Serco Group Annual Report 2009

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Serco AR09 Cover_Serco AR08 - Design 26/03/2010 13:36 Page 1

Serco Group plc
Registered Office:
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire RG27 9UY

T: +44 (0)1256 745 900
E: generalenquiries@serco.com
www.serco.com

Bringing service to life

Delivering Essential Services... Together

Serco Group plc
Annual Review and Accounts 2009

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Serco AR09 Cover_Serco AR08 - Design 26/03/2010 11:52 Page 2

Contents

1
2

Introduction
2009 Highlights

Our business
Our offering
4
Our culture and values
5
A balanced portfolio
6
8
Markets
10 Our strategy
12 Managing our business lifecycle

Our performance
14 Chairman’s Statement
16 Chief Executive’s Statement
20 Operating review and case studies
36 Market Opportunities
Finance Review
38
46
Resources
50 Corporate responsibility
54

Principal risks and uncertainties

58 Directors, Secretary and Advisors
59 Corporate Governance Report
65 Directors’ Report
67 Directors’ Responsibilities
68 Directors’ profiles
70
81

Remuneration Report
Independent Auditors’ Report

Financial Statements
82 Consolidated Income Statement
82 Consolidated Statement of Comprehensive Income
83 Consolidated Statement of Changes in Equity
84 Consolidated Balance Sheet
85 Consolidated Cash Flow Statement
86 Notes to the Consolidated Financial Statements
135 Serco Group plc Company Financial Statements

141 Shareholder information
IBC Financial calendar

Financial calendar

2009 Full Year Results announcement

26 February

2010

Ex-dividend date
Record date

Last date for receipt/revocation of DRIP
dividend mandates

Interim Management Statement
Annual General Meeting
Final dividend pay date

10 March
12 March

27 April

11 May
11 May
19 May*

Half Year Results announcement

25 August**

Financial year-end

31 December

* Subject to shareholder approval
** Provisional

Printed on Cocoon Silk 50 which is certified
as an FSC product manufactured with 50%
recycled fibres and 50% virgin fibres.

Printed by The Midas Press plc.
www.midaspress.plc.uk

1. Cover and intro_Layout 1 25/03/2010 16:25 Page 1

Introduction

Serco is an international service company that
combines commercial know-how with a deep public
service ethos. We deliver essential services on behalf
of national and local governments, who represent over
90% of our business, and for commercial customers.

In doing so, we are helping them meet profound challenges.
Public finances are under significant pressure around the world
but citizens still expect continual improvements in service quality.
At the same time, our customers need to address crucial issues
such as economic development, congestion, security and
demographic and climate change. The companies we work for
face similar financial and operational pressures.

Increasingly, our customers are using our broad skills and
capabilities to address this significant agenda, and to improve
productivity and efficiency. We start by leading people more
effectively, and instilling our values and our ethos of delivering
high-quality services, which inform everything we do. At the
same time, we improve efficiency by introducing new
processes and technology and making the best use of assets.

This approach enables us to take on new and complex tasks and
transform the quality, reliability and efficiency of essential
services ranging from air traffic control to running scientific
establishments.

Our vision is to be the leading service company in our chosen
markets. This means we want to be the best partner to work
with, the company people aspire to work for and the
company that delivers superior returns to shareholders.
Our chosen markets are those that promise strong revenue
growth, attractive margins and the ability to offer good
working conditions for our people.

1. Cover and intro_Layout 1 25/03/2010 16:25 Page 2

2009 Highlights

A strong performance and well
positioned for future growth

Revenue
(2008: £3,124m)

£3,970m
+27.1%

Adjusted operating profit
(2008: £165.2m)

£229.7m
+39.0%

Adjusted earnings per share
(2008: 22.20p)

29.53p
+33.0%

Profit before tax
(2008: £136.1m)

£177.1m
+30.1%

Earnings per share
(2008: 20.49p)

26.76p
+30.6%

Revenue
(£m)

Adjusted operating profit
(£m)

Adjusted earnings per share
(pence)

Dividend per share
(pence)

2,260

2,548 2,811 3,124 3,970

105.9

122.8

142.0

165.2

229.7

13.41

15.92 18.57

22.20

29.53

2.97

3.60

4.25

5.00

6.25

2005

2006

2007

2008

2009

2005

2006

2007

2008

2009

2005

2006

2007

2008

2009

2005

2006

2007

2008

2009

1. Cover and intro_Layout 1 25/03/2010 16:25 Page 3

2009 highlights

Dividend per share
(2008: 5.00p)

6.25p
+25.0%

Group free cash flow
(2008: £94.2m)

£137.3m
+45.8%

Strong operational performance
and growth; awarded contracts
valued at £5.8bn

Excellent revenue visibility
supported by long-term contracts
and substantial £17.1bn order book

Outlook reflects high visibility,
selective bidding strategy, and £28bn
opportunity pipeline

• Continue to expect an increase in

revenue to approximately £5bn and in
Adjusted operating profit margin to
approximately 6.3% by the end of 2012*

• In 2010, expect continued strong

organic revenue growth and further
progress towards our 2012 margin
guidance

*excluding material acquisitions, disposals and
currency effects, based on 2008 exchange rates

• Signed contracts valued at £4.5bn
and appointed preferred bidder for
£1.3bn of contracts

• Order book of £17.1bn at

31 December 2009 (£16.3bn at
31 December 2008)

• Further strengthened our business
portfolio and extended capabilities
into new growth markets

• Visibility of 91% of planned revenue
for 2010, 76% for 2011 and 64%
for 2012

Well positioned to support customers
with our transformational capabilities

• Global economic environment driving
demand in existing and new markets

• Significant opportunities to address

customers’ needs through our growing
capabilities and deep public service
ethos

• Strong track record of transforming

efficiency and productivity in essential
public services

• Delivered strong operational

performance and successfully
launched major new contracts

• Built a strong platform for growth in
US through excellent progress on
integration of SI acquisition

• Maintained high win rates of one in
two new bids and 90% of rebids

Strong financial performance

• Revenue grew by 27.1%; 20.8%

excluding currency; 10.2% excluding
SI and currency

• Adjusted operating profit margin

increase of 50bps; 45bps excluding
currency; 27bps excluding SI and
currency

• Group free cash flow increased by

45.8% to £137.3m

Note: Adjusted operating profit and Adjusted earnings per share are before amortisation of acquired intangibles as shown on the face of the Group’s
consolidated income statement and the accompanying notes. Group free cash flow is free cash flow from subsidiaries and dividends received from joint
ventures and is reconciled in Section 3 of the Finance Review.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 4

Our offering

Serco delivers essential services in a wide range
of markets around the world. We are able to
operate across this broad spectrum because our
core capability is people-led service delivery and
change management.

This means that we analyse a customer’s
problems and produce a tailored solution
which has the improved management of
people and service at its heart.

Our solution is to redesign organisations to
remove bureaucracy, enhance processes
and liberate people to deliver their best.
We introduce technology, continue to
invest during the life of the contract and
make the best use of available assets.
The outcome is improved service quality
and productivity, which in turn reduces
costs for our customers.

Crucially, we instil our values, which are
defined by our Governing Principles (see
opposite), and are aligned with our ethos of
delivering high-quality services. These are
central to everything we do, and focus us
on delivering the best for our customers,
our people and the wider community –
what we call “bringing service to life”.

Transferable skills
In addition to our core capability, we have
developed a wide range of specialist skills
in the sectors in which we operate. These
help us to grow in a number of ways.

First, we can transfer these skills around the
world, winning new work and expanding
our geographical reach. For example, our

light rail skills from improving and running
the Docklands Light Railway in London
were instrumental in winning the contract
to operate the Dubai Metro. We were also
able to take our experience of operating
UK immigration centres to win similar work
for Australia’s Department of Immigration
and Citizenship.

Second, we are able to create unique
combinations of skills from around our
organisation to provide differentiated
proposals to customers. Operating
London’s Woolwich Ferry, for example,
uses the marine services skills we have
developed in our defence operations and
joins them with our experience of running
mass transit operations. Other examples
include the use of our information
technology skills to support services that
help the long-term unemployed into work,
enable citizens to access local services
and keep borders secure.

Third, we are able to benchmark our
performance across contracts in different
locations and ensure that we share best
practice, so that we can constantly
improve our operational delivery for
our customers.

We redesign organisations to remove
bureaucracy, enhance processes and liberate
people to deliver their best.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 5

Our culture and values

Our business

Serco could not succeed without the
skill and dedication of all of our people
around the world. They embody our
culture and are responsible for living our
values each day. Our culture and values
truly differentiate us from our
competition and underpin the way we
run the company.

We work with our customers in a
collaborative, flexible and imaginative way.
We seek to understand what motivates
them and to share their service ethos. We
devolve responsibility to the contract level,
empowering our people to deliver their
best for our customer and instilling a
stimulating culture so they feel they can
personally make a difference.

Our values, which are encapsulated in our
Governing Principles, are a fundamental
part of this culture, and inform every
decision we make. By living these values,
we ensure that we operate in a responsible
way and that we deliver the excellent
service on which our business success
depends.

Page 47 sets out how we develop our
people and enable them to excel.

Our Governing Principles

We foster an entrepreneurial
culture
We are passionate about building innovative and
successful Serco businesses. We succeed by
encouraging and generating new ideas.

We trust our people to deliver.

We embrace change and, by taking measured risks,
encourage creative thinking.

We enable our people to excel
Our success comes from our commitment and energy
to go the extra mile. We are responsible to each other
and can expect support when we need it most.

We expect our people to achieve more by recognising
and harnessing the power of individuals. We value
people for their knowledge, and ideas and potential to
contribute.

We deliver our promises
We do what we say we will do to meet expectations.
We only promise what we can deliver.

If we make mistakes we put them right. We are clear
about what we need to achieve and we expect to
make a fair profit.

We build trust and respect
We build respect by operating in a safe, socially
responsible, consistent and honest manner.

We never compromise on safety and we always
operate in an ethical and responsible manner.

We listen. In doing so, we treat others as we
would wish to be treated ourselves and challenge
when we see something is wrong. We integrate
with our communities.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 6

A balanced portfolio

Our business began in the UK and we have grown
rapidly. We have also diversified our portfolio by
expanding internationally, notably into North America
which now accounts for around a quarter of our
revenues, into Australia, Europe, the Middle East
and, most recently, India.

We deliver a wide range
of high-quality essential
services for our customers.
Our broad capabilities
and market expertise
have enabled us to build
a balanced portfolio of
long-term contracts in a
variety of sectors in Civil
Government, Defence,
Transport and Science.

Civil Government
2009 Revenue

£1,556m

Our work in Civil Government includes
home affairs, IT and business process
outsourcing (BPO), welfare to work,
integrated services, education and
children’s services, healthcare, and
consulting. In the US, we provide
support to a number of civil government
agencies through our records
management and IT capabilities.

In home affairs, we are the UK’s leading
private provider of custodial
accommodation, and deliver immigration
control, homeland security, electronic
monitoring, court escorting, case
management and technology services.
In Australia, we manage two prisons and
provide immigration services, including
operating seven immigration centres.
We also provide services to Hunfeld prison
in Germany.

We deliver transformational services in
the UK for local government using our
information and communications
technology (ICT) and BPO skills, and are
a leading provider of business support
services. In the US, we deliver information
technology and business process services
to government agencies such as the
Department of Energy, the Department of
Homeland Security, the Department of
State and the Federal Communications
Commission.

We provide ICT services in several
European countries, to both governments
and European agencies, and state-of-the-
art technology solutions and integrated
systems to government ministries and
commercial customers in the Middle East.
We established a presence in India in 2008
and now provide BPO services to major
international companies.

In welfare to work, we are delivering the
first phase of The Flexible New Deal in
three UK regions. The Flexible New Deal is
the UK Government’s new flagship initiative
to assist long-term unemployed people in
achieving and sustaining employment.

Our integrated services business provides
innovative environmental, streetscene and
other direct services to UK local councils,
and in Australia and Hong Kong. We also
manage a range of services contracts in
the health, local government and
commercial sectors.

We deliver education and children’s
services across three local authorities in
England, manage inspection services for
schools, further education colleges and
work-based learning organisations in the
central region of England, and support the
delivery of national children’s services
programmes locally.

In health, we provide a wide array of
services including pathology (through GSTS
Pathology, our joint venture with Guy’s and
St Thomas’ NHS Foundation Trust), out-of-
hours GP care, forensic medical services,
occupational and custodial health services
and community care.

In consulting, we raise awareness of Serco
and enhance our reputation with new and
existing customers by providing high-
impact advisory services and developing
new innovative delivery models.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 7

Our business

Science
2009 Revenue

£605m

Serco is a leader in managing both
science-based organisations and the
process of developing, transferring and
applying knowledge to deliver
maximum economic, social and
environmental benefits to society.

We manage the National Physical
Laboratory (NPL), which is one of the world’s
major scientific establishments. It is our
responsibility to maximise the positive
impact of NPL’s mission in measurement
standards and science, for business and
government. We also manage, with
Battelle and the University of Manchester,
the National Nuclear Laboratory, one of the
UK’s leading technology service providers
and a centre of excellence in nuclear
non-proliferation.

We have an integral role in the UK defence
and civil nuclear industries. Since 2000,
Serco, as a joint venture partner in AWE
Management Limited, has been entrusted
with the management of the UK Atomic
Weapons Establishment, which is
responsible for providing the warheads for
the UK’s nuclear deterrent. In addition we
have provided independent specialist
nuclear safety advice to the Royal Navy in
support of its nuclear submarine fleet for
nearly half a century.

We also offer specialist technical support
to the UK’s civil nuclear industry, providing
safety, environmental, risk and asset
management advice and operational
solutions across the UK’s civil nuclear sites.

Defence
2009 Revenue

£1,020m

Serco is a leader in the provision of
support services to the armed forces
of the UK, US, Canada, Australia
and Germany.

In the UK, we provide training, engineering
and operational support to the Royal Air
Force, and the aviation arms of the British
Army and Royal Navy. We also support the
Royal Navy’s three main UK bases and
operate and maintain strategic assets such
as secure satellite communications, the
Defence Academy of the United Kingdom,
and the UK’s ballistic missile early warning
system at RAF Fylingdales. We provide
systems engineering, safety assurance and
risk management services, and support
the essential defence and force protection
research carried out at the Defence
Science and Technology Laboratory.

In North America, our skills encompass
information technology, professional
services, cyber operations, personnel
support services, systems engineering,
logistics, national security analysis and
intelligence, and we serve every branch
of the military. Many of our employees are
embedded in military bases, working
side-by-side with servicemen and women
to deliver military support. In Canada, we
provide base operations to the Canadian
Department of National Defence at
Goose Bay.

We deliver training, logistics and operational
support services to the Australian Defence
Force, with a presence on every defence
base in Australia. In Germany, we deliver
training, logistics and operational support
services to the Bundeswehr.

Transport
2009 Revenue

£789m

We deliver innovative transport
solutions to road and public transport
authorities, government agencies and
commercial enterprises. We are a key
provider of infrastructure and
operational expertise across metro,
rail, road, air traffic control and
ferry services.

In the UK, with our partner, Abellio
(formerly known as NedRailways), we run
Northern Rail – the UK’s largest train
franchise – and Merseyrail – the UK’s most
punctual train operator. We operate the
award-winning Docklands Light Railway
and Woolwich Ferry in London. Key road
contracts include the design and
implementation of Transport for London’s
Cycle Hire Scheme, the National Traffic
Control Centre, national motorway traffic
infrastructure services and the installation
and maintenance of road safety cameras
throughout the UK.

We own and operate Great Southern Rail
in Australia, including the Ghan and Indian
Pacific trans-continental services. In Hong
Kong, we provide parking services and
operate road tunnels and the road corridor
to mainland China. We run information and
integrated transport management systems
in Hong Kong, Queensland, Western
Australia and New South Wales, and traffic
camera services in Victoria.

In North America, we operate more than
60 air traffic control towers for the Federal
Aviation Administration. We support
Georgia’s traffic management center and
have a new contract to install and operate
an intelligent transportation system. We
offer parking services, including a smart
parking system in San Francisco. In
Canada, we deliver driver examination
services in Ontario.

In the Middle East, we run the new Dubai
Metro system and provide air traffic control
services, and airport and technical services,
across the United Arab Emirates and in
Bahrain. We provide consultancy for
Dubai’s Roads and Transport Authority,
supporting operations, maintenance and
IT processes.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 8

National and local governments around the world
face unrelenting demand from citizens for better
public services.

Markets

Unemployment

Growing population s

Crime prevention

Economic development

Migration

Congestion

Ageing populations

Security

Climate change

Governments must also address significant
challenges, including unemployment and economic
development, ageing and growing populations,
migration, security, crime prevention, congestion and
climate change.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 9

Our business

Increasing demand for high-
quality services
National and local governments around
the world face unrelenting demand from
citizens for better public services.

At the same time, their finances have
deteriorated sharply and many face
significant budget deficits which will take
years to rectify. Governments must also
address significant challenges, including
unemployment and economic development,
ageing and growing populations, migration,
security, crime prevention, congestion and
climate change.

The scale of these challenges, and the
requirement to improve productivity given
the financial challenges they face, are
encouraging governments to make
transformational changes and address
some of the largest areas of their spend.
This is driving a greater acceptance of
innovative ways of achieving change and
broadening our addressable markets.

Governments are not alone in the need to
improve productivity. Our private sector
customers face similar imperatives and
are seeking our help to achieve their aims.

Given our customers’ challenges, our
ability to support them with high-quality
services is increasingly attractive to them.
We are well placed to help them maintain
and improve service standards whilst
achieving greater productivity, given the
breadth and depth of our capabilities
across a wide range of markets, our track
record of delivery and our proven ability to
create innovative solutions targeted at
their needs.

Significant potential for
market growth
Our markets are large and expanding,
with the services we offer increasingly
helping our government customers to
address some of the biggest areas of
their spending.

The UK, for example, is one of the world’s
most developed markets for the
outsourcing of public services, but there
is still considerable scope for growth.
Of the UK’s total government spending
of £620bn, the public services industry
accounts for around £80bn. Similarly, in
the US, the federal government services
market accounts for around 10% of total
federal government expenditure.

The scale of our markets and the increasing
scope of our capabilities, which allows us
to enter new areas within these markets,
means that we can be selective about the
opportunities we bid for, only taking on
those which meet our strict criteria. It also
means that our share of any individual
market is not relevant to our ability to
succeed there or to delivering our
growth ambitions.

Our competitive environment

Competition is necessary for our
markets to operate effectively.

A fair, competitive environment encourages
customers to put services out to tender, as
it provides a benchmark to ensure they are
getting best value, and drives our public
services industry to innovate.

Our competitors are mainly commercial
companies but in some markets they can
include public sector bodies. We have, for
example, competed against government-
owned railway companies in the transport
market and against UK National Health
Service Trusts in health.

The breadth of our business means that
no organisation competes with us across
all our markets, and only a few operate in
more than one. However, we see a good
number of effective competitors in all of
our markets. As we enter new markets,
we meet competitors who specialise in
those areas, but in our established
markets, competition has remained steady
as our customers focus on the established
providers who they trust to deliver what
they need.

Our long track record as a pure service
company, the breadth and depth of our
capabilities, our ability to tailor our offering
and to develop new models and better
ways of working, puts us in a strong
position for the future.

Given our customers’ challenges, our ability to
support them with high-quality services is
increasingly attractive to them.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 10

Our strategy

Our strategy has four elements, each of which contributes
to two or more desired outcomes. This table explains
our strategy and sets out what we achieved in 2009.

Strategy

Description

Desired outcome
Reduce our exposure to
market fluctuations

Strengthen our position in
our chosen markets

Develop new skills and
capabilities for the future

Key achievements
in 2009

Build a balanced
portfolio

We aim to reduce risk and increase
opportunity by building a balanced
contract portfolio, spread across
markets. This reduces our exposure
to market fluctuations, enables us
to select the best opportunities
whichever market they are in, and
allows us to transfer expertise from
one market to another.

We strengthened and broadened our
portfolio. We won £4.5bn of contracts,
both through new wins and expanding
the scope and scale of existing contracts.
The Operating Review, starting on page 14,
contains more details of our wins during
the year.

We entered new growth markets, such
as pathology and welfare to work, and
broadened the scope of our business in
existing geographical markets by leveraging
capabilities developed in other regions,
such as using our UK skills in immigration
services to win contracts in Australia, and
our light rail skills to ensure a successful
start to our Dubai Metro contract.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 11

Our business

Deliver excellent
service

Make strategic
acquisitions

Develop new models

Delivering excellent service means
meeting – and often exceeding –
customer expectations. We do this
by having the responsible behaviours
enshrined in our values at the heart
of everything we do.

While we are primarily focused on
organic growth, we make
acquisitions to acquire skills which
will be important for future growth
and to enter markets where we see
strong opportunities.

This enables us to build long-term
customer relationships, to expand
the scope and scale of contracts
during their life, retain contracts at
rebid and win new contracts.

We respond to emerging opportunities
by finding new ways to deliver services.
This may mean collaboration between
our divisions, bringing together skills
and experience which few other
companies can replicate,or it may
mean partnering with our customer
or the third sector. Our ability to
lead change keeps us at the
forefront of our markets.

We maintained our rebid win rate at 90%
and continued to win one in two new bids,
reflecting the quality of our service and our
ability to select the most attractive
opportunities.

We successfully started a number of major
new contracts, including our contract to
operate the Dubai Metro, three Flexible
New Deal contracts in the UK, and our
immigration services contract in Australia.

Our focus on service and corporate
responsibility was reflected in numerous
awards. Our approach to corporate
responsibility is described on page 50
of this report.

We have built a strong platform for growth
in the substantial US federal government
services market through the successful
integration of SI International, which we
acquired at the end of 2008. We now
serve all branches of the US armed
services, as well as intelligence and federal
civil government agencies.

We also successfully integrated two smaller
acquisitions, InfoVision in India (now Serco
BPO), positioning us for opportunities in
the Indian services market, and Grosvenor
Health in the UK (now Serco Occupational
Health), adding to the services we offer our
customers in the UK.

We won three contracts in a new UK
market – welfare to work – by developing a
unique and innovative model, partnering
with third sector and other organisations.

Similarly, our partnership with third sector
organisations played a significant role in
helping to secure our appointment as
preferred bidder for two new prison
contracts, at Belmarsh West and Maghull,
in the UK.

We created GSTS Pathology, a
groundbreaking joint venture with Guy’s
and St Thomas’ NHS Foundation Trust, to
improve its pathology services.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 12

Managing our
business lifecycle

To achieve our vision of becoming the
leading service company in our chosen
markets, we must manage our business
as effectively as possible.

Summary of the Business Lifecycle Governance Process
The Business Lifecycle Governance Process (BLGP) formalises our approach
to maximising value creation and managing the associated risk. It helps us to
determine the markets we want to do business in, to bid successfully for the
contracts that add the most value, to transition these contracts to deliver this
value, and then to retain and grow them.

1. Selecting markets

2. Identifying opportunities

3. Bidding selectively

4. Transitioning effectively

5. Delivering operational excellence

6. Deciding to rebid

Yes

7. Rebidding

8. Exit

1. Selecting markets
We select markets that are politically
and economically stable, which offer
multiple contract opportunities and good
growth potential, and where we can
differentiate Serco from the competition.

We also ensure these markets have the
appropriate margin and cash flow
characteristics to enable us to meet our
financial aspirations. We analyse many
other factors, including our understanding
of the customers and the way they procure,
the market’s drivers and maturity, and
whether we can create an attractive
and rewarding working environment
for our employees.

In new markets, we consider our market-
entry strategy and whether we need a new
business model to succeed, and we
assess any ethical and human rights
factors which may influence our decision to
go ahead.

2. Identifying opportunities
Once we are satisfied that the market
is attractive, we identify opportunities
we can bid for.

At this step we test the quality of each
opportunity, including our understanding of
the customer’s business and vision, their
funding for the project and how likely they
are to proceed to procurement. We compare
each opportunity against other opportunities
elsewhere, to determine which would be
the best use of our resources.

2. Our business NEW_Layout 1 25/03/2010 16:31 Page 13

Our business

3. Bidding selectively
Bidding can take many months and can
therefore involve considerable expense
and use of our people resources, so we
only bid for the best opportunities –
those which meet all our financial,
ethical and other criteria and where we
have a strong chance of winning.

