audit effectiveness
following the audit of the 2017 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 key
judgements 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;
56
GOVERNANCE • the quality and comprehensibility of the audit findings reports;
• the quality and clarity of the auditor’s external report; and
• feedback from senior management on the audit process generally.
In addition, the Committee reviewed the FRC’s 2017/18 Audit
Quality Inspection (AQI) of Grant Thornton and discussed its
findings with the Audit Engagement Partner as well as satisfying
itself as to the adequacy of the firm’s internal quality assurance
processes.
The results were collated and presented to the
December 2018 Audit Committee by the Chief Financial Officer.
Group Finance will use the outputs of the exercise to support
control improvement plans as part of the transformation
activities in 2019.
Internal Audit will consider the results of management’s self-
assessment alongside the delivery of internal audit work in
related areas during 2019.
A draft 2019 internal audit plan has been agreed for the first half
of the year but with flexibility maintained to adapt to changes as
the Company’s transformation continues.
The Committee also monitored, reviewed and assessed the role
and effectiveness of internal audit in the overall context of the
Group’s risk management system and review.
The Internal Audit Partner has direct access to the Chair of the
Committee and they meet on a regular basis in addition to the
formal committee process.
REVIEW
The Committee confirms that it has fulfilled its responsibilities
during the year in relation to, and confirms the Group is
in compliance with, The Statutory Audit Services for Large
Companies Market Investigation (Mandatory Use of Competitive
Tender Processes and Audit Committee Responsibilities)
Order 2014.
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
8 March 2019 and signed on its behalf by:
Anne Fahy
Chair of the Audit Committee
8 March 2019
The Audit Engagement Partner has direct access to the Chair of
the Committee and they meet on a regular basis in addition to the
formal committee process. On 21 February 2019, the Committee
received the FRC report following completion of their review
of the Grant Thornton 2017 audit file and will be reviewing and
discussing the findings and proposed actions with the auditors.
INTERNAL AUDIT
The internal audit function provides an independent and objective
appraisal to the Board, through the Committee, of the adequacy
and effectiveness of the processes established to manage risk
and control the business, makes recommendations on how the
system of internal control might be improved, assists the Board
in meeting its objectives and discharging its responsibilities and
also provides certain advisory reports on business initiatives in
support of management initiatives. The Internal Audit function is
outsourced to PwC assuring a further level of independence.
The annual internal audit plan of work, submitted to the
Committee each December for approval, is risk-based and
designed to provide core assurance against those areas identified
as high risk and deliver cyclical reviews of key business activities,
financial reporting processes and medium-risk areas. The annual
plan for 2018 was reviewed and refreshed, subject to agreement
by the Committee, at the half year to ensure it remained relevant
and focused and in the context of the current financial and
operational restructuring of the Group.
Specialist subject matter experts are engaged where appropriate
across many reviews to address areas such as engineering and
commercial issues, VAT, employment law, IT, business continuity,
culture and behaviour, working capital and information security.
The 2018 plan focused on Fit for Growth savings, key financial
controls across the Group, and controls over the utilisation and
reporting of information on the contracts with large forward-loss
provisions.
The Committee received full copies of each internal audit review
undertaken during the year comprising a set of findings, proposed
corrective actions, management’s responses to those findings and,
where appropriate, recommendations for improvements.
Closure of the agreed corrective actions was tracked via a web-
based system and monitored by management, with progress
reported to the Committee in July 2018, December 2018 and
February 2019.
In 2018 Internal Audit refreshed the controls self-assessment
checklist that is used by the Group to monitor controls across
11 business processes. In November 2018 the Chief Financial
Officer requested each of the Divisional Finance Directors to
complete the updated self-assessment checklist for their divisions
and to submit the results to Group Finance.
57
GovernanceFinancial StatementsStrategic ReportOverview Directors’ remuneration report
Nick Salmon
Chairman of the Remuneration Committee
Dear Shareholder
On behalf of the Board, I am pleased to present the Remuneration
Committee’s annual report on directors’ remuneration for the
year ended 31 December 2018 which sets out the amounts earned
by the directors under the Remuneration Policy approved by
shareholders at the 2018 AGM. This is my first time of writing to
you as Chair of the Remuneration Committee. I took over from
Keith Ludeman following the AGM on 12 June 2018 when he
stepped down from the Board.
ALIGNMENT OF REMUNERATION WITH STRATEGY
Our current Remuneration Policy was approved by over 97 per
cent of our shareholders at last year’s AGM. The policy is a
conventional remuneration structure that includes separate
annual and long-term incentives albeit with a weighting towards
long-term performance. This structure is fully aligned with
Interserve’s businesses which require operational excellence in
the short term to support the delivery of long-term contracts with
our customers.
We made minimal changes to the policy at the AGM given that it
already included standard ‘best practice’ features such as
200 per cent of salary share ownership requirements, recovery
and withholding provisions and a two-year holding period on
vested long-term incentive award shares.
Our future approach on remuneration is likely to be influenced
by the imminent deleveraging event and the Committee will
be keeping this matter under review to ensure the Company
has a policy that is aligned with stakeholder objectives and the
Company’s strategy.
2018 REMUNERATION PAYMENTS
As detailed in the Strategic Report, notwithstanding the
challenging external environment, 2018 was a year of significant
progress. We achieved a successful refinancing in April, and
the business traded robustly and continued to win major new
contracts. Our Fit for Growth programme is delivering material
cost savings and a simpler and more effective business structure.
In addition to the above, we also made good progress in relation
to positioning the Group for long-term sustainable success. We
moved much closer to closing out and exiting the Energy from
Waste (EfW) business and we continued the discussions with
our lenders to reach agreement on key terms of a proposed
Deleveraging Plan which was announced in February.
Annual Variable Pay
The annual bonus targets set at the start of 2018 were equally
weighted against a challenging range of operating profit,
operating cash flow and strategic targets. These targets reflected
the Group’s key operational priorities for the year.
An element of the profit and strategic targets were met, but
neither were achieved in full. In particular, whilst elements of
the strategic targets set in relation to EfW were achieved, the
Committee considered it appropriate given the wider context of
EfW that no vesting should be attributed to this element.
Full details of the annual bonus targets initially set, and
performance against them, are set out on pages 70 and 71. The
Committee has not yet approved any bonus payments and has
a discretion over the quantum of any payments made. It will
consider the exercise of this discretion in finalising any awards
after the outcome of the deleveraging event is known. It is
anticipated that any bonuses would be paid in April/May.
Long-term variable pay
2016 Performance Share Plan (PSP) awards
The long-term incentive awards granted in 2016 were eligible to
vest based on independent, challenging three-year normalised
EPS1 and relative total shareholder return (TSR) targets (versus the
FTSE 250, excluding investment trusts).
Under the EPS element of the award, the threshold performance
target was not met. With regards to our relative TSR
performance, we were below the median when compared
against the peer group and so this target was also missed.
Accordingly, there will be no vesting in relation to the 2016 long-
term incentive award.
As disclosed last year, we granted PSP awards in 2018 with
challenging targets based on relative TSR, cumulative operating
profit and strategic targets linked to the business transformation
plan. Details of the specific performance targets are set out on
pages 75 and 76.
Base salaries
Details of the executive directors’ salaries are set out on
page 68. There was an increase of circa two per cent in executive
directors’ base salaries during the year under review. This was
consistent with the typical increase awarded to the general
salaried workforce.
1 Normalised EPS is 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.
58
GOVERNANCE APPLICATION OF REMUNERATION POLICY IN 2019
As noted above, the Remuneration Policy will be reconsidered
after the deleveraging event in consultation with major
shareholders and, if changed, submitted for shareholder approval.
Annual Variable Pay
Under the current policy, executive directors are eligible for
Annual Variable Pay of up to 125 per cent of basic salary in the
case of the Chief Executive Officer and the Chief Financial Officer
and 100 per cent of basic salary in the case of other executive
directors. Part of the bonus is subject to deferral into Interserve
shares, and recovery and withholding provisions will apply.
Long-term variable pay
Under the current policy, executive directors may be awarded up
to 150 per cent of basic salary.
Following the announcement of the deleveraging proposal,
the Committee is currently in the process of considering the
implications on 2019 long-term incentive awards both in terms
of the potential quantum of award and the associated
performance targets.
The expectation is that any variable pay awards will be subject
to performance conditions that are aligned with our key
objectives, including delivering long-term profitability, returns
for shareholders and delivering against the Board’s long-term
transformation plan.
Developments in corporate governance
The Committee has monitored developments in corporate
governance over the course of 2018 and has reviewed the
new legislation on remuneration reporting and the 2018 UK
Corporate Governance Code. These matters will be given further
consideration during 2019. We will, for example, undertake
further work to determine the most appropriate method of
disclosing the ratio of CEO pay to the pay of our UK employees,
in line with the new regulations. In line with the 2018 Code, we
will also engage with the workforce to explain how executive
remuneration aligns with wider company pay policy. We will
formally report against these matters next year.
Shareholder engagement
The Committee is committed to maintaining an ongoing dialogue
with shareholders on the issue of executive remuneration and we
welcome any further feedback you may have.
We look forward to your support on the resolutions relating to
remuneration at the 2019 AGM.
On behalf of the Remuneration Committee
Nick Salmon
Chairman of the Remuneration Committee
59
GovernanceFinancial StatementsStrategic ReportOverview Directors’ remuneration report
In this section:
REMUNERATION POLICY
Executive directors’ remuneration policy
Terms of appointment and remuneration policy for non-executive directors
ANNUAL REPORT ON REMUNERATION
How the Remuneration Policy will be applied in 2019
How the Remuneration Policy was applied in 2018
Governance and operation of the Remuneration Committee
REMUNERATION POLICY
Page
60
67
68
68
78
This part of the report sets out the Company’s Remuneration Policy, which was approved by shareholders at the AGM on 12 June 2018
and which took effect from that date.
EXECUTIVE DIRECTORS’ REMUNERATION POLICY
The following table summarises the main elements of the executive directors’ remuneration policy, the key features of each element,
their purpose and linkage to our current strategy. Details of the remuneration arrangements for the non-executive directors are set out
on page 67.
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.
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.
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.
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. These benefits are
provided for defined periods only.
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).
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.
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.
60
GOVERNANCE Element of pay
Purpose and link to strategy
How operated in practice
(including framework for assessing performance)
Pension
To provide benefits
commensurate to the
market in which the
Company operates.
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.
A Company contribution calculated at up to 15% of base salary for
executive directors provided they are making the maximum 8%
employee contribution.
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.
Targets are set by the Committee with reference to stretching targets
that are set annually by the Board.
Bonuses are based on achievement against challenging financial and,
where appropriate, non-financial targets. The Committee may use
different performance metrics and weightings for each performance
cycle to better reflect the strategic priorities of the Company as these
evolve. However, a substantial proportion will be based on structured
financial targets each year.
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:
• 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 Officer and
Chief Financial Officer, 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.
Maximum opportunity
Employer's defined
contribution and/or
pension cash supplement
up to a total maximum of
15% of base salary.
Maximum opportunity:
125% of basic salary for the
Chief Executive Officer and
Chief Financial Officer 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.
61
GovernanceFinancial StatementsStrategic ReportOverview Directors’ remuneration report continued
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 achieve 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.
Maximum:
Awards vest subject to performance conditions tested over a minimum
of three years. A majority of awards must be subject to a challenging
range of financial targets (e.g. EPS) and/or TSR targets. A minority of an
award may be subject to strategic targets.
With regard to financial targets, 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, with graduated scales operating between performance points.
No awards vest for below-threshold performance levels. In relation to
strategic targets, the structure of the target will vary based on the
nature of target set (i.e. it will not always be practicable to set such
targets using a graduated scale and so vesting may take place in full for
strategic targets if specific criteria are met in full).
The Committee will review the performance conditions each year prior
to awards being made and may make appropriate revisions in light of
developments in the Company’s strategy.
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 financial and/or
TSR performance condition
can vest for achieving the
threshold performance
level.
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.
Post-tax vested shares must be retained for at least a two-year holding
period after vesting.
Dividends accrue on shares that vest to the later of three years from
grant and the conclusion of any holding period. Dividends may be paid in
cash or shares and assume reinvestment of dividends into the Company’s
shares.
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.
All-employee
share
schemes
To support and
encourage share
ownership by employees
at all levels.
The Company currently provides two all-employee HMRC tax-advantaged
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.
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.
62
GOVERNANCE Element of pay
Purpose and link to strategy
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, 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.
Discretion retained by the Committee
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 66); 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).
The Committee also retains the discretion to:
• 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.
Operation of Annual Variable Pay and the Performance Share Plan
With regard 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.
For the long-term incentives, the Committee will continue to 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.
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.
Targets are set based on sliding scales that take account of internal planning and external market expectations for the Company. Only
modest rewards are available for delivering threshold performance levels with maximum rewards requiring substantial out-performance
of the challenging plans approved at the start of each year.
How the executive directors’ Remuneration Policy relates to the wider Group
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, other senior employees and employees
more generally. Variable pay opportunity tends to be set at higher levels at more senior executive levels as these employees are those
that are perceived to have the greatest ability to influence overall Group performance. In addition, the choice of performance metrics
for executive directors tends to be more heavily weighted towards Group results rather than business unit or individual performance.
Incentive plan targets for senior employees are typically set against a combination of metrics (e.g. Group, division and business unit) with
wider employee targets more likely to be weighted towards division and business unit performance. In all cases targets link back to overall
Group business plans. This approach provides a strong alignment of interest between senior executives, employees and investors.
Operation of the PSP is limited to the most senior employees who are perceived to have the greatest ability to influence Group-level
performance. Historically, circa 130 senior employees have participated in the PSP, but in 2018 PSP awards were made to 10 employees;
all members of the Executive Team.
Benefits are provided across the Group at all levels with these often linked to employee grade. In terms of the most valuable benefits
to executive directors these include the provision of a cash allowance and/or company car benefit with the value limited to £30,000.
The Shareholding Guidelines are not applicable other than to the executive directors.
How the views of employees are taken into account
In light of the new 2018 UK Corporate Governance Code, the Board has determined that in 2019 two “town hall” meetings will be held with
employees that will be attended by, as a minimum, both the Chief Executive Officer and the Group Chairman, that will allow the views
from a broad cross-section of the employee population. The Board will also utilise the new employee engagement survey to gain insights
into employee views.
The Committee takes due account of remuneration structures elsewhere in the Group when setting pay for the executive directors (for
example, consideration is given to the overall salary increase budget and the incentive structures that operate across the Group).
63
GovernanceFinancial StatementsStrategic ReportOverview
Directors’ remuneration report continued
How the views of shareholders are taken into account
The Remuneration Committee considers shareholder feedback received in relation to the AGM each year and guidance from shareholder
representative bodies more generally. This feedback, plus any additional feedback received during any meetings held with shareholders
from time to time, is then considered as part of the Committee’s ongoing review of remuneration policy.
Ability to make payments to executive directors
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.
When approving this directors' Remuneration Policy, authority was 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 74 to 77 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.
Remuneration scenarios for executive directors
The Remuneration Policy results in a significant proportion of remuneration received by executive directors being dependent on Group
performance. The graph below illustrates how the total pay opportunities for the executive directors varies under three different
performance scenarios: below target, on-target and maximum. When reviewing the graph, it should be noted that it has been prepared
based on the policy detailed above but also includes a scenario showing an assumed future share price growth of 50 per cent.
CEO
3,500
3,000
2,500
2,000
1,500
1,000
500
0
£3,180k
£2,683k
37%
31%
32%
£1,920k
33%
22%
45%
£860k
100%
CFO
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
£488k
100%
£1,831k
£1,521k
37%
31%
32%
£1,098k
33%
22%
45%
Minimum
On-target
Maximum
Minimum
On-target
Maximum
Fixed Pay
Annual Bonus
LTIP
LTIP value with 50% share price growth
Assumptions:
• Minimum – fixed pay only, based on salary effective 1 January 2019, 15 per cent of salary pension contribution (or 15 per cent of
salary contribution in lieu of pension) and benefits received in the 2018 financial year (annualised where relevant).
• On-target – minimum plus 50 per cent of the maximum pay-out under the Annual Variable Pay scheme, and 65 per cent PSP vesting.
• Maximum – minimum plus 100 per cent of the maximum pay-out under the Annual Variable Pay scheme, and full PSP vesting and full
PSP vesting with 50 per cent share price growth.
Dividend equivalent payments provided for under the PSP have been disregarded and other than for the share price growth scenario, no
share price growth is assumed for the purposes of these charts.
Service contracts and policy on payments for loss of office
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 one year’s basic annual salary.
Details of the executive directors’ service contracts are summarised below. Each contract has an indefinite unexpired term and a notice
period of one year.
Name
D J White
M A Whiteling
D I Sutherland1
Date of contract
1 September 2017
1 October 2017
1 January 2011
1 Dougie Sutherland stepped down from the Board on 12 February 2019.
64
GOVERNANCE 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
Resignation1
Departure on agreed terms2
Salary (after
cessation of
employment)
Nil
Up to one year’s basic salary which may be payable monthly
for the duration of the notice period of up to 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.
Good leaver3
Nil
Pension
and benefits
Annual
Variable
Pay
Performance
Share Plan
Nil
For existing directors up to one year’s benefits and pension.
Nil
For newly-appointed directors up to one year's benefits and
pension as part of the PILON as detailed above.
Nil if the executive
departs before the
payment date unless
the Remuneration
Committee
determines otherwise.
All awards, including
those which have
vested but are
unexercised will
lapse immediately
upon cessation of
employment.
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.
May be payable at the discretion
of the Committee based on
performance pro-rated for the
proportion of the financial
year 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.
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, to
settle any potential claim against the employer, provide
outplacement support and assistance with legal fees.
Nil
1 For 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 under ‘departure on agreed terms’.
65
GovernanceFinancial StatementsStrategic ReportOverview 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
General policy
Specifics
Salary
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
Annual Variable
Pay
In line with Company policies.
Where appropriate, relocation expenses/arrangements may be provided.
In line with existing schemes.
Maximum opportunity 100% of base salary
or in the case of a Chief Executive Officer or
Chief Financial Officer, 125% of base salary.
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.
Performance
Share Plan
In line with Company policies and PSP rules.
Maximum award up to 200% of basic salary
(at the date of grant) may be made.
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.
Other share
awards or
remuneration1
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.
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.
1 The 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 Officer and the Board. Any fees earned in that
capacity may be retained by the executive director.
66
GOVERNANCE TERMS OF APPOINTMENT AND REMUNERATION POLICY FOR NON-EXECUTIVE DIRECTORS
Terms of appointment
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
G A Barker
G M Edwards
A K Fahy
R J King
C N Pollard1
N R Salmon
Date first appointed
1 January 2016
1 February 2017
1 January 2013
1 September 2014
26 June 2018
1 August 2014
Date last elected/re-elected
12 June 2018
12 June 2018
12 June 2018
12 June 2018
n/a
12 June 2018
1 Nick Pollard will be proposed for election by shareholders at the 2019 AGM.
The following table summarises the non-executive directors’ Remuneration Policy.
Element
Purpose and link to strategy
How operated in practice
Maximum opportunity
Fees
To recruit and maintain
non-executives of a
suitable calibre for the
role and duties required.
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.
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.
67
GovernanceFinancial StatementsStrategic ReportOverview Directors’ remuneration report continued
ANNUAL REPORT ON REMUNERATION
The Annual Report on Remuneration will be put to an advisory vote at the 2019 AGM.
HOW THE DIRECTORS’ REMUNERATION POLICY WILL BE APPLIED FOR THE YEAR ENDING 31 DECEMBER 2019
Executive directors’ remuneration
Given the recent announcement in relation to the proposed deleveraging event, the Committee will review the appropriateness of the
current policy and, if appropriate, formulate a new policy and seek shareholder approval of that new policy. Hence it is not possible at
this point to state the basis on which the current, or any revised policy, will be applied for the year ending 31 December 2019.
Non-executive director fees
The fee levels operated in 2018 will remain unchanged during 2019 and are set out in the table below:
Element
Fee paid to Group Chairman
Base fee paid to other non-executive directors
Supplementary fees:1
- Senior Independent Director
- Audit Committee Chairman
- Remuneration Committee Chairman
- Nomination Committee Chairman
Fee effective
1 January 2019
£
170,000
51,400
7,000
10,000
10,000
Fee effective
1 January 2018
£
170,000
51,400
7,000
10,000
10,000
See note2
See note2
Percentage
change
nil
nil
nil
nil
nil
n/a
1 Nick Pollard is paid an additional fee of £10,000 per annum to recognise his additional responsibility and commitments in respect of supporting the restructuring and engagement
with the lender group.
2 The Group Chairman is Chairman of the Nomination Committee and receives no supplementary fee for chairing this committee.
HOW THE REMUNERATION POLICY WAS APPLIED FOR THE YEAR ENDED 31 DECEMBER 2018
The salaries for the executive directors are set out in the table below:
Name
D J White
M A Whiteling
D I Sutherland
Salary as at
1 January 2019
£
663,000
413,100
322,205
Salary as at
1 January 2018
£
650,000
405,000
315,188
Cost of living increases of circa two per cent were made to the executive directors, broadly in line with those awarded to the general
salaried workforce, with the increases effective from 1 July 2018 in line with the Remuneration Policy.
Debbie White is a non-executive director of Howden Joinery Group plc for which she receives a fee of £55,000 per annum. She is also an
unremunerated trustee of Wellbeing of Women.
Mark Whiteling is a non-executive director of Connect Group Plc for which he receives an annual fee of £53,000.
The table on the following page shows the remuneration paid to each director and also includes the potential Annual Variable Pay that
may be received based on an assessment of performance against the performance targets. The Remuneration Committee retains a
discretion as to whether and to what extent any payments are made and is reserving the right to exercise that discretion only following
the deleveraging event such that any payment determined by the Committee would be due in April/May. Furthermore, as a good leaver,
the Committee has a further discretion to consider as to whether any payment should be made to Mr Sutherland which, again, will be
determined post-deleveraging. Further details are included on pages 70 and 71.
68
GOVERNANCE Remuneration paid to each director (audited information)
£
Year
Salary & fees
Taxable
benefits
Annual
Variable Pay12
PSP9/10
Pension11
Other
remuneration
Total
Executive directors
D J White1
M A Whiteling2
Sub-total
Non-executive directors
G A Barker
G M Edwards3
A K Fahy
R J King
C N Pollard4
N R Salmon
Sub-total
Former directors
K L Ludeman5
D I Sutherland6
Sub-total
Total
2018
2017
2018
2017
2018
20177
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
20178
2018
20178
656,500
97,093
404,430
216,667
6,641
270,089
409,050
13,450
251,991
101,250
3,433
126,562
1,065,550
110,543
656,421
317,917
10,074
396,651
170,000
170,000
51,400
47,117
61,400
61,400
58,400
58,400
25,700
-
56,400
51,400
423,300
388,317
30,700
61,400
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
–
-
-
318,697
17,390
157,236
315,188
17,973
-
349,397
17,390
157,236
376,588
17,973
-
1,838,247
127,933
813,657
1,082,822
28,047
396,651
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
98,475
32,500
61,358
15,188
159,833
47,688
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
47,805
47,278
47,805
47,278
207,638
94,966
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,256,498
525,897
735,849
246,433
1,992,347
772,330
170,000
170,000
51,400
47,117
61,400
61,400
58,400
58,400
25,700
-
56,400
51,400
423,300
388,317
30,700
61,400
541,128
380,439
571,828
441,839
2,987,475
1,602,486
1 Debbie White was appointed on 1 September 2017.
2 Mark Whiteling was appointed on 1 October 2017.
3 Gareth Edwards was appointed on 1 February 2017.
4 Nick Pollard was appointed on 26 June 2018.
5 Keith Ludeman resigned on 12 June 2018.
6 Dougie Sutherland stepped down from the Board on 12 February 2019 and ceased employment on 28 February 2019.
7 The 2017 comparator remuneration sub-total figure does not include Dougie Sutherland’s 2017 remuneration as disclosed in the 2017 Annual Report, which has moved to the former
directors’ section of the table.
8 The 2017 comparator remuneration sub-total and total figures do not include former directors’ remuneration as disclosed in the 2017 Annual Report (Lord Blackwell, Adrian Ringrose,
Tim Haywood and Bruce Melizan).
9 The PSP awards awarded on 5 April 2016 have not met the performance conditions and will not vest. For further information see page 72.
10 The PSP awards awarded on 1 June 2015 did not meet the performance conditions and did not vest. For further information see last year’s Remuneration Report.
11 15 per cent salary supplement in lieu of pension.
12 As noted on page 68 these amounts have not been paid. The Committee will determine whether and to what extent payments are to be made following the deleveraging event.
Whether any payment is made to Mr Sutherland is also subject to an independent discretion noting Mr Sutherland is a good leaver.
69
GovernanceFinancial StatementsStrategic ReportOverview Directors’ remuneration report continued
Additional notes to the directors’ remuneration table (audited information)
1. Taxable benefits
The table below sets out the constituent elements of the taxable benefits for the executive directors included in the single figure table
above for the period that each individual was a member of the Company’s Board:
Executive directors
D J White
M A Whiteling
Former directors1
D I Sutherland
Total
Cash allowance
in lieu of
company car
£
Company car
£
Fuel benefit
£
Travel and
accommodation
£
Medical
insurance
£
-
-
-
-
-
-
-
-
18,000
6,000
12,000
3,000
13,896
13,896
43,896
22,896
-
-
-
75
1,537
2,208
1,537
2,283
77,1362
32,3092
-
-
-
-
77,136
32,309
1,957
641
1,450
358
1,957
1,869
5,364
2,868
Total
£
97,093
6,641
13,450
3,433
17,390
17,973
127,933
28,047
Year
2018
2017
2018
2017
2018
20173
2018
20173
1 Values represent the benefit received as a serving director during the year.
2 This amount relates to expenses that were agreed to be reimbursed to the CEO on a cost-neutral basis (net of tax basis) at the time of her recruitment to enable her to work across
different offices. The 2018 amount relates to the reimbursement of expenses in relation to the 2018 financial year. In addition, a further payment was made in the 2018 financial year
as a reimbursement of expenses incurred in the 2017 financial year of £32,309. The amount of this payment had not been finalised at the time of publishing the 2017 Annual Report.
3 The 2017 comparator remuneration sub-total and total figures do not include former directors’ remuneration as disclosed in the 2017 Annual Report (Adrian Ringrose, Tim Haywood
and Bruce Melizan).
2. Determination of 2018 Annual Variable Pay
The bonus structure applicable to all executive directors in 2018 was as follows:
Proportion of bonus
Metric
One-third
One-third
One-third
Operating profit
Operating cash flow
Achievement of defined strategic targets
Operating profit and operating cash flow were introduced as part of a Group-wide focus on returning the Company back to targeted
levels of profitability and cash generation. It was also considered appropriate to include a greater weighting than in prior years on
delivery against specific objectives arising from the Energy from Waste plans and early conclusions of the strategic review and those in
the transformation plan.
The targets relating to operating profit and operating cash flow were set using a challenging sliding scale set with reference to
the Company’s internal planning expectations, market expectations for our performance and the plans presented to lenders and
other financial stakeholders in connection with the refinancing of the Company’s debt. With regard to the non-financial targets, a
combination of quantitative and qualitative targets applied that were based on delivery against the Company’s Fit for Growth strategy
and leadership to ensure that the changes agreed by the Board to be driven through the business were sustainable.
In relation to any payment in connection with the above targets, the Committee retained the discretion to reduce these elements of
Variable Pay (to zero) if it considered it appropriate to do so in light of the Company’s overall financial performance achieved during
the year. The Committee has not yet approved any bonus payments and will consider the exercise of discretion in finalising any awards
after the outcome of the deleveraging event is known. Furthermore, whether any payment is made to Mr Sutherland, is also down to
Committee discretion in considering Mr Sutherland as a good leaver. It is anticipated that any bonuses will be paid in April/May.
70
GOVERNANCE The actual targets set and performance against the targets is set out below.
Metric
Maximum
award as a
proportion
of salary
Original performance target
Targets applicable to Debbie White and Mark Whiteling
Operating profit
41.67%
Less than £76 million
£76 million
£91 million
£101 million
Straight-line pay-out occurs between
performance points.
Operating cash flow 41.67%
Less than £11 million
Strategic targets
41.67%
£11 million
£31 million
£51 million
Straight-line pay-out occurs between
performance points.
Delivery of sustainable savings in
line with the agreed targets in the
business plan and with the agreed
timescales.
Good governance of the change
programme overall delivering
confidence against the strategic
milestones and benefits delivery
and reviewed by internal audit as
appropriate.
Percentage
of element
payable
Performance assessment
Extent of
achievement
[TBC]
Actual
award as a
percentage of
salary [TBC]
0%
10%
50%
100%
0%
10%
50%
100%
79.7%
33.22%
Nil
Nil
33.3% Savings figure exceeded so target
100%
13.89%
met in full.
33.3% Regular monthly comprehensive
100%
13.89%
updates including a full-year review
in December 2018 have been
provided to the Board and key
external stakeholders. Further
assurance work confirming good
governance and progress to
complement programme testing
has been provided through external
advisors in May and December 2018
and reported to the Audit Committee
resulting in the assessment of the
condition being achieved in full.
Delivery of EfW projects and
overall programme to the timeline,
cost and cash profile consistent
with the agreed business plan
provided to lenders.
33.3% Nil vesting
Targets applicable to Dougie Sutherland and the extent the targets were achieved are as stated above, but with the maximum award
for each element being 33.33% as a proportion of salary rather than 41.67% and noting that any payment to Mr Sutherland is at the
discretion of the Committee as a leaver.
The above provides full disclosure of the original financial targets set for the year and the calculation of performance against those
targets. In determining the vesting percentage the Committee had the discretion to adjust the calculation and it had exercised that
discretion which is reflected in the stated vesting percentage for the Operating Profit element. For example, the original targets may
be adjusted for any discontinued, divested or acquired businesses to ensure the targets remained similarly challenging and it had
made such an adjustment to the targets in respect of the disposal of Access Hard Services which is reflected in the vesting percentage
disclosed. In relation to non-financial targets, an overview has been provided which omits any disclosures that are considered
commercially sensitive. As the Committee has retained the discretion to consider and determine the quantum of actual bonus payments
post-deleveraging, further disclosures on the discretion exercised in respect of 2018 performance and the adjusted targets that
determine the basis of the actual payments made will be provided when preparing the 2019 Annual Report on Remuneration.
71
GovernanceFinancial StatementsStrategic ReportOverview Directors’ remuneration report continued
3. Determination of 2018 Performance Share Plan payments
The analysis below explains how the PSP payments for the performance period ending 31 December 2018 were determined.
The PSP awards granted on 5 April 2016 were based on performance over the three-year period from 1 January 2016 to
31 December 2018 and were subject to the following performance conditions, neither of which were satisfied:
The EPS Performance Condition for two-thirds of the 2016 Awards
Normalised EPS1 growth of the Company over the performance period
Vesting percentage of two-thirds of shares subject to the award
Less than 16.7%
16.7% to 37%
37% to 65%
Greater than 65%
0%
25% to 65% (pro-rated)
65% to 100% (pro-rated)
100%
1 Normalised EPS is 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 discretion of the Committee.
In testing the performance condition, the Committee assessed performance based on the definition of EPS detailed above and noted
that no growth in EPS had occurred over the period which meant the target was not achieved and therefore the EPS condition had not
been met and the EPS part of the award will not vest.
The TSR Performance Condition for one-third of the 2016 Awards
This condition is determined by comparing the Company’s TSR performance to the TSR of each company in the FTSE 250, excluding
investment trusts.
TSR ranking of the Company compared to the Comparator
Group over the performance period
Below median ranking
Median ranking (top 50%)
Median to upper quartile ranking
Upper quartile ranking (top 25%)
Vesting percentage of one-third of shares subject to the award
0%
25%
25% to 100% (pro-rated)
100%
TSR performance was below the median of the comparator group and therefore the TSR condition was not met and the TSR part of the
awards will not vest.
4. Directors’ pension entitlements
During 2018 none of the executive directors were active participants of the Defined Contribution section of the Interserve Pension
Scheme and, as at 31 December 2018, all the executive directors who were former members of the Scheme had transferred their
deferred benefits out of this section of the Scheme. All the executive directors receive 15 per cent salary supplement in lieu of
pension contributions.
Non-executive directors’ fees are not pensionable.
5. Payments for cessation of employment
Dougie Sutherland stepped down from the Board on 12 February 2019 and ceased employment on 28 February 2019. A payment to
Mr Sutherland of £322,205, being a payment in lieu of the contractual notice of period of 12 months, has been made along with a
statutory redundancy payment of £9,144. In view of the reason for termination being by way of redundancy, the Committee resolved
Mr Sutherland to be a “good leaver”. His unvested PSP awards over 213,802 and 524,730 shares granted in 2017 and 2018 respectively,
will become exercisable at the end of the respective performance periods subject to the applicable performance conditions being
satisfied and time pro-rating of the award to the date of cessation of employment, being 28 February 2019. Any vested awards must be
exercised within 12 months of the vesting date, after which time they will lapse. Any shares acquired must be held for a further two
years and are subject to the recovery and withholding provisions of the PSP.
Shares purchased by Mr Sutherland under the Share Incentive Plan (along with any associated dividend shares) are transferable to him
under the terms of that plan.
The Committee will consider whether it is appropriate to exercise its discretion to award a bonus to Mr Sutherland in respect of the
2018 financial year.
The payment of £322,205 will be subject to such deductions in respect of tax and national insurance that the Company is required by
law to make.
72
GOVERNANCE Performance graph
The graph below shows the value, on 31 December 2018, 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.
Historical TSR Performance
£400
£300
£200
£100
0
December
2008
December
2009
December
2010
December
2011
December
2012
December
2013
December
2014
December
2015
December
2016
December
2017
December
2018
Interserve Plc
FTSE All-Share Support Services
Source: Thomson Reuters Datastream
Change in Chief Executive remuneration
The table below provides a summary of the Chief Executive’s remuneration over the last ten years:
Total remuneration (£000)
Annual Variable Pay (% of maximum)
PSP vesting (% of maximum)
2018
1,2566
2017
9851
48.8%4 33.02%2
nil5
nil3
2016
679
nil
nil
2015
2014
2013
2012
2011
1,418
1,797
2,054
1,928
1,318
2010
543
2009
943
77.8%
62.6%
58.7% 100.0% 100.0%
30.0%
98.0%
44.5%
54.2% 100.0% 100.0%
50.0%
nil
50.0%
The data for this table was taken from the Directors’ Remuneration Reports for the relevant years and adjusted to take account of the
actual share price on the date of vesting for the PSP.
1 This figure represents the total remuneration for Adrian Ringrose for the period during the year that he served as Chief Executive (1 January to 31 August 2017) combined with the
total remuneration for Debbie White for the period during the year that she served as Chief Executive Officer (1 September to 31 December 2017).
2 This figure represents the average bonus paid based on Adrian Ringrose receiving no bonus (0% of the maximum) for the eight-month period from 1 January 2017 to 31 August 2017
and Debbie White receiving a bonus (100% of the maximum) for the period of four months from 1 September 2017 to 31 December 2017.
3 This figure represents the vesting of PSP awards with performance conditions ending at 31 December 2017; in this case, the PSP award granted to Adrian Ringrose on 1 June 2015
which did not vest. The recruitment award to Debbie White (detailed on page 76) is excluded since it does not relate to performance at Interserve.
4 This figure is an estimate of the potential maximum that may be paid based on the performance targets. Whether and to what extent such amount is paid will be determined by the
Committee after the deleveraging event.
5 Debbie White had no PSP awards vesting with performance conditions ending at 31 December 2018.
6 This includes the calculated maximum potential bonus payment that has not yet been paid and may not be paid as noted in 4 above.
73
GovernanceFinancial StatementsStrategic ReportOverview Directors’ remuneration report continued
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 2017 and 31 December 2018, compared to the percentage increase for UK Senior Management (on a per capita basis):
Salary
Chief Executive
Senior Management1
Benefits
Chief Executive2
Senior Management1
Annual bonus
Chief Executive3
Senior Management1 4
Percentage change
2.00%
3.00%
(16.87)%
10.20%
41.10%
46.67%
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.
2 For the purposes of providing comparable information the benefits and expenses for 2017 for the CEO have been annualised and the expenses incurred attributed to the appropriate
financial year.
3 Based on the maximum potential bonus that could be paid, noting that no such bonus may be paid and this remains at the discretion of the Committee post the deleveraging event.
4 This figure is an estimate only of the potential 2018 bonus. To the extent that there is a material difference this will be disclosed in the 2019 report.
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 2017 compared to the financial year ending
31 December 2018:
Overall expenditure on pay
Dividends paid
2018
£million
1,093.7
–
2017
£million
1,147.0
–
Percentage
change
(4.7)%
–
Performance Share Plan (audited information)
The following grants were made to the executive directors under the PSP during the year:
Executive director
D J White
M A Whiteling
D I Sutherland
Date of grant
Number of shares
03.05.18
03.05.18
03.05.18
1,082,130
674,250
524,730
1 Valued using the closing share price at the date of grant, being 89.05p per share.
Face value
£
Performance period
Exercise period
963,6371
01.01.18 - 31.12.20
03.05.21 – 02.05.23
600,4201
01.01.18 - 31.12.20
03.05.21 – 02.05.23
467,2721
01.01.18 - 31.12.20
03.05.21 – 02.05.23
All awards were made in the form of nil-cost options equivalent to 150 per cent of base salary.
As disclosed last year, the performance conditions attached to the awards to the executive directors were a combination of relative
TSR performance, cumulative operating profit and the implementation of the Company’s business transformation plan and strategy,
as detailed on pages 75 and 76.
Achievement of the minimum performance over the performance period would result in 25 per cent of the awards vesting on
3 May 2021 together with the corresponding dividend equivalent. The 2018 PSP awards are subject to the two-year post-vesting holding
period and recovery and withholding provisions detailed in the policy table on page 62.
74
GOVERNANCE 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:
Executive director
Date
granted
Balance as
at 1 January
2018*
Granted
during year
Market
price at
date of
award
pence
Market
price at
date of
vesting
pence
Market
price at
date of
exercise
pence
Vested
during
year
Lapsed
during
year
Amount
realised on
exercise
£
Balance as at
31 December
2018*
Performance period
D J White
11.09.17
599,778
- 161.50
03.05.18
– 1,082,130
89.05
M A Whiteling
02.10.17
526,840
- 116.25
03.05.18
-
674,250
89.05
D I Sutherland
01.06.15
71,784
05.04.16
106,425
06.04.17
213,802
- 619.50
- 419.60
- 223.50
03.05.18
-
524,730
89.05
–
-
-
-
-
-
-
-
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 71,784
n/a
n/a
n/a
-
-
-
n/a
599,778
01.01.17-31.12.193
n/a 1,082,130
01.01.18-31.12.205
n/a
n/a
-
n/a
n/a
n/a
526,840
01.01.17-31.12.19 3
674,250
01.01.18-31.12.205
-
01.01.15-31.12.171
106,425
01.01.16-31.12.182
213,802
01.01.17-31.12.194
524,730
01.01.18–31.12.205
1 As detailed in last year’s Remuneration Report, the 2015 PSP award’s performance conditions were not met and the awards lapsed in full on 1 June 2018.
2 As detailed on page 72, the 2016 PSP award’s performance conditions were not met and the awards will lapse in full.
* The maximum number of shares that could be receivable by the executive if performance conditions set out below are fully met:
3 The Reduction of Net Debt Performance Condition for the 2017 Awards (applicable to Debbie White and Mark Whiteling only)
As disclosed last year, net debt targets were set for the PSP awards granted to Debbie White and Mark Whiteling in 2017 to align with the Group’s core strategic priority. The
actual average net debt numbers underpinning the sliding scale are considered to be commercially sensitive and as a result have not been included below. The actual targets and
performance against them will be published in the 2019 Directors’ Remuneration Report. For further details, see last year’s Remuneration Report. The 2017 PSP awards were granted
in the form of nil-cost options. Debbie White’s options are exercisable between 11 September 2020 and 10 September 2022. Mark Whiteling’s options are exercisable between
2 October 2020 and 1 October 2022.
Average Q4 2019 net debt
Less than target
Target
Between target and maximum
Maximum (89.2% of target to reflect reduced debt aspiration)
Vesting percentage of shares subject to the award
0%
25%
25% to 100% (pro-rated)
100%
4 The EPS Performance Condition for the 2017 Awards (applicable to Dougie Sutherland only)
The EPS condition measures EPS growth from the 2016 normalised EPS result through to the conclusion of the 2019 financial year.
Normalised EPS growth of the Company over the performance period
Vesting percentage of two-thirds of shares subject to the award
Less than 6%
6% to 30%
Greater than 30%
0%
25% to 100% (pro-rated)
100%
4 The TSR Performance Condition for the 2017 Awards (applicable to Dougie Sutherland only)
This condition is determined by comparing the Company’s TSR performance to the TSR of each company in the FTSE Small Cap and the FTSE 250, excluding investment trusts.
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%)
Median to upper quartile ranking
Upper quartile ranking (top 25%)
0%
25%
25% to 100% (pro-rated)
100%
The 2017 PSP awards were granted to Dougie Sutherland in the form of nil-cost options, exercisable between 6 April 2020 and 5 April 2022.
5 The TSR Performance Condition for the 2018 Awards
This condition is determined by comparing the Company’s TSR performance to the TSR of each company in the FTSE Small Cap and the FTSE 250, excluding investment trusts.
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%)
Median to upper quartile ranking
Upper quartile ranking (top 25%)
0%
25%
25% to 100% (pro-rated)
100%
75
GovernanceFinancial StatementsStrategic ReportOverview Directors’ remuneration report continued
5 The Cumulative Operating Profit Condition for the 2018 Awards
The actual operating profit numbers underpinning the sliding scale are considered to be commercially sensitive and as a result have not been included below. The targets and
performance against them will be disclosed in the 2020 Directors’ Remuneration Report. For further details, see last year’s Remuneration Report.
Cumulative operating profit (2018 + 2019 + 2020)
Less than 86.3% of target operating profit
86.3% of target operating profit
100% of target operating profit
113.7% of target operating profit
Straight-line vesting between performance points
Vesting percentage of one-third of shares subject to the award
0%
25%
50%
100%
5 The Strategic Targets Condition for the 2018 Awards
One-third of the award will vest based on how successfully the Company’s business transformation plan and strategy are implemented. The strategic targets have been set against the
targets included in the Company’s transformation plan and strategy through to 2020. As with the operating profit target detailed above, the actual strategic targets are considered
commercially sensitive and the Committee intends to provide full details of the actual targets and our performance against them in the 2020 Directors’ Remuneration Report. For
further details, see last year’s Remuneration Report.
In addition to the above, the vesting of the award will be subject to a general financial underpin that will require the Committee to be satisfied that the vesting result is consistent
with the underlying financial performance of the Company over the performance period. Should this not be the case, the Committee retains discretion to reduce the vesting outcome
to better reflect underlying financial performance.
The 2018 PSP awards were granted in the form of nil-cost options, exercisable between 3 May 2021 and 2 May 2023.
Chief Executive Officer’s buy-out awards (audited information)
On 11 September 2017 Debbie White was granted a share award over 1,897,899 shares to replace her forfeited awards from previous
employment. Consistent with the Company’s Remuneration Policy, the share award replicates, as far as practicable, the terms
(including performance conditions where relevant and time period to vesting) and value of awards forfeited by Mrs White in agreeing
to join the Company. Where forfeited awards were subject to performance conditions, these awards have been exchanged for shares
in Interserve at an equivalent face value at the date she joined the Company but with the number of shares vesting remaining subject
to the extent to which the performance conditions in her previous employer are ultimately met. This approach results in the new
Chief Executive Officer being aligned with Interserve shareholders through holding an interest in the Company’s shares but results in
no personal benefit being derived from the switching of employment. Details of the performance conditions applying to Mrs White’s
share awards are included in the Report and Accounts of Mrs White’s previous employer. Where share awards were not subject to
performance conditions (i.e. shares were awarded that vested based on continued employment only), these shares were replaced by an
equivalent value of Interserve shares calculated at the time of commencing employment with vesting to take place over the same time
period as the awards forfeit. No consideration was paid for the grant of these awards.
Details of the share awards, which will be satisfied by market purchase shares and which are subject to the rules governing the award
and to Mrs White’s ongoing employment with the Company, are shown below:
Tranche
Date
granted
Balance as at
1 January
2018
Granted
during year
1
2
3
4
5
6
7
8
9
10
11.09.17
11.09.17
11.09.17
11.09.17
11.09.17
11.09.17
11.09.17
11.09.17
11.09.17
11.09.17
481,158
267,310
133,655
133,655
133,655
66,827
66,827
307,406
153,703
153,703
-
-
-
-
-
-
-
-
-
-
Market price
at date of
award
pence
Market price
at date of
vesting
pence
Vested
during year
161.50
481,158
90.20
161.50
161.50
161.50
161.50
161.50
161.50
161.50
161.50
161.50
-
-
-
-
-
-
-
-
-
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Amount
realised on
vesting
£
442,665
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Balance as at
31 December
2018
Vesting date
-
01.05.181 3
267,310
27.04.191
133,655
133,655
133,655
66,827
66,827
27.04.192
27.04.192
09.09.191
09.09.192
09.09.192
307,406
27.04.201
153,703
27.04.202
153,703
27.04.202
Lapsed
during year
-
-
-
-
-
-
-
-
-
-
1 No performance conditions apply.
2 Performance conditions apply.
3 Vesting of the first tranche was originally due to take place on 11 March 2018 but was conditionally deferred until the dealing day after the Company announced its annual results, in
accordance with the terms of the restricted stock contract.
76
GOVERNANCE
Share options (audited information)
No options were granted to, or exercised by, the executive directors during the year pursuant to an executive share option scheme and
none remain outstanding. The aggregate gain made on the exercise of options was £nil (2017: £nil). The market price of the shares as
at 31 December 2018 was 10.62p. The highest and lowest market prices of the shares during the financial year were 123.5p and 10.4p
respectively.
Sharesave Scheme (audited information)
No grants were made to the executive directors under the Interserve Sharesave Scheme 2009 during the year and no options remain
outstanding. 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 the options.
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 up to a maximum of 20 per cent.
Shareholding guidelines
Executive directors are expected to build up over time a shareholding equivalent to 200 per cent of their base salary. Further details of
the shareholding guidelines are set out in the executive directors’ remuneration policy table on page 63.
Shareholdings of directors (audited information)
The beneficial interests of each person who served as a director of the Company during the financial year in the 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 200 per cent of salary:
Executive directors
D J White
M A Whiteling
D I Sutherland
Non-executive directors
G A Barker
G M Edwards
A K Fahy
R J King
K L Ludeman
C N Pollard
N R Salmon
31 December 2018
Beneficially Owned
31 December 2017
Beneficially Owned
Outstanding vested
PSP awards
31 December 2018
% shareholding
requirement
(% of salary/fee)
% actual
shareholding
(% of salary/fee)1
640,030
30,000
149,147
93,970
21,350
8,000
3,000
4,9902
7,723
5,000
65,408
-
149,145
93,970
21,350
8,000
3,000
4,990
–3
5,000
-
-
-
-
-
-
-
-
-
-
200%
200%
200%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
34.4%
2.6%
16.5%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
1 Using a share price of 35.63p, being the three-month average to 31 December 2018.
2 As at 12 June 2018, when Keith Ludeman stepped down from the Board.
3 As at 26 June 2018, when Nick Pollard was appointed to the Board.
The above figures include shares held in trust pursuant to the Share Incentive Plan (SIP).
Between the year end and the date of this report, there have been no changes in the shareholdings of the directors who held office at
the year end.
Dilution limits
Under present dilution limits the Company is permitted to allocate a rolling 10-year aggregate of up to 10 per cent of its ordinary share
capital (14,971,993 shares) under all its share schemes. At 31 December 2018 there remained headroom equivalent to 4,420,523 shares
over which options may be granted under the Company’s share schemes.
77
GovernanceFinancial StatementsStrategic ReportOverview Directors’ remuneration report continued
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 Officer (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 Officer 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 Officer). 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.
Name
N R Salmon (Committee Chairman)1
G A Barker
G M Edwards
A K Fahy
R J King
K L Ludeman2
Date of appointment to Committee
1 August 2014
1 January 2016
23 June 2017
1 January 2013
1 September 2014
1 January 2011
1 Appointed as Committee Chairman on 12 June 2018.
2 Keith Ludeman (former Committee Chairman) resigned on 12 June 2018.
The Committee meets as often as is necessary to discharge its duties and met seven times during the year ended 31 December 2018.
Members’ attendance at the meetings is set out in the table on page 46. The Chief Executive Officer and Chief Financial Officer 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.
An independent evaluation of the Committee’s effectiveness is included with the independent board evaluation process that is due to
report in 2019, as detailed in the Corporate Governance Report on page 47.
Advisers
In determining the executive directors’ remuneration, the Committee consulted with and received recommendations from
Debbie White. The Committee also received advice from Korn Ferry and Sally Cabrini, Director of Transformation, People and
IT, which materially assisted the Committee in relation to the 2018 financial year. Executives are not present when matters affecting
their own remuneration arrangements are decided.
Korn Ferry was appointed to provide independent advice to the Committee on remuneration matters for a period of three years
commencing on 1 January 2017. Korn Ferry is a signatory to the Remuneration Consultants’ Code of Conduct and has confirmed
its compliance with the Code. The fees paid to Korn Ferry in respect of its services to the Committee during the year was £95,000
excluding VAT. The advice provided included providing IFRS 2 and performance monitoring in addition to providing advice in relation to
the design and implementation of incentive arrangements. The Committee reviews the performance of its advisers periodically and is
satisfied that the advice it has received from Korn Ferry has been objective and independent.
Representatives from Korn Ferry meet either on a one-to-one basis with the Committee Chairman, or with the Director of
Transformation, People and IT or Company Secretary, as necessary, to discuss matters such as topical issues in remuneration which are
of relevance to the Company or if there are specific pieces of work which the Committee requires to be undertaken.
78
GOVERNANCE Statement of shareholder voting at AGM
At the AGM held on 12 June 2018, the Directors’ Remuneration Policy and the Annual Report on Remuneration received the following
votes from shareholders:
Resolution
Votes for
% for
Votes against
% against
Total votes cast
(excluding votes withheld)
Votes withheld
Directors’ Remuneration Policy
Annual Report on Remuneration
41,540,619
34,729,009
97.86
82.87
908,028
7,179,574
2.14
17.13
42,448,647
561,872
41,908,583
1,109,937
APPROVAL
The Directors’ Remuneration Report was approved by the Board of Directors on 8 March 2019 and signed on its behalf by:
Nick Salmon
Chairman of the Remuneration Committee
8 March 2019
79
GovernanceFinancial StatementsStrategic ReportOverview Directors’ report
Andrew McDonald
General Counsel and Company Secretary
The directors of Interserve Plc (the Company) present their report
and the audited consolidated financial statements for the year
ended 31 December 2018.
SCOPE OF REPORTING
For the purposes of compliance with paragraphs 4.1.5R(2) and
4.1.8R of the Disclosure Guidance and Transparency Rules (the
DTRs) 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 Financial Statements 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 87 and 98, 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 DTRs 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.
Information required to be disclosed under Listing Rule 9.8.4R can
be found in the following locations:
Section of
LR 9.8.4R
Topic
Location
(1)
(2)
(4)
(12)
(13)
Interest capitalised by the Group
Financial Review
Information required by Listing
Rule 9.2.18
Consolidated
Financial Statements
Details of long-term incentive
schemes
Directors’
Remuneration
Report
Shareholder waivers of dividends
Directors’ Report
Shareholder waivers of future
dividends
Directors’ Report
The remaining disclosures required by Listing Rule 9.8.4R are not
applicable to the Company.
All the information cross-referenced above is hereby incorporated
by reference into this Directors’ Report.
THE COMPANY
Principal activities
The Company is incorporated in the UK with company number
00088456 and is the holding company of the Interserve Group.
The Group’s activities, both in the UK and internationally,
are focused on the provision of outsourced support services;
the design, construction and maintenance of buildings and
infrastructure; and the design, hire and sale of formwork,
falsework and associated access equipment.
Branches
The Company, through various subsidiaries, has established
branches in a number of different countries in which the Group
operates. Details of the Company’s related undertakings are listed
on page 175 to 180.
Amendment of the Articles of Association
The Company’s constitution, known as the articles of association
(the Articles), is essentially a contract between the Company and
its shareholders, governing the management of the Company.
A copy of the Articles is available on our website at
www.interserve.com or can be obtained on request from the
Company Secretary. Amendments to the Articles must be
approved by at least 75 per cent of those voting in person or by
proxy at a general meeting of the Company.
FINANCIAL RESULTS
The Group’s Consolidated Income Statement set out on page 100
shows Group loss before taxation of £111.3 million (2017: loss of
£244.4 million). The detailed results of the Group are given in the
financial statements on pages 100 to 158 and further comments
on divisional results are given in the Operational Review on
pages 24 to 30.
On 27 February 2019 Interserve announced a proposed
Deleveraging Plan, which the directors believe will provide the
Group with sufficient liquidity to service its short-term cash
obligations, create a strong balance sheet and a fundamentally
strong foundation from which the Group can improve its business
and deliver on its long-term strategy.
The Deleveraging Plan is a consensual restructuring of Interserve,
which is urgently required to avoid a default in the existing
financing arrangements and to provide sufficient liquidity,
cash and bonding facilities to allow the Group to service short-
term obligations and secure a stable platform. Such a default,
were it to occur, would be expected to have material adverse
80
GOVERNANCE consequences for stakeholders and, in particular, for existing
shareholders.
The Deleveraging Plan preserves fully the pre-emption rights of
existing shareholders. If they take up their entitlements in the
equity raise their ownership will not be diluted and they will
participate on the same terms as lenders.
Shareholders are being asked to approve the Deleveraging Plan
at a General Meeting which has been convened at 11.00 am on
15 March 2019. For further information on the Deleveraging Plan,
including a copy of the prospectus published on 27 February 2019,
please visit www.interserve.com.
Further post-balance sheet events that require disclosure or
adjustment in the financial statements can be found in note 33 to
the consolidated financial statements and the Financial Review on
pages 35 to 41.
DIVIDENDS
No interim dividend was paid in respect of the 2018 financial year
(2017: nil). The directors do not recommend a final dividend to be
paid for 2018 (2017: nil).
Link Trustees (Jersey) Limited, the trustee of the Interserve
Employee Benefit Trust (the Trust), has waived its rights to
receive dividends on any shares held by the Trust in the name of
Link Market Services Trustees (Nominees) Limited. As no dividends
were paid during the 2018 financial year, no dividends were
waived over shares held by the Trust (2017: nil).
DIRECTORS AND DIRECTORS’ INTERESTS
The following have served as directors during the year:
Glyn Barker* (Group Chairman)
Gareth Edwards*
Anne Fahy*
Russell King* (Senior Independent Director)
Keith Ludeman*1
Nick Pollard*2
Nick Salmon*
Dougie Sutherland
Debbie White (Chief Executive Officer)
Mark Whiteling (Chief Financial Officer)
* Non-executive director
1 Resigned from the Board on 12 June 2018
2 Appointed to the Board on 26 June 2018
Since the year end, Dougie Sutherland stepped down from the
Board on 12 February 2019.
The biographical details of the directors of the Company are given
on pages 42 and 43.
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,
shares in the Company, are set out on pages 74 to 77 of the
Directors’ Remuneration Report.
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.
APPOINTMENT AND REPLACEMENT OF DIRECTORS
The Board must comprise of not less than three and no more than
12 directors. Directors may be appointed by shareholders (by
ordinary resolution) or by the Board.
Under the Company’s Articles, 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. Nick Pollard will therefore be standing for election
at the 2019 AGM.
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 UK Corporate
Governance Code, all the directors 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, 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
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 or her.
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.
81
GovernanceFinancial StatementsStrategic ReportOverview Directors’ report continued
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
consolidated financial statements. A breakdown of employee diversity, as required by the 2006 Act, can be viewed on pages 28 and 29
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 Strategic Report on pages 26 to 29.
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.
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 reported, in addition to emissions associated
with our construction sites.
Summary table
Global GHG emissions data for 1 January 2013 to 31 December 2018 is as follows:
2018
2017
2016
2015
2014
2013
Emissions from:
- Combustion of fuel and operation of facilities
- Electricity, heat, steam and cooling purchased for own use
57,718
14,007
61,596
14,476
79,9491
14,366
61,352
20,133
64,440
14,331
61,174
13,045
Intensity measurement:
- Emissions reported above, normalised to tonnes CO2e
24.02
23.24
28.70
25.09
25.03
31.54
per £m revenue
1 Increase predominantly relates to the consumption of 6 million litres of gas oil/diesel associated with specific contracts undertaken by The Oman Construction Company LLC and
Adyard Abu Dhabi LLC.
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 “UK Government GHG Conversion Factors for Company Reporting” (June 2016) to calculate our emissions
based on data gathered from each of our business units.
Additional information relating to the Group’s GHG emissions and some of the actions being taken to mitigate our impact on the
environment are set out within the Strategic Report.
POLITICAL DONATIONS
The Group made no political donations and incurred no political expenditure during the year (2017: £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.
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 pages 35 to 41.
82
GOVERNANCE SHARE CAPITAL AND STRUCTURE
General
The Group is financed through both equity share capital and debt
instruments. Details of the Company’s share capital is provided
below and information on the debt instruments is set out in
note 20 to the consolidated financial statements.
In connection with the 2018 refinancing, on 2 May 2018 the
Company created and issued 36,428,530 warrants over ordinary
shares in the capital of the Company to certain of its lenders,
representing 20 per cent of the Company’s existing issued share
capital at that time as enlarged by the exercise of the warrants.
The warrants are freely transferable and may be exercised at any
time at a subscription price of 10p per share, either by payment
of the subscription price or by a cashless exercise mechanism.
Further details are set out in note 20 to the consolidated financial
statements.
Following approval by shareholders at the AGM on 12 June 2018
and in connection with the issue of the warrants, the Company’s
issued share capital of 149,719,938 ordinary 10p shares was sub-
divided into 149,719,938 ordinary shares of 0.1p and 149,719,938
deferred shares of 9.9p. The sub-division was required to enable
the exercise price of the warrants to be reduced to less than
10p, if necessary, as a result of certain dilutive events such that
ordinary shares could be allotted pursuant to the exercise of
warrants at a price not less than the nominal value of the ordinary
shares (as would be prohibited under the 2006 Act).
The economic and voting rights of the ordinary 0.1p shares remain
the same as the ordinary 10p shares. The deferred shares were
created to enable the Company to reduce the nominal value of
the ordinary shares without going through a process that would
require Court approval. The deferred shares were issued to all
persons on the Company’s register of members as at 12 June 2018
on the basis of one deferred share for each ordinary share held.
The deferred shares, which are not listed or admitted to trading
on any investment exchange, are not transferable, do not carry
any voting or dividend rights and are not expected to have any
economic value.
All ordinary and deferred shares are fully paid up. The ordinary
0.1p shares are quoted on the London Stock Exchange. No person
holds shares carrying special rights with regard to control of the
Company.
4,005,818 of the warrants were exercised on 16 May 2018 for
a cash consideration of approximately £0.4 million and the
equivalent number of ordinary 10p shares issued to the warrant
holders who had exercised those warrants. The Company’s issued
share capital at the end of the year therefore stood at 149,719,938
ordinary shares of 0.1p each and 149,719,938 deferred shares of
9.9p each (£14,971,994) (2017: 145,714,120 ordinary shares of 10p
each - £14,571,412).
No further shares have been issued since the year end. The
issued share capital at the date of this report therefore stands
at 149,719,938 ordinary shares of 0.1p each (£149,719.94)
(representing 1 per cent of the Company’s issued share capital)
and 149,719,938 deferred shares of 9.9p each (£14,822,273.86)
(representing 99 per cent of the Company’s issued share capital).
Details of outstanding awards and options over shares in the
Company as at 31 December 2018 are set out in notes 26 and 28 to
the consolidated financial statements.
Issue of shares
Section 551 of the 2006 Act provides that the directors may
not allot shares unless empowered to do so by shareholders. As
detailed above, the Company issued 36,428,530 warrants over
ordinary shares in the capital of the Company during the year
under the authority granted at the 2017 AGM. 4,005,818 of the
warrants were exercised during the year and the equivalent
number of ordinary 10p shares issued to the warrant holders who
had exercised those warrants. No further warrants were exercised
during the year or since the year end.
A resolution giving such authority was also passed at the AGM held
on 12 June 2018. No shares have been allotted by the Company
under the authority granted at the 2018 AGM.
The directors will propose a similar resolution at the 2019 AGM
to renew the authority granted to them at the 2018 AGM to
allot shares up to an aggregate nominal value of one-third of
the Company’s issued share capital and, in accordance with the
Investment Association’s Share Capital Management Guidelines,
the directors again propose to extend this by 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). In March 2015,
the Pre-Emption Group issued a revised Statement of Principles
for the disapplication of pre-emption rights (the Principles). In
addition to the standard annual disapplication of pre-emption rights
up to a maximum equal to five per cent of issued ordinary share
capital, the Pre-Emption Group is now supportive of extending the
general disapplication authority for an additional five per cent in
connection with an acquisition or specified capital investment.
In line with the Principles, the directors are again seeking
approval at the 2019 AGM for the disapplication of pre-emption
rights up to an aggregate nominal value of no more than five
per cent of the Company’s issued ordinary share capital on an
unrestricted basis and an additional five per cent in connection
with an acquisition or specified capital investment. In accordance
with recommended best practice, the Company has split the
section 561 resolution into two separate resolutions. Further
information is set out in the Notice of AGM.
The Principles also require 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.
Pursuant to its employee share schemes, the Company issued
none of its issued share capital on a non-pre-emptive basis in
2018 and 0.3 per cent in the period 2016 to 2018 (calculated by
reference to the Company’s closing issued share capital at
31 December 2018).
The warrants described above were issued to the Company’s
lenders for non-cash consideration on the basis that the
consideration was the lenders’ agreement to vary the terms of
the existing financing and their agreement to provide a new loan.
The statutory pre-emption requirements in section 561 do not
apply to an allotment of equity securities if they are to be paid up
otherwise than in cash (as was the case for the warrants).
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GovernanceFinancial StatementsStrategic ReportOverview Directors’ report continued
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 the three resolutions outlined
above, 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 2018 AGM to repurchase up to 14,571,412 of the
Company’s ordinary shares in the market. This authority expires
on 30 June 2019 or at the conclusion of the 2019 AGM, whichever
is earlier. No shares have been repurchased by the Company under
the authority granted at the 2018 AGM.
A similar resolution will be proposed as a special resolution at
the 2019 AGM 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 expected
earnings per share and would be for the benefit of shareholders
generally.
The authority sets the minimum and maximum prices at which
the shares may be bought and it will be limited to a maximum
of 10 per cent of the Company’s issued share capital calculated
at the latest practicable date prior to the publication of the
Notice of AGM. 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 and deferred shares are set
out in the 2006 Act and the Company’s Articles.
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 (particularly in relation
to the deferred shares), 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.
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 2019 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 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.
If a person fails to comply with 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. Unless the information required 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 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.
As permitted by the Company’s Articles and in line with practice
increasingly adopted by UK public companies, voting at the 2019
AGM will be conducted by way of a poll rather than a show of
hands. Voting by poll is considered to be a more transparent and
equitable method of voting because it includes the votes of all
shareholders, including those cast by proxies in advance of the
meeting, rather than just the votes of those shareholders who
attend the meeting. As soon as practicable following the AGM, the
results of the poll will be published via a Regulatory News Service
and on the Company’s website at www.interserve.com.
Dividends
Subject to the restrictions below in respect of deferred shares
and 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.
84
GOVERNANCE Transfer of shares
Subject to the restrictions below in respect of deferred 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 and prevailing legislation. In accordance
with the EU Market Abuse Regulation, 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.
Deferred shares
A deferred share does not entitle its holder to receive dividends or distributions, does not entitle its holder to receive notice of nor to
attend, speak or vote at, any general meeting of the Company and is not capable of transfer without the prior written consent of the
directors of the Company.
Further, the Company, at its option, may force a transfer of any or all deferred shares for nil consideration to any person appointed by
the directors, may purchase any or all of the deferred shares for nominal consideration, or may cancel any or all deferred shares for
nil consideration.
SUBSTANTIAL SHAREHOLDINGS
As at 31 December 2018 the Company had been notified, pursuant to paragraph 5 of the DTRs, of the following notifiable voting rights
in its ordinary share capital:
Name of holder
Number of ordinary shares
Percentage of total voting rights1
Nature of holding
Coltrane Asset Management, LP
The Goldman Sachs Group, Inc
Standard Life Aberdeen plc
Farringdon Capital Management2
Deutsche Bank AG
Old Mutual Plc
Blackwell Partners LLC2
40,874,655
15,232,700
10,325,162
10,095,665
8,550,819
7,184,490
5,916,987
27.3
10.2
6.9
6.7
5.7
4.8
4.0
Indirect
Indirect
Indirect
Indirect
Direct
Indirect
Direct
1 Calculated according to the number of total voting rights as at 31 December 2018.
2 Farringdon’s direct holding (Blackwell Partners LLC) is included within its larger indirect holding.
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:
• Coltrane Asset Management, LP – increase to 41,458,971 shares (27.7 per cent).
• The Goldman Sachs Group, Inc – decrease to 256,151 shares (0.2 per cent).
• Standard Life Aberdeen plc – decrease to 7,384,204 shares (4.9 per cent).
No further notifications have been received 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).
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 debt documents detailed on pages 38 and 39 of the Strategic Report, if any person, or group or persons acting
in concert, gains control of the Company, all facilities will be cancelled and all outstanding loans or instruments or notes under the
debt documents, together with accrued interest and all other amounts payable under the debt documents, shall become immediately
due and payable.
• 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 66 of the Directors’ Remuneration Report.
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GovernanceFinancial StatementsStrategic ReportOverview Directors’ report continued
AUDITOR
Resolutions to re-appoint Grant Thornton UK LLP as the
Company’s auditor and to authorise the directors to determine
their remuneration will be proposed at the forthcoming AGM.
Statement of disclosure of information to auditor
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 auditor is unaware; and
(b) they have each made such enquiries of their fellow directors
and of the Company’s auditor 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 auditor is 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 2019 AGM, together with
the explanatory notes, appear in the separate Notice of AGM
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
8 March 2019 and signed on its behalf by:
Andrew McDonald
General Counsel and Company Secretary
8 March 2019
Interserve House
Ruscombe Park
Twyford
Reading
Berkshire
RG10 9JU
CAUTIONARY STATEMENT
The Strategic Report, Directors’ Report and Directors’
Remuneration Report have been prepared solely for existing
members of the Company in compliance with UK company law
and the Listing, Prospectus, and DTRs of the FCA. The Company,
the directors and employees accept no responsibility to any other
person for anything contained in the Strategic Report, Directors’
Report and Directors’ Remuneration Report. The directors’
liability for the Strategic Report, Directors’ Report and Directors’
Remuneration Report is limited, as provided in the 2006 Act.
The Company’s auditor provides an opinion on:
(a) whether the information given in the Strategic Report and the
Directors’ Report is consistent with the financial statements;
(b) whether the Strategic Report and the Directors’ Report
have been prepared in accordance with applicable legal
requirements;
(c) whether in the light of the knowledge and understanding of
the Company and its environment obtained in the course of
the audit, the auditor has identified material misstatements
in the Strategic Report and the Directors’ Report and, if
applicable, give an indication of the nature of each of those
misstatements;
but neither the Strategic Report nor the Directors’ Report
are audited.
Statements made in the Strategic Report, Directors’ Report
and Directors’ Remuneration Report reflect the knowledge
and information available at the time of their preparation. The
Strategic Report and the Directors’ Report contain 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.
86
GOVERNANCE Directors’ responsibility statement
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, including the requirements of FRS 101 Reduced
disclosure framework 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 Guidance 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
position and performance, business model and strategy.
By order of the Board
Debbie White
Chief Executive Officer
8 March 2019
Mark Whiteling
Chief Financial Officer
The directors are responsible for preparing the Annual Report
and 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), including the requirements of
FRS 101 Reduced disclosure framework.
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.
In preparing the Group financial statements, International
Accounting Standard 1 requires that the directors:
• 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.
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.
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GovernanceFinancial StatementsStrategic ReportOverview
FINANCIAL STATEMENTS
Independent auditor’s report
to the members of Interserve Plc
OPINION
Our opinion on the financial statements is unmodified
We have audited the financial statements of Interserve Plc (the ‘parent company’) and its subsidiaries (the ‘Group’) for the year
ended 31 December 2018 which comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive
Income, the Consolidated and Parent Company Balance Sheets, the Consolidated and Parent Statement of Changes in Equity, the
Consolidated Cash Flow Statement and notes to the financial statements, including a summary of significant accounting policies.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law
and International Financial Reporting Standards (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 applicable law and United Kingdom Accounting
Standards, including Financial Reporting Standard 101 Reduced disclosure framework (United Kingdom Generally Accepted
Accounting Practice) .
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 2018 and of the Group’s loss 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 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.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK) ) and applicable law. Our responsibilities
under those standards are further described in the ‘Auditor’s responsibilities for the audit of the financial statements’ section of our
report. We are independent of the Group and the parent company in accordance with the ethical requirements that are relevant to
our audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public-interest entities, and
we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our opinion.
Material uncertainty related to going concern
We draw attention to note 1 in the financial statements, which indicates that successful completion of the Group’s proposed
Deleveraging Plan is subject to a shareholder vote, an event which is outside of the control of the Group. The Board’s going concern
assessment and conclusion includes anticipated receipt of proceeds from the successful completion of the Group’s proposed
Deleveraging Plan. As stated in note 1, these events or conditions indicate that a material uncertainty exists that may cast significant
doubt on the Group and parent company’s ability to continue as a going concern. Our opinion is not modified in respect of this matter.
8888
Material uncertainty related to going concern
See the Group statement on going concern on page 41 and
note 1 to the financial statements, which indicates that there
is a material uncertainty relating to the Group and parent
company’s ability to continue as a going concern.
The Board’s going concern assessment and conclusion includes
anticipated proceeds from the Group’s proposed Deleveraging
Plan, first announced to the market on 10 December 2018 and
updated on 6 February 2019. The anticipated proceeds are
dependent on shareholder approval.
The fact that a shareholder vote is required to raise additional
capital via the conclusion of the proposed Deleveraging Plan is
outside of the control of the Group.
These events and conditions give rise to a material uncertainty
that may cast significant doubt about the Group and parent
company’s ability to continue as a going concern. Our opinion is
not modified in respect of this matter.
Our audit work included, but was not restricted to:
• Assessing the construction, integrity and accuracy of the model
used for the purposes of cash flow forecasting, with the support
of a review by a restructuring specialist acting as an auditor’s
expert
• Agreeing key inputs into the model, such as revenue and margin
assumptions, to underlying divisional budgets and forecasts
approved by the Board
• Assessing the historical accuracy of the Group’s budgets and
forecasts for the last three years, to analyse its track record
of including accurate forecast projections within its financial
model
• Challenging the appropriateness of key judgements and key
assumptions made in the Group’s cash flow forecast model
• Assessing the projected level of liquidity headroom in the
Group’s cash flow forecast model over the going concern period
• Challenging the process that management has undertaken to
conclude over the duration of the going concern period
• Reading other information that includes projections beyond the
assessed going concern period, including, but not limited to,
the viability statement, and assessing whether the disclosures
provided give rise to any event or condition outside of the going
concern period that may cast significant doubt over the Group
and parent company’s ability to continue as a going concern
• Recalculating the sensitivities prepared by management to
assess their accuracy, challenge management’s assessment
of going concern and consider the appropriateness of
management’s sensitivity analysis
• Challenging management on the sufficiency and appropriateness
of the disclosures within the Board’s viability statement and
going concern statement
• Obtaining a copy of the new proposed financing agreement
pursuant to the proposed Deleveraging Plan, and checking that
continuing obligations (including compliance with financial and
non-financial covenants) have been appropriately modelled and
tested against forecast projections
Key observations
A material uncertainty exists that may cast significant doubt over the Group and parent company’s ability to continue as a going
concern. Our opinion is not modified in respect of this matter.
8989
GovernanceFinancial StatementsStrategic ReportOverview
Independent auditor’s report continued
to the members of Interserve Plc
Conclusions relating to principal risks, going concern and viability statement
The events and conditions set out in note 1 to the financial statements indicate that a material uncertainty exists that may cast
significant doubt over the Group and parent company’s ability to continue as a going concern. The Group’s viability scenarios all assume
the successful completion of the proposed Deleveraging Plan. Failure to complete the proposed Deleveraging Plan represents a material
uncertainty which may cast significant doubt over the Group and Company’s ability to continue as a going concern, and also may cast
significant doubt over the viability of the Group and parent company.