This stage has multiple steps, from our
initial submission to the customer, to being
shortlisted, to our final bid. During the
bidding process, we develop a detailed
solution for the customer’s requirements
and test it thoroughly. We also review the
opportunity’s attractiveness, and the risks
associated with it, at every step and
reconfirm that we want to proceed with it.
Once selected by the customer, the final
step is to negotiate and sign the contract.

4. Transitioning effectively
Effectively transitioning a new contract
is vital. This process commences at
contract signing and carries through to
ongoing service delivery.

We ensure that we have appropriate
planning and control measures in place to
start work seamlessly on day one, as we
begin to implement the solution which we
have developed in detail during the bidding
phase. We also transfer the knowledge we
created during the bid to the team who will
run the contract, and continue to build
good working and strategic relationships
with our customer and other stakeholders.

5. Delivering operational excellence
Throughout the life of a contract, we
aim to deliver operational excellence
and continual improvement
through innovation.

Devolving responsibility to the contract
director helps us do this, by enabling them
to be responsive to our customer’s needs
and allowing them to put new ideas into
practice. It also makes our business
scalable, allowing us to successfully
manage a growing number of contracts.

Our contracts are run within the control
framework set out in the Serco Management
System (SMS) and every decision must be
in accordance with our values, as defined by
Serco’s Governing Principles (see page 5).
This ensures that we always operate safely
and responsibly, safeguarding the needs of
all our stakeholders.

Working in the right way and meeting – or
exceeding – our customer’s expectations,
helps us to build a long-term relationship
with our customer and makes us part of
their organisation. This often leads to our
customer expanding the scale or scope of
the contract during its lifetime, which is very
important for our growth. It also positions
us well to win the contract at rebid.

6. Deciding to rebid
As the contract nears the end of its life,
we decide whether or not to rebid it.

Although we usually rebid, we do
occasionally determine that it would be
better to exit the contract. We might do
this, for example, if the market has stopped
growing or become too price competitive,
making it difficult for us to operate by our
strict criteria such as providing good
working conditions for our people, and
meaning that we can get a greater return
by investing our resources elsewhere.

7. Rebidding
If we decide to rebid, we approach the
bid as if it were a new one, looking for
further innovations and ways to increase
the scope of the services we perform
for the customer.

This helps us deliver even greater
productivity and service quality during the
next contract term. Often the customer
chooses to include more services and
lengthen the contract, so that the value of
a rebid can be considerably larger than the
original contract. The quality of our service
delivery and our ability to innovate mean
that we retain around 90% of our contracts
at rebid.

Once we have secured the rebid, we return
to the transition phase, where we bed-in
our changes and any new services we
have taken on.

8. Exit
When we exit a contract, we always
ensure we do so in the right way.

Where appropriate, we work closely with
the incoming contractor to protect the
interests of the customer and of the people
who will transfer from us as the contract
passes on. This is also important because
of the value we place on long-term
relationships, which mean that we may well
work for that customer again in the future.

3. Our performance_Layout 1 26/03/2010 09:57 Page 14

Chairman’s Statement

Serco performed strongly in 2009. We strengthened
our position in existing markets by expanding the
scope and scale of our current contracts and winning
a significant number of new contracts, and broadened
our portfolio by entering a number of new markets
where we see strong opportunities for growth.

The business performed very well
operationally, including successfully
starting several major new contracts,
and we created an enhanced platform
for growth through excellent progress
on the integration of the SI International
(SI) acquisition.

We also continued to develop new
opportunities for future growth, which are
reflected in the increase in our pipeline of
opportunities to a record £28bn.

Financial Results
We delivered a strong financial performance
and also benefited from a first-year financial
contribution from SI. Revenue increased by
27.1% to £3,970m, and Adjusted operating
profit by 39.0% to £229.7m. Excluding
currency effects, revenue grew by 20.8%
to £3,774.0m and Adjusted operating profit
rose by 31.1% to £216.5m.

Our margins increased, with the Adjusted
operating profit margin rising 45 basis
points to 5.74%, excluding currency
effects. Excluding both SI and currency
effects, revenue grew by 10.2% to
£3,442.1m and Adjusted operating profit
rose by 15.8% to £191.3m. Organic
revenue growth, excluding currency, was
9.4%. Group free cash flow increased by
45.8% to £137.3m. Group recourse net
debt at the year end decreased by
£136.8m from the end of 2008 (£84.8m
excluding currency effects) to £387.7m,
placing us very comfortably within all of
our banking requirements.

“Our ability to transform essential services
for our customers and our track record
of high-quality and efficient operational
delivery were reflected in substantial
contract awards during the year, and
continued high win rates.”
Kevin Beeston
Chairman, Serco Group plc

3. Our performance_Layout 1 25/03/2010 16:27 Page 15

Revenue
(2008: £3,124m)

£3,970m
+27.1%

Adjusted operating profit
(2008: £165.2m)

£229.7m
+39.0%

Dividend per share
(2008: 5.00p)

6.25p
+25.0%

Our performance

“I will look back on my
time at Serco with great
pride and affection and
wish the new Chairman
and the Board every
success in taking
Serco forward to
new heights”.

Our ability to transform essential services
for our customers and our track record of
high-quality and efficient operational
delivery were reflected in substantial
contract awards during the year, and
continued high win rates. In total, we were
awarded contracts valued at £5.8bn,
comprising contracts signed valued at
£4.5bn and preferred bidder appointments
valued at £1.3bn. We won 90% of our
contract rebids and one in two of our new
bids, demonstrating the value placed by
both existing and new customers on our
capabilities and our consistent delivery of
high-quality service.

Dividend
In line with our policy of increasing the
total dividend each year broadly in line
with the increase in underlying earnings,
the Board has proposed a final dividend of
4.40p per share, representing an increase
on the 2008 final dividend of 25.0% and
bringing the total dividend for the year to
6.25p. The final dividend will be paid,
subject to shareholder approval, on
19 May 2010 to shareholders on the
register on 12 March 2010.

Twenty-five years of evolution
As announced in October 2009, I will be
stepping down as Chairman and from
the Board at the Annual General Meeting
in May.

By then I will have been at Serco for 25 years.
Some things have remained constant
during that time, among them our people-
focused values and our commitment to
being a trusted and responsible company.
The shape of the business, though, has
changed beyond recognition.

In 1985, Serco was almost entirely UK
focused and defence was our dominant
market. Since then, we have successfully
broadened our contract portfolio around
the world, and operate in many geographic
markets and sectors for both governments
and businesses. With our customers facing
ever-increasing challenges, under pressure
to improve service quality and productivity,
and looking to outsource new types of
work, that expansion is set to continue as
we support their agendas for change.

I will look back on my time at Serco with
great pride and affection and wish the new
Chairman and the Board every success in
taking Serco forward to new heights.

People
As a service company, people are our
major asset. Serco’s track record of growth
and our reputation for service excellence
are the result of having people who are
willing to go the extra mile and put our
customers’ interests first. I would like to
thank each and every one I have worked
with over the last 25 years for their
dedication and support and for making
Serco the great company it is today.

3. Our performance_Layout 1 26/03/2010 09:57 Page 16

Chief Executive’s
Statement

2009 was another successful year for Serco, and I am
very pleased with our performance. I am particularly
proud of the commitment and extraordinary efforts of
our people who are at the heart of the service we
deliver to citizens and customers around the world,
and who remain fundamental to our achievements.

Strong performance in 2009
Serco delivered a strong performance
in 2009, and entered 2010 with a record
order book and increasing opportunities
both in the UK and internationally.
We continued to strengthen our existing
capabilities with new skills for growing
markets. With fiscal pressures increasing
across all markets, we see strong
demand for our capabilities to ensure the
efficient delivery of essential services.

Strengthening our position in
existing markets
In 2009, we were awarded new contracts
and through renewals and extensions we
expanded our work across a broad
spectrum of our existing markets, including
home affairs, IT and BPO, education,
transport and integrated services. Smaller
and medium-sized contract wins continued
to be an important driver of our growth,
and further details of some of these
awards are given in the Operating Review,
starting on page 20.

In larger contract awards, we were
selected for a number of significant new
home affairs contracts. In Australia,
building on capabilities developed in the
UK, we signed two new contracts with the
Australian Government Department of
Immigration and Citizenship (DIAC) to
transform its immigration services across
the country, and, towards the end of the
year, to manage the operation of
immigration residential housing and
immigration transit accommodation.

Together, these contracts are valued at
around AUS$415m over five years. In the
UK, we were appointed as the preferred
bidder to manage and operate two new
prisons at Belmarsh West, London, and
Maghull, Liverpool, with a combined value
to Serco of around £600m over 26½ years.
Signing of contracts for these prisons is
expected by summer 2010.

“In 2009, the dedication of our people and
the breadth of our capabilities meant that
we continued to deliver a strong
operational performance in the services
we provide, and therefore the value we
add for our customers.”
Christopher Hyman
Chief Executive, Serco Group plc

3. Our performance_Layout 1 25/03/2010 16:27 Page 17

Our performance

In defence, we provide military satellite
communications support to the US Air
Force 4th Space Operations Squadron
(far left).

In health, we are helping Guy’s and
St Thomas’ NHS Foundation Trust
to improve the efficiency and
responsiveness of its pathology
services (left).

Delivering operational excellence
In 2009, the dedication of our people and
the breadth of our capabilities meant that
we continued to deliver a strong
operational performance in the services we
provide, and therefore the value we add,
for our customers.

We successfully started a number of major
new contracts, valued at over £1bn. These
included our Flexible New Deal contracts
in the UK; our contract to operate the
Dubai Metro, where we have achieved very
high performance levels, supported by an
in-depth programme of over 50,000
training days, equipping what will be
3,000 employees when all lines are open
with the safety and technical skills needed
to deliver a world class railway; and our
immigration services contract in Australia,
where we completed the successful
handover of immigration detention centres
in under six weeks.

We also set a number of new performance
benchmarks and received awards in our
existing contracts, including: Merseyrail
setting a new record for UK rail punctuality
with 96% of trains running to time; our UK
marine services delivering outstanding
support to the Royal Navy with
performance levels consistently running
over 99%; exam results from our UK
education contracts improving at almost
twice the national average; in the US, our
receipt of the highest award from the
Federal Aviation Authority for air traffic
control safety and service excellence, and
the Best Practice award from the US
Department of Defense for our US Marines
Wounded Warrior Call Center; and the
recognition of our commitment to health
and safety by the UK’s Royal Society for
the Prevention of Accidents through 29
different awards and commendations.

In North America, we renewed and
expanded our work across the armed
forces, and intelligence and civil
government agencies. We saw a significant
expansion of our work supporting the Air
Force Space Command, winning
US$131m of task orders, and nearly
doubled the size of one of our intelligence
agency contracts. We were awarded task
orders under our US Army HR Solutions
contract valued at US$196m, of which
US$54m were new orders, and renewed
our contract with the US Department of
Homeland Security’s US Citizenship and
Immigration Services to provide records
processing support at its National Benefits
Center, valued at approximately US$190m
over a period of up to five years.

In transport, we renewed and expanded
our contract to provide the Dubai Airports
Company with air traffic services at Dubai
International Airport. The renewed contract
is valued at £245m over a longer period of
ten years and builds on the air traffic
services that Serco has provided to Dubai
for more than 40 years.

Our integrated services business built on
its expertise in the local authority and health
facilities management markets, with the
signing of a number of new contracts.
These included contracts with the London
Borough of Bexley, valued at £160m over
a potential term of up to 15½ years, to
provide a full range of environmental
services, and with the Plymouth Hospitals
NHS Trust to provide services at the
Derriford Hospital and the Royal Eye
Infirmary, valued at around £140m over
a period of up to ten years.

From the start of 2010, we have
repositioned our business to maximise our
focus on growth and opportunities and to
ensure that we maintain a flexible and
devolved organisation which is responsive
to our customers’ needs. As a result, we
have created five new divisions, focused
on our principal markets.

These are: Civil Government; Defence,
Science and Nuclear; Local Government
and Commercial; Americas and AMEAA
(Africa, Middle East, Asia and Australasia).
Our segmental reporting will reflect these
five divisions, starting at our half year
results in August 2010.

Entering new growth markets
In 2009, we entered a number of new
markets where we see significant
opportunities for growth.

In the UK, we opened a new market,
pathology, to help our customers improve
the efficiency and responsiveness of health
services. At the beginning of the year, we
formed a new partnership, GSTS Pathology
LLP, with Guy’s and St Thomas’ NHS
Foundation Trust, to pursue opportunities
in this substantial market, which is valued
at approximately £2.5bn. In January, GSTS
signed a contract, valued at £250m over
ten years to Serco, to improve Guy’s and
St Thomas’ pathology services, and in the
second half it further expanded its
operations by signing a similar contract
with the Bedford Hospitals NHS Trust,
valued at approximately £31m to Serco
over ten years.

We have identified significant opportunities
in the new welfare to work market in the
UK to support jobseekers in returning to
and remaining in work. In 2009, we signed
three contracts under the UK
Government’s Flexible New Deal initiative,
which we are delivering through a unique
network of private, public, community and
voluntary organisations. These five-year
contracts have an aggregate value to
Serco of £400m-£500m, and we expect
further opportunities to arise in
2010 and beyond.

We also continued to extend our
capabilities in the transport market in 2009,
adding cycle hire to our existing portfolio
of metro, heavy rail, air traffic control,
marine and roads operations. We signed
a new six-year contract with Transport for
London, valued at approximately £140m,
to design, build and operate the new
London Cycle Hire Scheme. Under the
contract we will design and integrate
technology and customer service
operations, and provide, operate and
maintain 6,000 bicycles for hire in Central
London at 400 docking stations.

3. Our performance_Layout 1 25/03/2010 16:27 Page 18

Chief Executive’s
Statement
continued

High visibility of planned revenue
at 31 December 2009

2010

2011

2012

79%

11% 1%

91%

61%

13%

76%

47%

14% 3%

64%

Order book

Extensions & rebids

Preferred bidder

Strong platform for growth in the US
market created through SI integration
We have made excellent progress with
the integration of SI in its first year of
ownership, with our enhanced capabilities
providing a strong platform for growth.

People
Serco has around 70,000 people delivering
essential services around the world. Our
ongoing success is the result of their hard
work and commitment to our values and
public service ethos.

This platform positions us well for
opportunities in 2010 and beyond in the
largest government services market in the
world, the US Federal Government
services market, notably in supporting the
government in modernising and improving
the effectiveness and security of services.
We were also pleased with SI’s financial
performance. SI’s revenue grew by 7.5%
to US$618.5m, and SI’s Adjusted
operating profit increased by 28.3% to
US$47.1m, representing a margin of 7.6%.

Developing our leaders is vital for Serco’s
future. During the year, we profiled the
capabilities of our top 100 leaders against
our model for great leadership. This sets
out the skills and behaviours required to
implement our Governing Principles and
to meet our future business challenges.
The process ensured that our leaders fully
understand their alignment to the model
and we are now in the process of creating
personal development plans to help them
deliver higher levels of performance.

“With the recent

substantial increase
in fiscal deficits,
governments are
increasingly seeking new
ways to fundamentally
transform the efficiency
and productivity of
essential services.”

We also undertook a comprehensive talent
review. This involved every business unit
around the world identifying its current
and future leaders, enabling us to create
comprehensive succession plans and
talent pipelines in each part of our
business. This is particularly important in
a high-growth company such as Serco,
where we continually need to develop new
leaders in the organisation.

Our “Viewpoint” survey measures our
people’s engagement with and commitment
to Serco. This year’s survey identified our
people’s world-class levels of commitment
and discretionary effort and showed that
Serco has an open and respectful culture.
The ambition of our people to excel and to
develop further within Serco was also clear,
and we will increase our focus in these
areas in the future.

Ensuring high levels of safety for our people
and other stakeholders is fundamental to
the way we work. We were delighted,
therefore, to receive 29 awards from the
Royal Society for the Prevention of
Accidents. These included the Sir George
Earle Trophy, won by Northern Rail, which
recognises outstanding health and safety
management. We also received a Sword
of Honour from the British Safety Council.
In the US, our air traffic control business
won the Willie F Card FAA Contract Tower
Service Award for the fifth time since 2003.
This award is given for excellence in safety
and customer service.

Board Change
Kevin Beeston will be retiring from the
Company after its Annual General Meeting
in May 2010. Kevin has made a significant
contribution to the progress of the Company
over the last 25 years and I would like to
thank him personally, and on behalf of the
Board, as well as wish him every success
in the future. The process of appointing a
new Chairman is under way and is being
led by the Senior Independent Director,
Baroness Ford of Cunninghame.

Outlook
Our customers, who are principally
governments and large commercial
organisations, continue to face rising
demand from their citizens to improve the
delivery of public services, and to address
challenges arising from migration, security,
economic development, climate change,
ageing populations and congestion.

With the recent substantial increase in
fiscal deficits, governments are increasingly
seeking new ways to fundamentally
transform the efficiency and productivity of
essential services. We believe that this will
result in both a broadening of opportunities
in existing markets, and the continued
development of new markets, both in the
UK and overseas.

We have a strong track record of high-
quality service delivery and innovation,
and continue to develop our substantial
capabilities in improving productivity
and efficiency across a broad range of
essential services. Given our long-standing
relationships with our customers, our deep
experience of all types of contracting
models, and our people’s public service
ethos, we are well placed to help our
customers meet their growing challenges.

Together the excellent visibility we have over
our revenues, the substantial opportunities
we see and our growing capabilities and
strong track record support our expectation
of further progress in 2010 and the
medium-term.

Our performance

Organic growth is the bedrock of our
business but we also make acquisitions to
bring in new skills or to open up a market
for us. This means that together, we are
better positioned to succeed. Our 2008
acquisition of SI International in the US,
for example, has significantly expanded our
capabilities and broadened our customer
base, in particular in the defence market.
Serco now serves all branches of the US
armed forces.

We always remember that we must work
together with the communities that surround
our contracts. Often these communities
are the end users of our services. Our
people also live in these communities,
and we want them to be proud of what we
do and their role in it. Delivering essential
services together is a fundamental part of
our business and as we continue to
innovate, it will only become more
important. Our values and our experience
of collaborating with our stakeholders
make us an attractive partner and position
us well to succeed.

3. Our performance_Layout 1 25/03/2010 16:27 Page 19

Delivering essential
services... together

Serco delivers essential services.
The work we take on is vital to our
customers but needs to be done more
productively and with an improved
outcome. Our contracts involve us in
some of the most important areas of
public service and government
spending such as health, education,
transport and defence, and what we
do often has a direct bearing on
people’s lives.

What do we mean by delivering
essential services together?
It means, first and foremost, that we build
long-term and mutually-beneficial
relationships with our customers. The
closer we are to them, the better we are
able to help them achieve what they want.
We build these relationships by providing
excellent service and innovation during the
life of the contract, so that they retain us at
rebid. For example, we have delivered air
traffic control services to our customers in
the Middle East for more than 60 years.
We also create new ways to work with
our customers. Our joint ventures with
Glasgow City Council and Guy’s and St
Thomas’ NHS Foundation Trust, which are
among the first of their kind, are excellent
examples of this.

Second, our people must work well
together to deliver what our customers
need. Our culture and values create an
environment where people are liberated
to do their best, where we support, listen to
and respect each other, and where people
of all backgrounds come together with a
common aim. Our Dubai Metro contract,
for example, employs people from
26 nationalities.

In recent years, we have increasingly
reaped the benefits of bringing the skills
of our divisions together to create a
compelling offering for our customers.
Often, this means spreading our skills
around the world. Our expansion in the
home affairs market in Australia and
our success with the Dubai Metro both
depended on our local market knowledge
and the world-leading capabilities we
transferred from our UK divisions. We are
also increasingly combining the specialist
skills of two or more of our businesses to
create a unique blend of skills, for example
in our, information and communications
technology skills supporting our welfare to
work contracts, or our call centre expertise
for the London Cycle Hire contract.

Delivering essential services together also
means working with partners, as we have
done with great success. For example,
our joint venture with Abellio (formerly
NedRailways) to run Northern Rail and
Merseyrail has made us one of the UK’s
leading train operators, with very high
levels of performance. We also work
together with third (or non-profit) sector
organisations, who have experience in
tackling some of society’s most pressing
problems. Our contracts to deliver the
UK’s Flexible New Deal programme, for
example, involve us co-ordinating more
than 60 subcontractors, around a third of
which are from the third sector. In the US,
we actively support SMEs and veteran-
run businesses.

“Delivering essential services together means first and
foremost that we build long-term and mutually-
beneficial relationships with our customers.”

3. Our performance_Layout 1 25/03/2010 17:06 Page 20

Civil Government

2009 Revenue

£1,556m

(39% of Group Revenue)

Our track record of
providing secure and cost-
effective services, which
promote rehabilitation and
enhance care, resulted
in a number of significant
contract awards in 2009.

In Civil Government, our work
encompasses sectors including home
affairs, welfare to work, integrated
services, education and children’s
services, healthcare, ICT and BPO,
and consulting. In the US, we provide
support to a number of civil government
agencies through our records
management and IT capabilities.

Home affairs
In home affairs, our customers are seeking
to improve efficiency, increase capacity,
and to ensure positive outcomes for those
in their care. Our track record of providing
secure and cost-effective services, which
promote rehabilitation and enhance care,
resulted in a number of significant contract
awards in 2009.

In Australia, we signed a new five-year
AUS$370m contract (with a four-year
extension option) with the Australian
Government Department of Immigration
and Citizenship (DIAC) to transform its
immigration services across the country.
Since the successful completion of the
transition from the existing service provider
in November, we have implemented a full
programme of activity for the people in our
care, including educational programmes
and language tuition with the involvement
of community groups and volunteers, and
are continuing our work on upgrading their
living environment. We are also discussing
with DIAC arrangements to further expand
capacity on Christmas Island.

In the second half of the year, we signed
a new contract with DIAC to transform the
operation of immigration residential
housing and immigration transit
accommodation. The five-year contract is
estimated to be valued at AUS$45m and
commenced on 31 January 2010.

In border security and control, we
extended our contract, known as Mycroft,
to provide infrastructure and intelligence
applications to the UK Border Agency and
other Home Office agencies. The new
contract is valued at around £34m over its
five-year term. Also in the UK, as part of the
Trusted Borders consortium, we have now
successfully delivered the first capability
piece for e-Borders, allowing the processing
of over 100 million passengers a year, and
are providing infrastructure to support the
next stages of this key programme.

Our work includes:
• Border protection
• Prisons management
• Welfare to work
• IT and IT-enabled services
• Government web portal management
• Education and children’s services
• Environmental services
• Health management and

hospital support

• Management consultancy

In our existing Cyclamen border security
contract, while start up has taken longer
than expected, we expect to complete the
roll-out of this system, which will provide
protection against the illegal importation of
radioactive materials, in 2010. This leading
edge capability, part of the UK Government’s
counter-terrorism strategy, will be operated
by the UK Border Agency and maintained
by Serco.

In the UK, we were selected as preferred
bidder for contracts to provide and operate
two new prisons in the UK, at Belmarsh
West, London, and Maghull, Liverpool,
with a combined value to us of around
£600m over 26½ years. We expect to sign
these contracts by summer 2010, and
construction is expected to be completed
in the second half of 2011.

Also in the UK, the expansion of two of
our existing prisons has progressed well.
At HMP Dovegate, construction to add a
further 260 cells and associated activity
and other buildings was completed on
budget and ahead of programme, while
similar works at HMP Lowdham Grange
are nearing completion as expected.
The high quality and value of the service
we provide was also recognised during the
year with HMP Lowdham Grange ranked
fifth out of all 138 prisons in the UK estate
in the National Offender Management
Service’s Measuring the Quality of Prisoner
Life survey, and Hassockfield Secure
Training Centre being awarded the British
Safety Council Sword of Honour for its
health and safety performance.

We also expanded other services in the
home affairs market. We extended our
Electronic Monitoring contract in England
and Wales by two years, securing additional
revenue of around £70m, and won a five-
year contract valued at over £7m to
provide electronic monitoring equipment
into Poland.

3. Our performance_Layout 1 25/03/2010 16:28 Page 21

Our work in home affairs includes
electronically monitoring offenders (right)
and running prisons in the UK, Australia
and Germany (far right).