Other than this matter, we have nothing to report in respect of the following information in the Annual Report, in relation to which the
ISAs (UK) require us to report to you whether we have anything material to add or draw attention to:
• the disclosures in the Annual Report set out on pages 31 to 34 that describe the principal risks and explain how they are being
managed or mitigated;
• the directors’ confirmation, set out on page 48 of the Annual Report that they have carried out a robust assessment of the principal
risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity;
• whether the directors’ statements relating to going concern and their assessment of the prospects of the Company required under
the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
• the directors’ explanation, set out on pages 39 to 41 of the Annual Report as to how they have assessed the prospects of the Group,
over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they
have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the
period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Overview of our audit approach
• Overall Group materiality: £4.6 million, which represents five per cent of the Group’s
operating profit before non-underlying items and amortisation of acquired intangible assets.
• Key audit matters were identified as revenue recognition and contract accounting (Group) ,
the presentation and disclosure of non-underlying items (Group) , impairment of goodwill
and interests in joint-venture entities and associated undertakings (Group) and investments
in subsidiaries (parent company) , defined benefit pension schemes (Group and parent
company) , and accounting for new long-term borrowings (Group) .
• We performed full-scope procedures at all operating locations in the United Kingdom. We
performed targeted procedures over component entities in Guernsey, Oman, Qatar, the
United Arab Emirates, Saudi Arabia, and Australia. We performed analytical procedures over
component entities in all other geographical locations.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud)
that we identified. These matters included those that had the greatest effect on: the overall audit strategy; the allocation of resources
in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the
financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
In addition to the matter described in the ‘Material uncertainty related to going concern’ section, we have determined the matters
described below to be the key audit matters to be communicated in our report.
9090
FINANCIAL STATEMENTS Key audit matter
How the matter was addressed in the audit
Revenue recognition and contract accounting (Group)
Revenue £2,904.0 million (2017: £3,250.8 million)
Trade receivables, accrued income and amounts due from construction contract customers £544.6 million
(2017: £610.3 million)
Contract provisions £22.5 million (2017: £60.3 million)
Revenue is recognised in the Group financial statements
as the fair value of consideration received or receivable in
respect of provision of service and construction contracts.
Provision is made for expected contract losses as soon as
they are foreseen.
Determining the amount of revenue to be recognised in
respect of construction and service contracts requires
management to make significant judgements and estimates
including the cost to complete, and the identification of any
other costs that might arise, the probability of customer
acceptance of claims and variations and the recoverability
of work-in-progress and receivables balances.
Additionally, the Group has adopted IFRS 15 in the year
which involved significant management judgement and
potentially restating prior year balances and updating
accounting policies.
We therefore identified revenue recognition and contract
accounting as a significant risk, which was one of the most
significant assessed risks of material misstatement.
Our audit work included, but was not restricted to:
• 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 on each selected contract carrying out the
following procedures:
◦ confirming that a signed contract was in place and the work
being performed is in line with each selected contract;
◦ testing 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 to purchase invoice or other source documents
(where percentage of completion applies) ;
◦ performing a detailed analytical review of margins and balance
sheet items throughout the year;
◦ challenging management’s assertions relating to the expected
costs to complete (where relevant) 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;
◦ agreeing revenues per the Group financial statements either to
the contracted amounts, reconciling differences to variations
that were submitted during the period, or to the monthly Cost
Variance Report;
• agreeing a sample of balances within accrued income to supporting
third-party documentation and subsequent authorisation to bill;
• testing a sample of revenue items for non-contract revenue,
covering both hire and sale revenue, agreeing items selected for
testing through to documented supporting existence;
• agreeing a sample of claims and variations to evidence of the work
having been performed;
• evaluating management’s assessment of forward-loss provisions
recorded on long-term contracts (the most significant and
judgemental of which are identified in the Key Estimates and
Judgements section in note 1(b) to the financial statements on
pages 107 to 111) , including challenging management on the
judgements inherent within the forecast revenue and profit on the
contract, understanding the basis for cost savings, consideration of
historical experience, comparing against expected outcomes, and
the latest status of disputes with customers;
• investigating the extent of historic recovery of work-in-progress
balances held by the Group, with reference to certifications and
correspondence from customers, and testing a sample of aged
work-in-progress balances to identify any unrecoverable WIP;
• testing the operating effectiveness of key controls within the
Construction division over contract execution, certification,
invoicing, collections, cost approvals and cost allocations, to
confirm they were executed as designed;
• testing the operating effectiveness of key controls within the
Support Services division over customer and contract existence,
and management’s monthly review of contract performance; and
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Independent auditor’s report continued
to the members of Interserve Plc
Key audit matter
How the matter was addressed in the audit
• assessing the implementation of IFRS 15 on contract accounting by
considering management’s assessment and determining whether
the treatments proposed met the requirements of the standard,
obtaining the analysis of contracts prepared at a divisional level
and agreeing this analysis to the work performed on the contract,
and recalculating the impact on revenue recognition and bad debt
provision respectively.
The Group’s accounting policy on revenue recognition and contract
accounting is shown in note 1(d) to the financial statements and
related disclosures are included in note 2. The Audit Committee
identified revenue recognition and contract accounting as a significant
issue in its report on page 55, where the Audit Committee also
described the action that it has taken to address this issue.
Key observations
As a result of our work, we concluded that revenue recognition and contract accounting was acceptable.
Presentation and disclosure of non‑underlying items (Group)
Non‑underlying items £(133.9) million losses (2017: £(308.3) million)
The Group has presented separately certain items on
the face of the Consolidated Income Statement as non-
underlying. The directors believe that the resulting
“underlying” income statement reflects better the Group’s
trading performance during the year.
In the Group’s reported results, significant adjustments have
been made to statutory loss before tax of £111.3 million to
derive underlying profit before tax of £13.7 million, and to
statutory loss after tax of £128.9 million to derive underlying
loss after tax of £5 million. The most significant of these are
discussed in detail in note 32(a) .
Non-underlying items are not defined by IFRSs as adopted
by the European Union. Consequently, management have
written an accounting policy to define non-underlying items
in the financial statements, which is set out in note 1. In
applying this accounting policy, management exercises
significant judgement in respect of what it determines as
a non-underlying transaction. In making this assessment,
management has identified significant non-recurring
transactions that, by their size or nature, require separate
presentation. As such, there is a risk of management bias in
the selection of the items identified as non-underlying.
Alternative performance measures can provide shareholders
with appropriate additional information and understanding
of a company’s financial performance and strategy.
However, when improperly used and presented, such
measures might prevent the Annual Report being fair,
balanced and understandable by confusing the real
financial position and results or by making the results of the
reporting entity seem more attractive. Failure to disclose
clearly the nature and impact of material non-underlying
earnings may distort the reader’s view of the financial result
in the year.
We therefore identified the following significant risks in
respect of non-underlying items in the Consolidated Income
Statement, which was one of the most significant assessed
risks of material misstatement:
Classification of non-underlying items and whether they
meet the definition set out in the policy;
Our audit work included, but was not restricted to:
Classification
• inspecting and challenging the nature of the items included within
non-underlying items as follows:
◦
◦
for contract-related items, agreeing the revenue and cost in the
current and prior year to our work on that contract. In each case,
as these contracts represent a material judgement in their own
right, performing a detailed contract review which is commented
on under the previous Key Audit Matter; and
for non-contract items, obtaining a detailed breakdown of these
items and obtaining an understanding of the nature of each
cost or income item; substantively testing a sample of items
to invoice or other supporting evidence, confirming that the
specific project or activity is one identified as non-underlying by
management.
Presentation
• Challenging management’s rationale for the basis for inclusion of
certain classes of items within the Consolidated Income Statement
as non-underlying, particularly around the areas of higher
judgement, to determine whether the items recognised as non-
underlying meet the criteria of the accounting policy for such items
defined by the Group.
• Evaluating the appropriateness of the inclusion of items, both
individually and in aggregate, within non-underlying items,
including ensuring adherence to IFRS requirements and latest FRC
guidance, and benchmarking them against market practice.
Disclosure
We also assessed the disclosures made, and considered:
• the extent to which the prominence given to the ‘underlying’
financial information and related commentary in the Annual
Report compared to the statutory financial information and related
commentary could be misleading;
• whether the statutory and ‘underlying’ financial information are
reconciled with sufficient prominence given to that reconciliation;
• whether the basis of the ‘underlying’ financial information is clearly
and accurately described and consistently applied; and
• whether the ‘underlying’ financial information is not otherwise
misleading in the form and context in which it appears in the
Annual Report and whether the overall presentation is fair,
balanced and understandable.
9292
FINANCIAL STATEMENTS
Key audit matter
How the matter was addressed in the audit
Presentation of non-underlying items as a separate column
in the income statement, and whether the presentation of
the ‘underlying’ financial information is fair, balanced, and
understandable in its representation of underlying trading,
or whether undue prominence has been given to this
information over the GAAP information; and
Disclosure of information in respect of the non-underlying
items in respect of its appropriateness and quality, including
associated critical judgements and estimates.
The Group’s accounting policy on non-underlying items is shown in
note 1(s) and related disclosures are included in note 5. The Audit
Committee identified non-underlying items as a significant issue in
its report on page 55, where the Audit Committee also described the
action that it has taken to address this issue.
Key observations
As a result of our work, we concluded that the classification, presentation and disclosure of non-underlying items was acceptable.
Impairment of goodwill and interests in joint‑venture entities and associated undertakings (Group) and investments
in subsidiaries (parent company)
Goodwill: £342.3 million (2017: £372.9 million)
Interests in joint‑venture entities and associated undertakings: £121.5 million (2017: £124.9 million)
Investments in subsidiaries: £462.9 million (2017: £462.9 million)
Under International Accounting Standard 36 Impairment
of assets, the directors are required to make an annual
assessment to determine whether the Group’s goodwill and
investments are impaired: under FRS 101 the directors are
required to make the same assessment in respect of the
parent company’s investments in its subsidiaries.
The process for assessing whether impairment exists under
both standards is complex. The process of determining
the recoverable amount, being the higher of the value in
use and the fair value less cost to sell, through forecasting
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.
Due to the inherent uncertainty and key assumptions
involved in forecasting and discounting future cash flows,
we therefore identified the impairment of goodwill
and interests in joint-venture entities and associated
undertakings (Group) and investments in subsidiaries
(parent company) as a significant risk, which was one of the
most significant assessed risks of material misstatement.
Our audit work included, but was not restricted to:
• obtaining management’s assessment of the relevant CGUs used in the
impairment calculations and comparing those to our understanding
of the business units and operating structure of the Group;
• checking the arithmetical accuracy of management’s impairment
calculations, and performing sensitivity analysis of cash flow inputs
including the discount rate applied;
• testing the assumptions utilised in the impairment models, including
growth rates and discount rates, by checking the accuracy of the
calculations and agreeing the inputs to market data and considering
management’s assessment of whether any modifications should
be made to this data to take into account Interserve’s specific
circumstances;
• checking the assumptions used are consistent across the business,
and that where different assumptions are used based on the profile
of different divisions, these are consistent with our knowledge of the
business and our detailed work performed on the forecasts used for
going concern and viability;
• testing the accuracy of management’s forecasting through a
comparison of budget to actual data and historical variance trends
and inspecting the cash flows for non-underlying or unusual items or
assumptions; and
• taking all the above procedures into account, assessing whether the
resulting impairment charge is complete.
The Group’s accounting policy on impairment is shown in note 1(g)
to the financial statements and related disclosures are included in
note 12. The Audit Committee identified impairment as a significant
issue in its report on page 55, where the Audit Committee also
described the action that it has taken to address this issue.
Key observations
As a result of our work, we noted adjustments related to the assessment of carrying value of CGUs. Management has corrected these
adjustments in the Annual Report. Following these corrections, we concluded that the carrying value of goodwill, reduced following the
recognition of an impairment charge in the year, was acceptable.
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Key audit matter
How the matter was addressed in the audit
Defined benefit pension schemes (Group and parent company)
Retirement benefit surplus/(obligation) (Group): £93.9 million (2017: (£48.0 million))
Fair value of scheme’s assets (Group): £938.7 million (2017: £1,016.1 million)
Present value of defined benefit asset (Group): £844.8 million (2017: £1,064.1 million)
Retirement benefit surplus/(obligation) (parent): £98.8 million (2017: (£38.5 million))
Fair value of scheme’s assets (parent): £856.5 million (2017: £928.7 million)
Present value of defined benefit asset (parent): £757.7 million (2017: £967.2 million)
The Group has a number of defined benefit pension
schemes that provide benefits to a significant number of
current and former employees.
The measurement of the defined benefit pension scheme
asset in accordance with IAS 19 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
defined benefit pension scheme asset or liability being
recognised within the Group financial statements. The
Group has changed its assumptions from RPI to CPI in the
year and as a result the net position on the balance sheet is
an asset.
We therefore identified the assets and liabilities associated
with the defined benefit pension schemes, specifically the
valuation of the assets and completeness of the liabilities,
as a significant risk, which was one of the most significant
assessed risks of material misstatement.
Our audit work included, but was not restricted to:
• reviewing the model and assumptions to ensure that they are
reasonable and consistent, and in line with IAS 19;
• utilising the expertise of our in-house actuarial specialists to assess
and challenge the assumptions used for reasonableness and the
methods employed in the calculation of the obligation;
• confirming that the change in assumptions in the year from RPI to CPI
was correctly calculated, and is correctly accounted for in line with
the pension scheme agreement; and
• confirming that the pension scheme agreement allows an overall
asset to be recognised on the balance sheet.
The Group’s accounting policy on defined benefit pension schemes is
shown in note 1(q) to the financial statements and related disclosures
are included in note 29. The Audit Committee identified defined benefit
pension schemes as a significant issue in its report on page 55, where
the Audit Committee also described the action that it has taken to
address this issue.
Key observations
As a result of our work, we concluded that the carrying value of the pension scheme asset was acceptable.
9494
FINANCIAL STATEMENTS
Key audit matter
How the matter was addressed in the audit
Our audit work included, but was not restricted to:
• assessing terms of the warrant agreement, with particular focus on
the legal requirements of “anti-dilution” provisions, to ascertain
whether the requirements of the IAS 32 fixed for fixed test had been
met;
• obtaining management’s assessment of compliance with IFRS 9,
specifically their consideration of IFRS 9 in respect of the
refinancing;
• obtaining and reviewing key terms in result of the modifications to
loan agreements to understand significant changes, and confirming
these changes to management’s assessment;
• challenging management on their assessment of the significance of
the modification of debt, as defined by IFRS 9; and
• challenging management on their assessment of fair value on
recognition of new debt facilities, and their disclosure of key
judgements and sources of estimation uncertainty.
The Group’s accounting policy on borrowings is shown in note 1(n)
to the financial statements and related disclosures are included in
note 20. The Audit Committee identified accounting for debt as a
significant issue in its report on page 55, where the Audit Committee
also described the action that it has taken to address this issue.
Accounting for new long‑term borrowings (Group)
Borrowings: £827.9 million (2017: £657.7 million)
On 27 April 2018 the Group concluded refinancing
negotiations and secured access to £834 million of
committed borrowing facilities. This involved the renewal
of existing credit facilities and US loan notes alongside
the injection of a new £175 million long-term loan and
£21.5 million of money-market lines. As part of the
refinancing, the Group issued 36.4 million warrants at a fair
value of £35.3 million, accounted for as a separate equity
instrument.
The accounting treatment for the warrants is assessed
under IAS 32, in particular whether the requirements for
the “fixed for fixed” test have been met. The directors
concluded that the requirements were met, leading to
classification of the warrants as a separate component of
equity.
The new debt is required to be accounted for under IFRS 9
Financial instruments, adopted for the first time in the
year to 31 December 2018. Under IFRS 9, the Group is first
required to establish whether debt is legally extinguished or
modified on refinancing. If the debt has been modified, the
Group is also required to determine if the modification is
substantial or non-substantial.
The directors have concluded that the refinancing has led
to a substantial modification of the previous facilities and
US loan notes and are therefore required to derecognise
existing debt and recognise refinanced facilities at their
fair value. The calculation of fair value involves significant
judgement.
We therefore identified the renewal of the revolving credit
facilities and US loan notes, specifically initial recognition
under IAS 32 and subsequent measurement under IFRS 9,
as a significant risk, which was one of the most significant
assessed risks of material misstatement.
Key observations
As a result of our work, we concluded that the accounting for new long-term borrowings was acceptable.
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to the members of Interserve Plc
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions
of a reasonably knowledgeable person would be changed or influenced. We use materiality in determining the nature, timing and extent
of our audit work and in evaluating the results of that work.
Group
£4.6 million which is five per cent of Group
operating profit before non-underlying
items and amortisation of acquired
intangible assets. This benchmark is
considered the most appropriate because
this is a key performance measure used
by the Board of Directors to report to
investors on the financial performance of
the Group.
Materiality for the current year is higher
than the level that we determined for the
year ended 31 December 2017. In the prior
year, materiality was determined based
on statutory loss before tax due to the
significant uncertainty over the allocation
of non-underlying items, which meant that
during our planning procedures there was
no confirmed expected operating profit
before non-underlying items and intangible
assets and, as a result, this benchmark
could not be used. Given the fact that the
classes of items and contracts included as
non-underlying are now established, the
operating profit before non-underlying
items and amortisation could be more
clearly identified at the planning stage
this year.
The increase in materiality reflects the
different benchmark used in the year and
the increase in underlying operating profit.
70 per cent of financial statement
materiality.
We also determine a lower level of specific
materiality for certain areas such as
directors’ remuneration.
£229,000 and misstatements below that
threshold that, in our view, warrant
reporting on qualitative grounds.
Parent company
£3.2 million which is two per cent
of total assets capped at Group
performance materiality. This
benchmark is considered the most
appropriate because the parent
company does not trade externally
but functions primarily as a holding
company for its investments in
subsidiaries.
Materiality for the current year is higher
than the level that we determined for
the year ended 31 December 2017, as it is
capped at Group performance materiality,
its movement reflects the increase in
Group materiality.
70 per cent of financial statement
materiality.
We also determine a lower level of specific
materiality for certain areas such as
directors’ remuneration.
£160,000 and misstatements below that
threshold that, in our view, warrant
reporting on qualitative grounds.
Materiality was determined as follows:
Materiality measure
Financial statements as a whole
Performance materiality used to drive the
extent of our testing
Specific materiality
Communication of misstatements to the
Audit Committee
9696
FINANCIAL STATEMENTS An 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 control 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, liabilities, revenues and profit before
taxes, to assess the significance of the component and to determine the planned audit response. For those components that were
evaluated as 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 the
operating effectiveness of 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 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 made up 85 per cent of consolidated revenues and 59 per cent of operating
profit before non-underlying items and amortisation of intangible assets. Statutory audits of subsidiaries, where required by local laws,
were 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,
particularly in its Equipment Services and Construction divisions. Through an analysis of these operations we determined that targeted
audit procedures were to be carried out in eight entities located in Guernsey, Oman, Qatar, the United Arab Emirates (UAE), Saudi
Arabia and Australia. These targeted procedures addressed the Key Audit Matters described above, where relevant to the entity. Those
components subjected to targeted audit procedures comprise seven per cent of total revenues and 15 per cent of operating profit
before non-underlying items and amortisation of intangible assets. The joint ventures and associates which were subjected to targeted
audit procedures contributed 10 per cent of operating profit before non-underlying items and amortisation of intangible assets.
The remaining operations of the Group were subject to analytical procedures over the balance sheet and income statements of the
related entities with a focus on the Key Audit Matters 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 were to be addressed through the audit procedures and indicated
the information that needed to be reported back to the group audit team. The group audit team performed site visits in Oman and the
UAE, which included a review of the work performed by the component auditors. Where targeted components outside of the UK were
not physically visited, an assessment of the supporting working papers was conducted remotely. The group audit team communicated
with all component auditors throughout the planning, fieldwork and concluding stages of the local audits.
Other information
The directors are responsible for the other information. The other information comprises the information included in the Annual
Report, other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not cover
the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are
required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we
are required to report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of the other information where we conclude that those items meet
the following conditions:
• fair, balanced and understandable set out on page 87 – the statement given by the directors that they consider the Annual Report and
Financial Statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to
assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or
• the Audit Committee report set out on page 53 – the section describing the work of the Audit Committee does not appropriately
address matters communicated by us to the Audit Committee; or
• the directors’ statement of compliance with the UK Corporate Governance Code set out on page 45 – the parts of the directors’
statement required under the Listing Rules relating to the Company’s compliance with the UK Corporate Governance Code containing
provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a
relevant provision of the UK Corporate Governance Code.
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GovernanceFinancial StatementsStrategic ReportOverview Independent auditor’s report continued
to the members of Interserve Plc
Our opinions on other matters prescribed by the Companies Act 2006 are 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.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements
are prepared is consistent with the financial statements; and
• the Strategic Report and the Directors’ Report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report under the Companies Act 2006
In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of
the audit, we have not identified material misstatements in the Strategic Report or the Directors’ Report.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us 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.
Responsibilities of directors for the financial statements
As explained more fully in the Directors’ Responsibility Statement set out on page 87, the directors are responsible for the preparation
of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors
determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to
fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group’s and the parent company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless the directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative
but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.
We are responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that
material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in
accordance with the ISAs (UK) . Our audit approach is a risk-based approach and is explained more fully in the ‘An overview of the scope
of our audit’ section of our audit report.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s
website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
9898
FINANCIAL STATEMENTS Other matters which we are required to address
We were appointed by the Audit Committee on 13 June 2014. Our total uninterrupted period of engagement is five years, covering the
periods ending 31 December 2014 to 31 December 2018.
The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain
independent of the Group and the parent company in conducting our audit.
Our audit opinion is consistent with the additional report to the Audit Committee.
Use of our report
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.
Philip Westerman
Senior Statutory Auditor
for and on behalf of Grant Thornton UK LLP
Statutory Auditor, Chartered Accountants
London
8 Match 2019
9999
GovernanceFinancial StatementsStrategic ReportOverview Consolidated income statement
for the year ended 31 December 2018
Year ended 31 December 2018
Year ended 31 December 2017
Before non‑
underlying
items and
amortisation
of acquired
intangible
assets
£million
Non‑underlying
items and
amortisation
of acquired
intangible
assets
(note 5)
£million
Before non‑
underlying
items and
amortisation
of acquired
intangible
assets #
£million
Non‑underlying
items and
amortisation
of acquired
intangible
assets #
(note 5)
£million
Total
£million
Total
£million
3,019.2
206.5
3,225.7
3,408.6
258.3
3,666.9
(321.7)
–
(321.7)
(416.1)
–
(416.1)
2,697.5
206.5
2,904.0
2,992.5
258.3
3,250.8
(2,372.2)
(242.5)
(2,614.7)
(2,640.9)
(368.7)
(3,009.6)
325.3
(249.9)
–
–
(249.9)
(36.0)
(27.8)
(18.7)
(33.1)
(79.6)
75.4
(115.6)
17.3
–
17.3
92.7
3.5
(82.5)
13.7
(8.7)
5.0
17.0
–
17.0
(98.6)
–
(26.4)
(125.0)
(8.9)
289.3
(277.7)
(18.7)
(33.1)
(329.5)
(40.2)
34.3
–
34.3
(5.9)
3.5
(108.9)
(111.3)
(17.6)
(133.9)
(128.9)
1.7
3.3
5.0
(133.9)
(132.2)
–
3.3
(133.9)
(128.9)
(89.2p)
(89.2p)
1.1p
0.9p
351.6
(292.6)
–
–
(292.6)
59.0
25.5
–
25.5
84.5
5.9
(28.4)
62.0
(8.1)
53.9
51.9
2.0
53.9
(110.4)
(86.7)
(21.5)
(60.0)
(168.2)
(278.6)
(30.6)
(0.1)
(30.7)
(309.3)
2.9
–
(306.4)
(1.9)
(308.3)
241.2
(379.3)
(21.5)
(60.0)
(460.8)
(219.6)
(5.1)
(0.1)
(5.2)
(224.8)
8.8
(28.4)
(244.4)
(10.0)
(254.4)
(308.3)
(256.4)
–
2.0
(308.3)
(254.4)
(176.0p)
(176.0p)
35.6p
34.0p
Notes
2
2
15
4
7
8
9
11
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
Impairment of goodwill
Total administration expenses
Operating profit/(loss)
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/(loss)
Investment revenue
Finance costs
Profit/(loss) before tax
Tax charge
Profit/(loss) for the year
Attributable to:
Equity holders of the parent
Non-controlling interests
Earnings per share
Basic
Diluted
Headline
Diluted headline
# restated (note 1)
100
FINANCIAL STATEMENTS
Consolidated statement of comprehensive income
for the year ended 31 December 2018
Loss for the year
Items that will not be reclassified subsequently to profit or loss:
Actuarial gains/(losses) 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
(Losses) /gains on cash flow hedging instruments (excluding joint ventures)
Recycling of cash flow hedge reserve to profit and loss account
Deferred tax on above items taken directly to equity
Net impact of items relating to joint-venture entities
Other comprehensive income/(loss) net of tax
Total comprehensive (loss)
Attributable to:
Equity holders of the parent
Non-controlling interests
# restated (note 1)
Year ended
31 December 2018
£million
Year ended
31 December 2017
£million
Notes
(128.9)
(254.4)
29
9
9
54.0
(9.2)
44.8
14.0
-
10.4
(1.8)
0.8
23.4
68.2
(60.7)
(64.0)
3.3
(60.7)
(10.4)
1.8
(8.6)
(34.8)
(23.0)
22.7
0.2
3.0
(31.9)
(40.5)
(294.9)
(297.3)
2.4
(294.9)
101
GovernanceFinancial StatementsStrategic ReportOverview
Consolidated balance sheet
at 31 December 2018
Notes
31 December 2018
£million
31 December 2017
£million
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interests in joint-venture entities
Interests in associated undertakings
Retirement benefit surplus
Deferred tax asset
Current assets
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
Non-current liabilities
Borrowings
Trade and other payables
Long-term provisions
Retirement benefit obligation
Total liabilities
Net assets/(liabilities)
Equity
Share capital
Share premium account
Warrants in issue
Capital redemption reserve
Merger reserve
Hedging and revaluation reserve
Translation reserve
Investment in own shares
Retained earnings
12
13
14
15
15
29
16
17
19
20
20
22
25
20
23
25
29
26
342.3
30.9
209.9
33.2
88.3
93.9
1.3
799.8
35.8
641.3
196.7
873.8
372.9
54.5
228.6
46.5
78.4
-
23.4
804.3
34.0
722.0
155.1
911.1
1,673.6
1,715.4
-
(741.3)
(4.5)
(29.3)
(775.1)
98.7
(827.5)
(12.7)
(59.4)
-
(899.6)
(6.8)
(798.6)
(7.2)
(50.2)
(862.8)
48.3
(647.5)
(14.5)
(80.0)
(48.0)
(790.0)
(1,674.7)
(1,652.8)
(1.1)
62.6
15.0
116.5
31.4
0.1
121.4
3.5
88.5
-
(392.4)
14.6
116.5
-
0.1
121.4
(5.9)
74.5
(1.9)
(272.0)
47.3
15.3
62.6
Retained earnings
(392.4)
(272.0)
Equity attributable to equity holders of the parent
Non-controlling interests
Total equity
(16.0)
14.9
(1.1)
These financial statements were approved by the Board of Directors on 8 March 2019.
Signed on behalf of the Board of Directors
D J White
Director
102
M A Whiteling
Director
FINANCIAL STATEMENTS
Consolidated statement of changes in equity
for the year ended 31 December 2018
Share
capital
£million
Share
premium
£million
Warrants
in issue
£million
Capital
redemption
reserve
£million
Merger
reserve1
£million
Hedging
and
revaluation
reserve2
£million
Translation
reserve
£million
Investment
in own
shares3
£million
Retained
earnings
£million
Attributable
to equity
holders of
the parent
£million
Non‑
controlling
interests
£million
Total
£million
Balance at
1 January 2017
Profit/(loss) for the year
Other comprehensive
income
Total comprehensive
income
Dividends paid
Shares issued
Purchase of
Company shares
Company shares used
to settle share-based
payment obligations
Share-based payments
Transactions with owners
Balance at
31 December 2017
Impact of adoption of
IFRS 15 (see note 1(a))
Balance at
1 January 2018
as restated
Profit/(loss) for
the year
Other comprehensive
income
Total comprehensive
income
Dividends paid
Shares issued
Warrants issued
Warrants exercised
Purchase of
Company shares
Company shares used
to settle share-based
payment obligations
Share-based payments
14.6
116.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14.6
116.5
–
–
14.6
116.5
–
–
–
-
0.4
-
-
-
-
-
–
–
–
-
-
-
-
-
-
-
-
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
-
-
35.3
(3.9)
-
-
-
31.4
0.1
121.4
(8.8)
109.7
(1.9)
(9.4)
342.2
12.9
355.1
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2.9
2.9
–
–
–
–
–
–
–
(35.2)
(35.2)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(256.4)
(256.4)
2.0
(254.4)
(8.6)
(40.9)
0.4
(40.5)
(265.0)
(297.3)
2.4
(294.9)
–
–
–
–
2.4
2.4
–
–
–
–
2.4
2.4
–
–
–
–
–
–
–
–
–
–
2.4
2.4
0.1
121.4
(5.9)
74.5
(1.9)
(272.0)
47.3
15.3
62.6
–
–
–
–
–
(37.5)
(37.5)
–
(37.5)
0.1
121.4
(5.9)
74.5
(1.9)
(309.5)
9.8
15.3
25.1
–
–
–
-
-
-
-
-
-
-
-
–
–
–
-
-
-
-
-
-
-
-
–
9.4
9.4
-
-
-
-
-
-
-
-
–
14.0
14.0
-
-
-
-
-
-
-
-
–
–
–
-
-
-
-
-
-
-
-
3.9
-
1.9
-
1.9
(1.9)
2.5
4.5
(132.2)
(132.2 )
3.3
(128.9)
44.8
68.2
–
68.2
(87.4)
(64.0)
3.3
(60.7)
-
(3.7)
(3.7)
0.4
35.3
-
-
-
2.5
38.2
-
-
-
-
-
-
0.4
35.3
-
-
-
2.5
(3.7)
34.5
Transactions with owners
0.4
Balance at
31 December 2018
15.0
116.5
31.4
0.1
121.4
3.5
88.5
-
(392.4)
(16.0)
14.9
(1.1)
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 in 2014.
2 The hedging and revaluation reserve includes £14.8 million relating to the revaluation of financial assets within the joint ventures held at fair value through other comprehensive
income (2017: £16.0 million) .
3 The investment in own shares reserve represents the cost of shares in Interserve Plc held by the trustees of the Interserve Employee Benefit Trust. The number of shares held at
31 December 2018 was 32,144 (2017: 466,909) , with the market value of these shares at 31 December 2018 being £nil (2017: £0.4 million) .
103
GovernanceFinancial StatementsStrategic ReportOverview
Consolidated cash flow statement
for the year ended 31 December 2018
Operating activities
Total operating profit/(loss)
Adjustments for:
Amortisation of acquired intangible assets
Impairment of goodwill
Amortisation of capitalised software development
Impairment of capitalised software development
Depreciation of property, plant and equipment
Impairment of capitalised IT development
Profit on disposal of investments in joint ventures
Proceeds on disposal of PFI investments
Non-cash gain on pension indexation
Other non-current asset non-cash impairment items
Loss on disposal of subsidiary
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
Gain on disposal of plant and equipment - hire fleet
(17.0)
(22.2)
Operating cash flows before movements in working capital
(Increase) /decrease in inventories
(Increase) /decrease in receivables
Increase/(decrease) in payables
Capital expenditure - hire fleet
Proceeds on disposal of plant and equipment - hire fleet
Cash used by operations
Cash used by operations - Energy from Waste exited business
Cash used by operations - other non-underlying
Cash generated by operations - ongoing business
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
Investment in joint-venture entities
Proceeds on disposal of subsidiary
Receipt of loan repayment - investments
Net cash from/(used in) investing activities
# restated (note 1)
104
17.6
(1.7)
59.2
(135.0)
(20.3)
20.0
(60.2)
(29.7)
(41.8)
11.3
(11.4)
(71.6)
3.2
11.8
8.9
(19.6)
(0.8)
2.5
-
6.0
14
15a
13/14
15b
15b
Year ended
31 December 2018
£million
Year ended
31 December 2017 #
£million
Notes
(5.9)
(224.8)
13
12
13
13
14
14
15
5
5
5
28
18.7
33.1
6.1
-
35.7
-
(17.0)
47.0
(70.6)
15.0
7.1
(16.9)
(17.3)
2.5
(17.0)
(2.9)
21.5
60.0
1.6
6.3
39.5
9.4
(7.5)
12.3
-
1.4
-
(15.9)
5.2
2.1
(22.2)
(0.2)
(111.3)
0.5
(11.1)
(26.4)
(17.8)
30.2
(135.9)
(95.9)
(72.9)
32.9
(8.6)
(144.5)
5.9
17.2
1.6
(39.3)
(32.7)
0.7
(46.6)
FINANCIAL STATEMENTS
Consolidated cash flow statement continued
for the year ended 31 December 2018
Year ended
31 December 2018
£million
Year ended
31 December 2017 #
£million
Notes
Financing activities
Interest paid
Dividends paid to non-controlling interests
Proceeds from issue of warrants
Proceeds from issue of shares and exercise of warrants
Proceeds from disposal of derivatives
Increase in bank loans
Repayment of bank loans
Repayment of obligations under finance leases
Net cash from financing activities
Net increase 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 in cash and cash equivalents
Net increase in bank loans
Movement in obligations under finance leases
Change in net debt resulting from cash flows
Change in PIK interest (non-cash)
Change in discount on debt (non-cash)
Effect of foreign exchange rate changes
Movement in net debt during the period
Net debt - opening
Net debt - closing
# restated (note 1)
(42.8)
(3.7)
35.3
0.4
-
163.4
(36.5)
(3.0)
113.1
47.5
148.3
0.9
196.7
196.7
-
196.7
47.5
(126.9)
3.0
(76.4)
(24.7)
(13.8)
(13.7)
(128.6)
(502.6)
(631.2)
20
(27.3)
-
-
-
44.1
223.6
-
(1.0)
239.4
48.3
102.2
(2.2)
148.3
155.1
(6.8)
148.3
48.3
(223.6)
1.0
(174.3)
-
-
(53.9)
(228.2)
(274.4)
(502.6)
105
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements
for the year ended 31 December 2018
1. BASIS OF PREPARATION AND ACCOUNTING POLICIES
Basis of preparation
The financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted for use in
the European Union and therefore comply with Article 4 of the EU IAS Regulation and with those parts of the Companies Act 2006 that
are applicable to companies reporting under IFRS.
The financial statements are presented in sterling, rounded to the nearest one hundred thousand unless otherwise stated. They
have been prepared under the historical cost convention, except for the revaluation of certain financial instruments that have been
measured at fair value.
The financial statements have been prepared on the going concern basis, which assumes that the Group will continue to be able to meet
its liabilities as they fall due for the foreseeable future. In assessing the going concern assumptions, the Board has reviewed the base
case plans, identified downsides and anticipated receipt of proceeds from the proposed Deleveraging Plan. Following this assessment,
the Board has a reasonable expectation that the Group will be able to operate as a going concern for the foreseeable future.
In undertaking the assessment, the Board has considered the fact that the Deleveraging Plan is subject to a shareholder vote, an event
which is outside of the control of the Group. These events and conditions indicate a material uncertainty on the completion of the
Deleveraging Plan, which may cast significant doubt about the Group’s ability to continue as a going concern.
The going concern basis has been adopted for 2018 because the directors believe that the Group has realistic plans for the future
growth of the business and every expectation of successfully completing the Deleveraging Plan by the end of March 2019. The Board
believes that, with the Deleveraging Plan in place, even in a reasonable worst-case scenario, the Group will continue to have adequate
financial resources to realise their assets and discharge their liabilities as they fall due. Accordingly, the directors have formed the
judgement that it is appropriate to prepare the financial statements on the going concern basis. Therefore, the financial statements do
not include any adjustments which would be required if the going concern basis of preparation is inappropriate.
(a) Adoption of new and revised standards
IFRS 9 Financial instruments
The adoption of IFRS 9 has impacted the Group in the following areas. The Group continues to record movements in its financial assets
held within its PFI Joint Ventures through other comprehensive income (OCI) using the fair value through OCI category. This is because
these financial assets are held within a business model whose objective at Group level is achieved by both collecting contractual cash
flows and selling financial assets and the contractual terms of the financial assets meet the “solely payments of principal and interest
on the principal outstanding” criterion.
Therefore, there is no quantitative impact on the Group upon adoption of IFRS 9.
IFRS 15 Revenue from contracts with customers
During the year we concluded our review of the implications of the adoption of IFRS 15 Revenue from contracts with customers which
we adopted from the beginning of this year. As disclosed in the 2017 Annual Report, we identified no material change in the way that
we recognise revenue on contracts with customers. However, we did identify an issue with the transition from IAS 11 Construction
contracts whereby costs that we had previously capitalised under that standard on contracts that were ultimately onerous, where future
recovery was anticipated from a third party other than the customer, are not covered by similar provisions in IFRS 15. As such the
recognition of an asset in these circumstances falls to the more restrictive requirements of IAS 37 Provisions, contingent liabilities and
contingent assets. In order to recognise the asset, IAS 37 requires recovery to be virtually certain rather than expected, otherwise it
falls to be treated as a contingent asset and disclosed rather than recognised. Whilst we remain confident of recovery and our ultimate
expectation is unchanged, we are not able to meet the requirement of virtually certain which we have interpreted as being as close to
100% as to make any remaining uncertainty insignificant.
We have adopted IFRS 15 through the “modified retrospective adoption” approach and as such have booked a cumulative catch-up
adjustment to the opening balance sheet (charge to equity and increase in provisions) of £37.5 million without altering comparatives.
These recoveries will now flow through the income statement as received (in effect the £37.5 million becomes an unrecognised
contingent asset) .
During 2018 the Group has identified a number of minor differences as a result of the implementation of IFRS 15 which are as follows:
(i)
where revenue from insurance claims on contracts that would have previously been recognised that does not any longer meet the
criteria of being highly probable that these amounts would not be reversed. The total impact on the year ended 31 December 2018
revenue is a reduction of £32.5 million with a corresponding effect on provisions in the balance sheet.
(ii) where construction-related revenues have been subject to profit abatement rules the impact on the year ended 31 December 2018
has been a reduction in revenues of £7.3 million and a corresponding reduction in cost of sales. The impact on the balance sheet
has been a reduction in amounts due from contract customers and a reduction in the amounts due to contract customers.
At the date of authorisation of these financial statements the following standards and interpretations were in issue but not yet
effective, and therefore have not been applied in these year-end financial statements:
106
FINANCIAL STATEMENTS IFRS 16 Leases
The new standard will replace IAS 17 Leases. It will become effective for accounting periods on or after 1 January 2019, at the earliest.
It will require nearly all leases to be recognised on the balance sheet as liabilities, including those currently recognised as operating
leases, with corresponding assets being created.
The Group has assessed the estimated impact that initial application of IFRS 16 will have on its consolidated financial statements, as
described below. The actual impacts of adopting the standard may change because:
• the Group has not finalised the testing and assessment of controls over its new IT systems; and
• the new accounting policies are subject to change until the Group presents its first financial statements that include the date of
initial application.
IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing
its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition
exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard – i.e. lessors
continue to classify leases as finance or operating leases.
IFRS 16 replaces existing leases guidance, including IAS 17 Leases, IFRIC 4 Determining whether an arrangement contains a lease, SIC-15
Operating leases – incentives and SIC-27 Evaluating the substance of transactions involving the legal form of a lease.
(i) Leases in which the Group is a lessee
The Group will recognise new assets and liabilities for its operating leases of properties, fleet vehicles and other assets (see note 24(b)) .
The nature of expenses related to those leases will now change because the Group will recognise a depreciation charge for right-of-use
assets and an interest expense on lease liabilities.
Previously, the Group recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and
liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised.
In addition, the Group will no longer recognise provisions for operating leases that it assesses to be onerous as described in note 25.
Instead, the Group will include the payments due under the lease in its lease liability.
No significant impact is expected for the Group’s finance leases.
Based on the information currently available, the Group estimates that it will recognise additional lease liabilities of between
£125 million and £150 million as at 1 January 2019 and that IFRS 16 will increase the Group’s EBITDA by approximately £30 million and
reduce profits before tax by around £2 million.
(ii) Leases in which the Group is a lessor
The Group will reassess the classification of sub-leases in which the Group is a lessor. Based on the information currently available no
significant impact is expected for leases in which the Group is a lessor.
(iii) Transition
The Group is applying IFRS 16 in 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting IFRS 16
will be recognised as an adjustment to the opening balance of retained earnings at 1 January 2019, with no restatement of comparative
information.
The Group plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply
IFRS 16 to all contracts entered into before 1 January 2019 and identified as leases in accordance with IAS 17 and IFRIC 4.
Except for IFRS 16 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 and estimates are continually reviewed the facts and circumstances underlying them may
change and that could impact the results of the Group. Each judgement identified below also includes, where relevant, an assessment
of the key sources of estimation uncertainty. In particular:
Judgements
Glasgow EfW plant
In July 2012 Interserve was appointed by Viridor as the Engineer Procure Construct (EPC) contractor for the construction of the Glasgow
Energy from Waste (EfW) plant. In December 2016 this contract was terminated by the client. During 2018 the Group successfully
concluded its professional indemnity insurance claims, with all cash being received in the period. The key remaining judgement remains
the final account settlement with Viridor and whether this will crystallise within current expected parameters.
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GovernanceFinancial StatementsStrategic ReportOverview Notes to the consolidated financial statements continued
for the year ended 31 December 2018
1. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
(b) Critical accounting judgements and key sources of estimation and uncertainty continued
Judgements continued
Differences of interpretation of certain contract provisions between the parties exist, which are capable of having a material impact on
the liability of the Group for compensation on termination. These issues include, but are not limited to:
(i) Application of the liability cap to Viridor’s claims;
(ii) The order in which limitations on liability are taken into account in the compensation calculation;
(iii) The scope of contractual pain-share provisions;
(iv) The recovery of Viridor’s indirect losses; and
(v) Viridor’s duty to mitigate its costs incurred in completing the works.
The judgements in this regard have been based upon appropriate legal and technical advice and the directors regard them as
appropriate. Viridor’s parent company’s half-year results to 30 September 2018 included a net receivable due from Interserve relating to
this project of £64 million. Since the year end Viridor has submitted a draft termination account to Interserve significantly in excess of
this receivable. The directors believe this has no technical merit. The Glasgow contract contains an overall limit on Interserve’s liability
to Viridor under the contract which Interserve calculates after deducting payments to date as £71.0 million.
The directors have taken the view that the differences between the parties will be substantially narrowed if the interpretation disputes
(i) , (ii) and (iii) above are resolved. Assuming the directors’ views on these points are correct, the liability would be between £nil and
£33.5 million. If not, the liability could be higher. The directors consider that their best estimate of the outcome is £14.7 million which
is the accrued cost in the balance sheet to settle the final account.
Interserve believes that there are strong claims that there are provisions in the contract that limit the scope of the Group’s liability.
Accordingly, Interserve commenced an adjudication seeking a statement of law in respect of (i) , (ii) and (iii) above on 8 February 2019
and expects a decision to be delivered by April 2019. Any decision by the adjudicator could be subsequently challenged through formal
arbitration. There can, however, be no assurances as to the ultimate amount of any liability.
Derby EfW plant
In August 2014 a special-purpose vehicle (SPV) (formed as a 50:50 joint venture between Interserve and Renewi) , Resource Recovery
Solutions (RRS) , was awarded the contract by Derby City and County Councils (the Councils) for the construction and operation of the
Derby EfW plant. The SPV awarded an EPC contract to Interserve Construction for the construction of the plant.
The Group completed the physical construction of the plant in 2017 and started receiving municipal waste in January 2018; however,
the project has been delayed past the long-stop date of September 2018. During the fourth quarter of 2018 acceptance testing
commenced and discussions are currently ongoing as to how to demonstrate satisfactory completion of the tests. Transfer testing is due
to commence shortly once the plant is believed to be capable of performing at the optimum levels.
The key remaining judgements are:
• The acceptance and transfer tests are passed and independently certified within the current projected timescales.
◦ The Derby EfW plant has been operational since September 2018, excluding periods where defect rectification works have been
completed. The directors are confident that the Derby EfW plant will ultimately meet or exceed the required outputs.
◦ Delays would likely result in increased contractual costs to complete and damages. Depending on the cause, these costs could be
recovered from insurers. It is not possible to quantify unknown circumstances which could cause delays; however, current rates of
costs and damages are c£1.5 million per month and the adjustment would increase cost of sales and either provisions or accruals in
the balance sheet.
• Performance and availability damages are not levied as the plant operates at the required contractual levels.
• Interserve is not terminated on the project.
◦ In the event that Interserve and the Councils cannot come to an agreement, the Councils may exercise their contractual right to
terminate the Project Agreement which, in turn, would lead to the termination of the construction contract.
◦ Given the stage of completion of the project, the directors do not believe this would be a desirable outcome for all parties.
◦ The financial impact of such an event would depend on the calculation of the market value of the project, which the directors
expect would reduce Interserve’s debt and equity return in the SPV but not create a claim against Interserve. Interserve’s equity
and debt interests in the SPV were valued at £12.4 million at 31 December 2018, which is shown as an investment in joint ventures
in the balance sheet. In addition, the project finance lenders would seek to recover their losses from Interserve as a result of
Interserve’s alleged default in terms of failing to achieve completion by the long-stop date.
◦ The directors believe Renewi require Interserve’s consent as shareholder of the SPV to terminate Interserve’s construction
contract.
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FINANCIAL STATEMENTS • The Company has, as yet, not recognised any value for professional indemnity (PI) insurance claims relating to the construction of the
Derby EfW plant.
◦ This contract has been significantly loss making and, as required under IFRS, a forward-loss provision has been taken. This
forward-loss provision does not assume any PI insurance recoveries. The directors expect that, as on the Glasgow EfW project in
2018, significant PI recoveries on Derby EfW plant will be achieved.
◦ A notification has been made to the PI insurer of claims. The claims predominantly relate to alleged design deficiencies and
negligence of key sub-contractors, particularly design deficiencies relating to the Advanced Conversion Facility (ACF) power plant.
The claims are conceptually similar to the successful claims made on the Glasgow EfW plant.
◦ Interserve is yet to fully establish its entitlements as the project has not concluded, and recoveries will be recognised in the
income statement when cash is received. It is only at this point the directors deem the likelihood of recovery to meet the
virtually certain recognition criteria of IAS 37. The range in outcome from these claims is between £nil and £50 million, which is
the maximum receivable through a single claim under the policy. As at the balance sheet date, the directors expect to receive in
excess of £30 million; however, fully detailed and substantiated submissions have not been submitted. The timing of the resolution
of the insurance claims is not fully within the control of the Group; however, the directors expect substantial insurance proceeds
during the second half of 2019.
Future losses on the Ministry of Justice CRC contracts will fall within acceptable levels
Interserve is involved in providing probation and rehabilitation services to the Ministry of Justice (MoJ) . These services are provided via
five community rehabilitation companies (CRCs) each of which holds a contract to provide services in a given geographic area. During
2018, a fundamental variation to the contracts was agreed which improved their viability but still left a substantial loss over their
remaining life across all five of the contracts. The forward-loss provision of £12.1 million booked in the prior year has been updated for
these developments and continues to be reviewed on a regular basis.
The year-end 31 December 2018 forward-loss and impairment provisions of £11.4 million included within other debtors represents a
fair assessment of a number of potential outcomes. The sensitivities principally pertain to the Performance by Results income which
is impacted by reoffending data published by the MoJ on a quarterly basis and there are a number of factors which have a material
impact on reoffending.
ILE International Saudi debt
Interserve Learning and Employment International (ILE) had £36.0 million of outstanding debt at 31 December 2018 including trade
debtors and accrued income. Of this, approximately £17 million is recorded in deferred income as relating to activities to be undertaken
in 2019. £15.7 million of the debt was greater than 90 days old at the year end and only £1.8 million is over a year old.
Since the start of Q4 2018, it has been evident that our immediate customer, Colleges of Excellence (COE) , has had a funding shortfall
from its funding partner, Human Resources Development Fund (HRDF) . Initially COE commented to us that only 44% of outstanding
payments would be made. We received 44% of the amount due on the main COE contract but between the second half of October and
31 December 2018, we have had no further receipts. The Health programme, where we have been paid, is funded by the Ministry of
Health.
We believe that we will be paid in full for all of the outstanding sums and that no bad debt provision is necessary at this stage based on
the following reasons:
(i) The client has verbally assured us on innumerable occasions that we will be paid and that the issue is purely one of timing.
(ii) Moreover, the client has asserted in writing on a number of occasions that we have performed all of our obligations, that the sums
are due and that, subject to the finalisation of its own funding arrangements, these sums will be paid. We are establishing a fact
pattern for each contract to affirm the weight of evidence supporting these assertions.
(iii) We have now raised breach notices on all contracts and we have had no responses from the customer which would contest our right
to raise the breach notices, or entitlement to payment. If they had, such an action would prejudice our right to 100% of the debt.
(iv) Our contracts are reasonably straightforward, we have carried out those contracts and have exercised our rights according to these
contracts.
(v) It is not uncommon for payments to be made relatively slowly in Saudi Arabia and our experience of COE is that, whilst payments
have been slow, we have historically been paid.
(vi) The COE have continually stated throughout this process that Interserve is a strong strategic partner for the programme and
that they will shortly be entering into discussion to extend the current contracts, prior to commencing the process of the
recommissioning and expansion of the current programme.
(vii) We have robustly documented our position and we believe we are in a strong place if ever we were to have to take our case to a
higher authority – the Saudi Crown Prince or the Courts.
In the circumstances, we are firmly of the view, therefore, that we will be paid in full in due course for all of the sums due and this
position is supported by the fact that we have recently received approximately £13 million of cash in part settlement of the outstanding
debt.
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GovernanceFinancial StatementsStrategic ReportOverview Notes to the consolidated financial statements continued
for the year ended 31 December 2018
1. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
(b) Critical accounting judgements and key sources of estimation and uncertainty continued
Judgements continued
Accounting for debt restructuring under IFRS 9
On 27 April 2018 the Group re-negotiated its existing credit facilities which consisted of the renewal of existing Revolving Credit
Facilities (RCF) of £388.6 million and $350 million of US$ Loan Notes and obtaining £175 million of new Term Loans (LIBOR + 8.75%)
together with £21.5 million of Money Market lines. These renewals of the RCF and US$ Loan Notes (together, ‘the Override Agreement’)
were at significantly higher rates of interest than previously (LIBOR + 6.43% for RCF vs average of 2.8% in 2017 and LIBOR + 7.61% for the
US$ Loan Notes vs average of 5.6% in 2017) .
We concluded that the changes in the terms of the Override Agreement constituted a substantial debt modification under IFRS 9 and
therefore existing loans were derecognised and new loan balances were recognised. The Override Agreement was concluded at the
same time as the Group securing new lending, under the terms of a new ‘Super Senior Agreement’. The substantially modified debt
was initially recognised at fair value, calculated based on the expected present value of future cash flows, discounted at an effective
interest rate reflecting the Group’s cost of borrowing. Our view is that the effective rate of interest on the loan was consistent with
the market rates existing in April 2018. A total of 23 different banks participated as a syndicate on the RCF and five institutions on the
US$ bond. A significant proportion of these banks also participated in the Super Senior Agreement, alongside two lenders who had not
previously participated in the syndicate. On the basis of these facts, we concluded that this indicates that the interest rates offered
were arms-length in nature based on market-based pricing. The impact of these judgements was that there was no significant gain or
loss on refinancing under the terms of the Override Agreement, and that the increased cost of borrowing in the Override Agreement is
consistent with the prevailing market rate.
Measurement of impairment of goodwill and intangible assets
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. These estimates have been used to calculate a £33.1 million impairment against goodwill in Support
Services.
An impairment review of the Group’s investments in associates was also carried out at 31 December 2018. We specifically assessed the
impact of the current economic blockade in Qatar as a potential indicator of impairment. We have concluded, however, that the Qatar
blockade is of a temporary nature and that therefore no impairment provision is required at 31 December 2018.
Retirement benefit obligations
The Group has assessed that under IFRIC 14 IAS 19 it is appropriate to recognise a pension asset in the balance sheet at 31 December 2018.
Judgement is 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. This requires judgement of
the proportion of the buy-in contract that exactly matches the amount and timing of benefits payable and the choice of an appropriate
valuation technique in accordance with IFRS 13.
Non‑underlying item presentation
IAS 1 requires material items to be disclosed separately in a way that enables users to assess the quality of a company’s profitability.
In practice, these are commonly referred to as ‘exceptional’ or ‘non-underlying items’, but this is not a concept defined by IFRS and
therefore there is a level of judgement involved in determining what to include in headline profit. We consider items which relate to
non-recurring events and are significant in size or in nature to be suitable for separate presentation (see note 5) .
Estimates and uncertainty
Measurement of impairment of goodwill and intangible assets
As set out in notes 1(b) and (g) , 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 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.
These estimates have been used in the year to test for impairment against the goodwill held in the Group but are judgemental in
nature.
110110
FINANCIAL STATEMENTS Retirement benefit obligations
In accordance with IAS 19 Employee Benefits, the Group has disclosed in note 29 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 29.
(c) Restatement of comparatives
Certain items treated as non-underlying in the year ended 31 December 2018 financial statements have been restated for 2017
comparison purposes, and they relate to businesses exited in the current year, including London Construction, Site Services and Power.
This has reduced underlying revenues in 2017 by £120.6 million and increased underlying operating profit by £9.6 million, with an equal
and opposite impact on non-underlying revenue and operating profits.
Accounting policies
Interserve Plc (the Company) is a company incorporated in the United Kingdom under 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.
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.
(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 level of non-controlling interests in the acquired company is initially measured at the minorities’ proportion of the net fair value of
the assets, liabilities and contingent liabilities recognised.
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1. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
(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
other comprehensive income.
(d) Revenue
Effective 1 January 2018 the Group has applied IFRS 15 Revenue from contracts with customers. For additional information on the new
standard and the impact on our results of operations, refer to Adoption of New and Revised Standards.
Revenue depicts the transfer of promised goods or services to our customers in an amount that reflects the consideration which we
expect to be entitled in exchange for those goods or services. Across the Group revenue is recognised at the contract level, unless
there are separately identifiable parts which can be measured individually (e.g. separate buildings in a construction contract) . Where
separately identifiable parts can be measured individually revenue is recognised as and when performance obligations are completed.
The Group earns and recognises revenue across its divisions as follows:
Construction
Revenue is earned from the provision of advice, design, construction and fit-out services for buildings and infrastructure across a range
of sectors in both public and private markets.
The Group enters into construction contracts on a fixed and variable fee basis and recognises the related revenue over time. Due to
the high degree of interdependence between the various elements of these projects, they are accounted for as a single performance
obligation.
To depict the progress by which the Group transfers control of the constructed assets to the customer and to establish when and to
what extent revenue can be recognised, the Group measures its progress towards complete satisfaction of the performance obligation
using surveys of work performed by quantity surveyors in conjunction with clients. The quantity surveyor assessments provide the
most faithful depiction of the transfer of goods and services to each customer due to the Group’s ability to make reliable estimates of
the costs required to complete each project, arising from its significant historical experience of constructing similar assets. In addition
to the fixed fee, some contracts include bonus payments which the Group can earn by completing a project in advance of a targeted
delivery date.
Revenue for contract variations and claims are included in the Group’s estimate of the transaction price only if it is highly probable that
a significant reversal of revenue will not occur. In making this assessment the Group considers its historical record of performance on
similar contracts, whether the Group has access to the labour and materials resources needed to meet the contract programme, and
the potential impact of other reasonably foreseen constraints.
When payments received from customers exceed revenue recognised to date on a particular contract, any excess (a contract liability) is
reported in the balance sheet under advances received.
Construction projects do not typically include significant financing components. Where specific material contractual advance
payments are made, which are not for the purposes of proportionately providing security of payment to the Group, then the contract
consideration is reduced to reflect the value of the financing component which is then included within finance income in the income
statement.
Support Services
The Group earns revenue from the provision of facilities management and other support services. Revenue for such services are
accounted for over time in the accounting period when services are rendered.
Fee arrangements from services include fixed fee arrangements (where the customer pays a regular invoice to reflect the service
provided) , one-off additional fees for the performance of a specific service and certain variable fee arrangements which are dependent
on achieving required KPIs.
For fixed fee arrangements, revenue is recognised based on the actual services provided to date as the provision and consumption of
service occur simultaneously. Revenue for one-off additional fees is recognised when the associated performance obligations have been
met (i.e. completion of service) . Variable consideration is only recognised in the accounts to the extent that it is highly probable that
the amount will not be subject to a significant reversal when the uncertainty is resolved.
The Group has determined that no significant financing component exists in respect of the service revenue streams. This has been
determined because the period from when the service is rendered to the date the invoice is paid will be less than one year.
112112
FINANCIAL STATEMENTS A receivable is recognised in relation to these services when a bill has been invoiced, as this is the point in time that the consideration
is unconditional because only the passage of time is required before the payment is due.
Equipment Services
Revenue is derived from the provision of engineering solutions for the construction industry in the specialist field of temporary
structures, i.e. formwork, falsework and shoring.
Hire services do not meet the definition of a lease under IAS 17 as the hire contracts do not specifically identify the asset subject.
The Group recognises revenue in Equipment Services in the following manner:
• Hire services – recognised over time, as the supply and consumption of economic benefit is concurrent. The price per unit for each
equipment part supplied to a customer is agreed in advance and therefore the transaction price is certain.
• Sale of equipment – recognised at a single point in time, when the performance obligation has been completed.
• Other services – mainly recognised at a point in time when the performance obligation has been completed. This is, however,
dependent upon the nature of the individual contract/service being provided.
Payment terms are between 30-60 days for all types of sale and therefore the impact of the time value of money is minimal.
(e) 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.
(f) 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 to their presumed residual value over their expected useful lives.
Depreciation is provided on a straight-line or reducing-balance basis at rates ranging between:
Freehold land
Freehold buildings
Straight line
Nil
2% to 7%
Leasehold property
Over the period of the lease
Reducing balance
–
–
–
Plant and equipment
10% to 50%
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.
(g) 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 12) . 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.
(h) 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.
(i) 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.
(j) 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.
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Notes to the consolidated financial statements continued
for the year ended 31 December 2018
1. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
(k) PFI bid costs and other pre‑contract costs
Incremental costs of obtaining a contract are recognised as an asset where the Group expects to recover these costs.
(l) 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.
(m) 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 virtually certain
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.
Provisions for onerous contracts are calculated at the lower of the cost of fulfilling the contract and any compensation or penalties
arising from failure to fulfil it.
Vacant property provisions, including dilapidation costs, are recognised when the Group has committed to a course of action that will
result in the property becoming vacant.
(n) Financial instruments
Trade receivables
Trade receivables are initially measured at fair value, and subsequently at their amortised cost as reduced by appropriate allowances
for estimated irrecoverable amounts.
Impairment of financial assets
IFRS 9 impairment requires the use of more forward-looking information to evaluate expected credit losses. The new standard’s
expected credit loss model (ECL) replaces IAS 39’s incurred loss model. Instruments within the scope of IFRS 9 included loans measured
at amortised cost, trade receivables and contract assets recognised and measured under IFRS 15.
Recognition of credit losses is no longer reliant on the Group first identifying a credit loss event but, instead, the Group considers a
wider range of information when assessing credit risk and measuring expected credit losses. This information includes past events,
current conditions and reasonable forecasts in respect of the collectability of future cash flows of the instrument.
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
The Group holds derivative financial instruments to hedge its foreign currency and interest rate risk exposures. Embedded derivatives are
separated from the host contract and accounted for separately if the host contract is not a financial asset and certain criteria are met.
114114
FINANCIAL STATEMENTS Derivatives are initially measured at fair value. Subsequent to initial recognition, derivatives are measured at fair value, and changes
therein are recognised in profit or loss.
The Group designates certain derivatives as hedging instruments to hedge the variability in cash flows associated with highly probable
forecast transactions arising from changes in foreign exchange rates and interest rates and certain derivatives and non-derivative
financial liabilities as hedges of foreign exchange risk on a net investment in a foreign operation.
At inception of designated hedging relationships, the Group documents the risk management objective and strategy for undertaking the
hedge. The Group also documents the economic relationship between the hedged item and the hedging instrument, including whether
the changes in cash flows of the hedged item and hedging instrument are expected to offset each other.
Cash flow hedges
When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative
is recognised in OCI and accumulated in the hedging reserve. The effective portion of changes in the fair value of the derivative that
is recognised in OCI is limited to the cumulative change in fair value of the hedged item, determined on a present value basis, from
inception of the hedge. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss.
The Group designates only the change in fair value of the spot element of forward exchange contracts as the hedging instrument in
cash flow hedging relationships. The change in fair value of the forward element of forward exchange contracts (forward points) is
separately accounted for as a cost of hedging and recognised in a costs of hedging reserve within equity.
When the hedged forecast transaction subsequently results in the recognition of a non-financial item such as inventory, the amount
accumulated in the hedging reserve and the cost of hedging reserve is included directly in the initial cost of the non-financial item
when it is recognised. For all other hedged forecast transactions, the amount accumulated in the hedging reserve and the cost of
hedging reserve is reclassified to profit or loss in the same period or periods during which the hedged expected future cash flows affect
profit or loss.
If the hedge no longer meets the criteria for hedge accounting or the hedging instrument is sold, expires, is terminated or is exercised,
then hedge accounting is discontinued prospectively. When hedge accounting for cash flow hedges is discontinued, the amount that has
been accumulated in the hedging reserve remains in equity until, for a hedge of a transaction resulting in the recognition of a non-
financial item, it is included in the non-financial item’s cost on its initial recognition or, for other cash flow hedges, it is reclassified to
profit or loss in the same period or periods as the hedged expected future cash flows affect profit or loss.
If the hedged future cash flows are no longer expected to occur, then the amounts that have been accumulated in the hedging reserve
and the cost of hedging reserve are immediately recycled to profit or loss.
Net investment hedges
When a derivative instrument or a non-derivative financial liability is designated as the hedging instrument in a hedge of a net
investment in a foreign operation, the effective portion of, for a derivative, changes in the fair value of the hedging instrument or,
for a non-derivative, foreign exchange gains and losses is recognised in OCI and presented in the translation reserve within equity.
Any ineffective portion of the changes in the fair value of the derivative or foreign exchange gains and losses on the non-derivative is
recognised immediately in profit or loss. The amount recognised in OCI is recycled to profit or loss as an adjustment on disposal of the
foreign operation.
(o) 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 Sharesave Scheme. A stochastic model
has been used to value the Performance Share Plan.
(p) 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. The Group conducts a trade in the realisation of these types of investments and, as a result, any proceeds on disposal of these
investments are treated as part of operating cash flows in the consolidated cash flow statement.
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.
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.
115115
GovernanceFinancial StatementsStrategic ReportOverview Notes to the consolidated financial statements continued
for the year ended 31 December 2018
1. BASIS OF PREPARATION AND ACCOUNTING POLICIES CONTINUED
(p) PFI projects continued
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.
The Group accounts for PFI financial assets at FVOCI if the assets meet the following conditions:
• they are held under a business model whose objective is to “hold to collect” the associated cash flows and sell; and
• the contractual terms of the financial assets give rise to cash flows that are solely payments of principal and interest on the principal
amount outstanding.
Any gains or losses recognised in other comprehensive income (OCI) will be recycled upon derecognition of the asset.
(q) 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 other comprehensive
income and presented in the statement of comprehensive income.
For defined contribution schemes, the amount recognised in the income statement is equal to the contributions payable to the schemes
during the year.
(r) 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. The Group’s research and development activities allow it to claim R&D tax credits
from HMRC in respect of qualifying expenditure; these credits are reflected in the income statement in cost of sales. 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.
(s) Non‑underlying items
IAS 1 requires material items to be disclosed separately in a way that enables users to assess the quality of a company’s profitability.
In practice, these are commonly referred to as ‘exceptional’ or ‘non-underlying items’, but this is not a concept defined by IFRS and
therefore there is a level of judgement involved in determining what to include in ‘underlying’ profit. We consider items which relate
to non-recurring events and are significant in size or in nature to be suitable for separate presentation (see note 5) . Where an item
has been identified as ‘non-underlying’ due to a past event, any future impact will also be disclosed as non-underlying, to ensure
consistency of presentation.
116116
FINANCIAL STATEMENTS 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 rental income
Revenue including share
of associates and joint ventures
Consolidated revenue
2018
£million
2017
£million
2018
£million
2017
£million
1,907.4
1,103.8
214.5
3,225.7
2,028.2
1,379.6
259.1
3,666.9
1,858.9
830.6
214.5
2,904.0
1,924.1
1,067.6
259.1
3,250.8
3. BUSINESS AND GEOGRAPHICAL SEGMENTS
(a) Business segments
The Group is organised into three operating divisions, as set out below. Information reported to the Executive Team 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-sector 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.
Costs of central services, including the financial impact of our PFI investments, are shown in “Group Services”.
117117
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
3. BUSINESS AND GEOGRAPHICAL SEGMENTS CONTINUED
(a) Business segments continued
Revenue including share
of associates and
joint ventures
Consolidated revenue
Result
2018
£million
2017 #
£million
2018
£million
2017 #
£million
2018
£million
2017 #
£million
Support Services - UK
Support Services - International
1,597.7
1,642.3
1,584.3
1,625.5
172.1
193.9
138.0
142.2
Support Services
1,769.8
1,836.2
1,722.3
1,767.7
Construction - UK
Construction - International
Construction
Equipment Services
Group Services
Inter-segment elimination
756.6
246.6
972.8
290.5
756.6
972.8
13.5
-
1,003.2
1,263.3
770.1
972.8
195.5
229.0
195.5
229.0
57.9
(7.2)
92.1
(12.0)
16.8
(7.2)
35.0
(12.0)
51.4
7.2
58.6
2.2
13.3
15.5
39.6
(21.0)
-
39.4
2.8
42.2
(10.3)
19.2
8.9
54.4
(21.0)
-
Non-underlying items and amortisation of acquired intangible
assets (note 5)
206.5
258.3
206.5
258.3
(98.6)
(309.3)
3,019.2
3,408.6
2,697.5
2,992.5
92.7
84.5
Revenue/total operating profit/(loss)
3,225.7
3,666.9
2,904.0
3,250.8
Investment revenue
Finance costs
Profit/(loss) before tax
Tax
Profit/(loss) for the year
# restated (note 1)
Support Services - UK
Support Services - International
Support Services
Construction - UK
Construction - International
Construction
Equipment Services
(5.9)
3.5
(224.8)
8.8
(108.9)
(28.4)
(111.3)
(244.4)
(17.6)
(10.0)
(128.9)
(254.4)
Segment assets
Segment liabilities
Net assets/(liabilities)
2018
£million
422.2
107.7
2017
£million
423.1
109.4
2018
£million
2017
£million
2018
£million
2017
£million
(362.6)
(382.8)
(46.0)
(51.4)
59.6
61.7
529.9
532.5
(408.6)
(434.2)
121.3
40.3
58.0
98.3
209.1
231.5
(248.7)
(350.4)
(39.6)
(118.9)
62.9
55.9
-
-
272.0
287.4
(248.7)
(350.4)
62.9
23.3
55.9
(63.0)
264.0
255.1
(41.1)
(56.2)
1,065.9
1,075.0
(698.4)
(840.8)
222.9
367.5
247.7
615.2
198.9
234.2
315.7
549.9
(631.2)
(502.6)
(16.0)
47.3
Group Services, goodwill and acquired intangible assets
411.0
484.0
(163.3)
(168.3)
1,476.9
1,559.0
(861.7)
(1,009.1)
Net debt per balance sheet
Net assets/(liabilities) (excluding non-controlling interests)
118118
FINANCIAL STATEMENTS
Support Services - UK
Support Services - International
Support Services
Construction - UK
Construction - International
Construction
Equipment Services
Group Services
Depreciation and amortisation
Additions to property, plant and equipment
and intangible assets
2018
£million
18.0
2.9
20.9
2.5
-
2.5
17.7
41.1
19.4
60.5
2017
£million
13.5
3.9
17.4
3.0
-
3.0
17.6
38.0
24.7
62.7
2018
£million
13.9
1.1
15.0
0.4
-
0.4
21.3
36.7
3.2
39.9
2017
£million
23.3
1.1
24.4
0.7
-
0.7
16.3
41.4
15.9
57.3
119119
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
3. BUSINESS AND GEOGRAPHICAL SEGMENTS CONTINUED
(b) Geographical segments
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.
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
Revenue including share
of associates and
joint ventures
Consolidated revenue
Total operating profit
2018
£million
2017 #
£million
2018
£million
2017 #
£million
2018
£million
2017 #
£million
2,270.8
2,552.1
2,257.4
2,535.3
77.0
63.4
77.0
63.4
540.9
627.5
273.7
285.3
31.3
12.2
36.3
57.9
31.1
16.8
37.6
92.1
31.3
12.2
36.3
16.8
31.1
16.8
37.6
35.0
59.5
3.1
41.5
7.5
(0.3)
2.4
37.0
2.7
52.7
6.3
4.6
2.2
(21.0)
(21.0)
Inter-segment elimination
(7.2)
(12.0)
(7.2)
(12.0)
-
-
Non-underlying items and amortisation of acquired intangible
assets (note 5)
3,019.2
3,408.6
2,697.5
2,992.5
92.7
84.5
206.5
258.3
206.5
258.3
(98.6)
(309.3)
3,225.7
3,666.9
2,904.0
3,250.8
(5.9)
(224.8)
# restated (note 1)
United Kingdom
Rest of Europe
Middle East & Africa
Australasia
Far East
Americas
Group Services, goodwill and acquired intangible assets
Retirement benefit surplus
Deferred tax asset
Non‑current assets
2018
£million
95.7
9.6
190.9
15.4
10.3
33.6
349.1
704.6
93.9
1.3
799.8
2017
£million
137.9
6.1
177.7
16.4
13.3
30.8
398.7
780.9
-
23.4
804.3
Included in consolidated revenue above are revenues of approximately £104 million (2017: £90 million) which arose from sales to the
Group’s largest contract customer.
120120
FINANCIAL STATEMENTS
(c) Disaggregated revenue
The Group’s consolidated revenue has been disaggregated by major service line, primary geographical market and pattern of revenue
recognition and the tables below disclose this information by reference to the Group’s reportable segments.
The Group’s consolidated revenue disaggregated by major service lines is as follows:
Facilities management
Construction
Equipment sales
Equipment rental income
Support
Services
UK
Support
Services
International
2018
£million
2018
£million
1,692.9
138.0
2.6
-
19.1
-
-
-
Construction
UK
Construction
International
Equipment
Services
Group
Services
Total
2018
£million
2018
£million
13.1
819.7
-
-
2018
£million
2018
£million
2018
£million
-
13.5
-
-
-
-
56.3
139.2
14.9
1,858.9
(5.2)
830.6
-
56.3
(0.1)
158.2
The Group’s consolidated revenue disaggregated by primary geographical markets is as follows:
1,714.6
138.0
832.8
13.5
195.5
9.6
2,904.0
United Kingdom
Rest of Europe
Middle East & Africa
Australasia
Far East
Americas
Support
Services
UK
Support
Services
International
2018
£million
2018
£million
1,599.8
71.7
43.1
-
-
138.0
-
-
-
-
-
-
Construction
UK
Construction
International
Equipment
Services
Group
Services
Total
2018
£million
2018
£million
2018
£million
2018
£million
-
-
13.5
-
-
-
31.3
5.3
79.1
31.3
12.2
36.3
9.6
2,473.5
–
–
–
–
–
77.0
273.7
31.3
12.2
36.3
2018
£million
832.8
-
-
-
-
-
The Group’s consolidated revenue disaggregated by pattern of revenue recognition is as follows:
1,714.6
138.0
832.8
13.5
195.5
9.6
2,904.0
Support
Services
UK
Support
Services
International
Construction
UK
Construction
International
Equipment
Services
Group
Services
2018
£million
2018
£million
2018
£million
2018
£million
2018
£million
2018
£million
Total
2018
£million
Single service with fixed monthly fee subject to
non-performance deductions
Bundled services with fixed monthly fee subject to
non-performance deductions
Construction services over time
Equipment rental for a period of time
374.8
-
1,196.6
3.5
-
-
-
-
134.5
832.8
13.5
-
-
-
-
-
139.2
-
-
-
-
374.8
(1.9)
1,198.2
(5.2)
(0.1)
975.6
139.1
Goods and services transferred over time
1,571.4
138.0
832.8
13.5
139.2
(7.2)
2,687.7
Service at schedule of rates (hours or tasks)
Equipment sales at a point in time
Goods and services transferred at a point in time
143.2
-
143.2
-
-
-
-
-
-
-
-
-
-
16.8
160.0
56.3
56.3
-
56.3
16.8
216.3
1,714.6
138.0
832.8
13.5
195.5
9.6
2,904.0
121121
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
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
Impairment of capitalised software development
Impairment of capitalised IT development costs
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)
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:
Current year fees
Prior year additional fee
Total audit fees
Audit-related assurance services
Other services
Total non-audit fees
Total fees paid to the Company's auditors
Notes
2018
£million
2017
£million
14
14
13
13
14
13
15
34.4
1.3
6.1
-
-
(17.0)
(2.9)
18.7
-
30.3
51.4
18.5
38.6
1.0
1.6
6.3
9.4
(22.2)
(0.2)
21.5
0.1
33.6
49.4
27.0
6
1,093.7
1,147.0
3.0
1.1
2018
£million
2017
£million
0.2
1.5
1.3
3.0
0.1
–
0.1
3.1
0.2
0.9
-
1.1
0.1
-
0.1
1.2
In 2019 Grant Thornton were engaged as reporting accountants to provide services in relation to the deleveraging. Fees in relation to
this service are estimated at £1.8 million. Provision of these services are not prohibited by the ethical standard and were approved by
the Audit Committee.