Our performance

Together... we improve immigration services

Australian Department of Immigration
and Citizenship
In 2009, we signed a contract with the Australian Department
of Immigration and Citizenship (DIAC), to transform its seven
immigration centres. We created a compelling offering for our
customer by bringing together skills and capabilities from
different parts of Serco. We run similar centres in the UK and
combined our operational expertise from these with an in-depth
knowledge of the Australian market and DIAC’s requirements.

The partnership between our UK home affairs and Australian
businesses dates back several years, and our other notable
successes from it include our contracts to run Acacia and
Borallon Prisons. We have since won a second contract with
DIAC, to transform the operation of immigration residential
housing and transit accommodation in four capital cities and
will create a new experience of caring for people in detention.

Our work for DIAC also demonstrates another aspect of the
way we work. We aim to be good neighbours, integrating
with local communities, understanding their sensitivities and
ensuring our values are lived locally.

Employing local people is an important part of our community
involvement. At the four immigration centres on Christmas
Island, a remote location in the Indian Ocean, we have
increased local employment by nearly one-fifth. On the day
we began running the centres, 13 newly-trained Christmas
Island residents started work as Client Service Officers (CSOs),
caring for people in detention. This is a vital role as we focus
on the wellbeing of people in detention. The centres now
employ 85 of the island’s 900 residents with recruitment
ongoing. Flying in fewer staff from the mainland is a step
towards providing sustainable employment on the island,
boosting the local economy and offering our new employees
career opportunities and development at home. We are now
looking to the nearby Cocos Islands, where the male
unemployment rate is 65%. We hope to train a dozen Cocos
residents as CSOs to work on Christmas Island.

Recreational facilities at the immigration centre in Perth, Australia.

3. Our performance_Layout 1 25/03/2010 16:28 Page 22

Civil Government
continued

Together... we keep our environment clean

A Community Champion captures information about a ‘grot spot’.

Community Champions
We provide environmental services to 15 local authorities in
the UK. In doing so, we have learned that the best way to
keep the local environment clean is to work together with the
people who live there.

In partnership with one of our customers, Welwyn Hatfield
Borough Council, we have enlisted the help of ‘Community
Champions’. These volunteers tell us about ‘grot spots’ –
areas suffering from issu es such as heavy litter, graffiti or fly
tipping. We then despatch a clean-up team to fix the problem.

Working with the community in this way helps us to deal with
more incidents, more quickly. The success of the scheme has
encouraged more people to get involved, and we now have
18 Community Champions in Welwyn Hatfield.

Our Community Champions have also helped us to improve
our service. At their suggestion, we created a web page
where they can report their findings. By capturing standard
information each time, we can spot trends and work with the
Council to identify a solution.

Technology will also have an important role to play in helping
us work even more closely with communities. In our contract
with Charnwood Borough Council, we will be equipping our
Community Champions with GPS-enabled personal digital
assistants. These devices will allow them to photograph ‘grot
spots’ and send the picture to us electronically, along with its
precise co-ordinates. This will help us to respond more
efficiently, improving the environment for all the local residents.

3. Our performance_Layout 1 25/03/2010 16:28 Page 23

Our environmental services include
refuse collection (far left) and street
cleaning (left).

We deliver education services at
schools in Walsall and Bradford, UK.

Our performance

Integrated services
Our integrated services business had a
successful year, signing a number of new
contracts to help our customers in both
the public and private sector reduce overall
expenditure and improve service levels in
environmental services, and in health and
other facilities.

In environmental services, we now work
for 15 local authorities in the UK.
In the second half of the year, we signed
a new contract with the London Borough
of Bexley to provide a full range of
environmental services, including refuse
and recycling collection, commercial waste
and street cleaning. Our innovative
approach will result in an enhanced
standard of cleanliness in residential areas,
improvements to the efficiency of the
environmental services, and a 40%
reduction in the service’s carbon footprint.
The contract is for an initial term of 10½
years, with an option to extend for a further
five years, and is valued at over £160m
over the full 15½ years. This follows the
award of a new contract to provide refuse,
recycling and streetscene services for
Charnwood Borough Council in
Leicestershire, valued at around £35m for
a minimum period of seven years.

We also expanded our presence in other
integrated services markets during the
year. In the UK health market, our new
contract, with the Plymouth Hospitals NHS
Trust valued at around £140m for up
to ten years, commenced on 1 October.
During the early stages of the contract,
great progress has been made in
upgrading catering services for staff and
visitors, making a step change in cleaning
services including the introduction of
innovative microbiological testing of
cleanliness standards, and improving the
provision of catering serving 1,000 patients
a day.

We also renewed and expanded our
contract with Airbus valued at around
£40m over four years, for the management
and provision of a range of integrated
services in the UK, almost doubling our
business with Airbus. We also signed a
new four-year contract valued at £24m
with Babcock Marine, to provide building
and civil maintenance repairs and other
services to the naval base and Royal
Dockyard at Devonport, and associated
UK Ministry of Defence establishments.

In Australia, as previously reported, we
signed contracts valued in aggregate at
approximately £12m for facilities
management and maintenance for the
City of Melbourne, Docklands Melbourne
and the University of Melbourne.

Education and children’s services
We saw further improvements during the
year in the results achieved in our existing
education services contracts, and
expanded the scope of our work as a
leading private sector provider of education
and children’s services in the UK with new
contracts in inspections, strategic advisory
services and training.

We delivered a further strong improvement
in examination results in our education
services contracts at Bradford and Walsall,
with the percentage of pupils achieving
five A*- C grades at GCSE (including
English and Maths) increasing by 4.7% at
Bradford and 3.1% at Walsall, compared
to 2.2% nationally. The improvements we
have delivered in education at Bradford
have recently enabled the Secretary of
State for Children, Schools and Families to
lift the Government direction. The Council
is planning to take strategic control of
education services following the end of
our contract in July 2011, but we are
supporting the Council in exploring the
best ways to deliver operational services
in the future.

In the first half of the year, we signed a
new six-year, £55m contract in the UK
with Ofsted to deliver inspection services
to schools, further education colleges,
and work-based learning organisations
across central England. Since its start in
September, we have successfully
completed over 1,000 inspections.

In the second half, as lead for the Together
for Children and Learners consortium, we
were awarded a three-year £16m contract
(with the potential for a two-year extension)
by the Department for Children, Schools
and Families to provide strategic advisors
to help improve children’s services across
every local authority area in England.

Healthcare
Our new partnership in the pathology
market, GSTS Pathology LLP (GSTS),
made significant progress in its contract,
valued at £250m over ten years to Serco,
to improve Guy’s and St Thomas’ NHS
Foundation Trust’s pathology services.
In its first year, GSTS has implemented
new processes and performance
management systems, and an activity-
based costing model which has enabled
managers to better understand costs and
capacity utilisation. This has increased
capacity, allowing expansion of the
business, and improved turnaround times
on tests, in some cases by more than
50%. GSTS also further expanded its
operations by signing a similar contract
with the Bedford Hospitals NHS Trust.

In 2009, our occupational health business
won a number of new contracts with GKN
Aerospace, United Utilities, GE and the
Student Loan Company. The business
has now relocated to new clinical and
operational facilities, and has implemented
a new bespoke case management system
to support its operations.

In Bexley, our innovative
approach to environmental
services will result in an
enhanced standard of
cleanliness in residential
areas, improvements to
the efficiency of the
environmental services,
and a 40% reduction in the
service’s carbon footprint.

3. Our performance_Layout 1 25/03/2010 16:28 Page 24

Civil Government
continued

Together... we get people back to work

We help long-term unemployed people into sustainable jobs.

Welfare to work
We have developed a pioneering strategy to support the
Flexible New Deal (FND), the UK Government’s flagship
initiative to help long-term unemployed people into
sustainable work.

This a new market for Serco and so far we have won
contracts in the North West, Wales and the West Midlands.
Our unique strategy is to bring together a network of
partners to deliver all front-line services, drawing on
the best national providers and integrating them effectively
with local, specialist, community-based organisations.

Working together has several advantages. Our customers
have access to a broad range of service providers, each
with different capabilities. We create a programme that suits
their circumstances and draws on specialist support when
needed, such as debt counselling and vocational training.
Our model allows small organisations to benefit from large
government contracts, which they could not bid for
themselves.

The model is also transparent and helps to build trust
by allowing the Government to see the performance of
individual subcontractors.

In addition, we will deliver more sustained jobs at a
lower cost because our model directs resources to those
organisations best placed to support jobseekers.
We co-ordinate and manage our partners, allowing them
to concentrate on what they do best – service delivery.

Finally, we work alongside other strategic partners, including
local authorities, regional development agencies and
employers, to ensure that FND complements, rather than
duplicates, existing employment and training provision.

The most important benefit, though, is for the long-term
unemployed people we help. By working together, we and
our service-delivery partners will support more than 130,000
people into sustainable jobs. We have started the process
by staffing our new call centre in Rhyl with people who were
long-term unemployed.

Our performance

Our BPO business in India provides
customer services, database
management and back office services
in this fast growing country.

While our business in India had a challenging
year given the difficult conditions in the
global financial services market, we have
been encouraged by the interest we have
seen in the developing market for public
services in this fast-growing country,
including in areas such as rail, aviation,
health and education, and our expertise in
models such as public-private partnerships.

Consulting
Our consulting business performed well and
improved its profitability in a competitive
market. During the year, we built six expert
service lines: Performance Transformation;
Operational Efficiency; IT Advisory and
Transformation; Procurement; Organisation
and Leadership; and Programme Leadership
and Assurance. These service lines
differentiate our offering in the marketplace
and enhance our ability to enter new markets
through the provision of sector specific
expertise. Consulting also continued to
benefit from its position on a number of
government frameworks and programmes,
and to leverage its expertise in parts of
Serco, making a significant contribution
to winning contracts and assuring their
successful delivery.

3. Our performance_Layout 1 25/03/2010 16:28 Page 25

Our three Flexible New Deal contracts
help long-term unemployed people into
sustainable work by providing a
programme of tailored support
including career planning and job
search advice (far left and left).

Welfare to work
Welfare to work is a significant new market
supporting jobseekers in their return to work.

We signed new Flexible New Deal
contracts covering three regions, valued in
aggregate at £400m-£500m, with the UK
Department for Work and Pensions, to
support people who have been
unemployed for more than 12 months to
find sustainable work.

As prime contractor, we are delivering
these services through our local networks
of successful, established providers,
including private, public and third sector
organisations. They provide people with
tailored support, including career planning
and job search advice and specialist
services such as debt advice, top-up
training and confidence building.

We began the delivery of our Flexible New
Deal contracts on time in October 2009,
and referrals have increased in the first
part of 2010, reflecting the growth in
unemployment in early 2009. Job outcome
performance is tracking ahead of target,
with our highest performing providers
already achieving a good early success
rate of over 30% of their first jobseeker
referrals into employment.

In welfare to work, we are
tracking ahead of target,
with our highest
performing providers
already achieving a good
early success rate of over
30% of their first
jobseeker referrals into
employment.

IT and BPO
In IT and BPO, we further expanded our
presence in the UK local authority market
by signing a new contract, valued at £44m
over 11 years, to manage Peterborough
City Council’s ICT Services. Our innovative
approach will enable an investment of
around £6m in the Council’s ICT service at
no additional cost to them. We will advise
on and implement improvements that will
streamline the way services are delivered
to residents, and realise efficiencies for the
Council by taking advantage of our
sophisticated procurement techniques. We
will also provide new ICT facilities as part of
a modernisation programme that will
continually improve council services.

The value of the support we provide to
small and medium-sized enterprises in the
UK under our Business Link contracts was
recognised during the year through the
award of a new contract to provide
Business Link services to the South East
of England Development Agency, in a
contract that is valued at around £80m
over three years (with a two-year extension
option), and by expansion of our existing
contracts with the South West Regional
Development Agency valued at
approximately £20m.

In North America, we renewed a number
of existing contracts, including with the US
Department of Homeland Security’s US
Citizenship and Immigration Services, to
provide records processing support at its
National Benefits Center valued at
approximately US$190m over a period of
up to five years. In Canada, while
examination volumes at our Driver
Examination Service contract in Ontario
were affected in the second half of the year
by an industrial dispute, this was resolved
towards the end of the year. The service
has performed strongly so far in 2010, and
we are on track to clear the backlog of
outstanding examinations.

In Europe, we expanded our business
supporting IT, space and science through
a number of contract wins with European
institutions, the European Space Agency
and at CERN, with a combined value
of €93m.

3. Our performance_Layout 1 25/03/2010 17:06 Page 26

Defence

2009 Revenue

£1,020m

(26% of Group Revenue)

We are a major provider of operational
support services to the armed forces
of the UK, US, Canada, Germany and
Australia. We provide training,
engineering and operational support,
maintain strategic defence assets, and
deliver cost analysis, human resources,
systems engineering, safety assurance
and risk management services.

We have a strong track record of
improving productivity and reducing
the cost of customer operations, while
improving operational availability
and capability.

North America
In North America, we provide information
services, technology and network
solutions, and enterprise management,
engineering, logistics and personnel
support primarily to the US Government.
The acquisition of SI at the end of 2008
has significantly expanded our capabilities
and broadened our customer base, and
we now serve all branches of the US
armed forces.

During the year we expanded our work
across all branches of the armed forces
and were appointed to a number of
significant indefinite delivery/indefinite
quantity (IDIQ) contract vehicles during
the year giving us, as one of a number of
award winners, the opportunity to compete
for task orders.

We also saw a significant expansion of
our work supporting the Air Force Space
Command and other military commands
under our C4I2TSR engineering and
technical support contract. During the
year, we won US$131m of task orders
under this contract, which enables the
Department of Defense and civilian
government agencies to procure a full
range of services for mission-critical and
high-priority IT systems. We also saw a
similar expansion in one of our intelligence
agency programmes, which nearly
doubled in size.

The acquisition of SI at
the end of 2008 has
significantly expanded
our capabilities and
broadened our customer
base, and we now serve
all branches of the US
armed forces.

Our work includes:
• Command/control systems
• Defence establishments’ management
• Economic cost analysis
• Logistics consulting
• Marine services
• Port security
• Risk and safety management
• Secure IT support
• Through-life capability management
• Training and personnel services

We continued to broaden the scope of our
work supporting the US Navy. Activity under
our Sea Enterprise contract, providing IT
network support to ships and facilities,
increased by nearly 50% in the year.
In the second half, using our expertise
developed with the US Army, we won a
new contract, valued at US$55m over
five years, to support identification card
administration throughout the United
States. We also won a contract, valued at
US$15m over its one-year base period
plus four one-year option periods, under
which we will provide mobile hospitals
for military, humanitarian and disaster
relief operations.

We renewed two important contracts with
the US Navy. Under our SeaPort-e contract,
we will provide logistical support for the
management of hazardous material
products and chemicals, supporting 15
installations throughout the Southwest.
The contract has a one-year base period
with four one-year option periods and is
valued at approximately US$66m, inclusive
of the options. Under the Navy’s N1 support
contract, valued at US$60m over five years,
we will also continue to provide management
support for Manpower Personnel Training
and Education programs.

In our work for the US Army, we were
awarded 78 task orders under our HR
Solutions IDIQ during 2009. These were
valued in total at US$196m, of which
US$54m comprised new orders. These
included a task order under which we
will assist soldiers and their families
who are geographically dispersed make
connections with services and support
located back at home. This task order
has a one-year term and is valued at
approximately US$17m, more than
double the size of the previous order.

We were also awarded a contract with the
US Army to support the closure of bases in
Iraq, which is valued at US$30m over three
years, and were awarded a new contract
with the US Army Research Laboratory
to provide automation, information, and
technology services, with a potential value
of US$8m over a one-year base period
with four one-year options. We also
renewed a contract to provide access
card services for the US Army at around 70
locations worldwide, issuing approximately
1.1 million cards annually. The contract,
which Serco has held since 2001, is valued
at US$9.4m over one year.

3. Our performance_Layout 1 26/03/2010 10:11 Page 27

Our performance

We support essential satellite
communications technology for the US
Department of Defense (far left).

Our contract in the US to run the
Wounded Warrior Call Center helps ill and
injured marines, sailors and their families.

Together... we keep the armed forces connected

US Military support
An important part of our strategy is to make acquisitions
which bring us new skills and take us into new markets, so
that together we have a stronger platform for growth.

The 2008 acquisition of SI in the United States significantly
expanded our capabilities and broadened our customer
base.

Bringing SI into Serco has, for example, made us an
industry leader in developing technical documentation and
training for the US Department of Defense communication
satellite system. Our products and services help ensure
that these satellites provide vital communications to US
and allied forces worldwide.

We work directly with the operational squadrons, the
government program office and other contractors.
This ensures that we meet our customer’s expectations
and deliver technically accurate services that fit the
users’ needs.

Our people have been recognised for their expertise and
responsiveness, earning excellent performance ratings
from the customer for the last eight years.

We have also developed technical reference
documentation, which needs to keep pace with new
technology, system updates requested by the customer
and changes in the way our customer performs its mission.
By developing and co-ordinating changes together with the
satellite operators, we make sure our customer gets what it
needs, when it needs it.

Together with US Air Force instructors, we created a
technically demanding training course for officers in the
space operations squadrons. We held a continuous
dialogue with the instructors, so that we could deliver
exactly what they required. As a result, these materials
were the first ever to be used directly, as delivered, in
classroom and performance training by US Air Force
instructors.

Our services help ensure satellites provide US and allied forces with vital communications.

3. Our performance_Layout 1 25/03/2010 16:29 Page 28

Defence
continued

For the US Marines, we were awarded a
new contract to provide psychological
health outreach and referral services for
Marine Reservists returning from combat
zones or other assignments, and their
families. The contract is valued at US$9m
over three years.

For the US Air Force, we were awarded a
task order to provide its Materiel Command
with the capability to migrate data from
legacy systems into a modernised
integrated environment. This new task
order has a six-month base period plus
a one-year option and is valued at
approximately US$25m over its full term.

We were appointed to two new multiple
awarded government-wide IDIQ
procurement programmes, GSA Alliant and
STOC II, giving us the opportunity to
compete, as one of a number of award
winners, for task orders on these
programmes. Alliant has a ceiling value of
US$50bn over a five-year base period and
one five-year option period. We recently
secured our first task order under this
program, to support US Customs and
Border patrol with a system to enable port
officers to rapidly close borders to vehicular
traffic. The US Army Program Executive
Office for Simulation, Training and
Instrumentation Omnibus Contract
(STOC II) has a ceiling value of US$17.5bn
over a ten-year period.

In the second half, we renewed a number
of IDIQ contracts with the US Navy,
including two IDIQs for personnel services
with a potential value of over US$100m for
Serco, and another with a potential value
of up to US$70m for Serco over a five-year
period, enabling us to compete for US
Navy task orders in program management,
logistics, financial management and
administrative support services.

Growth in our UK defence
business continues to be
driven by our excellent
track record of retaining
and growing our existing
business, and winning a
number of smaller and
medium-sized contracts
to support the UK armed
forces.

3. Our performance_Layout 1 26/03/2010 09:59 Page 29

Our support for the Royal Air Force
includes providing aircraft refuelling
services (far left), air traffic control (left),
and providing training for pilots (below left).

Our performance

United Kingdom and Europe
Growth in our UK defence business
continues to be driven by our excellent track
record of retaining and growing our existing
business, and winning a number of smaller
and medium-sized contracts to support the
UK armed forces, enhance their operational
effectiveness and increase efficiency.

Towards the end of the year, we were
appointed preferred bidder for, and since
the year end have signed, a multi-activity
contract to provide services at RAF High
Wycombe and RAF Halton. We have
provided services including management
and administration, general engineering
and military transport, at RAF Halton since
1997. With this contract, we will now have
a presence at RAF High Wycombe, which
is the home of Headquarters Air Command.
The combination of services at both sites
will provide us with the ability to deliver
synergies across both stations through an
innovative and flexible solution. The
combined seven-year contract (with an
additional three option years) is valued at
up to £100m over the full ten years.

In other contract renewals, the UK Ministry
of Defence reappointed us to provide
support services across all its Air
Surveillance and Control Systems sites,
valued at £25m over the full eight years,
and we were successful in our rebid to
provide essential logistical services to the
US Air Force at three bases at Alconbury,
Molesworth and Croughton, valued at
£10m over five years.

In smaller contracts, we were awarded
an extension to our contract to support,
operate and maintain the UK Ministry of
Defence’s mobile underwater targets at
the British Underwater Test and Evaluation
Centre, Kyle of Lochalsh, Scotland, and
Weymouth, Dorset valued at up to £7.3m
over 4½ years.

Our services for the Australian Navy
include supporting innovative training
programmes at HMAS Watson for
combat, ship handling and navigation.

We were also appointed by the Ministry
of Defence as part of the Paradigm
consortium to supply the Cabinet Office
with crisis management facilities and key
crisis management centres across England,
Scotland, Wales and Northern Ireland with
a High Integrity Telecommunications
System (HITS). Our role, valued at £1.2m
over the first 12 months, will be to install
the HITS equipment and provide planned
and unplanned maintenance support for
the HITS systems throughout the UK.

Since the year end, we have been
appointed preferred bidder to manage
the UK’s Emergency Planning College on
behalf of the Cabinet Office in a 15-year
contract worth over £55m.

This places Serco at the heart of UK civil
resilience, which includes planning
responses to disruption from natural
events and major accidents, and builds on
our excellent track record in defence and
emergency training provision. As commercial
partner to the Cabinet Office, we will
provide and manage all services at the
College, and focus on both growing the
business and enhancing its reputation as
the UK’s leading provider of emergency
planning training.

In Germany, we secured £39m in new
business and growth, and renewals of
existing contracts. Wins have included:
contracts with the German Ministry of
Defence to provide a mobile military
hospital valued at £14m and to provide
technical logistic services valued at £3.5m;
a new £3.1m contract with NATO’s
Consultation, Command and Control
Agency to support NATO’s initiative to
improve data and voice communication
links between operating units from the
various member states; and contracts to
provide a deployable prison for the
German military police and deliver the
systems integration of deployable
command and control containers for close
proximity defence systems at German
MoD field camps.

Australia
In Australia, we were pleased to renew our
contract at HMAS Watson for the provision
of professional services to the Australian
Navy, supporting innovative training
programmes used in naval bases in New
South Wales, Victoria and Western
Australia to train military personnel in
combat, ship handling and navigation.
Under the five-year contract, valued at
AUS$10m, we will continue to provide
software engineering support to existing
electronic naval training, and design new,
improved systems.

3. Our performance_Layout 1 25/03/2010 17:06 Page 30

Transport

2009 Revenue

£789m

(20% of Group Revenue)

We are a major provider of transport
services to the UK and markets in
Australia, the Middle East and US.
We operate heavy and light rail systems,
are a leader in the development of
integrated traffic management systems,
and are one of the world’s largest
private sector suppliers of air traffic
control services.

We are broadening our capabilities into
other modes of transport, including
marine transportation services through
our operation of the Woolwich Ferry,
and bicycles with our contract to
operate the London Cycle Hire Scheme.

Light rail
The operational phase of our £500m
contract with the Dubai Government
Roads and Transport Authority (RTA) to
operate and maintain the first two lines of
the new Dubai Metro commenced in the
second half of 2009, with the Metro
inaugurated on schedule on 9 September.
Our start up has been very successful,
with the Metro having carried over 10
million passengers to the end of January
2010, and achieving very high levels of
performance, with the latest measures in
December and January showing 100%
availability and 99.5% punctuality with
approximately 80,000 passenger journeys
per day.

On the Docklands Light Railway (DLR),
passenger numbers increased by 3 million
to over 69 million, helped by the opening of
Woolwich Arsenal Station in early 2009.
The final phase of work to complete the
platform extension and upgrade work for
three-carriage trains to run between Bank
and Lewisham has now been completed,
with longer trains to be introduced on this
route throughout 2010. Preparation work is
now under way at other stations to enable
them to accommodate three-carriage
trains from the end of 2010, and work on
the Stratford International extension is
expected to be completed by the summer.

The Docklands Light Railway carried
over 69 million passengers in 2009.

Our work includes:
• Air traffic services
• Heavy rail operations and maintenance
• Light rail operations and maintenance
• Traffic control and transport systems
• Transport consultancy

Although services have been disrupted by
these works, reliability has averaged above
95% this year and customer satisfaction
with the service has remained above 90%
throughout. Serco Docklands was also
successful at the Light Rail Awards this
year, with the Community Ambassador
Scheme winning "Best Customer Initiative"
for its work through local ambassadors in
East London’s communities.

In Rail Technology, we continue to make
progress on our contract to develop an
Asset Inspection Train that measures
aspects of the London Underground
network, such as track profile, rail wear and
tunnel dimensions. While this has taken
longer than expected, we are now looking
forward to commissioning the train and
further enhancing its measurement capability.

Heavy rail
Northern Rail and Merseyrail, Serco’s two
joint ventures with Abellio (formerly Ned-
Railways), delivered excellent operational
performance and continued growth.

Northern Rail carried 85 million passengers
during the year, an increase of 34% since
the start of our contract in December
2004, and continued to improve
punctuality, with the number of trains on
time in 2009 improving by 2.5% to 91.8%.
Northern Rail was also the first train
operator to be awarded the highly
prestigious Sir George Earle Trophy for
outstanding health and safety
management performance at the 2009
Royal Society for the Prevention
of Accidents awards.

In the second half of the year, Merseyrail
was one of the first two train operating
companies ever to achieve over 96% of
trains on time for a continuous 12-month
period, a performance which was also
achieved for 2009 as a whole. In addition,
Merseyrail also gained an overall customer
satisfaction score of 91%, the highest in
the industry.

Our Australian rail operation, Great Southern
Rail, responded quickly to a weaker tourist
travel market with enhanced marketing and
reduced schedules. Although yields fell,
bookings were only slightly below last year’s
levels, with the service also benefiting from
the successful introduction of the Platinum
service on the Ghan train in late 2008.

3. Our performance_Layout 1 25/03/2010 16:29 Page 31

Our performance

We brought together people, skills and
experience from around the world to
ensure that the Dubai Metro enjoyed a
successful start (far left and left).

A Serco customer service agent on board the new Dubai Metro.

Together... we get Dubai moving

Dubai Metro
The Dubai Metro, which is the first in the Middle East,
opened on 9 September 2009. We operate and maintain it
on behalf of the Dubai Government Roads and Transport
Authority (RTA).

We brought together skills and experience from around the
world to help us win the contract and operate the Metro,
combining our local understanding of the Middle East
market and the RTA’s needs with our global transport and
metro capabilities, exemplified by the award-winning DLR
in London.

We have also brought people together to deliver excellent
service. Because the system is the first in the region, we
had to search internationally for the skills we needed.
To date, we have employed nearly 2,100 people, including
900 outsourced colleagues, from 26 countries, with 12%
recruited from the local Emirati population – our largest
ever recruitment drive.

While such a multinational workforce brings challenges, our
values have determined our approach. For example, part of
our training helps to foster respect for, and help our people
embrace, the cultures of their colleagues and Dubai. We
also provide high-quality accommodation for our people,
while free wireless internet allows them to stay in touch
with their families.

The outcome has been a successful start for the Metro.
Despite a very tight deadline, the system opened on time.
Since then, it has gone from strength to strength. Just
16 days after it opened, the Metro carried its one millionth
passenger, with this number reaching over ten million by
the end of January 2010.

We are now looking to increase the number of Emiratis
working on the Metro. As part of this, we are launching a
groundbreaking education programme which will help local
people become the Metro’s future operators, technical
specialists, managers and leaders.

3. Our performance_Layout 1 25/03/2010 16:29 Page 32

Transport
continued

Traffic management
Our customers are responding to the
increasing problem of congestion by
seeking to maximise the capacity of the
existing road infrastructure through traffic
management, and this has driven demand
for our innovative capabilities in 2009.

In the UK, we were appointed as preferred
bidder for the MF1 contract, valued at up
to £12m over three years, to renew
communications technology on the Scottish
Highways network, including CCTV,
variable message signs and emergency
roadside phones.

Since the year end, we have been selected,
together with our joint venture partner
Costain, as one of four delivery partners for
the Highway Agency’s Managed Motorway
initiative, a major investment programme of
£2bn to increase capacity through the use
of traffic control technology and hard
shoulder running, with a total of 34
schemes planned over the next ten years.
We will provide consultancy, systems
integration, technology installation and
maintenance expertise, and our selection
provides a strong foundation for us to
become a major partner in the Highways
Agency’s future strategy.

Other wins in the UK, valued at around
£4m in total, included: an expansion to our
National Traffic Control Centre contract;
our appointment as a supplier to the
Transport Scotland Consultancy
Framework; and a contract with the
Highways Agency covering software and
systems work on the abnormal loads
management and website booking system.

We also extended our contract for the
maintenance of Transport for London’s
(TfL) Eastern Tunnel management system
to the end of September 2010.

In the US, since the year end, we have
been awarded two contracts by the State
of Georgia Department of Transportation
(GDOT) valued in aggregate at around
US$55m, adding to our successful
operations at the Transportation
Management Center in Atlanta. Under the
GDOT IT Maintenance contract, valued
at around US$50m over five years, we will
manage the installation and upkeep of
over 1,000 devices that comprise the
department’s Intelligent Transportation
Systems, including several hundred
remotely operated traffic cameras as well
as changeable message signs. Under a
separate new contract, we will facilitate
the privatisation of GDOT’s traveller
information hotline.

In Australia we signed a contract, in
partnership with mdv, a leader in the
development of transport technology
solutions, with New South Wales Transport
and Infrastructure to transform the way
residents access transport information.
Under the contract, we are providing
transport journey planning information
services in New South Wales through a
variety of channels, including a call centre
and website. The contract has a value to
Serco of AUS$27m over its five-year term.

In the US, since the year
end, we have been awarded
two transport systems
contracts by the State of
Georgia Department of
Transportation

3. Our performance_Layout 1 25/03/2010 16:29 Page 33

Our joint venture to run Merseyrail
achieved record levels of punctuality and
customer satisfaction in 2009 (far left).
The Ghan, in Australia, introduced its
new Platinum service in late 2008 (left).
Providing air traffic services at Dubai
(below).

Our contract to design, build and
operate the London Cycle Hire Scheme
is an important step into a new market.

Our performance

Cycle hire
In the second half of the year, we signed
a new six-year contract with Transport
for London to design, build and operate
the new London Cycle Hire Scheme.
Under the contract, which is valued at
approximately £140m, we will design
and integrate technology and customer
service operations, and provide, operate
and maintain 6,000 bicycles for hire in
Central London at 400 docking stations.

We have made good progress in the
implementation phase of the scheme,
with works under way on the building of
docking stations across Central London,
and on the systems and contact centre.
We have also recruited the first members
of the operational team, which will include
a number of engineering apprenticeships,
helping to develop the skills of young
people in the capital.

Since the year end, we have been awarded
a US Federal Aviation Administration air
traffic control contract valued at around
US$170m over five years. Since 1994,
Serco has managed approximately 55 air
traffic control towers across the western
United States and Alaska and, with this
recent win, we will now be responsible for
a total of 64 sites, including new locations
in Hawaii, Guam and Saipan.

Civil aviation
In addition to the successful renewal and
expansion of our contract with the Dubai
Airports Company for air traffic services
at Dubai International Airport, valued at
£245m over ten years, we won a rebid for
a contract for the provision of air traffic
control and electronic engineering services
at Abu Dhabi and Al Ain International
Airports, and City Airport at Bateen, as
well as two additional satellite airports in
the Emirate of Abu Dhabi. Valued at over
£24m for two years, the contract
commenced in April 2009. Serco has also
been successful in the rebid for the provision
of air traffic control services for Ras Al
Khaimah’s International Airport, which has
a value of over £1.5m for one year.

3. Our performance_Layout 1 25/03/2010 16:30 Page 34

In the UK, we provide a wide array of
services including occupational and
custodial health services and
community care (far left and left).

Together... we enhance pathology services

Our pathology tests are essential to patient care.

Guy’s and St Thomas’ and Serco
Through our joint venture with Guy’s and St Thomas’ NHS
Foundation Trust, we are now the UK’s largest independent
provider of pathology services. The partnership, called
GSTS Pathology, is the first of its kind in the National
Health Service (NHS).

Pathology is vital to patients’ health. In the UK, 70% of
decisions about patient care depend on scientific tests
carried out in a pathology laboratory, and the £2.5bn NHS
pathology market is growing at up to 10% a year. At the
same time, clinical advances and new technology are driving
the need for change in pathology services.

Together, Serco and the Trust have the right combination of
skills and capabilities to grow in this exciting market, with
our expertise in transforming services and developing

businesses complementing the Trust’s clinical and
scientific excellence.

Our partnership is already delivering benefits. Operational
improvements, such as greater clarity of roles and personal
accountability, have enhanced patient service. Cervical
screening times, for example, have more than halved
and GSTS Pathology introduced its own swine flu test in
record time.

As a business, GSTS Pathology is also set to prosper. In
December 2009, it began work on a ten-year contract to
deliver pathology services for Bedford Hospitals NHS Trust.
The contract has enabled GSTS Pathology to establish a
hub in Eastern England, an area with a number of NHS
Trusts and hospitals that are seeking to modernise their
pathology services.

3. Our performance_Layout 1 25/03/2010 17:06 Page 35

Science

2009 Revenue

£605m

(15% of Group Revenue)

We support government and industry through our
management of scientific establishments such as the
National Physical Laboratory and the National Nuclear
Laboratory (above).

Our performance

Our work includes:
• Materials science
• Measurement science
• Nuclear assurance
• Research establishments’ management
• Technical training

In April we assumed management
responsibility for the National Nuclear
Laboratory (NNL), along with our partners
Battelle and Manchester University, and the
first months of operation saw a seamless
transition to the new management team.

In July, the UK Government announced the
creation of a Nuclear Centre of Excellence,
based at NNL, to help ensure the peaceful
use of nuclear power. This, coupled with
the world-leading expertise at AWE in the
fields of disarmament verification and non-
proliferation, places Serco as a significant
stakeholder in UK efforts to secure nuclear
non-proliferation, disarmament and the
peaceful application of nuclear technology.
These are issues likely to gain in relevance
during 2010 and beyond as part of the
global security agenda.

During the year, we have continued our
work at the National Physical Laboratory
(NPL) to maximise the impact of the
science we deliver in support of UK
industry. In 2009 NPL worked with over
2,000 companies, and independent studies
have shown that the laboratory’s work for
the National Measurement System
contributes approximately £2bn per year to
UK Gross Domestic Product. NPL also
continues to contribute with its work
supporting the low carbon economy and
the health of UK citizens, for example
through its work with UK hospitals to
ensure that radiotherapy doses are
measured and targeted effectively.

Serco manages science-based
organisations that are developing and
applying scientific knowledge for wealth
creation, addressing the growing
demand both for low carbon energy and
innovative solutions to the challenge of
climate change, and enabling
international nuclear safety, assurance
and verification.

Our joint venture at AWE continued to
perform strongly, with all contract outputs
delivered on time and budget, supported
by the engineering and management
expertise brought by Jacobs Engineering
in its first full year as a shareholder in AWE
Management Limited, alongside Serco and
Lockheed Martin. We were also pleased to
successfully conclude the periodic pricing
review under our existing 25-year contract,
setting the framework for important
investments in skills and facilities at AWE.

Our world-leading nuclear safety and
assurance business continued to
strengthen its support to operators of
nuclear plant, both in the civil and defence
nuclear sectors. During the year, this
business continued its growth through a
range of smaller, high-margin contracts,
valued at over £40m.

Our strong positioning to play a key role in
enabling nuclear new build was confirmed
shortly after the year end by our signing a
contract with Westinghouse, designer of
the AP1000 nuclear reactor currently under
assessment for the UK's civil nuclear
programme. We will serve as its primary
nuclear safety advisor in the UK, leading a
team of experts to assist it in completing
Step 4 of Generic Design Assessment for
the AP1000. This is a critical stage in the
reactor design approval process being
conducted by the UK Nuclear Regulators
which is due for completion in 2011.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:20 Page 36

Market opportunities

With our track record of
high-quality service
delivery, we are well
placed to help our
customers meet
demands for better
services and tackle
issues like congestion,
migration, ageing
populations and
terrorism, while
improving productivity
and efficiency.

We expect the deficits affecting our
government customers arising from the
global economic crisis to create
substantial opportunities for Serco.
Governments around the world are
increasingly recognising the benefits of
competition and the use of the private
sector to improve the quality and efficiency
of services and assist recovery from
recession and deficits. In the UK, new
models are promoting joined-up
government through shared support
services and a focus on outcomes,
increasing choice and the potential for us
to deliver benefits to all our stakeholders.
Around the world, we are seeing
governments learn from our UK
experience, and increasingly move
towards new, more sophisticated
contracting models, including joint
ventures, fixed price contracts, franchises,
PPPs and PFIs, and partnerships with the
voluntary sector.

Given our substantial capabilities, we
continue to see good opportunities for
growth across a broad portfolio of markets
and geographies, both from expansion of
the scope and scale in our existing
contracts and from new contract wins. In
new contracts, smaller and medium-sized
contracts remain an important driver of our
growth, and among larger opportunities,
we see a good range of nearer-term
opportunities in 2010, and a substantial
medium-term and longer-term pipeline.

In home affairs, the UK Government is
looking to increase efficiency and
productivity in offender management by
putting some underperforming public
sector prisons out to competition during
2010-11. We see substantial
opportunities, driven by this need for
greater efficiency and to achieve positive
outcomes from detention. In the UK, the
Government has announced the
commissioning of five new prisons, and
the market testing of five existing prisons,

and we also see opportunities in areas
such as probation services, health,
immigration, and asylum and refugee
support services. Other regions are seeing
similar pressures, leading to the potential
for expansions of existing facilities,
tendering of existing public sector prisons,
and for the provision of services such as
health in the home affairs sector.

The current economic climate and growing
fiscal pressures are leading the UK
Government to seek greater value in two
areas of significant spend, welfare benefits
and the National Health Service. In welfare
to work, we expect the second round of
23 Flexible New Deal contracts for a
further 14 regions to be let in 2010, with
contracts valued on average at around
£75m. We expect further opportunities for
expansion of our innovative model into
other benefit areas such as Employment
and Support Allowance. In health, we
continue to see further significant
opportunities for our joint venture with
Guy’s and St Thomas’ NHS Foundation
Trust to expand its presence in the
substantial UK pathology market, and to
develop new models, including
partnerships and franchises, to help
improve productivity in other areas of the
health service.

Local authorities in the UK remain under
significant budgetary and service quality
pressures, and although they are gaining
increasing freedom to allocate resources
and set priorities at a local level, protecting
education, police, and health services is
likely to put additional pressure on other
essential services which they are expected
to deliver. We are seeing a number of
opportunities in 2010 and beyond for
contracts to help local authorities address
this challenge, both by transforming the
way they operate, as we are doing for
Glasgow City Council, and also through
increased efficiency in integrated
services operations.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:20 Page 37

Our performance

In UK education and children’s services,
we continue to build our presence across
national government bodies while
consolidating our strong position in local
government services. Our national presence
was significantly boosted through our
inspection services contract with Ofsted,
and latterly through the award of the
strategically important Children and
Learners Strategic Advisers contract. We
see potential future opportunities in the
commissioning of educational services,
and also continue to work with a number
of authorities where we see a requirement
for service improvement across
children’s services.

In India, we continue to develop our BPO
business and remain encouraged by our
initial progress and the potential
opportunities which are developing, both
for expansion in the BPO market as rising
incomes lead to greater demand for
services, and in the delivery of
public services.

In defence, our customers are addressing
significant budgetary pressures, while
facing the challenge of ensuring that
troops in the front line have battle-winning
equipment and support. In the UK, both of
the main political parties are committed to
conducting a Strategic Defence Review, to
ensure an affordable and sustainable
outcome. Serco is well placed to assist
through the application of innovative
contracting models and methodologies
that will help to facilitate effective
financial planning.

The UK MoD is also focused on sustaining
the capability of its armed forces over the
long term, which is leading to good
organic growth opportunities. Serco has
also been selected to compete for two
large contracts, due to be awarded

between 2011 and 2012 - the Fleet
Outsourced Activities Project to provide
training services for the Royal Navy, and
the Armed Forces Recruitment Partnering
Project, where we are leading the
Prospector Group consortium which
includes Logica and the AMV Group.

In the US, the integration of SI’s
capabilities means that we now have
opportunities across a broad range of
customers in the largest government
services market in the world, the US
Federal Government services market. A
major focus for the federal government is
modernising and improving the
effectiveness of government services
through the upgrade of IT infrastructure, to
make processes more efficient and
effective, and to ensure security, with
cybersecurity likely to be a priority in 2010
onwards. In 2010, we will submit bids for
work across all branches of the armed
forces and a broad range of intelligence
and civil government agencies.

In transport, our customers are seeking
safe and cost-effective solutions to the
challenges of congestion and urban and
international mass transport and we now
have world-leading expertise across a
broad range of modes of transport to help
them. To leverage our capabilities, which
span metro and heavy rail, traffic and
roads management, marine, cycle hire and
air traffic control, we have created a Global
Transport function to grow our presence in
this market and to identify and prioritise
the significant opportunities we see in the
sector globally. Given the global nature of
the transport business, it is also likely that
the Global Transport function will
spearhead our expansion into new
geographies, developing new relationships
with governments and the private sector in
those regions.

We expect opportunities in science to be
driven by governments’ need to increase
efficiency while ensuring that scientific
skills continue to deliver maximum
economic, financial and social benefit,
particularly in the fields of climate change
and supporting a sustained economic
recovery. In the UK, we are working in
partnership with our customer at the
Department for Business, Innovation and
Skills, the Royal Society and other
organisations to see how science across
the public sector can be delivered more
efficiently and effectively. Our leading
position in nuclear safety and assurance
means that we are well placed to address
opportunities in both decommissioning
and new civil nuclear build in the UK and
overseas markets.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:20 Page 38

Finance Review

Overview

Income statement

Our business delivered a strong
financial performance in 2009, with
revenue growing 27.1% and Adjusted
operating profit increasing by 39.0%.
Our results benefited from the
acquisition of SI International, Inc. (SI)
and from currency movements:
excluding currency, revenue growth
was 20.8% (10.2% excluding SI) and
Adjusted operating profit growth was
31.1% (15.8% excluding SI). Our
Adjusted operating margin, excluding
currency, increased by 45 basis points
(27 basis points excluding SI) (Figure 2).
Free cash flow grew by 45.8% to
£137.3m, and Group recourse net debt
reduced by £136.8m to £387.7m from
the 2008 year end position.

Serco’s income statement for the year is summarised in Figure 1 below. This includes
the results of joint ventures which are proportionately consolidated.

Figure 1: Income statement

Year ended 31 December

Revenue
Gross profit
Administrative expenses
Adjusted operating profit
Investment revenue and finance costs
Adjusted profit before tax
Amortisation of acquired intangibles
Profit before tax
Tax
Profit for the year
Effective tax rate
Adjusted earnings per share
Earnings per share
Dividend per share

1.1 Currency translation

2009
£m
3,970.0
586.8
(357.1)
229.7
(35.0)
194.7
(17.6)
177.1
(46.9)
130.2
26.5%
29.53p
26.76p
6.25p

2008
£m
3,123.5
456.8
(291.6)
165.2
(19.9)
145.3
(9.2)
136.1
(36.5)
99.6
26.8%
22.20p
20.49p
5.00p

Increase
27.1%
28.5%
22.5%
39.0%

34.0%

30.1%
28.5%
30.7%

33.0%
30.6%
25.0%

The increase in the size of overseas operations with earnings not denominated in
Sterling, principally as a result of the acquisition of SI at the end of 2008, and
changes in currency exchange rates over the last 12 months, have benefited Serco’s
reported results. In order to present the underlying growth of the business in the
year, the effect of currency exchange rate changes on revenue, Adjusted operating
profit, investment revenue and finance costs, Adjusted profit before tax and Group
recourse net debt are presented in the Finance Review. The currency effect has been
calculated by translating non-Sterling earnings, including those of SI, for the year
ended 31 December 2009 into Sterling at the average foreign exchange rates for 2008.

Figure 2: Income statement bridge

Year ended 31 December

2008
Group
2009
Group excluding SI and currency

SI
Group including SI
Currency effects
Total

Revenue
£m

3,123.5

318.6
3,442.1
331.9
3,774.0
196.0
3,970.0

Revenue
growth
%

Adjusted
operating
profit
£m

Adjusted
operating
margin
%

165.2

5.29%

10.2%

10.6%
20.8%
6.3%
27.1%

26.1
191.3
25.2
216.5
13.2
229.7

0.27%
5.56%
0.18%
5.74%
0.05%
5.79%

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:20 Page 39

Our performance

1.2 Revenue

Revenue grew by 27.1% to £3,970.0m. Revenue growth, excluding SI and currency
effects was 10.2%. Organic revenue growth, excluding currency, was 9.4%, and
reflects the growth of existing contracts and the contribution of new contracts. SI’s
revenue was US Dollar 618.5m (£331.9m excluding currency effects), which added
10.6% to revenue growth. SI’s revenue grew 7.5% when compared to 2008.
Currency effects added a further £196.0m (6.3%) to Group revenue.

1.3 Gross margin

Gross margin – the average contract margin across our portfolio – was 14.8%
(2008: 14.6%).

1.4 Adjusted operating profit

Adjusted operating profit increased by 39.0% to £229.7m representing an Adjusted
operating profit margin of 5.79%. Adjusted operating profit margin increased by
50 basis points (45 basis points excluding currency effects). The table in Figure 2
illustrates the Adjusted operating profit and margin resulting from the Group
excluding SI and currency, SI, and currency effects.

1.5 Investment revenue and finance costs

Investment revenue and finance costs totalled a net cost of £35.0m (2008: £19.9m),
an increase of £15.1m. The increase, excluding currency effects, was £12.4m. Borrowing
costs to fund the SI acquisition and an increase in the net pension funding cost of
£5.7m charged to the income statement were the principal reasons for this increase.

1.6 Adjusted profit before tax

Adjusted profit before tax was £194.7m, an increase of 34.0%. Excluding SI and
currency effects, the Adjusted profit before tax margin was 4.92%, an increase of
27 basis points.

1.7 Tax

The tax charge of £46.9m (2008: £36.5m) represents an effective rate of 26.5%,
compared with 26.8% in 2008. The reduction principally reflects the fall in the UK
corporation tax rate from the blended UK corporation tax rate of 28.5% in 2008 to
28.0% in 2009.

1.8 Earnings per share (EPS)

Adjusted EPS rose by 33.0% to 29.53p. EPS grew by 30.6% to 26.76p.
EPS and Adjusted EPS are calculated on an average share base of 486.6 million
during the year (2008: 485.7 million).

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:20 Page 40

Finance Review
continued

2. Dividend

Serco’s policy is to increase the total dividend each year broadly in line with the
increase in underlying earnings. The Board has proposed a final dividend of 4.40p
per share, representing an increase on the 2008 final dividend of 25.0%, and bringing
the total dividend for the year to 6.25p, a growth of 25.0%. The final dividend will be
paid on 19 May 2010 to shareholders on the register as at 12 March 2010.

3. Cash flow

The Group generated a free cash inflow of £137.3m (2008: £94.2m), an increase of
45.8%.
Figure 3 analyses the cash flow. As in previous years, we have designed the analysis
to show the true cash performance of the Group – the cash flows generated by
subsidiaries plus the dividends received from joint ventures. It therefore differs from
the Consolidated Cash Flow Statement on page 85, which proportionately
consolidates the cash flows of joint ventures. The adjustment line in Figure 3
reconciles the movement in Group cash to the consolidated cash flow.

Figure 3: Cash flow

Year ended 31 December

Operating profit excluding joint ventures
Non cash items
Group EBITDA
Working capital movement
Group operating cash flow
Interest
Tax
Net expenditure on tangible and intangible assets
Dividends from joint ventures
Group free cash flow
Disposal of investments/subsidiaries
Acquisition of subsidiaries
Financing
Dividends paid
Group net increase in cash and cash equivalents
Adjustment to include joint venture cash impacts
Net increase in cash and cash equivalents

2009
£m
150.6
75.4
226.0
(27.2)
198.8
(31.5)
(26.5)
(49.8)
46.3
137.3
0.6
(15.4)
(36.8)
(25.9)
59.8
14.1
73.9

2008
£m
107.8
40.6
148.4
(22.8)
125.6
(25.0)
(11.8)
(31.8)
37.2
94.2
1.9
(322.2)
289.0
(21.6)
41.3
2.8
44.1

Note: Group EBITDA is earnings from subsidiaries (excluding joint ventures) before interest, tax, depreciation,
intangible amortisation and other non cash items.