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 56.
122122
FINANCIAL STATEMENTS
5. NON‑UNDERLYING ITEMS AND AMORTISATION OF ACQUIRED INTANGIBLE ASSETS
Exited businesses1
2018
Strategic
review of
Equipment
Services
£million
Energy from
Waste
£million
Property
development
£million
London
Construction
£million
Other (Site
Services/
Power)
£million
Restructuring
costs
£million
Professional
adviser
fees
£million
Asset
impairments/
disposal of
Industrial
£million
Pension
indexation
£million
Foreign
exchange
gain/(loss) on
retranslation of
loan notes
£million
Amortisation
of acquired
intangible
assets
£million
Consolidated revenue
Cost of sales
Gross profit/(loss)
Administration expenses
Amortisation of acquired
intangible assets
Impairment of goodwill
Total administration expenses
32.5
(45.1)
(12.6)
-
-
-
-
Operating profit/(loss)
(12.6)
Share of results of associates and
joint ventures
Amortisation of acquired
intangible assets of associates
Total operating profit/(loss)
Net finance costs
Total profit/(loss)
Tax on non-underlying items
Prior period adjustment
Other
Amortisation of acquired
intangible assets
Tax on non-underlying items
-
-
(12.6)
-
(12.6)
-
-
-
-
Profit/(loss) after taxation
(12.6)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Contract
review
£million
127.3
(118.8)
8.5
-
-
-
-
-
-
-
-
27.2
19.5
(50.0)
(23.7)
(22.8)
(4.2)
-
(4.9)
(4.9)
-
-
-
-
-
-
-
-
-
(2.0)
(2.5)
(15.1)
(43.0)
(13.7)
(22.1)
70.6
-
-
-
-
-
-
-
-
-
-
-
(33.1)
-
-
(2.0)
(2.5)
(15.1)
(43.0)
(13.7)
(55.2)
70.6
(24.8)
(6.7)
(20.0)
(43.0)
(5.2)
(55.2)
70.6
17.0
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
17.0
(24.8)
(6.7)
(20.0)
(43.0)
(5.2)
(55.2)
70.6
Total
£million
206.5
(242.5)
(36.0)
(27.8)
-
-
-
-
(18.7)
(18.7)
-
(33.1)
(18.7)
(79.6)
(18.7)
(115.6)
-
-
17.0
-
(18.7)
(98.6)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(26.4)
-
(26.4)
17.0
(24.8)
(6.7)
(20.0)
(43.0)
(5.2)
(55.2)
70.6
(26.4)
(18.7)
(125.0)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(12.0)
-
(12.0)
-
-
-
-
-
-
-
(12.0)
3.1
3.1
3.1
(8.9)
17.0
(24.8)
(6.7)
(20.0)
(43.0)
(5.2)
(55.2)
58.6
(26.4)
(15.6)
(133.9)
1 The construction of Energy from Waste facilities, where there was contractual responsibility taken for process risk, and business streams exited as a result of the strategic review
of Equipment Services and the decision to exit Property Development, and the Power and Site Services businesses, along with directly associated costs, are considered to be Exited
Businesses. Exited Businesses are presented as non-underlying items and are excluded from the calculation of headline earnings per share (reflecting their material and non-recurring
nature) . The Exited Businesses do not meet the definition of discontinued operations as stipulated by IFRS 5 Non-current assets held for sale and discontinued operations because
the business has not been disposed of and there are no assets classified as held for sale. Accordingly the disclosures within non-underlying items differ from those applicable for
discontinued operations.
123123
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
5. NON‑UNDERLYING ITEMS AND AMORTISATION OF ACQUIRED INTANGIBLE ASSETS CONTINUED
Exited businesses1
2017 #
Asset
impairments/
disposal of
Industrial
£million
Pension
indexation
£million
Foreign
exchange
gain/(loss) on
retranslation of
loan notes
£million
Amortisation
of acquired
intangible
assets
£million
Strategic
review of
Equipment
Services
£million
Energy from
Waste
£million
48.6
4.5
(81.6)
(7.2)
Consolidated revenue
Cost of sales
Gross profit/(loss)
(33.0)
(2.7)
Administration expenses
(2.1)
(4.4)
Amortisation of acquired
intangible assets
Impairment of goodwill
-
-
-
-
Total administration expenses
(2.1)
(4.4)
Operating profit/(loss)
(35.1)
(7.1)
-
-
-
-
-
-
-
-
Property
development
£million
London
Construction
£million
Other (Site
Services/
Power)
£million
Restructuring
costs
£million
Professional
adviser
fees
£million
50.3
40.6
(56.6)
(36.3)
(6.3)
4.3
-
(0.4)
(0.4)
-
-
-
Contract
review
£million
114.3
(186.6)
(72.3)
-
-
-
(4.0)
(3.6)
(32.8)
(13.9)
(9.2)
(16.7)
-
-
-
-
-
-
-
-
-
-
-
(60.0)
(4.0)
(3.6)
(32.8)
(13.9)
(9.2)
(76.7)
(10.3)
0.7
(33.2)
(13.9)
(81.5)
(76.7)
Share of results of associates and
joint ventures
Amortisation of acquired
intangible assets of associates
-
-
-
-
(26.0)
-
-
-
-
-
-
-
-
-
(4.6)
-
-
-
Total operating profit/(loss)
(35.1)
(7.1)
(26.0)
(10.3)
0.7
(33.2)
(13.9)
(86.1)
(76.7)
Net finance costs
-
-
-
-
-
-
-
-
-
Total profit/(loss)
(35.1)
(7.1)
(26.0)
(10.3)
0.7
(33.2)
(13.9)
(86.1)
(76.7)
Tax on non-underlying items
Prior period adjustments
Amortisation of acquired
intangible assets
Tax on non-underlying items
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(5.5)
-
(5.5)
Profit/(loss) after taxation
(35.1)
(7.1)
(26.0)
(10.3)
0.7
(33.2)
(13.9)
(86.1)
(82.2)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
Total
£million
258.3
(368.7)
(110.4)
(86.7)
-
-
-
-
(21.5)
(21.5)
-
(60.0)
(21.5)
(168.2)
(21.5)
(278.6)
-
(30.6)
(0.1)
(0.1)
(21.6)
(309.3)
-
2.9
(21.6)
(306.4)
-
(5.5)
3.6
3.6
3.6
(1.9)
-
-
-
-
-
-
-
-
-
-
-
2.9
2.9
-
-
-
2.9
(18.0)
(308.3)
1 The construction of Energy from Waste facilities, where there was contractual responsibility taken for process risk, and business streams exited as a result of the strategic review
of Equipment Services and the decision to exit Property Development, and the Power and Site Services businesses, along with directly associated costs, are considered to be Exited
Businesses. Exited Businesses are presented as non-underlying items and are excluded from the calculation of headline earnings per share (reflecting their material and non-recurring
nature) . The Exited Businesses do not meet the definition of discontinued operations as stipulated by IFRS 5 Non-current assets held for sale and discontinued operations because
the business has not been disposed of and there are no assets classified as held for sale. Accordingly the disclosures within non-underlying items differ from those applicable for
discontinued operations.
# restated (note 1)
Exit from Energy from Waste
During 2018 a further £12.6 million of further losses have been recognised on these contracts, mainly in respect of Derby EfW, taking
the cumulative 2015 to 2018 losses to £229.2 million. During 2018 £35 million of insurance proceeds were received in respect of Energy
from Waste projects.
During 2017 a further £35.1 million of losses were recognised on these contracts which reflected costs incurred to date, estimated costs
to complete and damages which took the cumulative losses on these projects to £216.6 million.
Strategic review of Equipment Services
Further closure costs of £7.1 million resulting from the strategic review of Equipment Services and the decision to exit a number of
smaller less attractive businesses were incurred in 2017 bringing total costs to just over £17.0 million that was announced at the time of
the review.
Property development
During 2017, as part of review of assets held, we took the decision to exit the business of Property Development. As a result of
that decision and a review of the carrying value of property assets held, it became necessary to impair those carrying values by
£26.0 million to bring them in line with their estimated net recoverable amounts.
As announced with the 2017 year-end results, we took the decision at the end of 2017 to exit from the business of Property Development
and during 2018 we have sold our one remaining development asset (the Haymarket site in Edinburgh) for net proceeds of £47 million
and realised a non-underlying profit of £17.0 million.
124124
FINANCIAL STATEMENTS
London Construction
We took the decision during the year to exit from activities in the London construction market. We will continue to offer fit-out but not
building projects in the London region. Costs associated with this exit and anticipated losses on the close-out of contracts within this
business resulted in losses of £24.8 million (2017: £10.3 million) .
Exit from Site Services and Power businesses
We took the decision during the year to exit from the Power business in Support Services and the Site Services business in Construction
at a cost of £4.2 million and £2.5 million respectively.
Restructuring costs
The Group has embarked on a three-year plan, “Fit For Growth”, to increase the Group’s organisational efficiency, improve Group-wide
procurement and ensure greater standardisation and simplification across the business. During the year the Group incurred termination
costs in respect of former directors and employees, property rationalisation expenses and other business closure costs of £20.0 million
(2017: £33.2 million) .
Professional adviser fees
Professional fees incurred during 2018 in connection with our strategic review and short-term refinancing totalled £43.0 million
(2017: £13.9 million) .
Contract review
As previously disclosed, the new management team commissioned a comprehensive contract and balance sheet review with the
independent support of PwC in the latter part of 2017. The contract review identified provisions and write-downs relating to
18 individual contract issues. Of these, two contracts were regarded as neither operationally or financially complete. Revenues
and costs in respect of these two contracts have been separately identified and disclosed above in 2018, to ensure consistency of
presentation. This resulted in 2017 of £86.1 million of non-underlying charges in respect of balance sheet write-downs and onerous
contracts. Within this amount 18 individual contracts were subject to £42.4 million of balance sheet write-downs principally in relation
to work-in-progress and receivables beyond existing provisions and impairment charges, and £43.7 million was provided in respect of
loss-making onerous contracts. During 2018 a further amount of £5.2 million of provision was made against these contracts being largely
the net release of £8.0 million on US Forces Prime contract following receipts from the UK Ministry of Defence in December 2018 and
a further provision made of £13.7 million on the CRC Transforming Rehabilitation contracts reflecting the terms of a recently signed
settlement agreement with the Ministry of Justice in December 2018.
Asset impairments/disposal of Industrial
At 31 December 2018 goodwill and intangible assets in the Support Services segment were impaired by £33.1 million (2017: £60.0 million)
(see note 12) .
During the year the carrying value of the Industrial Services business was impaired by £15.0 million and a further loss of £7.1 million was
incurred on final disposal.
During 2017, capitalised IT development costs of £16.7 million were written off (£6.3 million of Other Intangible Assets, £9.4 million of
Property, Plant and Equipment and £1.0 million of working capital) , as well as £5.5 million of deferred tax assets.
Pension indexation
During the year the Trustee of the Interserve Pension Scheme (IPS) agreed to our request to change the scheme’s terms relating to basis
of indexation for future pension increases in respect of deferred and pensioner members of the scheme. This plan amendment from RPI
to CPI resulted in the recognition of a one-off gain of £70.6 million (see note 29) .
Foreign exchange (loss)/gain on retranslation of loan notes
Non-underlying finance costs of £26.4 million (2017: £2.9 million gain) represent the impact of the retranslation of $350 million
US Private Placement Notes to current exchange rates following the termination of exchange rate swaps in 2017, as well as the loss
previously recognised in equity on the swaps being recycled to the income statement over the remaining life of the originally hedged
instruments. Following the refinancing of the US loan notes on 27 April 2018, which represents a substantial debt modification under
IFRS 9, the outstanding amount at that date of £9.8 million was recycled to the income statement (see note 8) .
Restatement of prior year non‑underlying items
The 2017 restatement of non-underlying items relates to £10.3 million of costs of a decision made to exit from the London construction
market during the first half of 2018 and in the second half of 2018 £0.5 million of Power business closure costs in Support Services and a
£1.2 million credit in respect of the Site Services business closure in the Construction division.
125125
GovernanceFinancial StatementsStrategic ReportOverview Notes to the consolidated financial statements continued
for the year ended 31 December 2018
6. STAFF COSTS
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 29)
Other UK - defined contribution
Other overseas - defined contribution
Pension costs
2018
Number
37,721
2,006
1,414
282
41,423
2018
£million
979.1
88.3
2.3
24.0
2017
Number
40,247
2,599
1,459
406
44,711
2017
£million
1,025.3
91.5
2.1
28.1
1,093.7
1,147.0
3.4
19.3
1.3
24.0
5.2
20.9
2.0
28.1
Detailed disclosures of directors’ aggregate and individual remuneration and share-based payments are given in the Directors’
Remuneration Report on pages 58 to 79 and should be regarded as an integral part of this note.
7.
INVESTMENT REVENUE
Bank interest
Interest income from joint-venture investments
Net return on defined benefit pension assets (note 29)
Foreign exchange gain on US private placement loan (note 20)
Other interest
8. FINANCE COSTS
Borrowings and overdrafts
Net interest cost on pension obligations (note 29)
Foreign exchange loss on US private placement loan and recycling of hedging reserve (note 20)
2018
£million
2017
£million
1.5
1.1
0.4
-
0.5
3.5
2018
£million
(82.5)
-
(26.4)
(108.9)
3.0
2.2
-
2.9
0.7
8.8
2017
£million
(27.3)
(1.1)
-
(28.4)
The borrowings and overdrafts costs includes £3.4 million (2017: £1.6 million) relating to loan facility expenses.
The foreign exchange gain/loss on US private placement loan, representing the impact of the retranslation of $350 million US Private
Placement Notes to current exchange rates following the termination of exchange rate swaps in 2017, also includes the loss previously
recognised in equity on the swaps being recycled to the income statement over the remaining life of the originally hedged instruments.
Following the refinancing of the US loan notes on 27 April 2018, which represents a debt modification under IFRS 9, the outstanding
amount at that date of £9.8 million was recycled to the income statement.
126126
FINANCIAL STATEMENTS
9. TAX
Current tax - UK
Current tax - overseas
Deferred tax (note 16)
Tax charge for the year
Tax charge before prior period adjustments
Prior period adjustments - charges
2018
£million
2017
£million
5.8
6.9
(2.7)
10.0
2.9
7.1
10.0
2.2
5.5
9.9
17.6
16.4
1.2
17.6
2017
2018
Subsidiary undertakings' profit before tax, excluding
one-offs
Group share of profit after tax of associates and joint
ventures
Other non-underlying items
Goodwill impairment
Amortisation
b
(Loss) before tax
b
Profit
£million
Tax
£million
Effective rate
%
Profit
£million
Tax
£million
Effective rate
%
(3.6)
8.7
0.0%
17.3
13.7
(73.2)
(33.1)
(18.7)
(111.3)
-
8.7
-
63.5%
12.0
(16.4%)
-
(3.1)
17.6
-
16.6%
(15.8%)
36.5
25.5
62.0
(224.8)
(60.0)
(21.6)
(244.4)
8.1
–
8.1
5.5
–
(3.6)
10.0
22.2%
–
13.1%
(2.4%)
–
16.7%
(4.1%)
UK corporation tax is calculated at 19% (2017: 19.25%) of the estimated taxable profit for the year. Taxation for other jurisdictions is
calculated at the rates prevailing in the relevant jurisdictions.
The Group is aware of the ongoing review by the European Commission of the UK Controlled Foreign Company (CFC) rules that exempt
certain transactions by multinational groups from a full CFC apportionment. Due to the uncertainty of the outcome of this review, no
provision for any UK corporation tax has been recognised at 31 December 2018; however, there is a contingent liability of approximately
£2.1 million at the balance sheet date.
The total charge for the year can be reconciled to the loss per the income statement as follows:
(Loss) before tax
Tax at the UK income tax rate of 19% (2017: 19.25%)
Tax effect of expenses not deductible in determining taxable profit
Current-year losses for which no deferred tax asset is recognised
Tax effect of share of results of associates
Effect of tax rates in foreign jurisdictions
Effect of change in rate of deferred tax
Prior period adjustments
b
Tax charge and effective tax rate for the year
b
2018
£million
(111.3)
(21.1)
9.8
38.1
(3.0)
(6.1)
(1.3)
1.2
17.6
%
19.0%
(8.8%)
(34.2%)
2.7%
5.5%
1.2%
(1.1%)
(15.8%)
2017
£million
(244.4)
(47.0)
18.2
33.4
1.0
(3.4)
0.7
7.1
10.0
%
19.2%
(7.4%)
(13.7%)
(0.4%)
1.4%
(0.3%)
(2.9%)
(4.1%)
127127
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
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 other comprehensive income and to statement of changes in equity in the year:
Tax on actuarial gains/(losses) on pension liability
Tax on movements in cash flow hedging instruments
Tax on exchange movements on hedged financial instruments
Tax on the intrinsic value of share-based payments
2018
£million
9.2
-
1.8
-
11.0
10. DIVIDENDS
There were no dividends paid in the current year or the prior year. There is no proposed dividend in respect of 2018.
11. EARNINGS PER SHARE
Calculation of earnings per share is based on the following data:
Earnings
Net loss attributable to equity holders of the parent (for basic and diluted basic earnings per share)
Adjustments:
Non-underlying items and amortisation of acquired intangible assets (note 5)
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 awards1
Weighted average number of ordinary shares for the purposes of diluted basic1 and
diluted headline earnings per share
Earnings per share
Basic earnings per share
Diluted basic earnings per share
Headline earnings per share
Diluted headline earnings per share
# restated (note 1)
2017
£million
(1.8)
(4.0)
3.8
-
(2.0)
2017 #
£million
(256.4)
308.3
51.9
2017
Number
2018
£million
(132.2)
133.9
1.7
2018
Number
148,227,359
145,714,120
33,839,453
6,781,433
182,066,812
152,495,553
2018
pence
(89.2)
(89.2)
1.1
0.9
2017 #
pence
(176.0)
(176.0)
35.6
34.0
1 Due to basic earnings per share being a loss in 2018 and 2017 these adjustments are anti-dilutive and are therefore ignored in calculating diluted basic earnings per share for 2018 and
2017.
128128
FINANCIAL STATEMENTS
12. GOODWILL
Cost
At 1 January
Exchange movements
At 31 December
Accumulated impairment
At 1 January
Impairment losses for the year
At 31 December
Carrying amount
At 31 December
2018
£million
492.9
2.5
495.4
120.0
33.1
153.1
2017
£million
497.0
(4.1)
492.9
60.0
60.0
120.0
342.3
372.9
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 and are summarised as follows:
At 1 January 2016
Impairment losses for the year
Exchange movements
At 31 December 2017
Impairment losses for the year
Exchange movements
At 31 December 2018
Construction
£million
Support Services
£million
Equipment Services
£million
11.9
-
-
11.9
-
-
424.1
(60.0)
(4.0)
360.1
(33.1)
2.5
1.0
-
(0.1)
0.9
-
-
Total
£million
437.0
(60.0)
(4.1)
372.9
(33.1)
2.5
11.9
329.5
0.9
342.3
Goodwill impairment testing
The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired.
Key assumptions
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.
Discount rates
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 rates used to discount the future cash flows range from 11.8% for Support Services (2017: 10.3%) to 12.8% for Construction and
Equipment Services (2017: 11.3%) and are based on the Group’s pre-tax weighted average cost of capital (WACC) . The increases reflect a
3% small capital company premium added to the Group WACC.
Growth rates and terminal values
The revenue growth rates and margins are based on current Board-approved budgets and forecasts based on prevailing market conditions
and expert forecasts. The Group produces three-year plans and then projects a further year based on growth rates of 2.0%, followed by a
terminal value based on a perpetuity calculated at a nominal 2.0% growth which does not exceed current market growth rates.
Sensitivity analysis
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% or a 1.0% reduction in the terminal growth rate. No further impairment in the carrying value of the goodwill
in the Equipment Services or Construction CGUs would occur as a result of adopting these sensitivities.
In the case of Support Services, however, if the discount rate is increased by 2% there would be further impairments of £30.1 million in
Support Services Private Sector CGU, and a further £11.5 million on the Learning and Education CGU. On the basis of a 1% reduction in
the terminal growth rate, Support Services Private Sector would be further impaired by £11.5 million and the Learning and Education
CGU by a further £4.3 million.
129129
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
12. GOODWILL CONTINUED
Review of the carrying value of goodwill in the Support Services CGU
Past acquisitions, principally Initial Facilities in 2014, have focused on the delivery of support services to the private sector and
performance in this sector has not been in line with previous projections. As part of its annual review of impairment, the Group has
updated its estimate of the recoverable amount of the CGU that relates to the delivery of support services to the private sector, which
has resulted in an impairment of £26.9 million being recognised against goodwill in Support Services.
The Group also focused on the carrying value of its Learning and Education CGU that is part of the Support Services segment and due to
underperformance against its previous profit projections and an increase in its risk adjusted discount factor from 10.3% in 2017 to 11.8%
in 2018, a goodwill impairment of £6.2 million has been recognised.
Key assumptions
The key assumptions underpinning the calculations of the net present value of future cash flows in respect of private-sector delivered
Support Services include:
• the calculations are based on a three-year plan approved by the Board;
• revenue of £630.0 million in 2018 and compound annual nominal growth rate of 3% over the plan period in line with the approved
detailed plan;
• an average operating margin of 2.3% after management charges;
• a terminal nominal growth rate of 2.0%; and
• a pre-tax discount rate for the CGU of 11.8% which has been adjusted for the risks specific to the market in which the CGU operates.
The key assumptions underpinning the calculations of the net present value of future cash flows in respect of Learning and Education
include:
• the calculations are based on a three-year plan approved by the Board;
• revenue of £75.5 million in 2018 and compound annual nominal growth rate of 3% over the plan period in line with the approved
detailed plan;
• an average operating margin of 6.6% after management charges;
• a terminal nominal growth rate of 2.0%; and
• a pre-tax discount rate for the CGU of 11.8% which has been adjusted for the risks specific to the market in which the CGU operates.
In reviewing the carrying value, the following factors have also been considered:
• macro pressures in the support services sector;
• a renewed focus on cost control under the Fit For Growth programme; and
• management resource to deliver the budget.
The value in use calculations are reliant on the accuracy of management’s forecast and the assumptions that underly them as well
as the discount rate and growth rates applied. Sensitivity analysis was performed on the forecasts to consider the impact of certain
trading scenarios and changes in assumptions both individually and in combination as referred to above.
A combination of these sensitivities concluded that a total goodwill impairment of £33.1 million represented the Audit Committee’s best
estimate.
130130
FINANCIAL STATEMENTS 13. OTHER INTANGIBLE ASSETS
Acquired
Computer
software
£million
Customer
relationships
£million
Other
£million
Total
£million
Cost
At 1 January 2017
Additions
Disposals
Exchange movements
Exchange movements
At 31 December 2017
Additions
Disposals
Exchange movements
At 31 December 2018
Accumulated amortisation
At 1 January 2017
Charge for the year
Impairments (note 5)
Eliminated on disposals
Exchange movements
At 31 December 2017
Charge for the year
Eliminated on disposals
Exchange movements
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
37.8
7.7
(6.4)
-
39.1
1.9
(1.7)
-
39.3
12.7
1.6
6.3
(5.7)
-
14.9
6.1
(1.0)
-
178.0
-
-
(1.1)
176.9
-
-
0.7
177.6
126.8
21.1
-
-
(1.0)
146.9
18.4
-
0.7
20.0
166.0
19.3
24.2
11.6
30.0
3.4
-
-
(0.2)
3.2
-
-
-
219.2
7.7
(6.4)
(1.3)
219.2
1.9
(1.7)
0.7
3.2
220.1
2.7
0.4
-
-
(0.2)
2.9
0.3
-
-
3.2
–
0.3
142.2
23.1
6.3
(5.7)
(1.2)
164.7
24.8
(1.0)
0.7
189.2
30.9
54.5
Useful lives
5 years
5-10 years
3-5 years
The useful life and amortisation period of each group of intangible assets varies according to the underlying length of benefit expected
to be received.
131131
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
14. PROPERTY, PLANT AND EQUIPMENT
(a) Movements
Cost
At 1 January 2017
Additions
Write-off (note 5)
Disposals
Exchange differences
At 31 December 2017
Additions
Disposals
Eliminated on disposal of subsidiary
Exchange differences
At 31 December 2018
Accumulated depreciation
At 1 January 2017
Charge for the year
Eliminated on disposals
Exchange differences
At 31 December 2017
Charge for the year
Eliminated on disposals
Eliminated on disposal of subsidiary
Exchange differences
Land and
buildings
£million
Hire
fleet
£million
Other
plant and
equipment
£million
34.3
10.3
-
(2.8)
(1.4)
40.4
3.9
(2.5)
(1.8)
0.5
315.4
17.8
-
(29.0)
(13.9)
290.3
20.3
(23.8)
(54.4)
3.4
40.5
235.8
18.2
2.2
(0.6)
(1.0)
18.8
2.7
(1.4)
(1.2)
0.4
129.6
18.2
(21.0)
(3.8)
123.0
18.0
(20.9)
(39.6)
0.6
146.4
21.5
(9.4)
(8.7)
(8.4)
141.4
13.8
(29.9)
(3.1)
5.2
127.4
97.9
19.2
(8.6)
(6.8)
101.7
15.0
(25.6)
(2.0)
4.3
Total
£million
496.1
49.6
(9.4)
(40.5)
(23.7)
472.1
38.0
(56.2)
(59.3)
9.1
403.7
245.7
39.6
(30.2)
(11.6)
243.5
35.7
(47.9)
(42.8)
5.3
Exchange differences
(1.0)
(3.8)
(6.8)
(11.6)
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
19.3
81.1
93.4
193.8
21.2
21.6
154.7
167.3
34.0
39.7
209.9
228.6
The carrying amount of the Group’s plant and equipment includes an amount of £nil (2017: £3.6 million) in respect of assets held under
finance leases. Details of property, plant and equipment held under finance leases are shown in note 24.
132132
FINANCIAL STATEMENTS
(b) Carrying amount of land and buildings
Freehold:
Land at cost
Buildings at cost less depreciation
Leaseholds under 50 years at cost less depreciation
(c) Future capital expenditure not provided for in the financial statements
Committed
15. 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:
31 December 2018
£million
31 December 2017
£million
2.0
1.1
3.1
18.1
21.2
2.5
1.2
3.7
17.9
21.6
31 December 2018
£million
31 December 2017
£million
2.3
0.7
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 2018
Year ended 31 December 2017
Joint
ventures
£million
Associates
£million
Total
£million
Joint
ventures
£million
Associates
£million
Total
£million
89.0
600.1
689.1
134.6
770.8
905.4
2.6
(0.8)
(0.4)
1.4
16.0
17.4
-
17.4
(0.2)
17.2
38.1
0.4
(3.6)
34.9
(18.0)
40.7
(0.4)
(4.0)
36.3
(2.0)
16.9
34.3
-
-
16.9
(11.6)
34.3
(11.8)
5.3
22.5
(22.1)
(1.2)
(0.7)
(24.0)
(1.3)
(25.3)
-
(25.3)
(0.3)
(25.6)
49.6
0.5
(3.6)
46.5
(26.3)
20.2
(0.1)
20.1
(16.9)
27.5
(0.7)
(4.3)
22.5
(27.6)
(5.1)
(0.1)
(5.2)
(17.2)
3.2
(22.4)
133133
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
15. INTERESTS IN ASSOCIATES AND JOINT‑VENTURE ENTITIES CONTINUED
(b) Joint‑venture entities
(i) Results and net assets
The aggregate results of joint ventures 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 2018
Year ended 31 December 2017
Support
Services
£million
Group
Services
£million
Total
£million
Support
Services
£million
Group
Services
£million
Total
£million
4.8
84.2
89.0
7.5
127.1
134.6
-
-
-
-
-
-
-
-
(0.1)
(0.1)
2.6
(0.8)
(0.4)
1.4
16.0
17.4
-
17.4
(0.1)
17.3
2.6
(0.8)
(0.4)
1.4
16.0
17.4
-
17.4
(0.2)
17.2
0.4
(22.5)
(22.1)
-
-
0.4
(0.2)
0.2
-
0.2
(0.1)
(1.2)
(0.7)
(24.4)
(1.1)
(1.2)
(0.7)
(24.0)
(1.3)
(25.5)
(25.3)
-
-
(25.5)
(0.2)
(25.3)
(0.3)
0.1
(25.7)
(25.6)
There are no significant restrictions on the ability of joint ventures to pay dividends or repay loans if agreed by the shareholders.
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
Year ended 31 December 2018
Year ended 31 December 2017
Support
Services
£million
Group
Services
£million
Total
£million
Support
Services
£million
-
167.5
167.5
0.5
(0.7)
401.9
402.4
(38.5)
(39.2)
-
1.7
(1.6)
Group
Services
£million
206.4
386.6
Total
£million
206.4
388.3
(44.8)
(46.4)
-
(504.2)
(504.2)
-
(480.7)
(480.7)
(0.2)
0.1
(0.1)
-
-
26.7
6.6
33.3
-
-
26.5
6.7
33.2
-
-
0.1
(0.1)
67.5
(21.0)
67.6
(21.1)
-
-
-
-
46.5
46.5
-
-
-
-
46.5
46.5
Carrying value of net assets and goodwill
(0.1)
33.3
33.2
The liabilities of the joint-venture entities principally relate to the non-recourse debt within those businesses as part of funding the
construction of the underlying asset.
134134
FINANCIAL STATEMENTS
(ii) Movements in the year
At 1 January 2017
Acquisitions and advances
Repayments to the Group
Disposals
Fair value adjustment to financial instruments and derivatives
Share of retained profits
At 31 December 2017
Acquisitions and advances
Disposals
Fair value adjustment to financial instruments and derivatives
Share of retained profits
At 31 December 2018
Shares
£million
0.1
-
-
-
-
-
0.1
-
-
-
-
Loans
£million
40.3
33.1
(0.7)
(3.2)
-
-
69.5
0.6
(41.0)
-
-
0.1
29.1
Share of
reserves
£million
1.2
-
-
(4.0)
5.3
(25.6)
(23.1)
-
9.1
0.8
17.2
4.0
Total
£million
41.6
33.1
(0.7)
(7.2)
5.3
(25.6)
46.5
0.6
(31.9)
0.8
17.2
33.2
Further details of the Group’s investment in PPP/PFI schemes are included in note 31.
During the year the Group disposed of its investment in the Haymarket site in Edinburgh for £47.0 million, realising a gain on disposal of
£17.0 million (see note 5) .
At 31 December 2018 the Group had no commitments for additional investment in joint-venture entities (2017: £nil) .
(c) Associated undertakings
(i) Results and net assets
The aggregate results of the Group’s various associated undertakings were as follows:
Year ended 31 December 2018
Year ended 31 December 2017
Construction
£million
Support
Services
£million
Total
£million
Construction
£million
Support
Services
£million
Total
£million
Revenues
499.6
100.5
600.1
628.9
141.9
770.8
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
33.1
0.6
(3.4)
30.3
(16.0)
14.3
-
14.3
(10.8)
3.5
5.0
(0.2)
(0.2)
4.6
(2.0)
2.6
-
2.6
(0.8)
1.8
38.1
0.4
(3.6)
34.9
(18.0)
16.9
-
16.9
(11.6)
5.3
43.4
0.7
(3.1)
41.0
(21.5)
19.5
-
19.5
(15.7)
3.8
6.2
(0.2)
(0.5)
5.5
(4.8)
0.7
(0.1)
0.6
(1.2)
(0.6)
49.6
0.5
(3.6)
46.5
(26.3)
20.2
(0.1)
20.1
(16.9)
3.2
There are no significant restrictions on the ability of associates to pay dividends or repay loans if agreed by the shareholders.
135135
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
15. INTERESTS IN ASSOCIATES AND JOINT‑VENTURE ENTITIES CONTINUED
(c) Associated undertakings continued
Total net assets of the associated undertakings were as follows:
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Year ended 31 December 2018
Year ended 31 December 2017
Construction
£million
48.2
445.3
Support
Services
£million
1.9
67.7
Total
£million
Construction
£million
50.1
513.0
55.7
453.9
Support
Services
£million
2.7
67.4
Total
£million
58.4
521.3
(298.0)
(28.1)
(326.1)
(333.5)
(32.9)
(366.4)
(43.9)
151.6
(3.5)
(47.4)
38.0
189.6
(39.6)
136.5
(3.9)
33.3
(43.5)
169.8
Less: Net assets attributable to non-Group interests
(71.0)
(35.0)
(106.0)
(81.7)
(14.4)
(96.1)
Net assets attributable to the Group
Goodwill
Acquired intangible assets
Carrying value of net assets and goodwill
(ii) Movements in the year
At 1 January 2017
Share of retained profits net of amortisation
Exchange differences
At 31 December 2017
Additions
Share of retained profits net of amortisation
Exchange differences
At 31 December 2018
80.6
1.2
-
81.8
3.0
3.5
-
6.5
83.6
4.7
-
88.3
54.8
1.2
-
18.9
3.5
-
73.7
4.7
-
56.0
22.4
78.4
Shares
£million
Loans
£million
5.9
-
-
5.9
–
–
–
5.9
8.9
-
-
8.9
0.1
–
–
9.0
Share of
reserves
£million
70.5
3.2
(10.1)
63.6
–
5.3
4.5
73.4
Total
£million
85.3
3.2
(10.1)
78.4
0.1
5.3
4.5
88.3
136136
FINANCIAL STATEMENTS
16. DEFERRED TAXATION
The following are the major deferred tax assets and (liabilities) recognised by the Group.
Retirement
benefit
obligations
£million
Acquired
intangible
assets
£million
Accelerated
capital
allowances
£million
Trading
losses
£million
Other
temporary
differences
£million
At 1 January 2017
(Charge) /credit to income
(Charge) /credit to equity
Exchange differences
At 31 December 2017
(Charge) /credit to income
Disposal of subsidiary
(Charge) /credit to equity
Exchange differences
8.8
(2.5)
1.8
-
8.1
(14.9)
-
(9.2)
-
(9.0)
3.5
-
-
(5.5)
3.1
-
-
-
5.8
6.3
-
0.4
12.5
(1.4)
-
-
0.7
Total assets/(liabilities) before set-off
(16.0)
(2.4)
11.8
Set off tax
At 31 December 2018
4.0
(1.6)
-
(0.1)
2.3
1.4
-
-
(0.8)
2.9
9.0
(3.0)
0.2
(0.2)
6.0
1.9
(1.3)
(1.8)
0.2
5.0
Total
£million
Deferred tax
assets
£million
Deferred tax
liabilities
£million
18.6
23.1
(4.5)
2.7
2.0
0.1
23.4
(9.9)
(1.3)
(11.0)
0.1
1.3
2.7
2.0
0.1
27.9
-
-
-
0.1
28.0
(23.4)
4.6
-
-
-
(4.5)
(9.9)
(1.3)
(11.0)
-
(26.7)
23.4
(3.3)
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 2018
£million
31 December 2017
£million
(3.3)
4.6
1.3
(4.5)
27.9
23.4
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 £99.3 million
(2017: £80.0 million) on gross losses of £577.4 million (2017: £460.0 million) .