3.1 Group operating cash flow

Group operating cash flow of £198.8m (2008: £125.6m) reflects a conversion of
Group EBITDA into cash of 88% (2008: 85%). The increase in working capital from
£22.8m to £27.2m reflects the requirements of a growing business and the continued
high level of contract start ups.

3.2 Interest

Net interest paid was £31.5m, compared to £25.0m in 2008 reflecting the increase in
borrowings resulting from the acquisition of SI in 2008.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:20 Page 41

Our performance

3.3 Tax

Tax paid was £26.5m (2008: £11.8m). The increase reflects the fact that there was
no tax relief available in 2009 on the special pension contribution made in 2007.
Cash tax is below the equivalent charge in the income statement as a result of
accelerated capital allowances and other timing differences.

3.4 Net expenditure on tangible and intangible assets

Net expenditure on tangible and intangible assets in the year was £49.8m
(2008: £31.8m). Gross expenditure, excluding disposals, was £52.3m (2008: £48.7m)
representing 1.6% of Group revenue excluding joint ventures (2008: 2.0%).

3.5 Dividends from joint ventures

Dividends received from joint ventures totalled £46.3m (2008: £37.2m), a conversion
rate of 93% (2008: 84%) of joint ventures’ profit after tax and minority interest,
excluding costs allocated by Group.

3.6 Acquisition of subsidiaries

To effect the partnership arrangement between Serco and Guy’s and St Thomas’
NHS Foundation Trust announced on 30 January 2009, in February 2009, Serco
Group plc acquired a 50% interest in GSTS Pathology LLP. The joint venture
arrangement with Guy’s and St Thomas’ NHS Foundation Trust will provide improved
pathology services to the Trust and target the significant national and international
pathology market. Total cash outflows associated with this transaction were £5.5m
including directly attributable costs. Other acquisition costs included the acquisition
of Sandrunner Limited, a UK based specialist consultancy provider, for £0.3m in
January 2009 and further payments in relation to the acquisition of Infovision and
SI in December 2008 of £3.7m and £5.9m respectively.
Due to the proximity of the acquisition of Infovision and SI to the year ended
31 December 2008, the fair values of the acquired companies’ assets, liabilities and
contingent liabilities were determined provisionally. The fair value adjustments arising
from the acquisitions were finalised in the current year, with adjustments made to the
previously published fair values. The Consolidated Balance Sheet at 31 December 2008
has been restated to reflect the finalisation of the fair value adjustments. These
adjustments represent management’s best estimate of the adjustments required to
restate book values to fair values at the date of acquisition. The net effect of these
adjustments is to reduce goodwill by £1.5m.

3.7 Financing

The movement in financing resulted primarily from repayments on our committed
facility and non recourse debt.

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Finance Review
continued

4. Net debt

Figure 4 analyses Serco’s net debt.

Figure 4: Net debt

Year ended 31 December

Group - cash and cash equivalents
Group - loans
Group - obligations under finance leases
Group recourse net debt
Joint venture recourse net cash
Total recourse net debt
Group non recourse debt
Total net debt

4.1 Group recourse net debt

2009
£m
253.7
(619.1)
(22.3)
(387.7)
58.2
(329.5)
(29.0)
(358.5)

2008
£m
199.8
(708.8)
(15.5)
(524.5)
44.5
(480.0)
(34.1)
(514.1)

Group recourse net debt decreased by £136.8m to £387.7m. This reflects the
changes in currency exchange rates which reduced Group recourse net debt by
£52.0m together with the repayment of debt. Group cash and cash equivalents rose
to £253.7m, an increase of £53.9m, primarily reflecting periodic changes in working
capital. Cash and cash equivalents includes encumbered cash of £11.2m (2008: £10.4m).
This is cash securing credit obligations and customer advance payments.

4.2 Group non recourse debt

The Group’s debt is non recourse if no Group company other than the relevant
borrower has an obligation to repay the debt under a guarantee or other
arrangement. The debt is excluded from all of our credit agreements and other
covenant calculations, and therefore has no impact on the Group’s ability to borrow.
Group non recourse debt reduced by £5.1m to £29.0m, primarily as a result of the
payments made in line with the debt repayment schedule on debt relating to our
Driver Examination Services contract in Canada.

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Our performance

5. Pensions

The Group operates and is a member of a number of defined benefit schemes and
defined contribution schemes.
At 31 December 2009, the net liability included in the Consolidated Balance
Sheet arising from our defined benefit pension scheme obligations was £113.6m
(2008: £20.5m), on a pension scheme asset base of £1.4bn.

Figure 5: Defined benefit pension schemes

At 31 December

Group schemes – non contract specific
Contract specific schemes:
– reimbursable
– not certain to be reimbursable
Net retirement benefit liabilities
Intangible assets arising from rights to operate
franchises and contracts
Reimbursable rights debtor
Deferred tax assets/(liabilities)
Net balance sheet liabilities

2009
£m
(120.0)

(144.3)
(29.9)
(294.2)

11.4
144.3
24.9
(113.6)

2008
£m
(0.7)

(89.6)
(24.4)
(114.7)

14.4
89.6
(9.8)
(20.5)

The total pension charge for the year ended 31 December 2009, including the
proportionate share of joint ventures, increased to £92.4m (2008: £85.9m). Within this
charge, the Group’s contributions to UK and other defined contribution pension
schemes increased to £64.8m (2008: £49.0m), reflecting the higher proportion of
Group employees who are now members of defined contribution pension schemes.
The charge relating to the Group’s defined benefit schemes was £27.6m (2008: £36.9m),
principally as a result of changes to inflation assumptions as at the end of 2008.
Serco has three main types of scheme which are accounted for as defined benefit
pension schemes. Each type has its own accounting treatment under International
Financial Reporting Standards. These are:

• Non contract specific – schemes which do not relate to specific contracts or

franchises. For these schemes, we charge the actuarial gain or loss for the year
to the consolidated statement of comprehensive income (SOCI);

• Reimbursable – schemes where we have a right of full cost reimbursement and
therefore include both the pension scheme deficit and offsetting reimbursable
rights debtor in the balance sheet; and

• Not certain to be reimbursable – schemes relating to specific contracts or

franchises, where the deficit will pass back to the customer or on to the next
contractor at the end of the contract. For these schemes, we charge the actuarial
gain or loss on our share of the deficit for the year to the SOCI, recognise a
recoverable intangible asset on the balance sheet at the start of the contract or
franchise and amortise the intangible asset to the income statement over the
contract or franchise life.

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Finance Review
continued

Serco has limited commercial risk in relation to the contract specific schemes, due to
either the right of cost reimbursement or because the deficit will, in general, pass
back to the customer or on to the next contractor at the end of the contract. Among
our non contract specific schemes, the largest is the Serco Pension and Life
Assurance Scheme (SPLAS). At 31 December 2009, SPLAS had a deficit of £54.7m
(2008: surplus of £62.4m). The deficit reflects the effect of the market conditions on
investment returns in the year and an increase in inflation assumptions.
The regular triennial review of SPLAS is currently ongoing. As part of this process, we
are working closely with the Trustees on options for the Scheme.
Figure 6 shows the sensitivity of the liabilities of our pension schemes to changes in
discount rates and to adjustments in the actuarial assumptions for the rate of
inflation, members’ salary increases and life expectancies.

Figure 6: Pension assumptions and sensitivities

Discount rate

Price inflation

Salary

Assumption
5.8%

3.3%

3.7%

Change in assumption
+ 0.5%
- 0.5%
+ 0.5%
- 0.5%
+ 0.5%
- 0.5%

Longevity

20.3-24.4*

Increase by one year

*Post retirement mortality range for male and female, current and future pensioners.

Change in liability
- 8%
+ 9%
+ 7%
- 7%
+ 2%
- 2%
+ 3%

6. Treasury

The Group’s principal debt finance comprises a £400m bank revolving facility which
matures in September 2013 together with a term loan and bilateral facility totalling
US Dollar 550m to fund the acquisition of SI. The term loan and bilateral facility are
repayable between September 2010 and September 2013. There is a scheduled
repayment of US Dollar 92m due in September 2010; thereafter the next repayment
on these facilities is due in September 2011. The facilities, which are syndicated with
a group of 13 banks, are unsecured. As at 31 December 2009, £458m had been
drawn down on these combined facilities (2008: £560m). Excluding the effects of
currency on the US Dollar denominated debt, the equivalent draw down would have
been £514m.
Serco has loan notes in issue under a private placement of £117m, which will be
repaid evenly from 2011 to 2015.

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Our performance

7. Segmental information

As disclosed in note 5 of the Notes to the Consolidated Financial Statements, the
Directors have determined that the segments under IAS 14 continued to be
appropriate under IFRS 8 for 2009. Although management information is presented in
a variety of ways, the reportable segments presented within the financial statements
reflect the principal way in which management information was reported to the Chief
Operating Decision Maker (the Chief Executive and Executive Board) during the year.
As discussed in the Chief Executive’s Statement, the Group has repositioned the
business for growth and, as a result, has created five new divisions. This change was
effective from 1 January 2010. We will present these divisions as our new reportable
segments for the first time in the half year results announcement for the six month
period ended 30 June 2010, including comparatives.
The new reportable segments are:

• Civil Government, comprising UK and Europe civil government and transport;

• Local Government and Commercial, comprising our UK and Europe IT and

BPO, integrated services, education and commercial businesses;

• Defence, Science and Nuclear, bringing together UK and Europe defence and

science-based businesses;

• Americas, comprising US defence, intelligence and federal civil government

agencies operations, and Canadian operations; and

• AMEAA, which consists of our operations in Africa, Middle East, Asia (including

Hong Kong and India) and Australasia.

8. Going concern

The Directors have acknowledged the guidance ‘Going Concern and Liquidity Risk:
Guidance for Directors of UK Companies 2009’, published by the Financial Reporting
Council in October 2009. Whilst the current economic environment remains
uncertain, the broad base of our contract portfolio and with over 90% of our
customers being government bodies, the Group is well placed to manage its
business risks (as discussed in the section Principal risks and uncertainties)
successfully and has adequate resources to continue in operational existence for the
foreseeable future.
The Group’s revenues are largely derived from long-term contracts with governments
which, historically, have been largely unaffected by changes in the general economy.
The contract portfolio is spread across a number of markets, sectors and geographies
such that a downturn in any one segment is highly unlikely to affect the Group as a
whole. In addition, with an order book of £17.1bn and high visibility of future revenue
streams (91% in 2010, 76% in 2011 and 64% in 2012), the Group is well placed to
manage its business risks despite the current uncertain economic climate.
In September 2008, the Group secured medium-term financing by entering into a
five-year revolving credit facility and bilateral facilities. Including the term loan and
US private placements, the Group has in excess of £860m of credit facilities. As at
31 December 2009, the headroom on the facilities was approximately £300m. The
first repayment on these facilities falls due in September 2010 for an amount of
US Dollar 92m. The Group fully expects to meet this repayment through internally
generated cash flows. Based on the information set out above, the Directors believe
that it is appropriate to prepare the financial statements on a going concern basis.

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Resources

Business relationships

Customers
Our ability to develop long-term
relationships with customers is a central
part of our business model. Day-to-day
responsibility for meeting our customers’
needs lies with our contract directors,
who we empower to do what is
necessary to deliver excellent service.
Our approach to working with our
customers is set out in our Governing
Principles (see page 5), which aim to
ensure that we deliver a consistently
good service to all our customers,
whatever we do for them.

We also maintain relationships at all
levels with our customers, so that they
are aware of how we can help them and
we can anticipate their changing needs
and identify opportunities at an early
stage. These relationships lie with our
divisional and Group leaders, including
business development teams and our
external affairs team.

Our reputation with our existing
customers is also vital in winning new
work. Many factors influence our
reputation, including the quality of our
service, our values and public-service
ethos, our capacity to innovate, and our
engagement with our employees and
other stakeholders, such as local
communities. We believe that our high
rebid and new bid win rates demonstrate
the strength of our reputation with new
and existing customers.

Suppliers
Our approach to procurement has four
main strands: to make the most of the
benefits of competitive supplier
selection; to optimise the efficiency and
effectiveness of our processes and
resources; to drive sustainability
throughout our supply chain; and to
develop positive relationships with our
key suppliers.

We have a dedicated procurement and
supply chain team which is responsible
for putting this approach into practice.
As part of this, they continue to enhance
our systems and processes for choosing
and managing our suppliers. This helps
us to maximise the value of our supplier
relationships, makes it quicker and
cheaper for us to transact with them,
and assists with understanding and
monitoring areas such as environmental
impact before our people make a
decision to buy.

Our contracts have many common
purchasing needs. For this reason, we
aim to use carefully chosen preferred
suppliers, enabling us to achieve better
terms and conditions and make the most
of our economies of scale.

The remainder of our contracts’
procurement needs are managed by our
contracts, allowing them to use local
suppliers when appropriate. In addition,
we are a member of Minority Supplier
Development UK, a not-for-profit
organisation which provides a direct link
between companies and ethnic-minority
businesses, to enable the building of
mutually beneficial business
relationships.

Joint ventures
Serco has a number of joint ventures
around the world, particularly in the
transport, defence and science sectors.

Our joint ventures with Abellio (formerly
known as NedRailways) provide
outstanding services to the travelling
public. Together, we run Northern Rail,
which is the country’s largest train
franchise, and Merseyrail, the UK’s most
punctual train operator.

AWE Management Limited (AWE) is our
highly successful joint venture with
Lockheed Martin and Jacobs Engineering
Group Inc.

AWE manages the UK’s Atomic Weapons
Establishment and has consistently
delivered contract outputs on time and
on budget.

In Australia, DMS Maritime, our joint
venture with P&O Maritime Services, is a
key partner for the Australian Defence
Force (ADF) and other agencies. In
partnership with Sodexo, we also deliver
garrison support services to the ADF
through Serco Sodexo Defence Services
Pty Limited.

We continue to develop new business
models, which can include forming joint
ventures with our customers. For
example, in 2009, we created GSTS
Pathology, a groundbreaking joint
venture with Guy’s and St Thomas’ NHS
Foundation Trust, to transform its
pathology services by combining the
clinical and scientific excellence of the
Trust with our service and business
expertise, and target the significant
pathology market.

Strong relationships, based on mutual
trust and respect and clarity of roles, are
essential ingredients if a joint venture is
to deliver excellent customer service.
Our divisional management teams are
responsible for relationships with our
joint venture partners, supported by
members of the Group Executive
Committee and Board as appropriate.
This includes holding regular strategy
and review meetings with our partners.

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Our performance

Strategic partners
We often run contracts as part of a
consortium, either as prime contractor or
as a subcontractor. This allows us to
bring together companies with the skills
to meet the precise requirements of a
bid. For example, at AWE we work
together with Lockheed Martin and
Jacobs Engineering Group to provide
and maintain the warheads for the UK’s
nuclear deterrent.

Our values and the open and honest way
in which we work also make us an
attractive partner for third-sector
organisations, who often lack the scale
and experience to be able to access
major government programmes.

In 2009 we won three Flexible New Deal
contracts with the UK Department of
Work and Pensions. We are delivering
these services through a network of more
than 60 subcontractors, around a third
of which are from the third-sector. These
arrangements allow us to integrate and
co-ordinate the work of our third-sector
partners, allowing them to concentrate on
delivering the best service to end users.

Responsibility for relationships with our
strategic partners lies with the relevant
contract and divisional management.

Our people

Our rapid growth means that the number
of our employees is continually
increasing. As a people-based business,
we have a clear framework for managing
and developing our people, so that we
can continue to succeed.

Our people strategy has three main
components. We want to develop
leaders who are fit for the future and who
will thrive as Serco grows. We want
people who bring service to life, who are
fully integrated and engaged with Serco,
and who we can develop to achieve their
full potential. And we want to make it
easier to manage our people, by
continually enhancing our systems
and processes.

Developing our leaders
As a devolved and fast-growing
organisation, Serco has a high demand
for capable and motivated leaders who
have the potential to grow with us. They
are responsible for managing operations,
securing our future growth and creating
the environment in which our workforce
can do what they do best: serve
customers with passion and skill. The
way they lead is as important as what
they deliver.

We have created a leadership model
known as H3 - Heart, Head and Hands.
These ingredients describe how great
leaders in Serco behave, with an
emphasis on our Governing Principles
and our customers. The components of
the model are summarised below:

Heart. This covers our leaders’ motives
and demonstration of our Governing
Principles. We want them to create our
culture through personal example and
have the courage to stand by their
convictions.

Head. This relates to intellectual and
personal capacity. We want leaders who
can solve complex problems, take a
long-term view, inspire and influence
others, focus on outcomes, innovate,
be resilient and be adaptable to a
situation’s needs.

Hands. This covers skills, knowledge
and experience. We want our leaders to
be skilled at shaping and delivering the
plans and capabilities that will drive our
performance and growth.

Behind each of these components is a
further set of criteria, which explain the
desired behaviours and the standards
against which we appraise our
leaders’ performance.

Developing our leaders is vital for
Serco’s future. During the year, we
profiled our top 100 leaders against the
model. The process ensured that our
leaders fully understand how they align
to the model and have development
plans to help them deliver higher levels
of performance.

In a separate exercise, we have also
undertaken a comprehensive talent
review, led by our Chief Executive. This
involved every business unit around the
world identifying its current and future
leaders, enabling us to create
comprehensive succession plans and
talent pipelines in each part of our
business to support our growth.

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Resources
continued

Integrating, engaging and developing
our people
We are dependent on the skill and
enthusiasm of our people. They enable
us to deliver great service to our
customers and are ultimately responsible
for the strength of our reputation and our
ability to grow. We therefore need to
integrate new joiners, effectively engage
with all our people and help them
achieve their potential. We also
recognise outstanding achievements
through our global Pulse Awards.

Integrating new people
Serco’s growth means that several
thousand people join us every year, as
we win new contracts. We typically find
that they bring with them a service ethos
that matches our own, given that a large
proportion of our employees also began
their careers delivering services in the
public sector. Our approach to managing
contracts liberates our people to put this
ethos into action.

The best method of spreading our values
is for our people to see them in use. Our
leaders have a key role to play, by
making decisions in accordance with our
values. We also prioritise communication
with our people, particularly in the
transition phase after we have won a
contract, so that they understand Serco
and the way we work.

Our approach – and the outcome – is the
same around the world. While there are
always cultural differences between
countries, our values are universal and
our people embrace them wherever they
are based.

Engaging with our people
In 2009, we once again undertook our
global Viewpoint employee survey. More
than three-quarters of our people
responded. This is an excellent rate,
particularly as the nature of many of our
people’s roles meant they were unable to
complete the survey online.

The survey’s results show that our values
are being put into action. Our people
believe that Serco has an open culture of
respect, and that we take into account
different opinions and perspectives,
making employees comfortable to speak
up. The survey also confirmed that our
people are motivated to go beyond what
is required of them, and do what is
needed to get the job done.

Viewpoint also highlighted areas where
we can improve how we work at a local
level. We have created an online tool to
generate action plans to deliver these
improvements. Around 1,500 plans are
logged on the system, with many others
held offline. These plans will help our
leaders enhance the working
environment for our people.

Developing our people
Enabling our people to excel is one of
our Governing Principles, meaning their
development is key. That development
may consist of informal on-the-job
training right through to highly specialist
and technical training. Increasingly we
are moving to a “blended learning”
approach. What this means is an
appropriate balance of face-to-face
learning and web-based learning. We are
in the process of rolling out e-learning
programmes which are both cost
effective for us and flexible for our
people, who can access them at their own
location and at a time that suits them.

We developed our Skills for You
programme in partnership with UK
Government departments, trade unions
and training providers. It offers our
people the chance to improve their
literacy, numeracy and language skills
while continuing with their workplace
learning. Since its introduction, we have
assessed 3,500 of our people with over
800 achieving a qualification.

In 2010 we will be appointing a third
party as our national Skills for Life
partner, who will market our programme
across our UK businesses and offer an
easy, standardised means of engaging
with the programme but with local
flexible delivery tailored to the needs of
each contract.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:20 Page 49

Our performance

Key people-related objectives for 2010

Objective

Comment

Extend learning tools within
the online Serco Academy

Standardise best practice in
people management across
the Group

To connect business
performance metrics and
levels of engagement

We will make tools available company-wide based
on need, including a bespoke online induction
programme due to be launched. All new starters
will complete the programme within three months
of starting and there will be sufficient licences to
also allow participation of existing employees.

We will make it easier for line managers to deliver
a common experience to employees to enable
them to excel. The employee lifecycle will be
documented.
We will develop measures to analyse the link
between engagement and business performance.

Recognising achievement
Our Pulse Awards are designed to
celebrate the very best qualities and
achievements of Serco people, our
customers and partners. The awards are
closely linked to our Governing
Principles. They recognise people who
excel at innovation, inspire through their
leadership, demonstrate outstanding
commitment and make an exceptional
impact on communities, the environment
or in areas such as safety and ethics. In
2009, 158 individuals and teams were
recognised with an award.

Managing our People
We continually look to improve our
efficiency, including the ways we manage
our people. Our aim is to have intuitive,
easy to use tools, processes and
systems which make it easier to manage
our growing workforce and deliver even
higher levels of productivity and service
as a result. We are creating a global
template for all the processes involved in
people management, which will both
reduce cost and ensure a consistent
experience for our people, wherever they
work. We have piloted this in our Dubai
Metro contract.

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Corporate
responsibility

We can only achieve our vision if we are trusted by
all those who touch our business – our customers,
people, partners, suppliers and the communities we
work in. This means we must consider our
responsibilities in everything we do.

Since our inception, we
have been a values-led
business. Our Governing
Principles set out these
values (see page 5) and
our systems and culture
ensure that we operate in
the right way.

We divide corporate responsibility into
four pillars – safety, people, community
and the environment. Our work for our
customers encompasses all four pillars,
but there are many things we do which
go beyond our contractual or
legal requirements.

Our approaches to safety, community
and the environment are summarised
below. Page 47 details how we engage
with, develop and manage our people.
We also publish a separate Corporate
Responsibility Review, which contains
many examples of how we put our
responsibilities into action.

The Business in the Community (BitC)
Corporate Responsibility Index providers
a useful overall measure of our
performance. We were pleased that for
the third year running, we achieved a
gold rating.

Safety
Our approach to safety is simple: we
never compromise. Operating safely is
vital if our people, customers and
society are to trust us.

Often our work is safety-critical: carrying
train passengers, enabling flights with air
traffic control and expert support for the
nuclear industry are just some examples.
In these areas, you would expect our
safety systems to be robust. But we
must have appropriate and consistent
standards wherever we operate, with
strong leadership and engaged people.

It is, of course, morally unacceptable for
people to suffer avoidable injuries, but it
is also good business sense to prevent
them. Avoiding an incident saves time,
repair costs and insurance expenses.
These, though, are only the immediate
costs. Lost trust is much harder and
more expensive to restore. Where
necessary, then, we go beyond our
legal obligations to improve safety.

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Our performance

Our focus on safety resulted in a
significant reduction in our reportable
accident rate, from 995 per 100,000
employees in 2008 to 678 in 2009. This
was partly due to an increase in the
number of employees who joined Serco
in relatively low-risk occupations.
Adjusting for this gives a reportable
accident rate of 930, a good reduction
on the previous year.

The lost time injury rate fell from 1,587
per 100,000 employees to 1,034,
although the average lost time per
incident rose by nearly 7%. We continue
to focus on the prevention of accidents.
In addition, Human Resources are
reviewing the broader issue of all
absence and developing a more
consistent policy for managing it, as well
as more active absence management.

We are always pleased when others
recognise our efforts. Our BitC score for
health, safety and well-being was 92%,
significantly better than the average for

our sector (82%) and for the index
(79%). The Royal Society for the
Prevention of Accidents (RoSPA) gave
our businesses 29 awards and
commendations in 2009. This included
both finalists for RoSPA’s highest
accolade, the Sir George Earle trophy.
Northern Rail won, with the National
Physical Laboratory as runner up. The
British Safety Council also rewarded
our court escorting contract with a
Sword of Honour.

In the US, the safety of our air traffic
control services was recognised again
this year when, for the fifth time since
2003, a Serco-run tower won the Willie F
Card FAA Contract Tower Service Award.
The award is given for excellence in
safety and customer service.

We want to continue to improve our
safety performance and we approach
this in two ways. The first is to
emphasise competency and training, so
our people have the skills, knowledge

and experience to work safely.
Continually refreshing their thinking
about safety is fundamental here.

The second strand is the development of
our monitoring of near misses, so we
can learn from them and stop them – or
a real incident – from happening again.

Across Serco, we are also getting better
at standardising many aspects of our
operations. Our policies set the
requirements, but our businesses have
often developed their own ways of
meeting these requirements. By
standardising, we help our businesses
meet our requirements and free them to
focus on their customers.

We also share best practice. For
example, our team at Port Kembla,
Australia, has passed more than
one million hours since their last lost
time injury. Their approach to safety has
now become a reference point for Serco
in Asia Pacific.

Key objectives for 2010
Our key health and safety objectives for 2010:

Objective

Comment

Continued focus on reducing
reportable incidents

30% reduction by end of 2012 against 2008
baseline

Reduce the amount of lost time
as a result of incidents through
active rehabilitation

Develop systems and processes
to manage and monitor near
miss events more effectively

50% reduction by end of 2012 against 2008
baseline

We will establish a baseline for future target
improvements for 2012

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Corporate responsibility
continued

Community
Much of our work directly benefits the
local communities where we operate.
Many of our people also live in those
communities and we want them to be
proud of what we do. For our business
to thrive, we need communities to trust
us to work in the right way and make a
difference to their lives.

Recruiting from local communities is an
important part of our integration. The
case studies on the Dubai Metro (page
31) and our Australian immigration
centres (page 21) are just two examples
of how we do this.

Customers increasingly use us to drive
social improvements. For example,
councils want the leisure centres we run
to improve health and inclusion, and
reduce crime and joblessness in their area.

Time and again, though, we go beyond
the contract with innovations that help
both us and the community.
Employability, for example, is a common
theme in our community work.

Serco’s sponsorship and bursary for the
Duke of Edinburgh Award equips
disadvantaged children with vital life
skills; building trust, teamwork,
confidence and self-esteem. We also
sponsored Business in the Community’s
Big Conversation campaign, to make
work experience meaningful, relevant
and inspiring. Contracts ranging from
RAF Fylingdales to the National Physical
Laboratory showed school students
what work can offer them.

Our people respond generously to
others’ needs. For example, this year,
our Australian and Middle Eastern
businesses raised significant sums for
the victims of natural disasters. Serco’s
Executive Committee spent four days
building houses for Habitat for Humanity,
while others supported causes close to
their customers.

In total, we aim to invest 1% of our pre-
tax profits into the community, through
donations, assets, gifts in kind and
employee time. In 2009, we invested
£1,746,261, representing approximately
1% of our profit. We also continued to
significantly outperform both the BitC
index average and our sector for
community management. We scored
100% for community investment and
achieved a substantial increase in our
community partnerships score, which
rose from 69% to 83%.

Key objectives for 2010
Our key community-related objectives for 2010:

Objective

Comment

Increasing work experience
for students in the UK

Capture knowledge and improve
working practices with the third
sector

We will develop and implement a sustainable
project to increase the number of worthwhile and
interesting work experience placements for
students and share this knowledge across the
business.

We will develop guidance to help both business
and third sector organisations work together
through better understanding of each others’
practices.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:21 Page 53

Our performance

Environment
Serco’s aim is to minimise our impact
on the environment. Reducing our
carbon dioxide emissions is central to
our environmental work, both in
delivering our contracts and our
company-wide infrastructure. We try to
approach this with the same rigour we
bring to managing safety.

Notwithstanding our moral obligation to
cut our carbon footprint, and the
financial savings we can make, we also
need to comply with tightening laws and
regulations. These include the UK
Government’s CRC Energy Efficiency
Scheme (formerly known as the Carbon
Reduction Commitment), which begins in
April 2010.

Serco completed the Carbon Disclosure
Project. This is an independent not-for-
profit organisation which holds the largest
database of corporate climate change

information in the world. Requests are
issued on behalf of institutional
investors, purchasing organisations and
government bodies. This was the first
year in which Serco has participated in
this Project. Serco achieved a creditable
score of 50 (out of 100). This is at the
high end of our market sector.

During 2009 we reduced our carbon
dioxide emissions from 257.3m tonnes to
226.7m tonnes, a decline of 11.9%.

The majority of our CO2 emissions come
from electricity usage. One of our
programmes is the installation of smart
utility meters. Traditional meters only
allow us to track our energy
consumption on a quarterly basis. Smart
meters give us real-time information,
enabling us to monitor usage and devise
ways to cut it. We can also identify
trends and act quickly when something
such as faulty equipment causes usage
to rise. Overall, we reduced our
electricity consumption by 6.5% in 2009.

Key objectives for 2010
Our key environment objectives for 2010:

The environment also represents a
significant opportunity for Serco, and our
services are increasingly geared towards
helping our customers manage their
responsibilities and winning new work
using our environmental expertise. Our
Sustainability Management Services
business advises customers and
improves our own performance. We also
have a great depth of experience in
environmental services for local
authorities and companies.

Finally, it is important for us to use our
knowledge to inform our customers’
environmental agendas. We do this not
only through our day-to-day interactions
with them but also by joining in the
public debate, on our own behalf and
through bodies such as the
Confederation of British Industry and the
Private Sector Council in the US.
Businesses and public services have an
important role to play in protecting the
environment, and we are determined to
take on our full responsibility in this area.

Objective
10% reduction in CO2/£m
revenue by end 2010 against
2008 baseline (0.0735)

Embed a single environmental
management system and
operating procedures across
all operations

Implement a carbon accounting
system to ensure accurate
consumption reporting on energy,
fuel used for business, travel,
waste and water

Comment

We will continue the work completed in 2009 to
drive a number of initiatives with a view to further
reduce our emissions. These are specific to
divisions and will be monitored through our
internal board structure.

We will be using our experience of implementing
an integrated health and safety management
system in the development and implementation of
the environmental management system. Work
has commenced and is being monitored by the
Environment Oversight Group.
Following a competitive selection process, we
purchased Greenstones Acco2untenterprise
system. This system will go live in the early part of
2010 and provide reporting provision for the CRC
Energy Efficiency Scheme, Carbon Disclosure
Project and Carbon Trust as well as supporting
Serco Group reporting.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:21 Page 54

Principal risks and
uncertainties

Serco has a well-established and embedded system
of internal control, including financial, operational
and compliance controls and risk management,
designed to safeguard shareholders’ investments
and our assets and reputation.

The Board has overall
responsibility for our
internal control system
and for reviewing its
effectiveness, and has
delegated to
management the
implementation of
policies on risk and
control.

We have developed robust systems and
processes to identify and manage the
key risks facing each of our businesses
and the Group as a whole, and all parts
of the business have appropriate risk
and crisis management plans that meet
our policy standards.

During the year we completed a
comprehensive review, with the support
of KPMG LLP (our internal auditors), of
the adequacy of our risk management
approach. The review confirmed the
maturity and effectiveness of current risk
management processes, and also put
forward a number of recommendations
around enhanced oversight, risk
identification and assessment, and
reporting and monitoring. We are
implementing these recommendations to
ensure that risk management remains
current, adds value to the management
of the business and is integral to our
internal audit approach.

Risk management is fundamental to how
we manage our business. Our risk
management policies, systems and
processes are therefore defined and
embedded within the Serco Management
System, as described below. The Board
regularly reviews these, which conform
to the Combined Code’s requirements.

Such policies, systems and processes,
however, can only be designed to
mitigate, rather than eliminate, the risk of
failure to achieve business objectives,
and can only provide reasonable, and
not absolute assurance, against
misstatement or loss. The Board
confirms that these have been in place
for the year under review and up to the
date of approval of the Annual Review
and Accounts.

Our approach to risk within the
Serco Management System

The Serco Management System (SMS)
sets out policy standards, systems and
processes that identify, review and
report risks at all levels of our business
and in the Group as a whole, with the
aim of safeguarding our shareholders’
investments, our stakeholders’
interests, and our assets and
reputation.

We regularly review the risk management
processes we apply throughout our
business as part of the SMS. This
ensures they reflect the nature of the
activities we undertake and the business
and operational risks inherent in them,
and therefore the level of control we
consider necessary to protect our
interests and those of our stakeholders.

These controls and processes fall into
four main areas: identification;
assessment; planning and control; and
monitoring, so that we:

•

identify business objectives that
reflect our stakeholders’ interests,
and the risks associated with
achieving these objectives;

regularly assess our exposure to risk,
including measuring key risk
indicators;

control and reduce risk as far as
reasonably practicable or achievable,
through cost-effective risk mitigation;
and

identify new risks as they arise and
remove risks that are no longer
relevant.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:21 Page 55

Our performance

Risk identification
In identifying the potential risks
associated with achieving our business
objectives, we consider both external
factors arising from the environment we
operate in, and internal risks arising from
the nature of our business, its controls
and processes, and our management
decisions.

Once identified, we document risks in
risk registers, which we maintain at a
contract, business unit, programme,
divisional and Group level. These risk
registers change as new risks emerge
and existing risks diminish, so that the
registers reflect the current key risks. We
review risk registers at least quarterly
and more frequently as required, and the
Board reviews the Group risk register at
each Board meeting.

Risk assessment
We assess the potential effect of each
identified risk on the achievement of our
business objectives and wider
stakeholder interests. To do so, we use a
risk scoring system based on our
assessment of the probability of a risk
materialising, and the effect if it does. We
assess this from three perspectives:

•

the risk’s significance to the
achievement of our business
objectives;

the risk’s significance to society,
including on public safety and the
environment; and

• our ability to influence, control and

mitigate the risk.

Analysis of our key risks allows us to
assess the probability of disruption to our
business objectives, and highlights critical
areas that require management attention.

Risk planning and control
We assign each identified and assessed
risk to a risk owner, who is responsible
for controlling and managing it and
developing a robust and effective plan to
reduce or mitigate the risk. Risk owners
are required to report to the Board on
specific risks. The Board may ask for
additional information or request an audit
to provide additional assurance.

Risk reduction involves taking early
management action to remove or reduce
identified risks before they can affect the
contract or project. We consider options
to eliminate, reduce or control the risks
as part of the risk identification and
analysis process.

Risk mitigation involves us identifying
appropriate measures, including
contingency plans, to reduce the severity
of the risks’ impact, should they occur.
This includes developing crisis
management plans in response to risks
whose potential impact warrants a
specific management process.

The SMS requires every contract to
develop a risk management plan
reflecting assessed risks and supported
by appropriate measures and
contingency plans to mitigate the impact
of the risks.

Risk monitoring
Changes in our external environment,
internal structures, and management
decisions may all affect the nature and
extent of the risks to which the Group is
exposed.

Our risk monitoring process therefore
regularly monitors changes to our
business and the external environment,
to ensure that we respond appropriately
to reduce the impact of emerging risks.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:21 Page 56

Principal risks and uncertainties
continued

Principal risks

Key Internal risks

The Group risk register identifies the
principal risks facing the business,
including those that we manage at a
Group level. The process identifies the
business objectives and the interests of
shareholders and other stakeholders
that are likely, directly or indirectly, to
influence the business’s performance
and its value.

The Group’s key stakeholders include,
but are not limited to, shareholders,
customers, suppliers, staff, trade unions,
government, regulators, banks and
insurers. The way that we operate as a
responsible company recognises the
interests of the community in areas such
as social, environmental and ethical
impact, as described under corporate
responsibility on page 50.

The most significant risks relate to our
reputation, and to operational and
financial performance. A number of our
risks also reflect social, environmental
and ethical issues.

The following summarises the key risks
we have identified that could have a
material impact on our reputation, our
operations, or our financial performance:

• Major accident or incident involving
failure of duty of care or compliance
with regulation, deaths or serious
injuries to public or staff, or
substantial damage to the environment

• Failure to manage our people

effectively, including attracting and
retaining key talent and maintaining
good industrial relations

• Failure to deliver contracted

commitments

• Major information security breach
resulting in loss or compromise of
sensitive company, personal or
customer information

• Major IT failure or prolonged loss of

critical IT systems, including
enterprise applications

•

Increase in people costs, including
pension-related costs

Key External risks

• Significant change in government

policy that impacts market
opportunities or results in changes to
existing or new contracts

• Significant changes in rates of

inflation directly impacting revenue
generation and/or costs

• Failure to have sufficient funding to
meet current and future business
requirements

• Outbreak of pandemic illness that

severely affects our ability to operate
and meet contracted commitments

We also have material investments in
a number of joint ventures, where we
have joint control over management
practices. Our representatives within
these companies ensure that their
processes and procedures for identifying
and managing risk are appropriate and
that internal controls exist and are
regularly monitored.

We keep reputational and emerging risks
under review and inform the Board of
changes. Emerging risks cover longer-
term risks that could represent a threat
to our activities but which are not yet
sufficiently defined to be included as
active risks. Examples of these risks
include climate change and changes in
key markets.

Managing and mitigating risk

Our risk management process enables
us to understand our operational risk
profile. While operational risk can never
be eliminated, we endeavour to
minimise the impact by the consistent
implementation of the SMS, ensuring
that appropriate infrastructure,
controls, systems, staff and
processes are in place.
Some of our key management and
control techniques defined in the SMS
are set out below:

• our operating processes fully reflect
the principles of clear delegation of
authority and segregation of duties

•

comprehensive business review
processes ensure we meet customer
expectations, regulatory
requirements, and performance
criteria including operational
effectiveness, investment returns,
cash flow requirements and
profitability

• we monitor and regularly review key
performance indicators. These
include analysis of business
performance and variances from
plan, customer satisfaction and
retention data, staff turnover and
satisfaction levels, occupational
health and safety incidents, and error
and exception reporting

•

selective recruitment, succession
planning and other human resource
policies and practices ensure that
staff skills are aligned with Serco’s
current and future needs

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:21 Page 57

Our performance

The Head of Internal Audit oversees the
internal audit process, as well as acting
as the conduit for sharing best practice,
and flagging emerging risks to ensure
each part of the business benefits
from the wider scale of the Group’s
assurance activity.

In addition to internal audit, many parts
of our business are subject to other
reviews of their controls by third parties,
including industry regulators, ISO
Standards, customers and other audits.
This third-party scrutiny significantly
increases the scope of auditing
conducted across the Group each year.

The Board confirms that the actions it
considers necessary are being taken to
remedy the failings and weaknesses
which it has determined to be significant
from its review of the internal controls
across the Group, including those of a
joint venture that is being closed. The
Board confirms that it has not been
advised of material weaknesses in
financial reporting as part of the internal
control system.

• we maintain insurance policies
against losses arising from
circumstances such as damage or
destruction of physical assets, theft,
legal liability for third party loss and
professional advice. We review the
adequacy of our insurance cover at
regular intervals

• our Investment Committee meets
regularly to ensure appropriate
governance and the management of
risk associated with larger or higher-
risk bids, acquisitions, disposals and
areas of significant capital expenditure

• we apply robust project management

and change implementation
disciplines to all major projects
including new contract transitions,
acquisitions, new technology
applications, change programmes
and other major initiatives

•

the Directors’ Report describes our
approach to health, safety and
environmental protection. Qualified
and experienced staff in each
business unit provide advice and
support on health, safety and
environmental issues and undertake
regular audits

• we have safety specialists in our

aviation, rail, defence, nuclear and
marine businesses who report to the
Board and maintain and further
develop the very high standards
expected in these industries

•

the Chief Information Officer is
responsible for ensuring that systems
and processes are in place to ensure
the confidentiality, integrity and
availability of sensitive information and
the associated information systems
that support our business activities

• our Ethics Committee has

responsibility for the review of ethical
issues that may arise from our
current and future activities

•

the Company Secretary manages a
confidential reporting service, to which
staff can report illegal, dangerous,
dishonest or unethical activities

Internal audit

An integral part of risk management is
assurance that the controls identified to
manage risks are operating and effective.
The Head of Internal Audit has led the
strategy to transform our assurance
programme so that it is aligned to test
the key controls managing the Group’s
risk. Internal audit is delivered at three
levels across the business:

• Group internal audit;

•

functional internal audit; and

• divisional internal audit.

The Head of Internal Audit leads the
Group internal audit programme, which
is independently delivered by KPMG LLP.
Its findings are reported directly to the
Group Audit Committee. In addition to
the audits conducted by KPMG, the
Head of Internal Audit supplements the
programme by conducting periodic
special reviews as requested by the
Serco Group plc Board or Executive
Committee from time to time.

The functional internal audit programme
supplements the Group internal audit
programme. It addresses finance
processes and controls, through a
centrally provided audit programme
delivered by divisional management on a
peer to peer basis, as well as audit
programmes completed by Group
functional specialists covering health,
safety and environment, and IT policy
compliance.

In addition to these programmes, each
operating division maintains a divisional
risk register, from which we develop a
divisional internal audit programme. This
programme selects a number of
contracts for review based on certain
key risks. These reviews are completed
through a self-assessment programme
focused on testing the controls which
manage and mitigate these key risks.
Divisional audit committees, which track
and report on the progress of the
divisional internal audit programme, meet
three times a year.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 58

Directors, Secretary and Advisors

Chairman

Kevin Beeston

Directors

Leonard V. Broese van Groenou*
Tom Corcoran*
Baroness Ford of Cunninghame*^
Christopher Hyman
Andrew Jenner
David Richardson*

Secretary

Joanne Roberts

*Non-Executive Director
^Senior Independent Director

Registered Office
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY

Serco Group plc is registered in England and
Wales No. 2048608

Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA

Auditors
Deloitte LLP
2 New Street Square
London
EC4A 3BZ

Investment Bankers
UBS Limited
1 Finsbury Avenue
London
EC2M 2PP

Stockbrokers
J.P. Morgan Cazenove
20 Moorgate
London
EC2R 6DA

Merrill Lynch International
2 King Edward Street
London
EC1A 1HQ

Principal Bankers
HSBC Bank PLC
8 Canada Square
London
E14 5HQ

Solicitors
Linklaters LLP
One Silk Street
London
EC2Y 8HQ

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 16:05 Page 59

Corporate Governance Report

Conflicts of interest
The Company’s Articles of Association include provisions
concerning conflicts of interest reflecting amendments which
were approved by shareholders at the 2008 Annual General
Meeting. The Board has in place procedures for Directors to
report any potential or actual conflicts to the other members of
the Board for their authorisation where appropriate. In deciding
whether to authorise a conflict or potential conflict of interest
only non-interested Directors (i.e. those that have no interest in
the matter under consideration) will be able to take the relevant
decision; in taking the decision the Directors must act in a way
they consider, in good faith, will be most likely to promote the
Company’s success. In addition, the Directors may impose
conditions or limitations when giving authorisation if they think
this is appropriate.
The process of reviewing conflicts disclosed, and
authorisations given, is repeated at least annually. Any conflicts
or potential conflicts considered by the Board and any
authorisations given are recorded in the Board minutes and in
a register of Directors' conflicts which is maintained by the
Company Secretary.

Reserved and delegated authorities
There is a formal schedule of matters reserved to the Board.
This schedule, which is reviewed annually, includes approval of:

• Group strategy

• Annual financial and operating plans

• Major capital expenditure, acquisitions or divestments

• Annual and half-year financial results

• Satisfying itself as to the integrity of financial information

• Dividend policy

• Ensuring adequate succession planning for the Board and

senior management and appointing and removing
Directors, the Company Secretary and Committee
members

• Treasury policy

• Review of the effectiveness of the Group’s system of

internal control and risk management process

• Training and development of the Board and the Company

Secretary.

Other specific responsibilities are delegated to Board
Committees which operate within clearly defined terms of
reference. Details of the responsibilities delegated to the
Committees are given on pages 62 and 63.

Corporate Governance Report

Introduction

In managing the affairs of the Group, the Board of Serco
Group plc is committed to achieving high standards of
corporate governance, integrity and business ethics for
all its activities around the world. A fundamental part of the
Group’s corporate governance processes is the Ethics and
Business Conduct Policy Standard that the Company and
Group have adopted to support the highest standards of
corporate governance.
Throughout 2009 Serco Group plc complied fully with the
provisions of Section 1 of the 2008 Combined Code on
Corporate Governance issued by the Financial Reporting
Council (the Code). The paragraphs below, together with Our
performance section on pages 14 to 57 and the Remuneration
Report on pages 70 to 80, provide details of how the Company
has applied the principles and complies with the provisions of
the Code.

The Board of Directors

Board composition
Currently the Board has seven members: the Chairman, two
Executive Directors and four Non-Executive Directors. No
individual or group of individuals dominates the Board’s
decision-making. With the exception of the Chairman who is
presumed under the Code not to be independent, the Board
considers all of the Non-Executive Directors to be
independent. In coming to this conclusion the Board has
determined that each Director is independent in character and
judgement and there are no relationships or circumstances
which are likely to affect, or could appear to affect, the
Directors’ judgements.
Each Director brings a valuable range of experience and
expertise to the Board. The profiles of all Directors can be
found on pages 68 and 69.

The role of the Board
The Board has responsibility for the overall management and
performance of the Group, the approval of its long-term
objectives and commercial strategy and for ensuring that any
necessary corrective action is taken promptly. Reporting to the
Board, the Corporate Assurance Group (CAG) is tasked by the
Group to develop and oversee corporate processes for the
identification and management of business risks and the
appropriate application of the Serco Management System
(SMS) and corporate responsibility activities throughout the
Group. The Our performance section on pages 14 to 57 details
the internal control and risk policies, procedures and
management framework adopted by the Group. The Corporate
Responsibility Review, which covers the whole spectrum of
corporate assurance processes and outcomes for 2009, is
available online at www.serco.com and illustrates how Serco’s
approach to corporate assurance and responsibility translates
from the Board into everyday working practices.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 60

Information flow
Senior executives below Board level attend certain Board
meetings at which they make presentations on the results and
strategies of their divisional units and functional areas of the
Group. Board members are given appropriate documents in
advance of each Board meeting and each Committee meeting,
as appropriate.
Board meetings are routinely held four times a year over two
days at a time and are structured to allow open discussion of
the strategy, trading and financial performance and risk
management of the Group. Board and Committee meetings are
held at varying locations and the opportunity is used to
combine the formal business of the Board with site visits and
divisional presentations and discussions. Additional Board
meetings are scheduled if required, usually to discuss major
transactions, if any.
The attendance of individual Directors at Board meetings held
during the year is shown in the table on page 61.

Company Secretary and independent advice
The Company Secretary is responsible for advising the Board
on all corporate governance matters, ensuring that all Board
procedures are followed, ensuring good information flow and
facilitating induction programmes for Directors. All Directors
have access to the advice and services of the Company
Secretary.
The Board has approved a procedure for Directors to take
independent professional advice, if necessary, at the
Company’s expense.

Chairman and Chief Executive
The roles of the Chairman and the Chief Executive are
separately held and the division of their responsibilities is
clearly established, set out in writing, and agreed by the Board.
As Chairman, Kevin Beeston is responsible for:

• Ensuring the effective running of the Board, its agenda and

processes

• Promoting the highest standards of corporate governance

and ensuring appropriate communication with shareholders
on these standards and the Group’s overall performance

• Ensuring appropriate Director development and succession

planning for the Board.

In October 2009 Kevin Beeston announced his intention to
retire from the Board of Serco Group plc at the conclusion of
the Company’s 2010 Annual General Meeting. The procedure
for the appointment of his successor is underway, led by
Margaret Ford, Senior Independent Director.

The Chief Executive, Christopher Hyman, is responsible for:

• The formation and implementation of the Group’s global

strategy

• Delivery of the Group’s business plan

• Providing motivation and leadership to the operating

divisions, chairing the Global Management Board and
setting its style and tone

• Setting the overall policy and direction of Serco’s business

operations, investments and other activities within a
framework of prudent and effective risk management and
ensuring that divisions and functions control those risks
satisfactorily

• Providing leadership and representation of the Group with

major customers and industry organisations.

Senior Independent Director
Margaret Ford was appointed Senior Independent Director in
October 2007. As part of her role, Margaret is available to
shareholders if they have any issues or wish to discuss any
aspects of the Company’s business without the Executive
Directors or Chairman present.