17. INVENTORIES
Goods held for resale
Materials
31 December 2018
£million
31 December 2017
£million
25.0
10.8
35.8
22.7
11.3
34.0
The cost of inventories recognised in cost of sales in the year was £18.5 million (2017: £27.0 million).
137137
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
18. CONTRACT ASSETS AND LIABILITIES
(a) Contract assets
31 December
2018
£million
Business
related
changes
£million
Exchange
differences
£million
Disposal of
subsidiary
£million
31 December
2017
£million
Amounts due from construction contract customers included in trade and
other receivables (note 19)
Retentions included in trade and other receivables (note 19)
80.8
43.2
(14.4)
4.3
Accrued income included in trade and other receivables (note 19)
148.1
(23.7)
272.1
(33.8)
0.2
0.1
1.7
2.0
(0.1)
(1.0)
(8.2)
(9.3)
95.1
39.8
178.3
313.2
Contract assets related to the portion of performance obligations already fulfilled by the Group and for which the definitive right to
receive cash was subject to completing further work under the relevant contracts. Contract assets are converted into trade receivables
at the point that work delivered to the client is invoiced resulting in the Group’s unconditional right to receive cash. Contract assets
therefore represent a portion of future payments receivable by the Group under existing contracts.
At 31 December 2018, contract assets amounted to £272.1 million, a decrease of 13% compared with 2017 (£313.2 million) . This is largely
due to the Group providing fewer services ahead of the agreed payment schedules for fixed-price contracts.
(b) Contract liabilities
Amounts due to contract customers included in trade and other payables
(note 22)
Deferred income included in trade and other payables (note 22)
31 December
2018
£million
29.9
64.0
93.9
Business
related
changes
£million
0.4
11.6
12.0
Exchange
differences
£million
Disposal of
subsidiary
£million
31 December
2017
£million
-
1.0
1.0
-
(0.2)
(0.2)
29.5
51.6
81.1
These liabilities consist mainly of cash advances received from customers on account of orders received and the remaining liabilities
relate to the amount of performance obligations still to be fulfilled and for which payment has already been received from the client.
At 31 December 2018, contract liabilities amounted to £93.9 million, an increase of 16% compared with 2017 (£81.1 million) . This is
largely due to the Group receiving higher payments in advance from customers for equipment and services.
(c) Revenue recognised in relation to contract liabilities
The following table shows how much of the revenue recognised in 2018 relates to brought-forward contract liabilities.
Revenue recognised in 2018 that was included in the contract liability balance at the beginning of 2018
31 December 2018
£million
47.9
138138
FINANCIAL STATEMENTS
19. 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
Accrued income
Included in the above are the following amounts recoverable after more than one year:
Retentions
31 December 2018
£million
31 December 2017
£million
354.2
(38.5)
315.7
80.8
43.2
27.1
26.4
148.1
641.3
384.4
(47.5)
336.9
95.1
39.8
39.8
32.1
178.3
722.0
31 December 2018
£million
31 December 2017
£million
8.1
7.2
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 35 days (2017: 32 days) .
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 121 days (2017: 83 days) .
Movement in allowance for doubtful debt is as follows:
Balance at 1 January
Disposal of subsidiary
Amounts written off as uncollectable
Impairment losses recognised in the year
Amounts recovered during the year
Exchange differences
Balance at 31 December
31 December 2018
£million
31 December 2017
£million
51.5
34.9
22.1
49.2
157.7
158.0
315.7
50.4
34.5
34.1
12.7
131.7
205.2
336.9
2018
£million
2017
£million
47.5
(1.4)
(7.8)
10.7
(11.6)
1.1
38.5
54.3
-
(14.9)
18.8
(7.1)
(3.6)
47.5
139139
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
20. CASH, DEPOSITS AND BORROWINGS
(a) Cash, deposits and borrowings
Cash and deposits
Bank overdrafts
Bank loans
Capitalised PIK interest
USD loans
US Private Placement loan notes
Finance leases (note 24)
Total borrowings
31 December 2018
£million
31 December 2017
£million
A
196.7
155.1
-
(508.5)
(24.7)
(22.0)
(272.3)
(827.5)
(0.4)
(827.9)
(6.8)
(388.6)
-
-
(258.9)
(654.3)
(3.4)
(657.7)
B
Per balance sheet
A+B
(631.2)
(502.6)
Cash and deposits comprise cash held by the Group and short-term bank deposits that have an original maturity of three months or less.
Where deposits earn interest, the interest rates are at floating rates related to UK base rates.
Included within cash and deposits is £30.4 million (2017: £31.0 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
Adjustment for discount on debt (see below)
Less: Amount due for settlement within 12 months
Amount due for settlement after 12 months
31 December 2018
£million
31 December 2017
£million
87.2
60.0
702.0
0.2
849.4
(21.5)
827.9
(87.2)
740.7
7.7
389.4
64.6
196.0
657.7
–
657.7
(7.7)
650.0
On 27 April 2018 the Group issued 36.4 million warrants for consideration of £35.3 million taken in the form of a discount arrangement
to recognise the fair value of the debt issued (see note 26) . The discount has subsequently been measured at amortised cost and is
being released to the income statement at an effective interest rate over the term of the underlying loan. At 31 December 2018, the
remaining discount on borrowing remaining was £21.5 million, with £12.8 million of the remaining discount expected to be released
within one year, £5.7 million between one and two years and £3.0 million between two and five years.
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 £4.9 million and is all due for payment within one year (2017: £1.4 million within one year) .
140140
FINANCIAL STATEMENTS
The analysis of utilisation of committed bank facilities is as follows:
Drawn facilities:
US Private Placement loan notes
Bank loans
Undrawn facilities maturing in less than one year
Total committed borrowing facilities
(b) Committed borrowing facilities
US Private Placement loan notes
Bank facilities
Total committed borrowing facilities
31 December 2018
£million
31 December 2017
£million
272.3
552.0
-
–
135.0
824.3
258.9
388.6
37.5
685.0
31 December 2018
£million
31 December 2017
£million
272.3
552.0
824.3
258.9
426.1
685.0
The Group has a US$ 348.3 million (£272.3 million) issue of US Private Placement loan notes (“loan notes”) , which have a weighted
average maturity length of 3.5 years. The loan notes attract a weighted average rate of interest of 5.61% and are repayable in
September 2021.
The loan notes are in addition to £552.0 million of committed bank facilities as at the year end.
Following the successful conclusion of our bank negotiations in April 2018, and expiry of the £37.5 million of short-term facilities, the
Group arranged access to committed borrowing facilities of £196 million.
These committed borrowing facilities, following partial repayments of the facilities during 2018, currently consist of a renewal of
existing revolving credit facilities of £383.4 million, $348.3 million of US loan notes, £147.0 million new term loan and $28.3 million of
new US dollar term loans. The term loan is repayable in instalments with £87.0 million of repayments due in 2019 and £60.0 million
in 2020. The balance of funding is committed until September 2021 and is subject to a covenant to reduce gross borrowings to below
£450 million by June 2020.
These facilities are subject to interest at the following rates:
Cash payment
Payment in kind
Total
Revolving credit facility
LIBOR + 3.00%
1.43% + 2.00% until September 2019
if net leverage is above 3.0x and
then subject to a ratchet increase
2.00% until September 2019
if net leverage is above 3.0x and
then subject to a ratchet increase
LIBOR + 6.43%
Weighted average of 7.61%
US$ loan notes
New term loan
Weighted average of 5.61%
LIBOR + 3.25%
5.50%
LIBOR + 8.75%
As part of the refinancing the Company has issued warrants to the providers of the new term loan and bonding facilities to buy shares
at 10 pence per share (the nominal price of each share at the time). If exercised, this would provide the warrant holders with an
interest of up to 20 per cent of the post-issue share capital. The warrants were initially recognised at their fair value of £35.3 million
(note 26) , measured as the first £35.3 million of proceeds from new loans in the year. Consequently, the fair value of the underlying
loan was initially measured at a £35.3 million discount to principal value, and subsequently measured at amortised cost, released to the
income statement through finance costs at an effective interest rate. In the year to 31 December 2018, the total unwind of the discount
on debt charged to the income statement was £13.8 million.
The Group also secured additional bonding facilities of up to £95 million as part of the arrangements which attract a cash margin
of 2.00% with payment-in-kind charges of 5.50% whilst net leverage exceeds 3.0x. Bond instruments previously in existence which
did not form part of the April 2018 refinancing attract a 0.50% uplift on existing pricing and 2.00% payment-in-kind charges until
September 2019, when the pricing is subject to a ratchet mechanism assessed periodically, which is determined by the extent to
which net leverage exceeds 3.0x. Payment-in-kind charges are capitalised to the balance sheet as a liability and become payable on a
subsequent refinancing. The cash and bond payment-in-kind charges for the year, and the amount capitalised on the balance sheet, is
£24.7 million.
It is anticipated that the total interest expense in 2019 will be approximately £86 million (including the amortisation of costs associated
with the warrants) of which circa £36 million will be cash interest.
141141
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
20. CASH, DEPOSITS AND BORROWINGS CONTINUED
(b) Committed borrowing facilities continued
The borrowings are subject to a number of financial covenants including absolute EBITDA and cash flow available for debt servicing
along with net leverage and cash interest cover. The calculation of EBITDA is subject to a cap on the level of non-underlying items that
are excluded for covenant calculation purposes. Net leverage requirements for net debt relative to EBITDA start at a maximum of 6.5x
and trend downwards to below 4.0x over the duration of the funding. Interest cover requirement is broadly for EBIT to cover interest by
at least 3.5x. These covenants are measured quarterly on a rolling 12-month basis. There is also a minimum net worth covenant that is
effective from December 2019.
The Group has granted security in respect of the new, and some of the existing debt, in the form of share pledges over material
subsidiaries and floating charges over various intercompany funding arrangements.
21. FINANCIAL RISK MANAGEMENT
Financial assets comprise trade and other receivables (excluding prepayments and accrued income) , long-term debtors and cash and
cash equivalents. Financial liabilities comprise trade and other payables (excluding accruals, deferred income and other tax and social
security) , bank borrowings, overdrafts, loan notes and finance leases.
The Group has the following categories of financial assets and liabilities:
Financial assets at amortised cost:
Cash and cash equivalents
Trade and other receivables
Total financial assets
Financial liabilities at amortised cost:
Borrowings, overdrafts and finance leases
Loan notes
Trade and other payables
Total financial liabilities
31 December 2018
31 December 2017
Other
financial assets
£million
Other
financial assets
£million
196.7
466.8
663.5
155.1
511.6
666.7
31 December 2018
31 December 2017
Other
financial liabilities
£million
Other
financial liabilities
£million
555.6
272.3
284.9
1,112.8
398.8
258.9
305.6
963.3
Trade and other receivables are recognised initially at the amount of consideration that is unconditional. The Group holds these
receivables with the objective of collecting contractual cash flows and therefore measures them subsequently at amortised cost using
the effective interest method.
Trade and other payables are unsecured and are usually paid within 30 days of recognition. The carrying amounts of trade and other
payables are considered to be the same as their fair values due to their short-term nature.
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.
142142
FINANCIAL STATEMENTS
(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
31 December 2018
31 December 2017
Fixed
rates
£million
Non–interest
bearing
£million
Total
£million
Floating
rates
£million
Fixed
rates
£million
Non–interest
bearing
£million
Total
£million
-
-
-
-
-
-
-
307.1
469.6
102.5
49.5
15.6
3.9
17.8
72.9
59.9
20.7
5.4
19.8
88.1
17.7
12.7
1.5
5.4
15.3
466.8
663.5
155.1
-
-
-
-
-
-
-
384.9
487.4
36.6
15.2
4.7
19.8
50.4
54.3
27.9
6.2
25.2
65.7
511.6
666.7
Floating
rates
£million
162.5
10.4
5.1
1.5
2.0
15.2
196.7
Analysis of financial liabilities, excluding derivatives used for hedging, by currency:
Sterling
US dollar
Euro
Australian dollar
Dirham
Other
31 December 2018
Floating
rates
£million
533.2
22.0
Fixed
rates
£million
0.4
272.3
-
-
-
-
-
-
-
-
Non‑interest
bearing
£million
237.4
24.4
4.7
1.3
5.6
Total
£million
771.0
318.7
4.7
1.3
5.6
11.5
11.5
31 December 2017
Fixed
rates
£million
Non‑interest
bearing
£million
3.4
258.9
-
-
-
-
259.4
22.3
2.0
1.5
10.7
9.7
Floating
rates
£million
388.6
-
4.2
-
-
2.6
Total
£million
651.4
281.2
6.2
1.5
10.7
12.3
555.2
272.7
284.9
1,112.8
395.4
262.3
305.6
963.3
Weighted average interest rates excluding
amortisation of arrangement fees and
bank margin
0.8%
5.6%
0.5%
5.3%
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.
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 currently has a $348.3 million US Private Placement loan which is currently unhedged. After the previous hedging
arrangements were terminated on 13 December 2017, the Group no longer has access to any derivative instrument bank facilities.
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 2018
£million
31 December 2017
£million
3.3
5.7
3.1
4.9
A 1% change in the US dollar exchange rate would result in a £2.9 million change in profit and a £2.9 million change in reserves/net
assets. A 1% change in the Qatari rial exchange rate would result in a £0.1 million change in profit and a £0.7 million change in reserves/
net assets. A 1% change in the UAE dirham exchange rate would result in a £0.2 million change in profit and a £0.5 million change in
reserves/net assets.
143143
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
21. FINANCIAL RISK MANAGEMENT CONTINUED
(b) Market price risk
The use of fixed-rate borrowings, 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
31 December 2018
£million
31 December 2017
£million
5.5
3.9
(c) Credit risk
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.
Credit risk in respect of cash balances and deposits held with banks is mitigated by the use of a number of highly-rated financial
institutions.
The Group’s credit risk is primarily attributable to its trade receivables. Credit risk is managed at a divisional level within a set of
overall Group risk management policy and procedures. More specifically the divisions monitor, where available, the external credit
ratings of their major customers and obtain, where necessary, credit references on their financial standing to ensure that they only deal
with credit worthy counterparties. Also, where considered appropriate, parent company guarantees and letters of credit are obtained.
A review of all bad debt history was carried out to evaluate whether this was indicative of any expected future credit exposures. These
historical rates of credit loss were then looked at in the context of current and future factors affecting customers’ credit worthiness.
Trade receivables are written off when there is considered to be very little likelihood of recovery of the debt.
The Group’s expected credit loss percentage is an immaterial amount despite the fact that that a significant allowance for doubtful
debts of £38.5 million has been provided at 31 December 2018 (see note 19) . This is because a significant proportion of these
allowances relate to business carried out in the Middle East region, in particular Saudi Arabia, Qatar and the UAE where provisions
have been made for overdue payments despite the fact that the Group is confident that these outstanding amounts will ultimately be
recovered once the economic blockade in Qatar is lifted and the overseas supplier payment mechanisms are normalised in Saudi Arabia.
Our current assessment is that no future credit losses will arise but the Group continues to monitor its exposure to expected credit
losses and further disclosure will be provided in future periods if the assessed expected credit losses are considered significant.
Apart from receivables due from customers related to HM Government and some existing credit exposures to customers in Saudi Arabia
(see note 1(b) ILE International Saudi debt) , the Group has no other significant concentration of credit risk, with exposure spread over a
number of counterparties and customers.
(d) 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. Some of the facilities require us to comply with certain financial
covenants, which are calculated excluding non-underlying items.
The maturity of financial assets and liabilities, with the exception of interest rate hedges above, are discussed in the specific asset and
liability footnotes.
(e) 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 20) , and equity attributable to equity holders of the parent.
The Group may adjust the capital structure of the Group by returning capital to shareholders, issue new shares or sell assets to reduce
debt (see note 33 - Events after the balance sheet date) .
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.
144144
FINANCIAL STATEMENTS
22. TRADE AND OTHER PAYABLES ‑ AMOUNTS FALLING DUE WITHIN ONE YEAR
Obligations under finance leases (note 24)
Trade payables
Advances received
Other taxation and social security
Other payables
Accruals
Deferred income
31 December 2018
£million
31 December 2017
£million
0.2
184.6
29.9
59.9
57.9
344.8
64.0
741.3
0.9
206.9
29.5
75.4
57.2
377.1
51.6
798.6
Accruals largely relate to contract costs, staff costs, building utilities and other overheads.
23. TRADE AND OTHER PAYABLES ‑ AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
Obligations under finance leases (note 24)
Trade payables
Other payables
31 December 2018
£million
31 December 2017
£million
0.2
0.3
12.2
12.7
2.5
0.3
11.7
14.5
The carrying amount of trade and other payables approximates to their fair value.
The average credit period taken for trade purchases is 36 days (2017: 41 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
31 December 2018
£million
31 December 2017
£million
302.4
12.5
314.9
339.5
12.0
351.5
145145
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
24. OBLIGATIONS UNDER FINANCE AND OPERATING LEASES
(a) Finance leases
Amounts payable under finance leases:
Within one year
In the second to fifth years inclusive
After five years
Less: future finance charges
Present value of lease obligations
Minimum lease payments
Present value of minimum lease
payments
2018
£million
2017
£million
2018
£million
2017
£million
0.2
0.2
-
0.4
-
0.4
2.4
2.4
1.0
2.5
0.2
3.7
(0.3)
3.4
4.4
4.4
0.2
0.2
-
0.4
n/a
0.4
2.2
2.2
0.9
2.5
-
3.4
n/a
3.4
4.7
4.7
Certain of the Group’s plant and equipment is held under finance leases. The average lease term is four to five years. For the year ended
31 December 2018 the average effective borrowing rate was 1.6% (2017: 1.8%) . 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.
(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 2018
31 December 2017
Land and
buildings
£million
19.4
47.9
85.2
Other
£million
Total
£million
15.5
22.1
-
34.9
70.0
85.2
152.5
37.6
190.1
Land and
buildings
£million
13.0
30.3
104.5
147.8
Other
£million
Total
£million
16.0
18.0
-
34.0
29.0
48.3
104.5
181.8
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.
146146
FINANCIAL STATEMENTS
25. PROVISIONS
At 1 January 2017
Additional provision in the year
Release of provision
Utilisation of provision
Exchange differences
At 31 December 2017
Additional provision in the year
Disposals
Reclassification against receivables
Release of provision
Utilisation of provision
Exchange differences
At 31 December 2018
Included in current liabilities
Included in non-current liabilities
The impact of discounting is not material.
Contract
rectification
provisions
£million
Onerous
contracts
£million
Insurance
claims
£million
Restructuring
costs
£million
Property
costs
£million
End of
service
benefits
£million
24.9
9.3
(8.0)
(4.3)
-
21.9
8.0
-
-
(8.6)
(3.9)
-
17.4
3.9
37.9
-
(3.4)
-
38.4
13.7
-
(11.4)
(9.8)
(25.8)
-
5.1
21.9
13.4
-
(3.9)
-
31.4
6.5
-
-
(1.8)
(3.3)
-
5.7
8.6
-
(0.7)
(0.3)
13.3
4.6
-
-
(3.6)
(3.4)
-
2.8
16.4
-
(0.3)
-
18.9
4.2
(0.2)
-
(4.9)
(2.4)
-
32.8
10.9
15.6
5.5
1.4
-
-
(0.6)
6.3
0.2
-
-
-
0.1
0.3
6.9
TotaL
£million
64.7
87.0
(8.0)
(12.6)
(0.9)
130.2
37.2
(0.2)
(11.4)
(28.7)
(38.7)
0.3
88.7
31 December 2018
£million
31 December 2017
£million
29.3
59.4
88.7
50.2
80.0
130.2
Contract rectification provisions include costs of construction site clearance, remedial costs required to meet clients’ contractual terms
and potential claims under contract warranties. The main contracts to which these provisions relate are Derby and Glasgow EfW plants
(see critical accounting judgements note 1(b) and DNRC Defence Establishment Maintenance contract which is expected to complete
in March 2019. Warranty claim provisions are expected to be utlised over their respective contractual warranty periods that may range
between one and 12 years but there is no certainty as to if and when a claim for rectification will be made.
Onerous contract provisions are made where the forecast costs of completing a contract exceed the forecast income generated over
the life of the project. The main contract to which these provisions relate is US Forces Prime contract (£4.6 million) that is due to end
no later than December 2019.
Insurance claim provisions mainly represent self-insurance via the Group’s captive insurance company of part of the Group’s
potential exposures to employers’ liability risks and professional indemnity claims which amount to £13 million at 31 December 2018
(2017: £13 million) . These insurance provisions also include public liability excess self-insurance which is not covered by the captive
insurance company amounting to £20 million at 31 December 2018 (2017: £17 million) . These provisions are utilised as insurance claims
are settled, which may take a number of years to close out.
Restructuring cost provisions largely relate to employee termination and property closure costs that form part of the Group’s Fit for
Growth cost optimisation programme (see note 5 non-underlying items) and these provisions are expected to be utilised in 2019.
Property cost provisions include costs in relation to remaining onerous office lease terms and dilapidation costs in respect of exited
properties; in particular, the Intersection House, George Road and Redditch offices. The lease expiry date for Intersection House
is June 2024, Redditch is December 2021 and the George Road lease ended in March 2018. These provisions will be released as the
properties are exited and negotiations with landlords over early termination of leases and the amount of dilapidations payable are
completed.
End of service benefits provisions relate to amounts provided in the Middle East region under the requirements of local labour laws
to settle staff gratuity payments at the end of their contract of employment. These provisions are released as employees leave the
companies, the exact timing of which is uncertain.
147147
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
26. SHARE CAPITAL
Issued and fully paid:
31 December 2018
£million
31 December 2017
£million
149,719,938 ordinary shares of 0.1p each and 149,719,938 deferred shares of 9.9p each (2017: 145,714,120
ordinary shares of 10p each)
15.0
14.6
At 1 January 2017
Share awards issued in 2017
At 31 December 2017
Exercised warrants
Share awards issued in 2018
At 31 December 2018
Shares
thousands
145,714.1
-
145,714.1
4,005.8
-
149,719.9
Share capital
£million
14.6
-
14.6
0.4
-
15.0
Following approval by shareholders at the AGM on 12 June 2018, our issued share capital of 149,719,938 ordinary 10p shares has been
sub-divided into 149,719,938 ordinary shares of 0.1p and 149,719,938 deferred shares of 9.9p.
This sub-division was required to enable the exercise price of the share warrants to be reduced to less than 10p if necessary as a result
of certain dilutive events. The economic and voting rights of the ordinary shares remain the same. The deferred shares have no value
(economic or otherwise) and have been created to enable the Company to reduce the nominal value of the ordinary shares without
going through a process that would require the approval of the Court. The deferred shares were issued to all persons on the Company’s
register of members as at 12 June 2018 on the basis of one deferred share of 9.9p for each ordinary share held. The deferred shares are
not transferable, do not carry any voting or dividend rights and are not expected to have any economic value.
Warrants
As disclosed in our 2017 Annual Report, the Company issued 36,428,530 warrants during the period, for consideration of £35.3 million
taken in the form of a discount adjustment to recognise the fair value of the debt issued, to the providers of the new term loan and
bonding facilities to buy ordinary shares at 10p per share. The warrants are exercisable from the date of issue through the duration of the
funding arrangements for which they were consideration (potentially up to September 2021) . 4,005,818 of these warrants were exercised
during the period for cash consideration of £0.4 million and the equivalent number of new shares issued to the holders.
148148
FINANCIAL STATEMENTS
Awards were granted during the year as indicated below (note 28) . Exercise and vesting details are stated in the Directors’ Remuneration
Report on pages 74 to 77. Outstanding options and awards over shares in the Company at 31 December 2018 were as follows:
(a) Performance Share Plan
31 December 2018
31 December 2017
Subscription
price per
share
Number of
beneficiaries
including
directors Number of shares
Number of
beneficiaries
including
directors Number of shares
Nil
Nil
Nil
Nil
Nil
Nil
Nil
Nil
-
-
111
98
8
1
9
1
-
-
2,001,852
3,741,674
996,143
526,840
3,821,381
317,250
11,405,140
7
120
123
112
8
1
-
-
15,382
1,695,314
2,079,878
4,006,741
996,143
526,840
-
-
9,320,298
Date of grant
9 April 2013
1 June 2015
5 April 2016
6 April 2017
11 September 2017
2 October 2017
3 May 2018
4 June 2018
(b) Restricted Stock Award
11 September 2017
Nil
1
1,416,741
1
1,897,899
1,416,741
1,897,899
(c) Sharesave Scheme
9 April 2014
511.0p
30 September 2014
529.0p
14 October 2015
467.0p
12 October 2016
317.0p
-
-
735
670
-
-
246,815
550,419
11 October 2017
91.0p
1,626
5,224,414
6,021,648
7
736
1,278
1,231
2,955
5,737
216,164
430,003
1,033,942
9,540,599
11,226,445
27. 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:
Maximum guarantee
Amounts utilised
Joint ventures and associates
Borrowings
Bonds and guarantees
2018
£million
20.9
246.0
2017
£million
18.9
226.0
2018
£million
2017
£million
0.8
131.1
4.7
2.4
4.4
2.2
266.9
244.9
131.9
1.7
138.3
140.0
149149
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
28. SHARE‑BASED PAYMENTS
Under the Group’s share-based incentive schemes the following expense was charged/(credited) :
Performance Share Plan
Restricted Stock Award
Sharesave Scheme
Total charge
Cash settled
Equity settled
Total charge
31 December 2018
£million
31 December 2017
£million
0.6
-
1.9
2.5
-
2.5
2.5
(1.3)
3.1
0.3
2.1
(0.3)
2.4
2.1
The cash settled element of the charge relates to cash payments equivalent to the dividends which would have accrued to Performance
Share Plan participants had their vested shares been awarded at the grant date.
(a) Performance Share Plan
The Performance Share Plan is a “free” share award with an effective exercise price of £nil. For all participants in the 2018 awards,
one-third of their award is subject to a Total Shareholder Return (TSR) performance condition with performance compared to a
comparator group, one-third is subject to a Cumulative Operating Profit (COP) performance condition and one-third is subject to a
performance condition of achieving various strategic targets. For previous awards, various performance conditions applied, some only
applicable to certain participants. The performance period on all awards is three years. Further details of these conditions are set out
in the Directors’ Remuneration Report on pages 75 and 76. 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
2018
Awards
number
9,320,298
4,138,631
-
2017
Awards
number
5,387,106
5,616,649
(26,562)
(2,053,789)
(1,656,895)
11,405,140
9,320,298
-
15,382
The remaining weighted average contractual life is 3.6 years (2017: 3.8 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 TSR award per share
150150
2018
grants
87.9p
0p
79.1%
3 years
0.8%
0.0%
65.5p
2017
grants
202.4p
0p
44.7%
3 years
0.3%
0.0%
27.9p
2016
grants
419.6p
0p
26.2%
3 years
0.5%
0.0%
134.6p
FINANCIAL STATEMENTS
(b) Restricted Stock Award
On 11 September 2017 the Chief Executive Officer, Debbie White, received Restricted Stock Awards in order to compensate her
for forfeited awards from her previous employment. The awards replicate, as far as practicable, the terms (including performance
conditions where relevant) and values of awards forfeited by Mrs White in agreeing to join the Group. The award is a “free” share award
with an effective exercise price of £nil. The vesting dates of awards vary from March 2018 to April 2020. Awards are normally forfeited
if the employee leaves the Group before the awards vest. Further details of the awards are set out in the Directors’ Remuneration
Report on page 76.
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
2018
Awards
number
1,897,899
2017
Awards
number
-
-
1,897,899
(481,158)
-
-
-
-
1,416,741
1,897,899
–
–
The remaining weighted average contractual life is 0.9 years (2017: 1.5 years) .
The fair value of the awards granted under this plan is 161.5p per share, which is based on the closing share price of the Company on
the grant date of 11 September 2017.
(c) Sharesave Scheme
The Sharesave Scheme is an all-employee HMRC tax-advantaged 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 grants from 2012 onwards was set at a
20% discount of the average share price over five days’ trading prior to the offer date of the scheme. There was no grant in 2018.
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
2018
2017
Options
number
Weighted average
exercise price
£
Options
number
Weighted average
exercise price
£
11,226,445
-
(27)
(5,204,770)
6,021,648
2.4
2.4
–
4.7
4.7
1.39
-
0.96
1.48
1.31
–
4.4
4.4
3,158,262
9,861,819
-
(1,793,636)
11,226,445
2.2
2.2
–
3.99
0.96
-
3.60
1.39
–
The outstanding options at the end of the period had a weighted average exercise price of £1.31 (2017: £1.39) and had a remaining
weighted average contractual life of 2.2 years (2017: 3.2 years) .
151151
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
28. 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
2018
grants
n/a
n/a
n/a
n/a
n/a
n/a
n/a
2017
grants
113.5p
91.0p
41.3%
3 years
0.5%
3.7%
33.0p
2016
grants
348.0p
317.0p
30.0%
3 years
0.8%
4.1%
62.3p
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.
29. 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 2018.
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 Interserve Pension
Scheme comprises two segregated sections (referred to as the Interserve and Landmarc sections) , with assets and liabilities ring-
fenced. 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.
152152
FINANCIAL STATEMENTS
The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation. The discount
rate and inflation assumptions shown below are the single equivalent rates for the full-yield curves assumed for the Interserve section
of the Interserve Pension Scheme, which represents 90% of the total defined benefit obligation. The life expectancy assumptions shown
relate to the vast majority of the membership of that scheme. The assumptions have been updated at 31 December 2018 to reflect the
recent downward trend observed in projected future life expectancies issued by the Continuous Mortality Investigation. Alternative
assumptions have been used for the less material arrangements where the specific nature of those schemes makes it appropriate to do
so. The weighted average duration of the expected benefit payments for the schemes is around 15 years.
Significant actuarial assumptions
Retail price inflation (pa)
Discount rate (pa)
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 price inflation (pa)
Pension increase assumptions (pa)
RPI
RPI (minimum 0%, maximum 5%)
RPI (minimum 3%, maximum 5%)
CPI
CPI (minimum 0%, maximum 5%)
CPI (minimum 3%, maximum 5%)
Fixed 5%
General salary increases (pa)
2018
3.2%
3.0%
86.3
88.3
87.3
89.5
2.1%
3.2%
3.1%
3.7%
2.1%
2.1%
3.2%
5.0%
2.6%
2017
3.2%
2.5%
87.7
89.6
89.5
91.0
2.2%
3.2%
3.1%
3.7%
2.2%
2.2%
n/a
5.0%
2.7%
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
(Asset) /liability recognised in the balance sheet
The change in the net (asset) /liability recognised in the balance sheet is comprised as follows:
Opening net liability
(Income)/expense charged to profit and loss
Amount recognised in other comprehensive income
Employer contributions
Closing net (asset) /liability
2018
£million
844.8
(938.7)
(93.9)
2018
£million
48.0
(65.3)
(54.0)
(22.6)
(93.9)
2017
£million
1,064.1
(1,016.1)
48.0
2017
£million
52.4
7.9
10.4
(22.7)
48.0
153153
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
29. DEFINED BENEFIT RETIREMENT SCHEMES CONTINUED
The Group has assessed that it is permissible under IFRIC 14 IAS 19 – The limit on a defined benefit asset, minimum funding requirements
and their interaction to recognise a pension asset at 31 December 2018.
Sensitivity to significant actuarial assumptions
Price inflation
Discount rate
Sensitivity
+0.5% pa
+0.5% pa
Post-retirement mortality (expectancy of life in years)
1 year increase
Indicative change in defined benefit
obligation
2018
£million
2017
£million
+48
-60
+30
+64
-85
+35
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 similar (although not necessarily equal) change in asset values, and the corresponding
overall impact on the net liability/(asset) is therefore likely to be different from than the amounts above.
The amounts recognised in the income statement are as follows:
Employer’s part of current service cost
Net interest (income)/expense on the net pension (asset) /liability
Administration expenses
Past service cost/(credit)
Total (income) /expense recognised in the income statement
2018
£million
3.4
(0.4)
2.3
(70.6)
(65.3)
2017
£million
5.2
1.1
1.6
-
7.9
The current service cost and administration expenses are included within operating profit. The interest cost is included within financing
costs.
At the balance sheet date, the current allocation of the schemes’ assets is as follows:
Equities (quoted)
Alternative investments (primarily unquoted)
Property (unquoted)
Liability Driven Investment ("LDI") (unquoted)
Insurance policies (unquoted)
Government bonds (quoted)
Corporate bonds (quoted)
Infrastructure (unquoted)
Cash and other (primarily unquoted)
31 December 2018
31 December 2017
Current
allocation
Fair value
£million
Current
allocation
Fair value
£million
2%
16%
0%
43%
33%
0%
0%
5%
1%
24.0
153.1
1.9
390.2
310.8
-
2.7
49.5
6.5
28%
19%
0%
13%
34%
0%
0%
5%
1%
286.1
192.5
3.9
132.7
342.7
-
2.8
49.0
6.4
100%
938.7
100%
1,016.1
Alternative investments include diversified growth funds, fund of hedge funds and emerging market multi-asset funds (primarily
unquoted) .
The Trustee of the Interserve Pension Scheme holds an insurance policy in the Interserve section of the scheme to protect the Group
from certain risks associated with approximately 35% of that section’s defined benefit obligation. The policy aims to match the pension
payments to the pensioner members who were above age 65 in July 2014. The policy is not an exact match for the benefits in certain
areas, notably: pension increases if price inflation falls below 0%; differences between the increase in the Consumer Prices Index and
the Retail Prices Index; and the eligibility criteria for dependants’ pensions. Due to the inexact nature of the match, the value of the
asset (£288 million) can vary from the value of the corresponding defined benefit obligation (£249 million) , which is primarily due to
different inflation measures being applicable to the benefits valued for the asset and the liability (RPI and CPI respectively) . Included
within these values, essentially, is circa £4 million of the defined benefit obligation which precisely matches the benefits in respect of
certain dependants in receipt of pension.
154154
FINANCIAL STATEMENTS
Except for the element of the policy which precisely matches the benefits (around 1% of the total policy value) , the policy has been
valued as the estimated replacement cost at the accounting date by the Group’s actuarial advisers, LCP, in accordance with the
fair value requirements of IFRS 13. The small matching element has been valued at the same amount as the defined benefit obligation
in respect of the matched benefits.
During 2016 the Interserve Pension Scheme invested in a bespoke pooled LDI fund. The LDI portfolio provides a broad 45% hedge of
the Interserve section’s interest rate and inflation exposure not covered by the insurance policy above. The LDI manager invests in a
combination of gilts and swaps, depending on the relative attractiveness of each instrument at each maturity.
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.
Following discussions in recent years between the Company and the Trustee of the Interserve Pension Scheme, the Trustee agreed
to change the Scheme terms relating to the inflation reference index used to calculate increases to some members’ benefits in the
scheme. The index previously used was RPI; with effect from 1 May 2018 this was changed to CPI for all affected members of the
scheme who are not currently in service, and from 1 October 2018 this was changed to CPI for affected active members. The accounting
treatment for the index changes is to allow for plan amendments as at 30 April and 30 September 2018 respectively. The corresponding
past service gain amounts have been measured as at the effective dates of change, using assumptions updated for market conditions at
the effective dates. As a result of this plan amendment, an exceptional gain of £70.6 million has been recognised as a non-underlying
item (see note 5) . The reconciliation over 2018 allows for the remeasurement of the balance sheet at these dates and resetting of the
financial assumptions for projections.
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 on defined benefit obligation
Contributions by schemes' participants
Actuarial loss/(gain) due to:
Changes in financial assumptions
Changes in demographic assumptions
Experience on defined benefit obligations
Benefits paid
Past service cost/(credit)
Closing defined benefit obligation
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 employers
Contributions by schemes' participants
Administrative expenses
Benefits paid
Closing fair value of the schemes' assets
2018
£million
1,064.1
3.4
25.0
0.3
(69.7)
(48.0)
1.6
(61.3)
(70.6)
2017
£million
1,044.6
5.2
28.6
0.3
39.7
(1.2)
(8.4)
(44.7)
-
844.8
1,064.1
2018
£million
1,016.1
25.4
(62.1)
22.6
0.3
(2.3)
(61.3)
2017
£million
992.2
27.5
19.7
22.7
0.3
(1.6)
(44.7)
938.7
1,016.1
A triennial actuarial valuation of the Interserve Pension Scheme is underway, with an effective date of 31 December 2017. The future
contribution rates will be determined in the light of this actuarial valuation. Based on current contribution rates and payroll, the Group
expects to contribute £19.0 million to the various defined benefit arrangements during 2019 (including deficit contributions to the
Interserve section of the Interserve Pension Scheme of £14.6 million) .