External directorships for Executive Directors
The Board considers that Executive Directors can gain valuable
experience and knowledge through appropriate and limited
non-executive appointments in other listed companies or
independent sector organisations. The Board is careful to
ensure that any such appointments do not compromise the
effective management of the Group and that these are
approved in advance of any appointments being taken up.
Details of the fees received by Executive Directors for external
appointments can be found in the Remuneration Report on
page 73.

Significant other commitments of the Chairman
Kevin Beeston is non-executive Chairman of Partnerships in
Care, Infinitas Learning BV and Domestic and General Ltd,
and is a non-executive Director of IMI plc.
The Board continues to believe that Kevin holds a
well-balanced portfolio of positions which allow him
to appropriately perform his duties as Chairman for the
remainder of his tenure.

Re-election of Directors
In accordance with the Company’s Articles of Association, a
Director must retire at the annual general meeting (but is
eligible for reappointment) if he or she has held office for more
than 30 months (as at the date of the notice convening the
annual general meeting) since he or she was appointed or last
reappointed. Any Directors appointed by the Board since the
last annual general meeting must stand for re-election at the
next annual general meeting. Any Non-Executive Directors who
have served for more than nine years will be subject to annual
re-election.
The names of the Directors retiring and standing for re-election
at the 2010 Annual General Meeting are set out in the Notice of
Annual General Meeting.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 61

Corporate Governance Report

The Non-Executive Directors

Board effectiveness

Independence
All the Non-Executive Directors are independent of
management and have no cross-directorships or significant
links which could materially interfere with the exercise of
independent judgement.

Term of appointment
All Non-Executive Directors are appointed for an initial term of
three years. Thereafter, subject to satisfactory performance,
they may serve one or two additional three-year terms, with a
thorough review of their continued independence and
suitability to continue as Non-Executive Directors being
undertaken if they are to remain on the Board for more than
nine years. The terms and conditions of the appointment of the
Directors are summarised in the Remuneration Report on
pages 73 and 74 and are available on request from the
Company Secretary.

Meetings of Non-Executive Directors
Non-Executive Directors meet separately (without the
Chairman or Executive Directors being present) at least once a
year principally to appraise the Chairman’s performance. This
meeting is chaired by the Senior Independent Director.

Board meetings and attendance

The Board holds its meetings on a quarterly basis with ad hoc
meetings in between if required. Board meetings are scheduled
over two days and are held at varying Group operating
locations usually including one overseas meeting per annum.
This allows a thorough exposure to the Group’s activities,
customers and management. The frequency and content of
Board meetings are reviewed by the Board annually.
The attendance of the individual Directors at Board and
Committee meetings during 2009 was as follows:

Kevin Beeston
Tom Corcoran
Christopher Hyman
Andrew Jenner
Leonard V. Broese van
Groenou

Margaret Ford
David Richardson

Board
(4 meetings)
4
4
4
4

Audit Remuneration Nomination
(3 meetings)
2
3
n/a
n/a

(4 meetings)
n/a
4
n/a
n/a

(3 meetings)
n/a
3
n/a
n/a

4
4
4

3
3
3

4
4
4

3
3
3

Note:
1. n/a means that the specified Director is not a member of that Committee,

although he or she may attend meetings at the invitation of the Chairman of
the Committee.

Induction
On joining the Board, Directors are given background
information describing the Company and its activities. They
receive an induction pack which includes information on all the
governance processes of the Group, the roles and responsibilities
of the Board, Committees and other management teams and a
range of other appropriate information about the Group, its
activities and its advisors. Meetings are also arranged with a
range of key people from across the Group on a structured basis
to assist with a Director’s induction. Visits are also arranged,
where possible, to a number of contracts around the country.

Continued professional development
During 2009 the Board members were all engaged in a
range of training and professional development activities.
In November 2009 the Company ran a technical workshop for
the members of the Audit Committee which considered the
impact of corporate governance developments, such as the
findings of the Walker review, as well as technical accounting
areas specifically relevant to the Company. The workshop was
led by our external auditors, Deloitte LLP. All training activities
are considered by the Board, which also considers the training
needs of the Company Secretary. All Board members are
encouraged to attend relevant training courses at the
Company’s expense. The training and development needs
of the Directors and the Company Secretary fall within the
remit of the Board, as it considers itself best placed to
perform this role.

Performance evaluation
The Group recognises the importance of a comprehensive
evaluation process for the Board and ensures that comments
and recommendations are considered carefully and
implemented where appropriate to ensure its continued
development. A formal evaluation has been undertaken of the
performance of the Board and its Committees during 2009.
The evaluation was performed through the completion of an
evaluation questionnaire followed by one-to-one meetings for
all Directors. The Audit Committee evaluation was performed
by an external facilitator. Matters covered by the Board
questionnaire included: the effectiveness of Board meetings;
risk and risk management; Group strategy; the structure and
composition of the Board including the skill-set and experience
of its members; finance and strategy; and stakeholder
engagement. The Board concluded that appropriate actions
have been put in place to address all matters raised, including
those identified as part of the 2008 review, and that overall the
Board and its Committees continued to operate effectively
throughout the period.
The Directors continue to believe the experience and diversity
of the Board members are key strengths, along with a strong
sense of value. The Board feel well informed and key issues
such as risk and strategy are well managed, with sufficient
opportunity for challenge and debate. A revision to the timings
of Board meetings to improve the timing of information flow
has been implemented, however the number of Board
meetings is a subject which the Board intend to keep under
review. The composition of the Board remains a key focus,
with the recruitment of a new Chairman being a critical factor
in this regard.

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Performance evaluation continued
The use of an external facilitator was considered for the
evaluation of the Board and all its Committees, as it was for
the Audit Committee, and it was agreed that the internal
process followed was sufficiently robust. This will be kept
under close consideration for future periods and the Board will
remain mindful of any governance requirements that may
evolve on this matter.
In addition an evaluation of the Chairman’s performance led by
the Senior Independent Director (taking into account the views
of both the Non-Executive and Executive Directors) was
carried out during the year.

Board committees

The Board has delegated authority to a number of permanent
Committees to deal with matters in accordance with written
terms of reference. The terms of reference for all Committees
are reviewed on a regular basis by the Board to ensure they
are still appropriate and reflect any changes in good practice
and governance; these are available online at www.serco.com.
Committees are authorised to obtain outside legal or other
independent professional advice if they consider it necessary.

The Audit Committee and Audit Committee Report
Membership: The Audit Committee consists solely of
independent Non-Executive Directors. It is chaired by David
Richardson and comprises Margaret Ford, Leonard V. Broese
van Groenou and Tom Corcoran.
The Chairman of the Committee has recent and relevant
experience for this role. The Audit Committee met three times
during the year. At the invitation of the Committee, the Finance
Director, the Head of Internal Audit, KPMG LLP (the Group’s
internal audit providers), and Deloitte LLP (the external
auditors), attend meetings. The Committee meets with each of
the internal auditors, external auditors and the Head of Internal
Audit separately at least once a year. All Directors have access
to the minutes of the Audit Committee meetings.

Responsibilities: The main responsibilities of the Audit
Committee are:

• To monitor the integrity of the financial statements of the

Company, including interim management statements, and
any formal announcements relating to the Company’s
financial performance, reviewing significant financial
reporting judgements contained in them

• To review the internal audit programme and ensure that the
internal audit function is adequately resourced and has
appropriate standing with the Company

• To review management’s and the internal auditors’ reports

on the effectiveness of systems for internal financial
control, financial reporting and risk management

• To consider the appointment, reappointment and removal
of the external auditors and assess independence of the
external auditors, ensuring that key partners are rotated at
appropriate intervals

• To recommend the audit fee to the Board and pre-approve
any fees in respect of non-audit services provided by the
external auditors and to ensure that the provision of
non-audit services does not impair the external auditors’
independence or objectivity

• To discuss with the external auditors, before the audit
commences, the nature and scope of the audit and to
review the auditors’ quality control procedures and steps
taken by the auditors to respond to changes in regulatory
and other requirements

• To oversee the process for selecting the external auditors

and make appropriate recommendations through the Board
to the shareholders to consider at the annual general
meeting.

Additionally, in accordance with the Combined Code, the
Committee is responsible for a formal whistleblowing policy
and procedure which applies throughout the Group.
Responsibility for the operation of this policy has been
delegated to the Company Secretary.
Members of the Audit Committee have received updates on
accounting standards and generally accepted accounting
practice on a quarterly basis as part of the Finance Director’s
report to the Board, and also on a half-yearly basis from the
external auditors.
During 2009 the Audit Committee discharged fully its
responsibilities listed above and, in doing so, considered the
following:

• Corporate Governance Report and statement of Directors’
Responsibilities for inclusion in the 2008 Annual Review
and Accounts

• 2009 Half Year Report and Auditors’ report thereon

• 2009 external audit fees

• Review of the whistleblowing policy

• Assessment of the Audit Committee and the external and

internal auditors (using an external facilitator)

• 2009 internal audit programme and the proposed 2010

programme

• The continuing independence of the external auditors.

Non-audit services: The Committee has reconfirmed its
policy on the provision of audit and non-audit services by
Deloitte LLP. It determined three categories of services;
Approved (e.g. audit and related assurance services),
Permitted (e.g. tax compliance and due diligence) and
Not Permitted (e.g. design/implementation of financial
information systems and quasi management services).
The Committee, the Company, and Deloitte LLP all monitor
compliance with the policy and review at each meeting the
fees earned and the estimates for the year.
The Group has complied with the policy throughout the year.
Where appropriate, non-audit services have been provided by
companies other than Deloitte LLP to safeguard auditor
objectivity and independence.

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Corporate Governance Report

Representatives from across the Serco business were invited
to the meetings, as appropriate, to discuss aspects of their
business or give presentations on specific topics. A senior
group of the GMB, the Executive Team, continued to operate
throughout 2009. Also chaired by the Chief Executive, it
comprised four members including the Executive Directors,
and had responsibility for the oversight of all aspects of the
day-to-day operations and trading of the Group. The Executive
Team met 11 times during the year.
With effect from 1 January 2010, a new senior management
structure has been introduced, which replaces that which was
in place during 2009. A new Executive Committee has been
established which is chaired by the Chief Executive and
comprises twelve other members, including the Group Finance
Director, Regional Chief Executives and other selected
corporate function heads. The Committee has delegated
responsibility from the Board to ensure the effective direction
and control of the business and to deliver the Group’s long-
term strategy and goals and will meet on a monthly basis.

Relationship with shareholders

The Company’s relationship with shareholders is given a high
priority. The Annual Review and Accounts is available to all
shareholders and, until 2009, a shorter Annual Review and
Summary Financial Statement was also available. Due to the
increasing length and complexity of this summary document it
has been decided that we will no longer produce this and all
shareholders who receive hard copy shareholder documents
will receive the full annual review for this and future years.
Shareholders were also advised at the time of our half-year
results announcement that we were no longer producing a
printed report of those results. Instead, a letter summarising
those results was issued and a copy of the full stock exchange
announcement was available on request.
Regular trading updates are published ahead of close periods
and before the annual general meeting by press release. In
addition, press releases and stock exchange announcements
are made regarding significant contracts or transactions. All
trading announcements are also posted on the Group’s
website www.serco.com.
Our communications strategy remains under review, including
making greater use of online media. Shareholders will be
contacted at the relevant time regarding any changes which
may affect them.

Annual General Meeting

Individual shareholders have the opportunity at the annual
general meeting to question the Chairman and through him the
chairs of the various Board committees and other Directors.
Details of the meeting are set out in the notice of annual
general meeting which is sent to shareholders and which
contains the text of the resolutions to be proposed and
explanatory notes. Shareholders attending will be advised of
the number of proxy votes lodged for each resolution, in the
categories “for” and “against” together with the number of
“votes withheld”. This information is also posted on the
Group’s website www.serco.com.

Auditors’ independence: The independence, objectivity and
effectiveness of the external auditors have been examined by
the Committee and discussions were held regarding their terms
of engagement, remuneration and proposal for partner rotation.
The appointment of Senior Statutory Auditor is rotated every
five years and, on that basis, the 2009 audit will be the last
year of Nigel Mercer’s tenure; he will be replaced by Richard
Knights, subject to shareholders’ approval of Deloitte LLP’s
reappointment referred to below. There are no contractual
obligations that restrict the Company’s current choice of
external auditor. The Committee recommended to the
Board that Deloitte LLP be proposed for reappointment
at the forthcoming 2010 Annual General Meeting. This
recommendation has been accepted and will be proposed
to shareholders.

The Nomination Committee
Membership: The Nomination Committee is chaired by Kevin
Beeston and comprises Margaret Ford, David Richardson,
Leonard V. Broese van Groenou and Tom Corcoran. The
Committee met three times during 2009.

Responsibilities: Matters considered during the year included
succession and contingency planning, Board structure and
composition and the appointment of a successor to the
Chairman, Kevin Beeston; at the meeting to discuss this latter
item, Kevin Beeston stood down as Committee Chairman, a
role assumed by Margaret Ford. No appointments were made
to the Board during the year. The Committee has responsibility
for the identification and nomination, for the approval of the
Board, of candidates to fill board vacancies as and when they
arise, engaging external search consultants as and when
necessary.
The Nominations Committee completed a robust tender
process which resulted in the appointment of a firm of external
executive search consultants being engaged for the
appointment of a new Chairman. In consultation with the
chosen search consultants, a specification was drawn up of
the role and attributes were identified that were felt to be
essential for its effective performance, including what would
be considered acceptable in terms of time commitment.
A rigorous selection process is currently in progress and
is being led, on behalf of the Nomination Committee, by
Margaret Ford, Senior Independent Director.

The Remuneration Committee
Details of the Remuneration Committee and its policies
together with the Directors’ remuneration, emoluments and
interests in the Company’s share capital are set out in the
Remuneration Report on pages 70 to 80.

Executive Committees

Throughout 2009, the Board delegated responsibility for the
day-to-day management of the business to the Global
Management Board (GMB). The GMB, chaired by the Chief
Executive, Christopher Hyman, comprised 17 senior managers
representing each of the Group’s operating divisions and a
number of functional heads, including both Executive
Directors. The GMB met formally four times during the year,
over two days at a time, to review the Group’s activities and
discuss management and operational issues.

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Institutional investors

Business conduct

The Chief Executive and Finance Director have regular
dialogue with institutional investors. The Chairman also meets
with institutional investors from time to time and as required.
The Company’s investor relations programme and day-to-day
activities are managed by the Head of Investor Relations. As
part of the role of Senior Independent Director, Margaret Ford
is also available to meet shareholders should it be required.
In addition, further dialogue continued during 2009, ahead of
the Company’s annual general meeting, between the Chairman
of the Remuneration Committee and the Company’s largest
shareholders (and representative bodies) in connection with the
Company’s triennial review of executive remuneration.
The Board receives an investor relations report on a quarterly
basis. This reviews share price movements and valuation,
changes in the share register, the Company’s recent and
planned investor relations activities, communication with
shareholders, analyst recommendations and significant news
from the market and support services sector. The report
ensures that the Board has a clear understanding of the
Company’s investor relations performance.

Group website

The Group website www.serco.com is a primary source of
information on the Group. The site includes an area tailored for
investors, including information such as an archive of all
reports, announcements, presentations and webcasts, share
price tools, the terms of reference for all Board Committees
and information on voting at the annual general meeting. It also
has a link directly to the Company’s registrars, allowing
shareholders to view their shareholding online and to vote on
the resolutions set out in the notice of annual general meeting.

Serco Group operates within a management system that
defines the policies, standards and processes to be applied
where we operate. Integral to this are our policies on Ethics
and Business Conduct and Human Rights that apply to all
business divisions, operating companies and business units
throughout the world. These two policies outline the Group’s
position on a wide range of ethical and legal issues including
conflicts of interest, financial inducements, human rights and
legal and regulatory compliance. They apply to Directors and
to all employees regardless of their position or location.
Recognising that ethical dilemmas may arise in a growing
company the Group has introduced an Ethics Consultation
Process that is to be followed to determine the Group’s
position on particular issues. To support this process an Ethics
Committee has been established comprising the Executive
Team, with a quorum of three and chaired by the Chief
Executive. As the leadership of the Company, the Executive
Team will make any fine judgements about what it considers
acceptable or otherwise.
Serco has established a dedicated whistleblowing hotline so
that employees can seek guidance or express any concerns on
Group-related issues. The Company Secretary investigates any
issues raised independently and reports back to the Board.
Reports can be made anonymously and without fear of
retaliation. The Group maintains a position of impartiality with
respect to party politics. Accordingly, it does not contribute
funds to any political party. It does, however, contribute to the
public debate of policy issues that may affect it in the countries
in which it operates.

Internal control and risk management

Further to the comments above regarding Corporate
Assurance, details of the Group’s internal control and risk
management processes are contained in pages 54 to 57 of the
Our performance section. The Board confirms that the actions
it considers necessary have been taken to remedy any failings
and weaknesses which it has determined to be significant
from its review of the Group’s internal controls and risk
management processes.

Going concern

The Directors have acknowledged the guidance on going
concern and financial reporting published by the Financial
Reporting Council in October 2009. This is discussed in the
Finance Review starting on page 38.

Approved by the Board of Directors and signed on its
behalf by:

Joanne Roberts
Secretary
25 February 2010

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Directors’ Report

Annual Review and Accounts

Substantial shareholdings

The Directors have pleasure in presenting the Annual Review
and Accounts of the Group for the year ended 31 December
2009. Comparative figures used in this report are for the
year ended 31 December 2008. The Corporate Governance
Report set out on pages 59 to 64 forms part of the Statutory
Directors’ Report.

Activities

Serco Group plc is a holding company which operates via its
subsidiaries and its joint ventures to improve services by
managing people, processes, technology and assets more
effectively. Serco supports governments, agencies and
companies by offering operational, management and
consulting expertise in the aviation, defence, education, health,
home affairs, local government, nuclear, science, technology,
transport and commercial sectors.
The Our performance section on pages 14 to 57 reports on the
activities during the year, post balance sheet events and likely
future developments. The information in this section, which is
required to fulfil the requirements of the Business Review, is
incorporated in this Directors’ Report by reference.

Share capital

The issued share capital of the Company, together with the
details of shares issued during the year is shown in note 28
to the Consolidated Financial Statements.
The powers of the Directors to issue or buy back shares is
restricted to that approved at the Company’s annual general
meeting.
The rules about the appointment and replacement of Directors
are contained in the Company’s Articles of Association.
Changes to the Articles of Association must be approved by
the shareholders in accordance with the legislation in force
from time to time.

Dividends

An interim dividend of 1.85p (2008: 1.48p) per ordinary share
was paid on 16 October 2009. The Directors recommend a
final dividend of 4.40p (2008: 3.52p) per ordinary share which,
if approved by shareholders at the Annual General Meeting, will
be paid on 19 May 2010 to those shareholders on the register
at the close of business on 12 March 2010.

As at 25 February 2010* the Company had been notified under
Rule 5 of the Disclosure Rules and Transparency Rules of the
Financial Services Authority of the following holdings of voting
rights in its shares:

Lloyds Banking Group plc
Fidelity International Limited
Baillie Gifford & Co
Newton Investment Management Limited
HBOS plc
Legal & General Group plc
Ignis Investment Services Limited

Number of shares
(millions)
24.2
23.9
24.0
23.6
20.5
20.3
19.5

% held
4.96
4.93
4.92
4.85
4.22
3.99
3.98

The Directors are unaware of any restrictions on transfer of
securities in the Company or on voting rights. There are also
no known agreements between holders of the Company’s
securities which may result in such restrictions.

Directors

The current members of the Board together with biographical
details of each Director are set out on pages 68 and 69.
In October 2009 Kevin Beeston announced his intention to
retire from the Board of Serco Group plc at the conclusion of
the Company’s 2010 Annual General Meeting.

Directors’ interests

With the exception of the Executive Directors’ service
contracts and the Non-Executive Directors’ letters of
appointment, there are no contracts in which any Director has
an interest.
Certain change in control conditions are included in the service
contracts of Directors which provide compensation or
reduction of notice periods in the event of a change in control
of the Company.
Details of the Directors’ interests in the ordinary shares and
options over the ordinary shares of the Company are set out in
the Remuneration Report on pages 70 to 80.

Annual general meeting

The Annual General Meeting of the Company will be held at
the Queen Elizabeth II Conference Centre, London at 11.00am
on 11 May 2010.
The Notice of Annual General Meeting together with
explanatory notes is sent to shareholders with this Review.

Financial risk policies

A summary of the Group’s treasury policies and objectives
relating to financial risk management, including exposure to
associated risks, is on pages 110 to 116.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 66

Employment policies

Creditor payment policies

The Board is committed to maintaining a working environment
where staff are individually valued and recognised. Group
companies and divisions operate within a framework of human
resources policies, practices and regulations appropriate to
their own market sector and country of operation.
The Group is committed to ensuring equal opportunity,
honouring the rights of the individual and fostering partnership
and trust in every working relationship. Policies and procedures
for recruitment, training and career development promote
equality of opportunity regardless of gender, sexual orientation,
age, marital status, disability, race, religion or other beliefs and
ethnic or national origin.
The Group gives full consideration to applications for
employment, career development and promotion, received
from the disabled and offers employment when suitable
opportunities arise. If employees become disabled during their
service with the Group, wherever practicable, arrangements are
made to continue their employment and training.
The Group remains proud of its record of managing employee
relations and continues to believe that the structure of
individual and collective consultation and negotiation are best
developed at a local level.
Over the years, the Group has demonstrated that working with
trade unions and creating effective partnerships allows
improvements to be delivered in business performance as well
as terms and conditions of employment. Where employees
choose not to belong to a trade union, employee
communication forums such as works councils exist to ensure
involvement of staff within the business.
Participation by staff in the success of the Group is encouraged
by the availability of Sharesave, a share option plan and long
term incentive plans for senior management, which effectively
aligns their interests with those of shareholders by requiring
that performance conditions are achieved prior to exercise.

Corporate responsibility

The Group maintains a focus on corporate responsibility
through a structure model that is applied across the business.
Our corporate responsibility model focuses on our people,
safety, the environment and the communities we serve. This
model forms an integral part of our management system and is
supported by defined policies in all of the areas it covers.
These are applied within the context of our policies on Ethics
and Business Conduct and Human Rights. Activities are
reported quarterly as part of our internal assurance reporting
process.
Further information on our approach to corporate responsibility
and how we have delivered our commitments is contained in
the Corporate Responsibility Review which is available online
at www.serco.com. This site also provides an overview of our
approach to corporate responsibility, our management system
and our policies.

The Group requires each of its business units to negotiate
and agree terms and conditions for payment for the supply
of capital and revenue items just as keenly as they negotiate
prices and other commercial matters.
Suppliers are made aware of the terms and the way in which
disputes are to be settled. Payment is then made in
accordance with those terms.
The Group’s average creditor payment terms in 2009 were
32 days (2008: 28 days).

Donations

The Group continues to encourage all staff to participate
in their local communities and has a process to capture
investment on a worldwide basis. This measure is based
upon the Business in The Community (BiTC) reporting format.
The value of this investment in 2009 at £1,746,261
(2008: £1,767,168) represents 1.0% of the Group’s
pre-tax profit.
During the year neither the Company nor the Group made
political donations and they intend to continue with this policy.
The US businesses which joined the Group in 2008 as part of
the acquisition of SI International have a Political Action
Committee (PAC) which is funded entirely by employees and
their spouses. No funds are provided to the PAC by Serco, nor
will they be, and any administrative services provided to the
PAC by the US business are fully charged to and paid for by
the PAC, and the Company does not therefore consider these
to be political donations. Employee contributions are entirely
voluntary and no pressure is placed on employees to
participate. Under US law, an employee-funded PAC must bear
the name of the employing company.

Financial statements

At the date of this report, as far as each Director is aware,
there is no relevant audit information of which the Group’s
auditors are unaware. Each Director has taken all the steps
that he/she ought to have taken as a Director in order to make
himself/herself aware of any relevant audit information and to
establish that the Group’s auditors are aware of that information.

Auditors

Deloitte LLP have expressed their willingness to continue in
office as auditors and a resolution to reappoint them will be
proposed at the forthcoming annual general meeting.
Approved by the Board of Directors and signed on its
behalf by:

Joanne Roberts
Secretary
25 February 2010

*As at 9 March 2010, the Company had not been notified of
any changes or additions to these notifiable interests.