155155
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
30. 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:
Sales of goods
and services
Purchases of goods
and services
Amounts due from
related parties
Amounts owed to
related parties
2018
£million
2017
£million
2018
£million
2017
£million
2018
£million
2017
£million
2018
£million
2017
£million
Joint-venture entities
Associates
7.1
3.1
43.7
7.6
-
-
51.0
19.8
5.3
4.1
14.5
4.8
-
6.1
-
2.5
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, nor any
amounts expensed through the income statement.
Key management personnel are considered to be the directors of Interserve Plc. No dividends were paid in the year (2017: £nil) in
respect of ordinary shares held by the Company’s directors. Amounts paid to key management personnel are given in the audited
section of the Directors’ Remuneration Report on pages 58 to 79.
Subsequent to the preliminary announcement of the Group’s unaudited financial statements for the year ended 31 December 2018,
adjustments have been made to the figures shown in the table above, as a consequence of undertaking the process to finalise certain
subsidiary 2018 year-end financial statements.
31. INVESTMENTS IN JOINT VENTURES ‑ ARRANGEMENTS
PFI/PPP arrangements that have reached financial close at 31 December 2018 include:
Interserve services
Dates
Design/
build Operate
Whole‑life
value
£million
Status
Awarded
Fully
operational
Contract
end
Share of equity/
sub‑debt
%
£million
Total capital
required
£million
Contract
Central/local government
Derby Waste
yes
no
145
construction Q3 2014
–
2042
50
17.6
190.8
Health
Alder Hey Hospital
Scottish National Blood Transfusion
Education
Hertford, Luton and Reading
Schools
Invested to date
Shares
Loans
Remaining commitment
no
yes
yes
yes
100
operational Q2 2013 mid-2015
43
operational Q4 2014
Q1 2017
2045
2042
20
50
3.7
1.8
200.0
43.0
yes
yes
160
operational Q1 2015
Q1 2017
2042
45
147.0
6.1
29.2
0.1
29.1
–
29.2
Interserve’s share of the capital commitments of the joint ventures above amounts to £nil (2017: £11.2 million) .
156156
FINANCIAL STATEMENTS
32. 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
Loss before tax
Adjusted for:
Amortisation of acquired intangible assets
Share of associates amortisation of acquired intangible assets
Non-underlying items - exited business - Energy from Waste
Non-underlying items - exited business - strategic review of Equipment Services
Non-underlying items - exited business - property development
Non-underlying items - exited business - London construction
Non-underlying items - exited business - other
Non-underlying items - restructuring costs
Non-underlying items - professional adviser fees
Non-underlying items - contract review
Non-underlying items - goodwill impairment
Non-underlying items - other asset impairments and disposal of Industrial
Non-underlying items - pension indexation
Non-underlying items - exchange gain/loss on retranslation of loan notes
Headline profit before tax
(b) Gross revenue
Consolidated revenue
Share of revenues of associates and joint ventures
Gross revenue
(c) Net debt
Cash and deposits
Bank overdrafts
Bank loans
Capitalised PIK interest
USD loans
US Private Placement Loans
Finance leases
Total borrowings
Per balance sheet
2018
£million
(111.3)
2017
£million
(244.4)
18.7
-
12.6
-
(17.0)
24.8
6.7
20.0
43.0
5.2
33.1
22.1
(70.6)
26.4
13.7
2018
£million
2,904.0
321.7
3,225.7
2018
£million
196.7
-
(508.5)
(24.7)
(22.0)
(272.3)
(827.5)
(0.4)
(827.9)
21.5
0.1
35.1
7.1
26.0
10.3
(0.7)
33.2
13.9
86.1
60.0
16.7
-
(2.9)
62.0
2017
£million
3,250.8
416.1
3,666.9
2017
£million
155.1
(6.8)
(388.6)
-
-
(258.9)
(654.3)
(3.4)
(657.7)
A
B
A+B
(631.2)
(502.6)
157157
GovernanceFinancial StatementsStrategic ReportOverview
FINANCIAL STATEMENTS
Notes to the consolidated financial statements continued
for the year ended 31 December 2018
33. EVENTS AFTER THE BALANCE SHEET DATE
On 6 February 2019, Interserve announced a proposed Deleveraging Plan, which the directors believe will provide the Group with
sufficient liquidity to service its short-term cash obligations, create a strong balance sheet and a fundamentally solid foundation from
which the Group can improve its business and deliver on its long-term strategy.
The Deleveraging Plan is a consensual restructuring of Interserve, which is urgently required to avoid a default in the existing financing
arrangements and to provide sufficient liquidity, cash and bonding facilities to allow the Group to service short term obligations and
secure a stable platform. Such a default, were it to occur, would be expected to have material adverse consequences for stakeholders
and, in particular, for existing shareholders.
The Deleveraging Plan preserves fully the pre-emption rights of existing shareholders. If they take up their entitlements in the equity
raise their ownership will not be diluted and they will participate on the same terms as lenders.
The Deleveraging Plan will be subject to approval by Interserve’s shareholders.
158158
Company balance sheet
at 31 December 2018
Non-current assets
Tangible assets
Investments in subsidiaries
Investment in associates
Retirement benefit surplus
Other investments
Current assets
Debtors:
Due within one year
Due after one year
Cash at bank and in hand
Creditors: amounts falling due within one year
Net current assets
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Retirement benefit obligation
Provisions for liabilities
Net assets
Capital and reserves
Called-up share capital
Share premium account
Warrants in issue
Capital redemption reserve
Merger reserve
Profit and loss account
Total shareholders’ funds
Notes
E
F
G
L
H
I
I
J
K
L
M
O
166.8
(152.5)
Overview
Strategic Report
Governance
Financial Statements
2018
£million
2.3
462.9
2.7
98.8
-
566.7
71.7
-
28.0
99.7
(65.8)
(37.4)
33.9
600.6
(4.0)
-
(45.1)
551.5
15.0
116.5
31.4
0.1
180.9
207.6
551.5
2017
£million
13.7
462.9
2.7
-
0.3
479.6
12.2
9.6
166.8
188.6
(152.5)
36.1
515.7
(3.9)
(38.5)
(33.6)
439.7
14.6
116.5
-
0.1
180.9
127.6
439.7
Interserve Plc reported a profit after taxation for the financial year ended 31 December 2018 of £15.2 million (2017: loss after taxation of
£69.3 million) .
The financial statements of Interserve Plc (registered number 00088456) were approved by the Board of Directors on 8 March 2019.
Signed on behalf of the Board of Directors
D J White
Director
M A Whiteling
Director
159159
FINANCIAL STATEMENTS
Company statement of changes in equity
for the year ended 31 December 2018
Called–up
share
capital
£million
Profit
and loss
account
£million
Warrants in
issue
£million
Balance as at 1 January 2017
14.6
193.7
Loss for the year
Other comprehensive income for the year
Total comprehensive income for the year
Share-based payments
Transactions with owners
–
–
–
–
0.1
(69.3)
0.8
(68.5)
2.4
2.4
Balance as at 31 December 2017
14.6
127.6
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Issue of share capital
Warrants issued
Warrants exercised
Investment in own shares
Company shares used to settle share-based payments
Share-based payments
Share-based payments
Transactions with owners
–
–
–
0.4
–
–
–
–
–
0.4
15.2
58.4
73.6
–
–
3.9
1.9
(1.9)
2.5
6.4
–
–
–
–
–
–
–
–
–
–
–
35.3
(3.9)
–
–
–
31.4
Share
premium
account
£million
116.5
Capital
redemption
reserve
£million
Merger
reserve
£million
0.1
180.9
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
£million
505.8
(69.3)
0.8
(68.5)
2.4
2.4
116.5
0.1
180.9
439.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
15.2
58.4
73.6
0.4
35.3
–
1.9
(1.9)
2.5
38.2
Balance as at 31 December 2018
15.0
207.6
31.4
116.5
0.1
180.9
551.5
The share premium reserve includes proceeds from share issues over and above the nominal value of the ordinary shares.
The merger reserve includes premium on the shares issued on acquisition of subsidiary companies.
160160
Notes to the Company financial statements
for the year ended 31 December 2018
Overview
Strategic Report
Governance
Financial Statements
(A) ACCOUNTING POLICIES
The principal accounting policies are summarised below. They have all been applied consistently throughout the year and the preceding
year.
(a) Basis of accounting
These financial statements have been prepared in accordance with Financial Reporting Standard 101 Reduced disclosure framework and
the Companies Act 2006. These financial statements have therefore been prepared under the historical cost convention.
Interserve Plc is a company incorporated in the United Kingdom under the Companies Act. The address of the registered office is given
on page 43 of the Group consolidated financial statements.
The Company meets the definition of qualifying entity under FRS 100 Application of financial reporting requirements. These financial
statements were prepared in accordance with FRS 101 Reduced disclosure framework as issued by the Financial Reporting Council.
The Company’s financial statements are included in the Interserve Plc consolidated financial statements for the year ended
31 December 2018. As permitted by section 408 of the Companies Act 2006, the Company has not presented its own profit and
loss account.
The Company has taken advantage of the following disclosure exemptions in preparing these financial statements, as permitted by
FRS 101 Reduced disclosure framework:
• the requirements of paragraphs 45(b) and 46 to 52 of IFRS 2 Share-based payment;
• the requirements of IFRS 7 Financial Instruments: disclosures;
• the requirements of paragraphs 91 to 99 of IFRS 13 Fair value measurement;
• the requirement in paragraph 38 of IAS 1 Presentation of financial statements to present comparative information in respect of:
◦ paragraph 79(a) (iv) of IAS 1;
◦ paragraph 73(e) of IAS 16 Property, plant and equipment; and
◦ paragraph 118(e) of IAS 38 Intangible assets;
• the requirements of paragraphs 10(d) , 10) (f) , 16, 38A, 38B, 38C, 38D, 40A, 40B, 40C, 40D and 111 of IAS 1 Presentation of financial
statements;
• the requirements of paragraphs 134 to 136 of IAS 1 Presentation of financial statements;
• the requirements of IAS 7 Statement of cash flows;
• the requirements of paragraphs 30 and 31 of IAS 8 Accounting policies, changes in accounting estimates and errors;
• the requirements of paragraphs 17 and 18A of IAS 24 Related party disclosures;
• the requirements in IAS 24 Related party disclosures to disclose related party transactions entered into between two or more
members of a group; and
• the requirements of paragraphs 134(d) to 134(f) and 135(c) to 135(e) of IAS 36 Impairments of assets.
These financial statements are separate financial statements.
Where required, equivalent disclosures are given in the Annual Report and Financial Statements of the Group as shown in notes 1 to 33.
(b) Going concern
The directors have carried out a detailed review of the viability of the Company over the period to December 2021. This review
has involved stress testing of the current strategic plan of the Company under a number of scenarios and has considered risks and
uncertainties to both the near and medium term.
Based on this analysis and approval of the Deleveraging Plan by shareholders, the directors have a reasonable expectation that the
Company has adequate resources to continue as a going concern for the foreseeable future, representing a period of at least a year
from the date of this statement. The Board of Directors has considered the length of the going concern period for this assessment
and, taking into account the terms of the replacement financing facilities and proposed Deleveraging Plan, has concluded that a going
concern period of 12 months remains appropriate.
In making this assessment the directors recognise that there is a material uncertainty in relation to the approval of the Deleveraging
Plan by shareholders and failure to secure shareholder approval represents a material uncertainty that may cast significant doubt over
the Company’s ability to continue as a going concern.
Based on current expectations, and on the basis that the directors have every expectation of successful completion of the financial
restructuring, the directors consider it appropriate to continue to adopt the going concern basis in preparing the financial statements.
A more detailed review of going concern can be found in the Annual Report and Financial Statements of the Company on page 41.
161161
Notes to the Company financial statements continued
for the year ended 31 December 2018
(A) ACCOUNTING POLICIES CONTINUED
(c) Leases
Operating lease payments represent rentals payable by the Company for its office properties. Leases are negotiated for an average term
of 10 years and rentals are fixed for an average of five years with a break option to extend at five years. Leases of land and buildings are
typically subject to rent reviews at five-yearly intervals and provide for the lessee to pay all insurance, maintenance and repair costs.
The payments made are charged to the statement of total comprehensive income on a straight-line basis over the lease term.
(d) Foreign currency
The financial statements are presented in pounds sterling, which is the currency of the primary economic environment in which the
Company operates (its functional currency) .
Transactions denominated in currencies other than the functional currency are translated at the rates ruling at the dates of the
transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the rates
ruling at that date. Non-monetary items that are measured in terms of historical cost in foreign currency are not retranslated.
Exchange differences are recognised in profit and loss in the period in which they arise.
(e) Tangible assets
Tangible assets are carried at cost less any accumulated depreciation and any impairment losses. Depreciation is provided on a straight-
line basis, calculated to write off the cost or valuation over its expected useful life, at rates ranging between:
Freehold land
Freehold buildings
Leasehold property
Computer hardware and software
Furniture, office and plant equipment
Nil
2%
Over period of lease
33.3%
10% to 33.3%
Useful lives are reviewed at the end of every reporting period.
The costs of operating leases are charged to the profit and loss account as they accrue.
(f) Provisions and contingent liabilities
Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable
that the Company 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 profit and loss 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.
Contingent liabilities are disclosed in the notes to the financial statements in respect of guarantees given to the Company’s subsidiaries,
associated undertakings, joint ventures and pension scheme. Due to the nature of the guarantees it would be difficult to reliably
measure the Company’s potential obligation and the Company considers it unlikely that there will be a requirement to make a financial
settlement as a result of these guarantees.
(g) Investments
Investments are stated at cost less any impairment at the balance sheet date.
(h) Impairment of investments
Investments are assessed for indicators of impairment at each balance sheet date. The investment is impaired where there is objective
evidence that, as a result of one or more events that occurred after the initial recognition of the asset, the estimate future cash flows
of the investment have been affected.
(i) Pensions
The Company participates in, and is the sponsoring employer of, 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 in the statement of other
comprehensive income.
For defined contribution schemes, the amount recognised in the profit and loss is equal to the contributions payable to the schemes
during the year.
162162
FINANCIAL STATEMENTS (j) 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.
The Company’s research and development activities allow it to claim R&D tax credits from HMRC in respect of qualifying expenditure;
these credits are reflected in the income statement in cost of sales.
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.
(k) Finance costs
Borrowing costs are recognised in the profit and loss in the period in which they are incurred. Differences between borrowing costs
payable in the year and costs actually paid are shown in accruals in the balance sheet.
(l) Financial instruments
Financial assets and financial liabilities are recognised in the Company’s balance sheet when the Company becomes party to the
contractual provisions of the instrument. Financial assets, other than those held at fair value through profit and loss, are assessed for
indicators of impairment at each balance sheet date. Financial assets are impaired where there is objective evidence that, as a result of
one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment
have been affected.
Trade receivables
Trade receivables are initially measured at fair value, and subsequently at their amortised cost as reduced by appropriate allowances
for estimated irrecoverable amounts. Trade receivables are impaired when the asset meets one of the following criteria:
(a) the financial asset is credit-impaired; or
(b) credit losses are expected on the asset. Any loss allowance relating to trade receivables has been calculated with reference to
historical experience in the recoverability of such receivables, taking into consideration current conditions and forecasts of future
economic conditions.
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.
(m) Share‑based payments
The Company 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 Sharesave Scheme. A stochastic model has been used to value the Performance Share
Plan. Note 28 to the Group’s consolidated financial statements sets out details of the share-based payments. 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.
For cash-settled share-based payments a liability is recognised based on the fair value of the payment earned by the balance sheet
date. For equity-settled share-based payments the corresponding credit is recognised directly in reserves.
163163
GovernanceFinancial StatementsStrategic ReportOverview Notes to the Company financial statements continued
for the year ended 31 December 2018
(A) ACCOUNTING POLICIES CONTINUED
(n) Critical accounting judgements and key sources of estimation uncertainty
In the application of the Company accounting policies, which are described above, the directors are required to make judgements,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual
results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised if the revisions affect only that period, or in the period of the revision and future periods if the
revision affects both current and future periods.
There are no critical judgements, apart from those involving estimates (which are dealt with separately below) , that the directors have
made in the process of applying the Company’s accounting policies and that have the most significant effect on the amounts recognised
in the financial statements.
The key assumptions concerning the future, and other key sources of estimation uncertainty at the balance sheet date, that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are
discussed below.
Impairment of investments in subsidiaries
Determining whether the Company’s investments in subsidiaries have been impaired requires judgement. In making these judgements,
net assets of subsidiaries at the balance sheet date and Board-approved budgets for the next three years are taken into consideration.
The carrying amount of the investments in subsidiaries at the balance sheet date was £462.9 million (2017: £462.9 million) with £nil
(2017: £nil) of impairment losses recognised in 2018.
Retirement benefit obligations
In accordance with IAS 19 Employee benefits, the Company has disclosed in note L 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 L. 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.
(B) PROFIT ON ORDINARY ACTIVITIES AFTER TAXATION
Interserve Plc reported a profit after taxation for the financial year ended 31 December 2018 of £15.2 million (2017: loss after taxation
of £69.3 million) .
The auditors’ remuneration for audit services to the Company was £0.3 million (2017: £0.4 million).
164164
FINANCIAL STATEMENTS (C) EMPLOYEES
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
2018
£million
13.7
1.7
1.7
1.1
18.2
2018
£million
1.7
0.8
2.5
-
2.5
2.5
2017
£million
17.4
2.1
1.4
1.3
22.2
2017
£million
1.4
0.7
2.1
(0.3)
2.4
2.1
The average number of persons employed, being full-time equivalents, by the Company during the year, including directors, was 254
(2017: 345) .
Share-based payments are issued to certain employees of the Company and its wider Group. All schemes referenced in the Company
accounts are applicable to the Company. The division of costs across the Company has resulted in no charge to the Company. Further
details can be found in note 28 to the Group’s consolidated financial statements on pages 150 to 152.
Directors’ remuneration
Detailed disclosures of directors’ aggregated individual remuneration and share-based payments included in the above analysis are
given in the Directors’ Remuneration Report on pages 58 to 79 and should be regarded as an integral part of this note.
(D) DIVIDENDS
There were no dividends paid in the current year or prior year.
The directors do not recommend the payment of a final dividend for the year ended 31 December 2018.
165165
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the Company financial statements continued
for the year ended 31 December 2018
(E) TANGIBLE FIXED ASSETS
(a) Movement during the year
Cost
At 1 January 2018
Additions
Disposals
At 31 December 2018
Depreciation
At 1 January 2018
Charge in year
Disposals
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
(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
(c) Operating leases
Land and
buildings
£million
12.6
2.4
(11.8)
3.2
2.5
0.1
(1.0)
1.6
1.6
10.1
Computers
£million
Other
£million
Total
£million
4.7
0.7
(3.0)
2.4
1.4
0.5
-
1.9
0.5
3.3
1.0
0.1
(0.1)
1.0
0.7
0.1
-
0.8
0.2
0.3
18.3
3.2
(14.9)
6.6
4.6
0.7
(1.0)
4.3
2.3
13.7
2018
£million
2017
£million
1.3
0.2
1.5
0.1
1.6
1.3
0.2
1.5
8.6
10.1
At the balance sheet date, the Company had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
Land and buildings
2018
£million
2017
£million
1.3
3.6
2.8
7.7
1.3
3.7
3.9
8.9
Other
2018
£million
0.1
–
–
0.1
2017
£million
0.1
–
–
0.1
Within one year
Between two to five years
After five years
b
b
166166
FINANCIAL STATEMENTS
(F) INVESTMENTS IN SUBSIDIARIES
Cost
At 1 January 2018
Additions
Disposals
At 31 December 2018
Provisions
At 1 January 2018
Additions
Disposals
At 31 December 2018
Carrying value
At 31 December 2018
At 31 December 2017
£million
477.4
–
–
477.4
14.5
–
–
14.5
462.9
462.9
The Company tests annually for impairment against investments held.
The Company prepares cash flow forecasts derived from the most recent financial budgets approved by management for the next three
years, plus the net present value of cash flows extrapolated to perpetuity based on an estimated growth rate of 2% (2017: 2%) . This rate
does not exceed the average long-term growth rate for the relevant markets. The rate used to discount the forecast cash flows is the
Group weighted average cost of capital which varies per entity being reviewed, 11.8% to 12.8% (2017: 10.3% to 11.3%).
Details of the Company’s subsidiaries at 31 December 2018 are given on pages 175 to 180, which form part of these financial
statements. Direct subsidiaries are annotated with a superscript note 2.
167167
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the Company financial statements continued
for the year ended 31 December 2018
(G) INVESTMENTS IN ASSOCIATES
Cost
At 1 January 2018
Additions
Disposals
At 31 December 2018
Provisions
At 1 January 2018
Additions
Disposals
At 31 December 2018
Carrying value
At 31 December 2018
At 31 December 2017
£million
2.7
–
–
2.7
–
–
–
–
2.7
2.7
The Company’s direct associate at 31 December 2018 is Al Binaa Contracting Company W.L.L. (incorporated in Qatar) . Both the
proportion of ownership interest and proportion of voting power held is 49%. Of the total investment, £17,565 relates to investment in
shares and the remainder is a loan.
2018
£million
–
2017
£million
0.3
2018
£million
2017
£million
-
0.1
61.6
6.9
3.1
(0.1)
71.7
–
–
0.5
7.6
0.9
3.2
12.2
9.6
9.6
(H) OTHER INVESTMENTS
Bonds
(I) DEBTORS
Amounts falling due within one year:
Trade debtors
Amounts owed by Group undertakings
Corporation tax
Prepayments and accrued income
Amounts falling due after more than one year:
Deferred taxation (note N)
168168
FINANCIAL STATEMENTS
(J) CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
Trade creditors
Amounts owed to Group undertakings
Other taxation and social security
Other creditors
Accruals and deferred income
(K) CREDITORS: AMOUNTS FALLING DUE AFTER ONE YEAR
Other creditors
2018
£million
1.3
25.6
17.7
7.4
13.8
65.8
2018
£million
4.0
4.0
2017
£million
2.2
99.7
34.1
6.1
10.4
152.5
2017
£million
3.9
3.9
(L) RETIREMENT BENEFIT SCHEMES
The principal pension scheme the Company participates in and acts as sponsor for has been valued for the purposes of IAS 19 Employee
benefits. The pension scheme 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 scheme as at 31 December 2018.
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 and 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 Company contributes to a defined benefit pension scheme in the UK, the Interserve Pension Scheme, where benefits are generally
related to service and final salary. The Interserve Pension Scheme comprises two segregated sections (referred to as the Interserve
and Landmarc sections) , with assets and liabilities ring-fenced. The Company 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 Company’s defined benefit scheme 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 the Company 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 Company that adverse experience could lead to a requirement for the Company to make
considerable contributions to recover any deficit.
169169
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the Company financial statements continued
for the year ended 31 December 2018
(L) RETIREMENT BENEFIT SCHEMES CONTINUED
The following table sets out the key IAS 19 assumptions used to assess the present value of the defined benefit obligation. The discount
rate and inflation assumptions shown below are the single equivalent rates for the full-yield curves assumed for the Interserve section
of the Interserve Pension Scheme, which represents 90% of the total defined benefit obligation. Alternative assumptions have been used
for the less material sections where the specific nature of the schemes makes it appropriate to do so. The weighted average duration of
the expected benefit payments for the schemes is around 15 years.
The amount included in the balance sheet arising from the Company’s obligations in respect of the pension scheme is as follows:
Present value of defined benefit obligation
Fair value of scheme’s assets
Net (asset) /liability in balance sheet
The change in net liabilities recognised in the balance sheet is comprised as follows:
Opening net asset
Expense charged to profit and loss
Amount recognised outside profit and loss
Employer contributions
Closing net (asset) /liability
Price inflation
Discount rate
Sensitivity
+0.5% pa
+0.5% pa
Post-retirement mortality (expectancy of life in years)
1 year increase
2018
£million
757.7
(856.5)
(98.8)
2018
£million
38.5
(66.9)
(51.3)
(19.1)
(98.8)
2017
£million
967.2
(928.7)
38.5
2017
£million
39.5
5.4
13.4
(19.8)
38.5
Indicative change in defined benefit obligation
2018
£million
+43
-54
+27
2017
£million
+58
-76
+32
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/(asset) is therefore likely to be lower than the amounts above.
The amounts recognised in the profit and loss are as follows:
Employer’s part of current service cost
Net interest on the net pension liability/(asset)
Administration costs
Past service cost/(credit)
Total (income) /expense recognised in the profit and loss
2018
£million
2.0
(0.5)
2.3
(70.7)
(66.9)
2017
£million
3.0
0.8
1.6
-
5.4
The current service cost and administration costs are included within operating profit. The interest cost is included within financing
costs.
170170
FINANCIAL STATEMENTS
The current allocation of the schemes’ assets is as follows:
Equities (quoted)
Alternative investments (primarily unquoted)
Liability driven investment (“LDI”) (unquoted)
Insurance policies (unquoted)
Infrastructure (unquoted)
Cash and other (primarily unquoted)
Total
2018
2017
Current
allocation
Fair value
£million
Current
allocation
Fair value
£million
0%
16%
44%
34%
5%
1%
1.0
140.2
379.0
288.2
44.7
3.4
28%
19%
13%
34%
5%
1%
260.2
179.9
124
317.5
44.2
2.9
100%
856.5
100%
928.7
Alternative investments include diversified growth funds, fund of hedge funds and emerging market multi-asset funds (primarily
unquoted) .
The Trustee of the Interserve section of the Interserve Pension Scheme holds an insurance policy to protect the Company from certain
risks associated with approximately 35% of that section’s defined benefit obligation. The policy aims to closely match the pension
payments to the pensioner members who were above age 65 in July 2014. The policy is not an exact match for the benefits in certain
areas, notably: pension increases if price inflation falls below 0%; differences between the increase in Consumer Prices Index and the
Retail Prices Index; and the eligibility criteria for the dependants’ pensions. Due to the inexact nature of the match, the value of the
asset (£288 million) can vary from the value of the corresponding defined benefit obligation (£246 million) , which is primarily due to
different inflation measures being applicable to the benefits valued for the asset and liability (RPI and CPI respectively) . Included within
these values, essentially, is circa £4 million of the defined benefit obligation which precisely matches the benefits in respect of certain
dependants in receipt of pension.
Except for the element of the policy which precisely matches the benefits (around 1% of the total policy value) , the policy has been
valued as the estimated replacement cost at the accounting date by the Company’s actuarial advisers, Lane, Clarke and Peacock,
in accordance with the fair value requirements of IFRS 13. The small matching element has been valued at the same amount as the
defined benefit obligation in respect of the matched benefits.
During 2016 the Interserve Pension Scheme invested in a bespoke pooled LDI fund. The LDI portfolio provides a broad 119% hedge of
the Interserve section’s interest rate and inflation exposure not covered by the insurance policy above. The LDI manager invests in a
combination of gilts and swaps, depending on the relative attractiveness of each instrument at each maturity.
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.
171171
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the Company financial statements continued
for the year ended 31 December 2018
(L) RETIREMENT BENEFIT SCHEMES CONTINUED
Following discussions in recent years between the Company and the Trustee of the Interserve Pension Scheme, the Trustee agreed
to change the Scheme terms relating to the inflation reference index used to calculate increases to some members’ benefits in the
scheme. The index previously used was RPI; with effect from 1 May 2018 this was changed to CPI for all affected members of the
scheme who are not currently in service, and from 1 October 2018 this was changed to CPI for affected active members. The accounting
treatment for the index changes is to allow for plan amendments as at 30 April and 30 September 2018 respectively. The corresponding
past service gain amounts have been measured as at the effective dates of change, using assumptions updated for market conditions at
the effective dates. The reconciliation over 2018 allows for the remeasurement of the balance sheet at these dates and resetting of the
financial assumptions for projections.
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
Past service cost/(credit)
Curtailments and settlements
Bulk transfers
Closing defined benefit obligation
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
Curtailments and settlements
Bulk transfers
2018
£million
967.2
2.0
22.6
0.2
(61.4)
(46.5)
1.7
(57.4)
(70.7)
-
-
2017
£million
950.8
3.0
26.0
0.2
35.8
-
(7.1)
(41.5)
-
-
-
757.7
967.2
2018
£million
928.7
23.1
(54.9)
19.1
0.2
(2.3)
(57.4)
-
-
2017
£million
911.3
25.2
15.3
19.8
0.2
(1.6)
(41.5)
-
-
Closing fair value of the schemes’ assets
856.5
928.7
A triennial actuarial valuation of the Interserve Pension Scheme is underway, with an effective date of 31 December 2017. The future
contribution rates will be determined in the light of this actuarial valuation. Based on current contribution rates and payroll, the
Company expects to contribute £19.0 million to the Interserve Pension Scheme during 2019. This includes £14.6 million of deficit
contributions.
172172
FINANCIAL STATEMENTS
(M) PROVISIONS FOR LIABILITIES
2018
£million
2017
£million
Insurance Deferred Tax
Other
Total
Insurance Deferred Tax
Other
Total
At 1 January
Charged to the profit and loss account
Utilisation of provision
At 31 December
(17.3)
(1.4)
-
9.6
(16.3)
(23.4)
-
(0.5)
4.2
(24.0)
(25.3)
4.2
(15.9)
(1.4)
-
(18.7)
(13.8)
(12.6)
(45.1)
(17.3)
-
-
-
-
-
(16.3)
-
(15.9)
(17.7)
–
(16.3)
(33.6)
Insurance provisions are made for claim events that have been incurred, but not reported based on claims history as a guide to best
estimate the level of provision. The timing and outflow of these provisions will depend on when claims are settled. The Company aims
to close out old insurance years on a regular basis if favourable pricing can be obtained from the market in order to avoid holding on to
unnecessary provisions.
Other includes dilapidation and onerous lease costs for exiting a number of properties.
(N) DEFERRED TAXATION ASSET/(LIABILITY)
At 1 January 2017
Charge/(credit) to the profit and loss
Charge to other comprehensive income
At 1 January 2018
Charge/(credit) to the profit and loss
Charge to other comprehensive income
At 31 December 2018
Deferred tax liabilities (note M)
Deferred tax assets (note I)
Accelerated
tax
depreciation
£million
Retirement
benefit
obligation
£million
Share‑based
payments
£million
Other
£million
Total
£million
0.5
2.1
-
2.6
0.1
-
2.7
6.7
0.9
(1.1)
6.5
(11.3)
(12.0)
(16.8)
0.1
(0.1)
–
0.0
–
–
–
0.2
0.3
–
0.5
(0.2)
–
0.3
2018
£million
(13.8)
–
(13.8)
7.5
3.2
(1.1)
9.6
(11.4)
(12.0)
(13.8)
2017
£million
–
9.6
9.6
Deferred tax is calculated at 17% (2017: 17%) . A deferred tax rate of 17% has been used as the Company expects the value to
predominantly reverse after April 2020 at which point the rate will be 17%.
(O) SHARE CAPITAL
Authorised
2018
£million
2017
£million
Ordinary shares of 0.1p each and deferred shares of 9.9p each (2017: ordinary shares of 10p each)
Unlimited
Unlimited
Allotted, called-up and fully paid
Ordinary shares of 0.1p each and deferred shares of 9.9p each (2017: ordinary shares of 10p each)
At 1 January
Issued on exercise of warrants
At 31 December
14.6
0.4
15.0
14.6
–
14.6
No share awards were issued during the year as indicated in note 26 to the Company’s consolidated financial statements.
Following approval by shareholders at the AGM on 12 June 2018, our issued share capital of 149,719,938 ordinary 10p shares has been
sub-divided into 149,719,938 ordinary shares of 0.1p and 149,719,938 deferred shares of 9.9p.
173173
GovernanceFinancial StatementsStrategic ReportOverview
Notes to the Company financial statements continued
for the year ended 31 December 2018
(O) SHARE CAPITAL CONTINUED
This sub-division was required to enable the exercise price of the share warrants to be reduced to less than 10p if necessary as a result
of certain dilutive events. The economic and voting rights of the ordinary shares remain the same. The deferred shares have no value
(economic or otherwise) and have been created to enable the Company to reduce the nominal value of the ordinary shares without
going through a process that would require the approval of the Court. The deferred shares were issued to all persons on the Company’s
register of members as at 12 June 2018 on the basis of one deferred share of 9.9p for each ordinary share held. The deferred shares are
not transferable, do not carry any voting or dividend rights and are not expected to have any economic value.
Warrants
As disclosed in our 2017 Annual Report, the Company issued 36,428,530 warrants during the period, for consideration of £35.3 million
taken in the form of a discount adjustment to recognise the fair value of the debt issued, to the providers of the new term loan and
bonding facilities to buy ordinary shares at 10p per share. The warrants are exercisable from the date of issue through the duration
of the funding arrangements for which they were consideration (potentially up to September 2021) . 4,005,818 of these warrants were
exercised during the period for cash consideration of £0.4 million and the equivalent number of new shares issued to the holders.
(P) CONTINGENT LIABILITIES
At 31 December 2018, 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 2018, these amounted to
£4.3 million (2017: £4.3 million) . The Company has provided a guarantee to the Interserve Pension Scheme for future contributions
due from subsidiary undertakings amounting to £250.0 million (2017: £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 £20.9 million (2017: £18.8 million) in respect of borrowings and £205.2 million (2017: £187.5 million)
in respect of guarantees. At 31 December 2018, £0.8 million (2017: £1.7 million) had been utilised in borrowings and £99.9 million
(2017: £108.1 million) in guarantees.
174174
FINANCIAL STATEMENTS Related undertakings
In accordance with section 409 of the Companies Act 2006, a full list of the related undertakings of Interserve Plc, as at 31 December 2018,
is disclosed below. Unless otherwise stated:
(a)
(b)
the principal operations of each related undertaking are conducted in its country of incorporation or registration;
the shareholding of each related undertaking relates to ordinary, common or unclassified share capital and is equivalent to the percentage of
voting rights held by the Group;
the equity capital of each related undertaking is held through an intermediate holding company rather than Interserve Plc;
the results of each related undertaking are consolidated within these financial statements; and
the consolidated financial statements include the results for the twelve months to 31 December even if the accounting reference date is different.
(c)
(d)
(e)
Subsidiary undertakings
Incorporated in the United Kingdom
Principal activity
England and Wales: Interserve House, Ruscombe Park, Twyford, Reading, Berkshire RG10 9JU
Advantage Healthcare Ltd
Advantage Healthcare Nursing and Care Ltd
Advantage Healthcare Payroll Ltd
Advantage Healthcare (QHRS) Ltd
Advantage Healthcare (QHS) Ltd
Bandt Holdings Ltd
Bandt P J H Ltd
Bandt Properties Ltd
Broomco (4110) Ltd1
ESG Holdings Ltd
ESG Intermediate Holdings Ltd
How Engineering Services Northern Ltd
How Group Ltd
How Group Trust Company Ltd
How Investments Ltd
ILE Corporate Services Ltd
Interserve Building Ltd
Interserve Developments No.1 Ltd
Interserve Developments No.2 Ltd
Interserve Developments No.3 Ltd
Interserve Developments No.4 Ltd
Interserve Developments No.6 Ltd
Interserve Energy Renewable Solutions Ltd
Interserve Engineering Ltd
Interserve Finance Ltd
Interserve Finance (Switzerland) Holdings Ltd
Interserve Group Holdings Ltd2
Interserve Group Holdings (Qatar) Ltd
Interserve Healthcare Holdings Ltd3
Interserve Healthcare Ltd
Interserve Holdings Ltd
Interserve International Ltd
Interserve Investments Ltd
Interserve Learning & Employment (Services) Ltd
Interserve Service Futures Holdings Ltd
Interserve Service Futures Ltd
Interserve Strategic Partnerships Ltd
Interserve Support Services Ltd
Interserve Trustees Ltd1 2 4
Interserve Working Futures Ltd
Kwikform Holdings Ltd5
Kwikform UK Ltd2
Modus FM Ltd1 22
Montana BidCo Ltd23
Montana FinCo Ltd23
Montana HoldCo Ltd23
Montpellier Health Care Ltd
Orient Gold Ltd
Professional Healthcare Services Ltd
Purple Futures LLP6
RMD Kwikform Holdings Ltd
R M Douglas Construction Ltd
Ruscombe Ltd2
Sencia Ltd5
Strand Nurses Bureau Ltd
T D Construction Ltd5
The Cheshire and Greater Manchester Community Rehabilitation Company Ltd
The Courtyard (Bristol) Management Company Ltd2 7
The Hampshire and Isle of Wight Rehabilitation Company Ltd
The Humberside, Lincolnshire and North Yorkshire Community Rehabilitation
Company Ltd
The Merseyside Community Rehabilitation Company Ltd
The West Yorkshire Community Rehabilitation Company Ltd
Tilbury Developments Ltd2 5
Tilbury Douglas Construction Ltd
Tilbury Douglas Projects Ltd
Dormant company
Dormant company
Dormant company
Dormant company
Dormant company
Holding company
Dormant company
Property management
Dormant company
Holding company
Holding company
Dormant company
Holding company
Corporate trustee of employee benefit trust
Dormant company
Central support to fellow subsidiary companies
Dormant company
Holding company
Holding company
Property development management
Holding company
Holding company
Dormant company
Holding company
Intra-group financing company
Holding company
Holding company
Dormant company
Holding company
Healthcare services
Holding company
Holding company
Operational and financial services to PFI/PPP projects
Vocational training services
Holding company
Holding company
Dormant company
Dormant company
Pension trustee company
Welfare-to-work services
Holding company
Dormant company
Dormant company
Non-trading company
Non-trading company
Holding company
Dormant company
Vocational training services
Dormant company
Management of five Community Rehabilitation Companies
Holding company
Dormant company
Dormant company
Training and employment services
Dormant company
Dormant company
Probation and rehabilitation services
Dormant company
Probation and rehabilitation services
Probation and rehabilitation services
Probation and rehabilitation services
Probation and rehabilitation services
Dormant company
Dormant company
Property rental
Group
holding
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
33.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
80.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
80.0%
33.3%
80.0%
80.0%
80.0%
80.0%
100.0%
100.0%
100.0%
175
GovernanceFinancial StatementsStrategic ReportOverview Related undertakings continued
Subsidiary undertakings
continued
Tilbury Estates Ltd2
Transcoast Ltd2
Triangle Training Holdings Ltd
Triangle Training Ltd
West’s Group International Ltd5
England and Wales: Capital Tower, 91 Waterloo Road, London SE1 8RT
Axiam (UK) Ltd
Baker Blythe & Company Ltd
Bateman’s Cleaning Services Ltd
Benchmark Carpet Care Ltd
Broadreach Group Ltd5
Building & Property (Holdings) Ltd
Building & Property Trustees Ltd
Central Window Cleaning Company Ltd
Clough Williams Power Ltd1
Euro AS Ltd
Fincham Industrial Services Ltd8
First Security Group Ltd9
Global Protect Ltd
Hi-Tech Cleaning Solutions Ltd
How Engineering Services Ltd
Industrial Services International Ltd
Insitu Cleaning Company Ltd
Interserve Building Services (UK) Ltd
Interserve Catering Services Ltd1
Interserve (Defence) Ltd
Interserve Environmental Services Ltd
Interserve (Facilities Management) Ltd
Interserve (Facilities Services) Ltd
Interserve (Facilities Services-Slough) Ltd8
Interserve Fire Services Ltd
Interservefm (Holdings) Ltd
Interservefm Ltd10
Interserve FS (UK) Ltd
Interserve Hospital Services Ltd
Interserve Integrated Services Ltd
Interserve Project Services Ltd
Interserve Security (Fire & Electronics) Ltd
Interserve Security (First) Ltd11
Interserve Security (Knightsbridge) Ltd
Interserve Security Ltd
Interserve Specialist Services (Holdings) Ltd
Interserve Technical Services Ltd
KGL Business Services Ltd
Knightsbridge Guarding Holdings Ltd9
Knightsbridge Guarding Ltd
Lancaster Employment Business Ltd
Lancaster Office Cleaning Company Ltd
Lancaster Payroll Company Ltd
Landmarc Solutions Ltd
Landmarc Support Services Ltd12
MacLellan Group Ltd
MacLellan Integrated Services Ltd
MacLellan International Airport Services Ltd
MacLellan International Ltd
MacLellan Ltd
MacLellan Management Services Ltd
MSS Facilities Management Ltd
Perception UK LLP6
Phoenix Fire Services Ltd
Phonotas Services Ltd
R & D Holdings Ltd
Ramoneur Cleaning and Support Services Ltd
Retail Cleaning Services Ltd1
SSD UK Ltd
St James Cleaning and Support Services Ltd
TASS (Europe) Ltd
The Ramoneur Company Ltd
THK Insulation Ltd
Tilbury (City) Ltd2
Unique Cleaning Services Ltd
Principal activity
Dormant company
Dormant company
Holding company
Holding company
Holding company
Dormant company
Dormant company
Dormant company
Dormant company
Holding company
Holding company
Dormant company
Dormant company
Dormant company
Dormant company
Dormant company
Dormant company
Dormant company
Dormant company
Dormant company
Dormant company
Contract cleaning
Dormant company
Catering services
Support services to defence sector
Asbestos services
Facilities management services
Non-trading company
Non-trading company
Dormant company
Holding company
Holding company
Contract cleaning and related services
Dormant company
Support services
International contracting services and supplies
Dormant company
Security manpower and associated support services
Manned guarding security services
Dormant company
Holding company
Mechanical and electrical engineering services
Dormant company
Holding company
Dormant company
Dormant company
Dormant company
Dormant company
Share plan trustee
Management/maintenance services for MoD Army Training Estate
Holding company
Dormant company
Dormant company
Facilities management services
Dormant company
Personnel and management services
Dormant company
Dormant company
Non-trading company
Dormant company
Dormant company
Dormant company
Dormant company
Specialist window cleaning
Dormant company
Dormant company
Dormant company
Dormant company
Dormant company
Dormant company
England and Wales: Ingenuity House, Elmdon Trading Estate, Bickenhill Lane, Birmingham B37 7HQ
CI-ONE Construction Ltd
Interserve Construction Ltd
Interserve Engineering Services Ltd
Interserve Piling Ltd
Interserve Rail Ltd2 5
Paragon Management UK Ltd
Tilbury Water Treatment Ltd
Whittle Contracts Ltd2
Dormant company
Sustainable solutions for building/infrastructure projects
Mechanical, electrical and engineering services
Non-trading company
Dormant company
Non-trading company
Dormant company
Dormant company
176
Group
holding
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
51.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
FINANCIAL STATEMENTS Subsidiary undertakings
continued
Principal activity
England and Wales: Brickyard Road, Aldridge, Walsall, West Midlands WS9 8BW
Rapid Metal Developments Ltd
RMD Kwikform Ltd
Dormant company
Equipment hire and sales
Scotland: Interserve House, Almondview Business Park, Livingston, West Lothian EH54 6SF
Bandt Ltd
Tilbury Homes (Glasgow) Ltd2
Tilbury Homes (Scotland) Ltd2
Holding company
Dormant company
Dormant company
Incorporated in the Rest of Europe
Channel Islands: Mill Court, La Charroterie, St Peter Port, Guernsey GY1 4ET
Interserve Insurance Company Ltd
Poland: Plac Konstytucji 6/55, 01-553 Warszawa
Tilbury Douglas Polska Sp zoo
Republic of Ireland: Ballyboggan Road, Finglas, Dublin 11, D11 AKW1
Interserve Industrial Services (Ireland) Ltd
RMD Kwikform Ireland Ltd
Spain: Calle San Miguel 25, Bajo 1, Azuqueca de Henares, Guadalajara 19200
Interserve Centro Especial de Empleo, SL
Spain: Calle Juan Ignacio Luca de Tena 8, Madrid 28027
Interserve Facilities Services, SA
Translimp Contract Services, SA
Spain: Avenida de Europa, 19 – Ed 2 – 2o D, Pozuelo de Alarcon, Madrid 28224
Tilbury Ibérica, SA2
Switzerland: Rue de la Serre 4, 2000 Neuchatel
Interserve Finance (Switzerland) Sàrl, en liquidation
Incorporated in the Middle East & Africa
India: 407-A6, Ansal Chamber – II, Bhikaji Cama Place, New Delhi 110066
RMD Kwikform India Private Ltd
Kingdom of Bahrain: Flat 34, Building 5, Road 3001, Block 330, Manama
RMD Kwikform Almoayed Bahrain WLL13
Kingdom of Saudi Arabia: 7536, Unit No 39, AR Riyadh 12472-4304
ESG (Saudi Arabia) LLC
Kingdom of Saudi Arabia: PO Box 26982, Riyadh 11595
Interserve Saudi Arabia LLC
Insurance
In liquidation
Dormant company
Equipment hire and sales
Support services for integration of disabled people into
cleaning contracts
Holding company
Support services for transport sector
Holding company
In liquidation
Equipment hire and sales
Equipment hire and sales
Education, training and employment services
Building maintenance and cleaning
Kingdom of Saudi Arabia: Office No.4A, Gulf Star Building, near Hotel Meridien, Prince Turkey Road, Al Khobar 31952
RMD Kwikform Saudi Arabia LLC
Equipment hire
Mauritius: 2nd Floor, The Axis, 26 Cybercity, Ebene 72201
Interserve International Equipment Ltd
Rental of plant and machinery
Republic of South Africa: 52 Jakaranda Street, Plot 22, Hennopspark, Centurion
RMD Kwikform (South Africa) (Proprietary) Ltd
Equipment hire and sales
State of Qatar: Building No.148, Zone No.40, Al Muntazah Street (next to Qatar Chamber of Commerce), PO Box 405, Doha
RMD Kwikform (Al Maha) Qatar WLL14
Equipment hire and sales
Sultanate of Oman: PO Box 1639, Hay Al-Mina, Muscat, Postal Code 114
Interserve Oman LLC15
Sultanate of Oman: Post Box 152, Muscat, Postal Code 103
RMD Kwikform Oman LLC
Sultanate of Oman: PO Box 142, Muscat, Postal Code 100
The Oman Construction Company LLC16
Facilities management
Equipment hire and sales
Transport and maintenance services to oil and gas industry
United Arab Emirates: PO Box 7604, Plot M10, Musaffah Industrial, Oil Services Area, Sector 10, MW2, Musaffah, Abu Dhabi
Adyard Abu Dhabi LLC17
Engineering, procurement and construction works and
maintenance services for oil and gas industry
United Arab Emirates: No.104, Arjan Emirates Real Estate – Branch 1, PO Box 129354, Al Hilal Building, Al Falah Road, Abu Dhabi
Landmarc Gulf Consultancy Management LLC18
Administrative consultancy
United Arab Emirates: Office 102-103 Khansaheb Building, Jamal Abdul Nasser Street, Al Majaz, Sharjah
RMD Kwikform Middle East LLC19
Equipment hire and sales
United Arab Emirates: Office No.W705, Level 7, West Tower, Trade Centre Towers, Abu Dhabi
RMD Kwikform Oil & Gas Services LLC20
Equipment hire and sales
Incorporated in Australasia
Australia: PO Box 169, Melrose Park, South Australia 5039
Rapid Metal Developments (Australia) Proprietary Ltd
New Zealand: PO Box 22.316, 101 Station Road, Otahuhu, Auckland 1640
Rapid Metal Developments (NZ) Ltd
Incorporated in the Far East
Equipment hire and sales
Equipment hire and sales
Hong Kong: Suite 3806, Central Plaza, 18 Harbour Road, Wanchai
RMD Kwikform Hong Kong Ltd2
Equipment hire and sales
Republic of Indonesia: 2nd Floor, Suite 202B, Wisma Pondok Indah, Jl Sultan Iskandar Muda V-TA, Pondok Indah, Jakarta
PT Rapid Metal Development Indonesia
Non-trading company
Republic of the Philippines: Unit 2406-09 Raffles Corporate Center, F.Ortigas Jr. Ave., Ortigas Center, Pasig City, Metro Manila
RMD Kwikform Philippines, Inc2
Equipment hire and sales
Republic of Singapore: 77 Robinson Road, #13-00 Robinson 77, Singapore 068896
RMD Kwikform Singapore Pte Ltd
Non-trading company
Group
holding
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
49.0%
100.0%
100.0%
74.9%
85.0%
100.0%
49.0%
70.0%
70.0%
70.0%
49.0%
25.0%
49.0%
49.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
177
GovernanceFinancial StatementsStrategic ReportOverview Related undertakings continued
Subsidiary undertakings
continued
Incorporated in the Americas
Bermuda: PO Box HM 1022, Clarendon House, 2 Church Street, Hamilton, HM11
Interserve Engineering & Construction (UAE) Ltd
Canada: Suite 1001, 275 Slater Street, Ottawa, ON, K1P5H9
Interserve Canada Ltd21
Cayman Islands: 190 Elgin Avenue, George Town, Grand Cayman KY1-9005
Interserve Engineering & Construction Ltd
Guam: Suite 101, Orlean Pacific Plaza, 865 South Marine Corps Drive, Tamuning 96913
RMD Kwikform Guam, LLC
Equipment hire and sales
Republic of Chile: La Estera 811, Valle Grande, Lampa, Santiago 9390433
RMD Kwikform Chile SA
Republic of Colombia: Calle 98, No 18-71 of 805, Bogota
RMD Kwikform Colombia SAS
Republic of Peru: Calle Los Zorzales No.160, Distrito de San Isidro, Lima
RMD Kwikform Peru SAC
United States of America: 251 Little Falls Drive, Wilmington, DE 19808
RMD Kwikform North America Holdings Inc
RMD Kwikform North America Inc
Equipment hire and sales
Non-trading company
Equipment hire and sales
Holding company
Equipment hire and sales
Principal activity
Group
holding
Oil-field maintenance, fabrication and construction services
100.0%
In liquidation
Holding company
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Notes - subsidiary undertakings
1 Ownership held in ordinary A and ordinary B shares.
2 Shareholding directly held by Interserve Plc.
3 Ownership held in ordinary A, ordinary B, preference A, preference B and deferred shares.
4 The Group has the right to appoint the majority of the directors of Interserve Trustees Ltd by virtue of provisions contained in its Articles of Association and
is therefore deemed to be a subsidiary undertaking.
5 Ownership held in ordinary and preference shares.
6 No share capital.
7 The Group exercises dominant influence and control over The Courtyard (Bristol) Management Company Ltd by virtue of provisions contained in its Articles
of Association. It is therefore consolidated in the Group financial statements as a wholly-owned subsidiary undertaking. Ownership is held in ordinary and
developer’s shares.
8 Ownership held in ordinary and deferred shares.
9 Ownership held in ordinary and ordinary A shares.
10 Ownership held in ordinary, redeemable ordinary and deferred shares.
11 Ownership held in ordinary, deferred A and deferred B shares.
12 Ownership held in ordinary A and ordinary C shares.
13 The Group has the right to appoint and remove the Board of Managers and therefore exercises dominant influence and control over RMD Kwikform Almoayed
Bahrain LLC. It is therefore consolidated in the Group financial statements as a wholly-owned subsidiary undertaking.
14 The Group has the right to appoint and remove the General Manager and therefore exercises dominant influence and control over RMD Kwikform (Al Maha)
Qatar WLL. It is therefore consolidated in the Group financial statements as a wholly-owned subsidiary undertaking.
15 The Group has a 70% equity shareholding in Interserve Oman LLC. It is consolidated in the Group financial statements as an 85%-owned subsidiary undertaking
on the basis of contractual arrangements.
16 The Group has a 70% equity shareholding in The Oman Construction Company LLC. It is consolidated in the Group financial statements as an 85%-owned
subsidiary undertaking on the basis of contractual arrangements.
17 The Group exercises dominant influence and control over Adyard Abu Dhabi LLC by virtue of provisions contained in its Memorandum of Association. It is
therefore consolidated in the Group financial statements as a wholly-owned subsidiary undertaking.
18 The Group has the right to appoint the majority of the directors of Landmarc Gulf Consultancy Management LLC by virtue of provisions contained in its
Memorandum of Association. It is therefore consolidated in the Group financial statements as a 51%-owned subsidiary undertaking.
19 The Group has the right to appoint and remove the Manager and therefore exercises dominant influence and control over RMD Kwikform Middle East LLC. It is
therefore consolidated in the Group financial statements as a wholly-owned subsidiary undertaking.
20 The Group has the right to appoint and remove the Manager and therefore exercises dominant influence and control over RMD Kwikform Oil & Gas Services
LLC. It is therefore consolidated in the Group financial statements as a wholly-owned subsidiary undertaking.
21 Dissolved post-year-end.
22 Name changed to Interserve Group Limited post-year-end.
23 Incorporated post-year-end.
Associated undertakings1
Principal activity
Accounted for as Associates within the financial statements
Incorporated in the Middle East & Africa
Kingdom of Saudi Arabia: Alsroor Building, Kilo 1, Mecca Road, Jeddah
Al-Esayi Saif Noman Douglas Ltd
In liquidation
Kingdom of Saudi Arabia: PO Box 245555, Riyadh 11312
Interserve Rezayat Company LLC
Building operation and maintenance, mechanical and
industrial works
State of Qatar: PO Box 1811, Building No.334, C Ring Road, Street 230, Zone 24, Doha
Al Binaa Contracting Company WLL2
Contracting and investment
State of Qatar: PO Box 3886, Building No.309, 230 C Ring Road, Area/Zone 40, Doha
Gulf Contracting Co WLL
Civil engineering, building and maintenance services
State of Qatar: Zone 39, Al Saad Street No.340, Building 55 United Tower, 2nd Floor, PO Box 24176, Doha
How United Services WLL
Mechanical, engineering and plumbing services
Group
holding
49.0%
50.0%
49.0%
49.0%
49.0%
178
FINANCIAL STATEMENTS
Associated undertakings1
continued
Principal activity
State of Qatar: PO Box 20459, Doha
Madina Group WLL
Qatar Inspection Services WLL
Severn Glocon (Qatar) WLL
State of Qatar: PO Box 23651, Doha
Qatar International Safety Centre WLL
State of Qatar: PO Box 22715, Doha
United Industrial Services WLL
State of Qatar: Zone 40, New Salata, Building No.309, C Ring Road, Doha
Darwish-Interserve Facility Management WLL
Sultanate of Oman: PO Box 1639, Hay Al-Mina, Muscat, Postal Code 114
Douglas OHI LLC
Sultanate of Oman: PO Box 375, Muscat, Postal Code 114, Jibroo
Occupational Training Institute LLC
United Arab Emirates: PO Box 2716, Dubai
Khansaheb Civil Engineering LLC
Khansaheb Group LLC
United Arab Emirates: PO Box 259, Abu Dhabi
Khansaheb Hussain LLC
Accounted for as Joint Ventures within the financial statements
Incorporated in the United Kingdom
Mechanical engineering fabrication contractor
Non-destructive testing and inspection services
Supply of valves and valve maintenance services
Safety training for oil, gas and petrochemical industries
Holding company
Facilities management services
Civil engineering and building
Health & safety, environment and educational services
Civil engineering, building and maintenance services
Facilities management and maintenance services
Civil engineering, building and maintenance services
England and Wales: Interserve House, Ruscombe Park, Twyford, Reading, Berkshire RG10 9JU
Harmondsworth Detention Services Ltd
Rehab Jobfit LLP3
Dormant company
Employment-related support services
England and Wales: Capital Tower, 91 Waterloo Road, London SE1 8RT
Axiam Ltd
PriDE (SERP) Ltd4
Sussex Estates and Facilities LLP3
England and Wales: 8 White Oak Square, London Road, Swanley, Kent BR8 7AG
Alder Hey Holdco 1 Ltd
Alder Hey Holdco 2 Ltd
Alder Hey Holdco 3 Ltd
Alder Hey (Special Purpose Vehicle) Ltd
England and Wales: 55 Baker Street, London W1U 8EW
HLR Schools Holding Ltd
HLR Schools Ltd
England and Wales: 5 The Triangle, Wildwood Drive, Worcester WR5 2QX
DCH Estates Partnership LLP3 6
DCH Estates Project Co Ltd6
Interserve Prime Solutions Ltd4 6
Partnering Solutions (Dorset) Ltd6
Partnering Solutions (Southampton) Ltd6
Partnering Solutions (Yeovil) Ltd6
Southampton CEDP LLP3 6
Southampton CEDP Project Co Ltd6
Yeovil Estates Partnership LLP3 6
Dormant company
MoD estate management services
Facilities management services
Holding company
Holding company
Holding company
Hospital construction/operation
Holding company
School/college construction/operation
Hospital construction/operation
Hospital construction/operation
Holding company
Hospital construction/operation
Hospital construction/operation
Hospital construction/operation
Hospital construction/operation
Hospital construction/operation
Hospital construction/operation
England and Wales: Suite 3a, Queens Insurance Building, Dale Street, Liverpool L2 4TZ
Public Services Lab LLP3
Public services lab to support charities, community groups
and social enterprises
England and Wales: Dunedin House, Auckland Park, Mount Farm, Milton Keynes, Buckinghamshire MK1 1BU
Resource Recovery Solutions (Derbyshire) Holdings Ltd5
Resource Recovery Solutions (Derbyshire) Ltd
Holding company
Construction/operation of new waste treatment facility
Scotland: Interserve House, Almondview Business Park, Almondview, Livingston EH54 6SF
Edinburgh Haymarket Developments Ltd5
Seacole National Centre (Holding) Ltd5
Non-trading company
Holding company
Seacole National Centre Ltd
Construction/maintenance of new National Centre for
Scottish National Blood Transfusion Service
Notes - associated undertakings
1 Accounted for using the equity method of consolidation.
2 Shareholding directly held by Interserve Plc.
3 No share capital.
4 Ownership held in ordinary A shares.
5 Ownership held in ordinary B shares.
6 Sold post-year-end.
Group
holding
49.0%
49.0%
49.0%
49.0%
49.0%
49.0%
49.0%
49.0%
45.0%
49.0%
49.0%
49.0%
49.0%
50.0%
50.0%
35.0%
20.0%
20.0%
20.0%
20.0%
45.0%
45.0%
25.0%
25.0%
50.0%
50.0%
50.0%
50.0%
25.0%
25.0%
25.0%
35.0%
50.0%
50.0%
50.0%
50.0%
49.5%
179
GovernanceFinancial StatementsStrategic ReportOverview
Related undertakings continued
Joint ventures1
United Kingdom
Principal activity
England and Wales: Brunswick House, Hindley Green Business Park, Leigh Road, Hindley Green, Wigan WN2 4TN
KMI Plus Water
KMI Water
Water project framework for United Utilities
Water project framework for United Utilities
Group
holding
30.8%
33.3%
Notes - joint ventures
1 Accounted for as joint operations within the financial statements.
The following entities used to be part of the Group’s former PFI portfolio and were transferred to the the trustee of the Interserve Pension Scheme (Interserve
Trustees Ltd) or Dalmore Capital. During 2017, any remaining indirect interests held by Interserve Trustees Ltd in these entities were transferred to either
another Group company or to Dalmore Capital. Whilst the Group has retained the legal interest shown, it no longer has any beneficial interest in these entities
and they have no impact on the consolidated financial statements.
Other holdings
Incorporated in the United Kingdom
Principal activity
England and Wales: Interserve House, Ruscombe Park, Twyford, Reading, Berkshire RG10 9JU
Ashford Prison Services Holdings Ltd1
Ashford Prison Services Ltd1
Custodial Holdings (PA) Ltd2 5
Dudley Summit PLC1
Falcon Support Services (Holdings) Ltd1
Falcon Support Services Ltd1
ICB Holdings Ltd1 3
Interserve Developments No.10 Ltd
Interserve PFI 2003 Ltd
Interserve PFI Holdings Ltd4
Interserve PFI Holdings 2014 Ltd
Investors in the Community (Buxton) Ltd1
Minerva Education and Training (Holdings) Ltd1
Minerva Education and Training Ltd1
Newcastle (Healthcare Support) Ltd5
Newcastle Holdco (Healthcare Support) Ltd2 5
Peterborough Prison Management Holdings Ltd1
Peterborough Prison Management Ltd1
PFI Custodial (Holdings) Ltd5
Pyramid Accommodation Services (Cornwall) Holdings Ltd1
Pyramid Accommodation Services (Cornwall) Ltd1
Pyramid Schools (Cornwall) Holdings Ltd1
Pyramid Schools (Cornwall) Ltd1
Pyramid Schools (Hadley) Holdings Ltd1
Pyramid Schools (Hadley) Ltd1
Pyramid Schools (Southampton) Holdings Ltd1
Pyramid Schools (Southampton) Ltd1
Pyramid Schools (Tameside) Holdings Ltd1
Pyramid Schools (Tameside) Ltd1
Summit Healthcare (Dudley) Ltd1
Summit Holdings (Dudley) Ltd1
Victory Support Services (Portsmouth) Holdings Ltd1
Victory Support Services (Portsmouth) Ltd1
West Yorkshire PFI Operational Training & Accommodation (Holdings) Ltd1
West Yorkshire PFI Operational Training & Accommodation Ltd1
Holding company
Prison construction/operation
Holding company
Investment company
Holding company
Construction/operation of MoD accommodation facilities
Holding company
Holding company
Holding company
Holding company
Holding company
Construction/operation of Health & Safety Laboratory
Holding company
Construction/operation of Defence Sixth Form College for MoD
Holding company
Holding company
Holding company
Prison construction/operation
Holding company
Holding company
Fire station construction/operation
Holding company
School/college construction/operation
Holding company
School/college construction/operation
Holding company
School/college construction/operation
Holding company
School/college construction/operation
Hospital construction/operation
Holding company
Holding company
Day care/respite care centre construction/operation
Holding company
Construction/operation of three new facilities for West Yorkshire
Police Authority
England and Wales: 8 White Oak Square, London Road, Swanley, Kent BR8 7AG
Healthcare Support (Newcastle) Finance Plc
Healthcare Support (Newcastle) Holdings Ltd
Healthcare Support (Newcastle) Ltd
Northern Ireland: Carnbane House, Shepherd’s Way, Newry, Co Down BT35 6EE
Belfast Educational Services (Dungannon) Holdings Ltd
Belfast Educational Services (Dungannon) Ltd
Belfast Educational Services (Holdings) Ltd
Belfast Educational Services Ltd
Belfast Educational Services (Omagh) Holdings Ltd
Belfast Educational Services (Omagh) Ltd
Investment company
Holding company
Hospital construction/operation
Holding company
School/college construction/operation
Holding company
School/college construction/operation
Holding company
School/college construction/operation
Notes - other holdings
1 Registered office changed post-year-end to c/o Albany Spc Services Limited, 3rd Floor, 3-5 Charlotte Street, Manchester M1 4HB.
2 Ownership held in ordinary A shares.
3 Ownership held in ordinary B shares.
4 Ownership held in an ordinary and a Special Rights share.
5 Registered office changed post-year-end to 1 Park Row, Leeds LS1 5AB.
Group
holding
8.4%
8.4%
50.1%
16.7%
25.1%
25.1%
10.0%
50.1%
50.1%
50.1%
50.1%
10.0%
22.5%
22.5%
25.1%
50.1%
8.4%
8.4%
25.1%
25.1%
25.1%
25.1%
25.1%
25.1%
25.1%
25.1%
25.1%
25.1%
25.1%
16.7%
16.7%
50.1%
50.1%
25.1%
25.1%
5.0%
5.0%
5.0%
25.1%
25.1%
16.7%
16.7%
25.1%
25.1%
180
FINANCIAL STATEMENTS
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
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
Group Services
Total operating profit
Investment revenue
Finance costs
Earnings per share, pence
Basic EPS
Headline EPS
Dividend per share, pence
Interim
Final
2018
£million
2017
£million
2016
£million
2015
£million
2014
£million
1,836.2
229.0
1,767.7
229.0
1,597.7
172.1
1,769.8
756.6
246.6
1,003.2
195.5
57.9
(7.2)
3,019.2
1,584.3
138.0
1,722.3
756.6
13.5
770.1
195.5
16.8
(7.2)
1,722.3
195.5
1,642.3
193.9
1,836.2
972.8
290.5
1,263.3
229.0
92.1
(12.0)
3,408.6
1,625.5
142.2
1,767.7
972.8
-
972.8
229.0
35.0
(12.0)
1,965.3
224.1
1,767.7
1,767.7
1,767.7
1,697.4
267.9
1,965.3
796.6
296.9
2,075.1
211.0
1,850.8
224.3
2,075.1
980.9
279.0
1,765.9
157.2
1,923.1
912.5
207.9
1,093.5
1,259.9
1,120.4
224.1
81.3
(50.1)
211.0
53.9
(61.6)
195.5
46.7
(58.7)
3,314.1
3,538.3
3,227.0
1,674.0
211.9
1,885.9
1,803.7
170.4
1,974.1
1,659.8
117.5
1,777.3
796.6
-
796.6
224.1
17.0
(50.1)
980.9
-
980.9
211.0
9.6
(61.6)
912.5
-
912.5
195.5
8.1
(58.7)
2,697.5
2,992.5
2,873.5
3,114.0
2,834.7
51.4
7.2
58.6
2.2
13.3
15.5
39.6
(21.0)
92.7
3.5
(82.5)
13.7
(89.2)
1.1
–
–
39.4
2.8
42.2
(10.3)
19.2
8.9
54.4
(21.0)
84.5
5.9
(28.4)
62.0
(176.0)
35.6
-
-
78.8
9.4
88.2
30.0
16.9
46.9
48.6
(25.2)
158.5
5.6
(23.3)
140.8
(71.2)
86.9
8.1
-
91.4
8.2
99.6
9.9
13.0
22.9
44.5
(23.6)
143.4
4.7
(21.1)
127.0
47.5
74.5
7.9
16.4
82.1
7.4
89.5
14.8
10.8
25.6
27.5
(24.4)
118.2
5.0
(16.0)
107.2
32.2
59.5
6.8
16.4
181181
GovernanceFinancial StatementsStrategic ReportOverview
FINANCIAL STATEMENTS
Five‑year analysis continued
(unaudited)
Balance sheet
Intangible assets
Property, plant and equipment
Interests in joint ventures
Interests in associated undertakings
Retirement benefit surplus
Deferred tax asset
Non-current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and deposits
Bank overdrafts and loans
Trade and other payables
Short-term provisions
Net current assets/(liabilities)
Bank loans
Trade and other payables
Long-term provisions
Retirement benefit obligation
Non-current liabilities
Net assets/(liabilities)
Cash flow
Operating cash flows before movements in working capital
Movement in working capital
Changes in hire fleet
Taxes paid
Net cash from operating activities
Acquisitions and investments
Net capital expenditure - non-hire fleet
Dividends from joint ventures and associates
Interest received
Net cash used in investing activities
Interest paid
Dividends paid
Other (including share issues)
Net cash used in financing activities excluding debt
Effect of foreign exchange
Other non-cash movements
Movement in net debt
Closing net cash/(debt)
182182
2018
£million
2017
£million
2016
£million
2015
£million
2014
£million
373.2
209.9
33.2
88.3
93.9
1.3
799.8
35.8
641.3
-
196.7
-
(745.8)
(29.3)
98.7
(827.5)
(12.7)
(59.4)
-
(899.6)
(1.1)
17.6
(77.5)
(0.3)
(11.4)
(71.6)
1.7
(10.7)
11.8
3.2
6.0
(42.8)
(3.7)
35.7
(10.8)
(13.7)
(38.5)
(128.6)
(631.2)
427.4
228.6
46.5
78.4
–
23.4
804.3
34.0
722.0
–
155.1
(6.8)
(805.8)
(50.2)
48.3
(647.5)
(14.5)
(80.0)
(48.0)
(790.0)
62.6
(111.3)
(37.0)
12.4
(8.6)
(144.5)
(32.0)
(37.7)
17.2
5.9
(46.6)
(27.3)
–
44.1
16.8
(53.9)
–
(228.2)
(502.6)
514.0
250.4
41.6
85.3
–
18.6
909.9
36.5
724.4
67.1
113.3
(11.1)
(901.9)
(21.8)
6.5
(449.4)
(16.6)
(42.9)
(52.4)
(561.3)
355.1
(61.2)
165.8
(9.3)
(10.2)
85.1
(9.8)
(29.7)
34.1
4.5
(0.9)
(23.3)
(37.1)
(0.3)
(60.7)
10.9
–
34.4
(274.4)
520.2
218.1
40.9
91.0
17.2
1.3
888.7
40.1
774.9
25.1
86.1
(15.5)
(794.1)
(27.4)
89.2
(406.1)
(15.9)
(43.3)
–
(465.3)
512.6
112.0
(51.7)
(21.6)
(6.8)
31.9
(6.6)
(29.6)
13.6
4.4
(18.2)
(21.1)
(34.7)
2.1
(53.7)
0.1
–
(39.9)
(308.8)
544.4
194.7
42.7
77.2
–
1.7
860.7
48.6
679.4
–
82.1
(5.5)
(755.0)
(35.7)
13.9
(362.8)
(14.8)
(33.5)
(4.8)
(415.9)
458.7
94.5
(53.3)
(30.3)
(10.2)
0.7
(253.8)
(24.0)
17.8
4.7
(255.3)
(16.0)
(34.4)
73.9
23.5
0.8
–
(230.3)
(268.9)
FINANCIAL STATEMENTSFINANCIAL STATEMENTS
Shareholder information
FINANCIAL CALENDAR 2019
Preliminary unaudited financial results for the year ended 31 December 2018
Approval of audited financial results for the year ended 31 December 2018
Annual General Meeting
Half-year results for the six months ended 30 June 2019
27 February 2019
8 March 2019
May/June 2019
August 2019
The Company will keep under review the appropriateness of issuing other trading updates to the market during the course of the year.
10.62p
10.40p
123.50p
%
55.83
39.52
6.65
SHARE PRICE
As at 31 December 2018
Lowest for the year ended 31 December 2018
Highest for year ended 31 December 2018
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 8 March 2019
Holders
Number
6
585
3,609
4,200
%
0.14
13.93
85.93
Shares
Number
80,591,136
59,170,503
9,958,299
100.00
149,719,938
100.00
SHAREHOLDER SERVICES
Link Asset Services (Link) is our Registrar. Link offer many services to make managing your shareholding easier and more efficient:
(a) Share Portal
Signal Shares 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.signalshares.com. All you need is your investor code, which can be found on your share certificate or by contacting Link
on +44 (0)371 664 0391.
(b) Shareholder Support Centre
Alternatively, you can contact Link’s Shareholder Support Centre which is available to answer any queries you have in relation to your
shareholding:
By email:
By phone:
By post:
enquiries@linkgroup.co.uk
+44 (0)371 664 0300 (lines are open 9.00am to 5.30pm, Monday to Friday, excluding public holidays in England and Wales)
Shareholder Administration, Link Asset Services, 34 Beckenham Road, Beckenham, Kent BR3 4TU
(c) Sign up to electronic communications
By 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.signalshares.com.
All you need is your investor code, which can be found on your share certificate or by contacting Link on +44 (0)371 664 0300.
183183
GovernanceFinancial StatementsStrategic ReportOverview
FINANCIAL STATEMENTS
Shareholder information continued
(d) Buy and sell shares
A quick and easy way to buy and sell shares is provided by Link Asset Services Share Dealing. 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.linksharedeal.com or call +44 (0)371 664 0445 (calls are
charged at the standard geographic rate and will vary by provider. Calls outside the United Kingdom will be charged at the applicable
international rate. Lines are open 8.00am to 4.30pm, Monday to Friday, excluding public holidays in England and Wales).
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.
Link Asset Services is a trading name of Link Market Services Limited and Link Market Services Trustees Limited. Share registration and
associated services are provided by Link Market Services Limited (registered in England and Wales, No.2605568). Regulated services
are provided by Link Market Services Trustees Limited (registered in England and Wales No.2729260), which is authorised and regulated
by the Financial Conduct Authority. Not all share plan activity is regulated. The registered office of each of these companies is The
Registry, 34 Beckenham Road, Beckenham, Kent BR3 4TU.
DONATE YOUR SHARES TO CHARITY
If 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.
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, Link Asset Services, or to the Company directly.
INVESTMENT SCAMS
In recent years many companies have become aware that their shareholders have received unsolicited telephone calls or
correspondence concerning investment matters. 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. The Financial Conduct Authority (FCA) have provided the following
advice with regard to avoiding investment scams:
• Reject unexpected offers
Scammers usually cold call, but contact can also come by email, post, word of mouth or at a seminar. If you’ve been offered an
investment out of the blue, chances are it’s a high risk investment or a scam.
• Check the FCA Warning List
Use the FCA Warning List to check the risks of a potential investment – you can also search to see if the firm is known to be
operating without FCA authorisation.
• Get impartial advice
Get impartial advice before investing – don’t use an adviser from the firm that contacted you.
You can report a firm or scam to the FCA on 0800 111 6768 or through www.fca.org.uk/scamsmart. If you’ve lost money in a scam,
contact Action Fraud on 0300 123 2040 or www.actionfraud.police.uk.
Please visit www.fca.org.uk/scamsmart for further information.
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.
184184
FINANCIAL STATEMENTSFINANCIAL STATEMENTS