Directors’ Responsibilities

The Directors are responsible for keeping proper accounting
records that disclose with reasonable accuracy at any time the
financial position of the company and enable them to ensure
that the parent company financial statements comply with the
Companies Act 2006. They are also responsible for
safeguarding the assets of the company and hence for taking
reasonable steps for the prevention and detection of fraud and
other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.

We confirm to the best of our knowledge:

•

the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company and the undertakings included in the
consolidation taken as a whole; and

the management report, which is incorporated into the
Directors’ Report, includes a fair review of the development
and performance of the business and the position of the
Company and the undertakings included in the
consolidation taken as a whole, together with a description
of the principal risks and uncertainties they face.

Approved by the Board of Directors and signed on its
behalf by:

Joanne Roberts
Secretary
25 February 2010

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Directors’ Responsibilities

The Directors are responsible for preparing the Annual
Review, Directors Report, Remuneration Report and the
Consolidated Financial Statements in accordance with
applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. The Directors are required
by the IAS Regulation to prepare the Group financial
statements under International Financial Reporting Standards
(IFRS) as adopted by the European Union. The Group financial
statements are also required by law to be properly prepared in
accordance with the Companies Act 2006 and Article 4 of the
IAS Regulation.
International Accounting Standard 1 requires that IFRS
financial statements present fairly for each financial year the
Group’s financial position, financial performance and cash
flows. This requires the faithful representation of the effects of
transactions, other events and conditions in accordance with
the definitions and recognition criteria for assets, liabilities,
income and expenses set out in the International Accounting
Standards Board’s ‘Framework for the Preparation and
Presentation of Financial Statements’. In virtually all
circumstances, a fair presentation will be achieved by
compliance with all applicable IFRSs.

Directors are also required to:

• 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 Group’s financial
position and financial performance; and

• make an assessment of the company’s ability to continue

as a going concern.

The Directors have elected to prepare the parent Company
Financial Statements in accordance with United Kingdom
Generally Accepted Accounting Practice. The parent company
financial statements are required by law to give a true and fair
view of the state of affairs of the company and of the profit or
loss of the company for that period. In preparing these
financial statements, the Directors are required to:

•

select suitable accounting policies and then apply them
consistently;

• make judgments and estimates that are reasonable and

prudent;

•

state whether applicable accounting standards have been
followed; and

• prepare the financial statements on the going concern
basis unless it is inappropriate to presume that the
company will continue in business.

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Directors’ profiles

Kevin Stanley Beeston FCMA (47)

Christopher Rajendran Hyman CA (SA) (46)

Chairman (3)
Kevin Beeston became Non-Executive Chairman of Serco
Group plc in September 2007, having previously served as the
Group's Executive Chairman, Chief Executive and Finance
Director since joining the Group in 1985. In addition, he is the
non-executive Chairman of Partnerships in Care, Infinitas
Learning BV and Domestic and General Ltd, and is a non-
executive Director of IMI plc.

Chief Executive
Christopher Hyman was appointed Chief Executive of Serco
Group plc in 2002. He is responsible for the day to day
management of the business as well as setting the vision and
strategy of the Group. He is also Chairman of the Prince of
Wales' charity In Kind Direct, and a Trustee of the Africa
Foundation. Christopher is a Trustee Director of the Board for
Business in the Community and is Chairman for The Prince’s
Seeing is Believing Programme. He is also a member of the
UK Commission for Employment and Skills.
Christopher graduated from Natal University in Durban, South
Africa and qualified as a chartered accountant, serving with
Arthur Andersen and Ernst & Young before joining Serco in
1994 as the European Finance Director. He was appointed
Group Company Secretary in 1996, Corporate Finance Director
in 1997 and Group Finance Director in April 1999.

Andrew Mark Jenner ACA (41)

Finance Director
Andrew was appointed Group Finance Director in May 2002.
He joined Serco in 1996 as Group Financial Controller, having
previously worked for Unilever and Deloitte & Touche LLP. He
became Corporate Finance Director with additional
responsibility for treasury activities in 1999 before joining the
Board in 2002. Andrew shares responsibility with the Chief
Executive for our relationship with shareholders and the City.
He is also responsible for the Group's risk management and
assurance framework and its PFI investment business.
Andrew is a non-executive Director of Galliford Try plc, one of
the UK’s leading construction and housebuilding groups and is
Chairman of its Audit Committee.

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Directors’ profiles

From left to right:
Leonard V. Broese van Groenou Non-Executive Director
Joanne Roberts Company Secretary
Kevin Beeston Chairman
Christopher Hyman Chief Executive
Margaret, Baroness Ford of Cunninghame Senior Independent Director
Tom Corcoran Non-Executive Director
David Richardson Non-Executive Director
Andrew Jenner Finance Director

Tom Corcoran BA PhD (65)

Baroness Ford of Cunninghame MA MPhil (52)

Non-Executive Director (1) (2) (3)
Tom joined Serco in December 2007 as a Non-Executive
Director. He brings 40 years of global business experience,
particularly in the US aerospace and defence contracting
industry. He is currently Senior Advisor to private equity firm
The Carlyle Group and President of Corcoran Enterprises, LLC,
a management consulting firm.
Tom has held senior positions in the aerospace, defence and
electronics industries including Chairman and Chief Executive
Officer of Allegheny Teledyne and President and Chief
Operating Officer of Lockheed Martin's Electronic and Space
Sectors. During his 26 years with General Electric, Tom held
senior management positions including Vice President and
General Manager of GE's Aerospace operations.
He is also a non-executive Director of Aer Lingus Ltd, L3
Communications Holdings Inc, Labarge Inc, ARINC Inc. and
GenCorp Inc.

Senior Independent Director (1) (2) (3)
Margaret joined Serco in October 2003 as a Non-Executive
Director. She spent her early career in a variety of roles either
in the public sector or as an advisor to Government. From
1997 to 2000 she was Chairman of Lothian Health Board and
from 2000 to 2003 was a non-executive Director of Ofgem. In
December 2007 Margaret retired from English Partnerships, the
national regeneration agency, after six years as Chairman.
From 2000 to 2005 Margaret was a Director of Good Practice
Limited, the publishing company that she founded. She was,
until May 2009, Managing Director, Social Infrastructure and
Development, Royal Bank of Canada Capital Markets.
Margaret is Chairman of Irvine Bay Urban Regeneration
Company. She is also a non-executive Director of Grainger plc
and a non-executive Director of Trade Risks Ltd. In April 2009
she was appointed as Chair of the Olympic Park Legacy
Company.

Leonard V. Broese van Groenou MSc (63)

David Richardson BSc FCA (58)

Non-Executive Director (1) (2) (3)
Leonard joined Serco as a Non-Executive Director in April 2006.
Leonard was previously Vice-President Human Resources and
member of the corporate executive committee of
Pennsylvania-based Air Products, a New York listed company
serving customers in technology, energy, healthcare and
industrial markets worldwide where he served for nearly 30
years. His career at Air Products spans numerous international
roles including financial control, business planning, operational
management and human resources. He is the Chairman of the
Netherlands Benevolent Society.

Non-Executive Director (1) (2) (3)
David joined Serco as a Non-Executive Director in June 2003.
He has previously held the position of Finance Director of
Whitbread, where his roles in a 20-year career have included
eight years as Strategy Director. David was instrumental in
transforming Whitbread from a brewing and pubs company
into a market leader in hotels, restaurants and leisure clubs.
David is currently a non-executive Director of Tomkins plc and
Chairman of Forth Ports plc

(1) Member of the Audit Committee
(2) Member of the Remuneration Committee
(3) Member of the Nomination Committee

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Remuneration Report

Introduction

The following Report details the remuneration policy and the
actual remuneration of the Directors of the Group for the year
ended 31 December 2009. In preparing this Report,
consideration has been given to the disclosure requirements of
the 2008 Combined Code and of the Companies Act 2006. A
resolution to approve this Report will be proposed at the
Annual General Meeting on 11 May 2010.

The Remuneration Committee

The Remuneration Committee (the Committee) consists solely
of independent Non-Executive Directors. It is chaired by
Leonard V. Broese van Groenou and comprises Margaret Ford,
David Richardson and Tom Corcoran.
The Chairman of the Company and the Executive Directors
may attend meetings of the Committee at its discretion and as
appropriate. They are not in attendance when their own
remuneration arrangements are discussed.
The Committee met four times during the year. The terms of
reference of the Committee, a copy of which can be found on
the Group’s website, are reviewed annually to ensure that they
meet best practice. Details of the Directors’ attendance at the
Committee meetings can be found in the Corporate
Governance Report on page 61.
The Committee determines the overall remuneration policy for
senior management and the individual remuneration of the
Chairman and the Executive Directors. This includes base
salary, bonus, long-term incentives, pension and other benefits
and terms of employment (including those terms on which
service may be terminated).

Advisors to the Remuneration Committee

The Committee has been advised by Towers Watson. They
have provided advice to the Committee throughout the year on
the overall remuneration policy and philosophy. This included
the setting of the remuneration for the Executive Directors,
work that commenced in 2008 with shareholder consultation in
the early part of 2009 and final shareholder approval of the
new arrangements at the annual general meeting held in
May 2009. Fees paid to Towers Watson during the period
totalled £122,083.
Geoff Lloyd (Group Human Resources Director) also provides
advice and guidance to the Committee.

Remuneration policy

Serco’s remuneration policy adopts the following principles
which are that executive remuneration should:

• Support Serco’s long-term future growth, strategy and

values

• Align the financial interests of executives and shareholders

• Provide market-competitive reward opportunities for

performance in line with expectations and deliver significant
financial rewards for sustained out-performance

• Enable Serco to recruit and retain the best in all our chosen

markets

• Be based on a clear rationale which participants,

shareholders and other stakeholders are able to understand
and support.

In setting the remuneration of the Executive Directors, in
particular the non-financial objectives relating to the annual
bonus scheme, the Remuneration Committee is able to
consider corporate performance on safety, environmental,
social and corporate governance. The Committee retains
discretion to reduce bonuses or the vesting of awards under
the share plans if performance in these areas is unsatisfactory.

The elements of remuneration

Composition
The remuneration package for Executive Directors consists of
base salary, annual bonus, long-term share-based incentives,
pension and other benefits. The Group’s policy is to ensure
that a significant proportion of the package is related to
performance.
The relative proportions of the performance-related and fixed
elements of remuneration (excluding pension and other
benefits) for Executive Directors - assuming ‘on-target’
remuneration - is shown below.

Remuneration for Chief Executive

41%

34%

25%

37%

24%

Remuneration for Finance Director

39%

Base salary

Performance-related annual bonus

Performance-related long-term incentives (expected value)

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Remuneration Report

The measurement of the performance targets is undertaken by
Mercer for the LTIP, DBP and PSP, and in relation to the
Earnings Per Share (EPS) element of the targets is audited
by Deloitte LLP. The conditions relating to the plans are
detailed below.

Deferred Bonus Plan
Following shareholder approval in 2009, the Executive
Directors were invited to participate in the DBP. Executive
Directors can elect to defer, for three financial years, up to
50% of the bonus earned by purchasing shares in the
Company pursuant to the terms of the DBP. The shares
purchased will be matched by the Company if two stretching
performance targets are met.
The two performance measures are independent and each
determines the vesting of half of the matching shares. The
measures are Total Shareholder Return (TSR) measured against
the companies in the FTSE 51 to 130 (excluding investment
trusts) and EPS growth. The structure for vesting is the same
for both measures.

TSR element:

• No matching shares will be awarded if the Group does not
meet or exceed the median TSR of the comparator group

• An award of matching shares of one half of the gross value
of the bonus deferred will vest for median or threshold
performance

• An award of matching shares with a value of two times the
gross value of the deferred bonus vest for upper quartile or
superior performance at the top end of the range.

EPS element:

•

If the annual compound growth in EPS does not meet
threshold then no matching shares will vest

If compound growth in EPS is at threshold then 25% of this
part of the matching award will vest

• For compound growth in EPS of between threshold and

maximum then this part of the award will vest on a straight
line basis to 100%.

For awards made in 2009, the performance range for the first
year of the performance period will be annual growth in EPS of
13% to 19%, for subsequent years the range will be
compound growth in EPS of 9% at threshold and 14% per
year at maximum.
The definition of EPS is basic EPS excluding material
acquisitions, disposals, currency movements and before
amortisation of acquired intangibles.
The Committee has discretion to vary the proportion of awards
that vest under the DBP to ensure that the outcomes are fair
and appropriately reflect the underlying financial performance
of the Group.
In 2009 both the Chief Executive and the Finance Director
elected to defer 50% of their bonus into the DBP.

Base salary
The Committee’s policy is to set the base salaries of the
Executive Directors so as to ensure that total target
remuneration is competitive.
The comparator group comprises the companies within the
FTSE 51 to 130 that are in the proprietary database of the
Committee’s advisors. This is a group of approximately 30
companies of broadly similar size and scope to Serco in terms
of turnover, growth profile and market capitalisation. The
comparator group gives access to a robust and stable data set
and is also used by Serco to benchmark other roles below
executive level across the Group.
Base salaries are normally reviewed annually. The Committee
takes note of relative pay and employment conditions
within the comparator group and the Company when
determining salaries.
There were no changes to the base salaries of the Executive
Directors during the period.

Annual bonus
Bonus is earned only on the basis of achievement of a mix of
financial and non-financial objectives which are weighted 80%
and 20% respectively. Payment for target performance is at
75% of base salary for the Chief Executive and 65% of base
salary for the Finance Director.
Financial measures are based on the Serco Group results and
the non-financial measures are individually set. The three
financial measures for 2009 were based on turnover, adjusted
profit before tax and amortisation, and cash conversion. These
measures reflect the growth and margin improvement
strategies of the business. The standards of performance set
are designed to be stretching. The non-financial goals set for
2009 assessed performance against a number of strategically
important areas.
The maximum annual bonus opportunity is 150% of base
salary for the Chief Executive and 130% of base salary for
the Finance Director. On the basis of Serco’s performance in
2009, annual awards of 135% and 117% of salary have been
determined. The Executive Directors delivered a financial
performance that exceeded target. Serco’s financial
performance for the year is described in more detail in the Our
performance section starting on page 14. The Executive
Directors also delivered a number of strategic objectives in the
areas of the integration of acquisitions, the development of
both the Group strategy and the Balance Sheet strategy, plus
improvements in Group governance.
The bonus objectives for 2010 have been set on a similar basis.
Annual bonuses are not pensionable.

Share-based remuneration

Following approval at the annual general meeting in May 2009,
long-term share incentives are awarded to Executive Directors
under the Serco Group plc Deferred Bonus Plan (DBP) and the
Serco Group plc Performance Share Plan (PSP). Prior to 2009
awards were made under the Serco Group plc 2006 Long Term
Incentive Plan (LTIP) and the Serco Group plc 2005 Executive
Option Plan (EOP). All grants and awards are made pursuant to
the rules of the applicable plans and in accordance with the
Model Code and policies in relation to the treatment of leavers
have been adopted.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 72

Performance Share Plan
Shareholders approved the PSP at the annual general meeting in May 2009. The PSP awards granted to the Executive
Directors are calculated at a face value on grant of 200% of base salary for the Chief Executive and 175% of base salary
for the Finance Director.
The shares will normally only vest at the end of a three-year period if the Executive Directors are still in employment with Serco
and two performance measures have been met. The two measures are independent. The measures are TSR against the
companies in the FTSE 51 to 130 (excluding investment trusts) and EPS growth. Relative TSR performance determines the
vesting of 70% of the shares and EPS growth the remainder. The structure for vesting is the same for both measures. The
shares will vest in full only if Serco’s performance is upper quartile or, in the case of EPS growth, superior and at the top end of
the range. Median or threshold performance will trigger the vesting of 25% of the award. Performance between
median/threshold and upper quartile/superior will be on a straight line basis.
The Committee has discretion to vary the proportion of awards that vest under the Plan to ensure that the outcomes are fair
and appropriately reflect the underlying financial performance of the Group.
Dividends will be reinvested and distributed only in respect of shares that vest under both plans at the end of the
performance period.
The Remuneration Committee continue to believe that the case for relative TSR and EPS as the performance measures for
long-term share-based plans remains strong. Relative TSR and EPS growth carry equal weight in respect of the matching
shares awarded under the DBP. This is to ensure a balance of internal and external measures and hence sufficient ‘line-of-sight’
to encourage investment in the plan. In the case of the PSP, greater weight has been placed on relative TSR to underscore the
importance of longer term alignment with shareholders’ interests.

Sharesave
The Group operates Sharesave. No performance conditions are attached to options granted under the scheme as it is an
all-employee scheme. Options granted to participants are normally set at a discount of 10% to the market value of shares at
grant. None of the Directors participate in Sharesave.

Share ownership policy

The share ownership requirement for the Chief Executive is two times base salary and one times base salary for the Finance
Director. Executive Directors are required to retain in shares 50% of the net value of any performance shares or options
exercised until they satisfy the shareholding requirement.
At the end of the year, by reference to the share price at that date, Executive Directors’ share ownership levels were as follows:

Chief Executive
Finance Director

Pension, life assurance and other benefits

Ordinary shareholding at
31 December 2009 (530p)

Ordinary shareholding at
31 December 2008 (450.50p)

Number of shares % of salary
604%
276%

735,510
198,075

Number of shares % of salary
116%
124%

166,440
104,874

Serco operates both defined benefit and defined contribution pension schemes. The Executive Directors participate in the Serco
Pension and Life Assurance Scheme (SPLAS). This is a funded, defined benefit scheme, which provides for a target pension of
two-thirds of pensionable salary following a full career. Members contribute to the scheme at rates varying according to the
section of the scheme.
From 1 January 2007 Serco also introduced SMART whereby all members were given the option to have their pension
contributions paid by salary sacrifice. Under this arrangement the member makes no normal pension contributions, Serco makes
additional contributions to SPLAS equal to those that the member would otherwise have made and the member’s contractual pay
is reduced by the amount of these contributions. Both Christopher Hyman and Andrew Jenner opted to have their contributions
paid by SMART.
Kevin Beeston’s pension benefits accrued prior to 6 April 2006 exceeded the new Lifetime Allowance, which came into force at
that date, and he opted to cease paying contributions and accruing benefits in the pension scheme after 6 April 2006. Kevin
Beeston remains entitled to lump sum and widow’s pension benefits should he die before retirement and while still employed by
or an officer of Serco.
The Chairman and Executive Directors receive a range of other benefits which include a car, private medical insurance,
permanent health insurance, life cover, an annual allowance for independent financial advice and voluntary health checks every
two years. The Executive Directors are also entitled to 25 days’ holiday per year.

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Remuneration Report

Service contracts and compensation

Each Executive Director has a rolling service contract and these contracts will be available for inspection prior to the start of and
after the Company’s annual general meeting.
New service contracts were put in place during the period, which reflect areas of best practice.
The new service contracts have a notice period of 12 months. The Company reserves the right to make a payment in lieu of
notice. In addition, where a Director leaves the Company following a change of control, whether or not he is dismissed or he
elects to leave on notice, he will be entitled to receive a payment equivalent of up to one year’s remuneration. The service
contracts do not provide for termination payments to be made in any other circumstances.
There have been no payments made during the year in relation to compensation for loss of office.
A summary of details relating to each Director who served during the year is provided below:

Name of Director
Christopher Hyman

Date joined
Company
30 August 1994

Date of

Appointment
to the Board
1 April 1999

Date of
Contract
10 June 2009

Andrew Jenner

4 November 1996

3 May 2002

10 June 2009

Unexpired term at
31 December 2009
Rolling contract
of 12 months
notice period
Rolling contract
of 12 months
notice period

External appointments

The Board believes that the Group can benefit from its Executive Directors holding appropriate non-executive directorships of
companies or independent bodies. Such appointments are subject to the approval of the Board. Fees are retained by the
Executive Director concerned.
Andrew Jenner served as a non-executive Director of Galliford Try plc during the year. Fees payable in the year were £38,400.
No other fee-paying external positions were held by any of the Executive Directors.

The Chairman and Non-Executive Directors

The Group’s policy is that the fees of the Chairman and the Non-Executive Directors, which are determined by the Board, are set
at a level which will attract individuals with the necessary experience and ability to make a substantial contribution to the Group’s
affairs.
Non-Executive Directors of the Group are initially appointed for a three-year term, and that appointment may be terminated on
three months’ written notice. The renewal of appointments is not automatic, and Non-Executive Directors are required to retire
and stand for re-election in accordance with the Company’s Articles of Association and the Combined Code on Corporate
Governance.
As at 31 December 2009, the Non-Executive Directors of the Group had no personal financial interest in the matters determined
by the Board, there are no conflicts of interest arising from cross-directorships and no involvement in the day-to-day running of
the Group. The Non-Executive Directors do not participate in the Group’s incentive or pension schemes, or receive other
benefits except as described.

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Current fee structure
Non-Executive Directors’ remuneration consists of cash fees paid monthly with increments for positions of additional
responsibility. In addition, reasonable travel and related business expenses are paid. No bonuses are paid to Non-Executive
Directors. The Board believe that payment of fees on a cash-only basis remains appropriate as opposed to the partial payment
of fees in shares. Non-Executive Directors’ fees are not performance related.
Non-Executive Directors are encouraged to hold shares in the Group but are not subject to a shareholding requirement.
The fees and terms of engagement of Non-Executive Directors are reviewed on an annual basis, taking into consideration market
practice, and approved by the Board.
The standard annual fees payable for the Chairman and Non-Executive Directors during the financial year under review are
shown in the table below.

Chairman (1)

Board member
Committee Chairmanship
Senior Independent Director

1 January 2009 to date
£
230,000

1 January to 31 August 2009
£
45,000
10,000
10,000

From 1 September 2009 to date
£
50,000
10,000
10,000

(1) The Chairman receives a range of other benefits which include a car, private medical insurance, permanent health insurance, life cover, an annual allowance for
independent financial advice, and voluntary health checks every two years. There was no change to the annual fees payable to the Chairman during the period.

A summary of details relating to each Non-Executive Director who served during the year is provided below:

Chairman:
Kevin Beeston (2)
Non-Executive Directors (3):
Margaret Ford
Leonard V. Broese van Groenou
David Richardson
Tom Corcoran

Date of Appointment
to the Board

Date of Letter
of Appointment

Unexpired term at
31 December 2009 (1)

29 February 1996

1 September 2007

28 months

8 October 2003
3 April 2006
2 June 2003
3 December 2007

7 October 2003
20 February 2006
29 May 2003
3 December 2007

28 months
16 months
28 months
16 months

(1) The unexpired term is taken from the date of last re-election at the annual general meeting
(2) In October 2009 Kevin Beeston announced his intention to retire from the Board of Serco Group plc at the conclusion of the Company’s 2010 Annual General

Meeting.

(3) Non-Executive Directors have a three-month notice period and no compensation or other benefits are payable on early termination

Directors’ remuneration

This section has been audited by Deloitte LLP.
The remuneration of the Directors for the year was as follows:

Kevin Beeston
Christopher Hyman
Andrew Jenner
Leonard V. Broese van Groenou
Margaret Ford
David Richardson
Tom Corcoran
Total

Note
2
1,2
1,2

Remuneration
£
230,000
645,000
380,000
Nil
Nil
Nil
Nil
1,255,000

Fees
£
Nil
Nil
Nil
56,700
56,700
56,700
46,700

Bonus
£
Nil
870,750
444,600
Nil
Nil
Nil
Nil
216,800 1,315,350

Total

Total
estimated remuneration remuneration
excluding
excluding
value of any
pensions
pensions
non cash
2008
2009
benefits
£
£
£
272,797
286,693
56,693
62,932 1,578,682 1,180,105
731,452
887,843
63,243
55,000
56,700
Nil
55,000
56,700
Nil
55,000
56,700
Nil
45,000
46,700
Nil
182,868 2,970,018 2,394,354

Notes:
1.
2.

The bonuses shown include performance bonuses earned in the period under review, but not paid in the financial year.
The value of the non cash benefits relates to the provision of a car allowance (fully inclusive of all scheme costs including insurance and maintenance) and private
healthcare.

3. Remuneration is shown gross of salary sacrificed under the SMART scheme. See page 72.

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Remuneration Report

Directors’ shareholdings

The Directors’ interests in the shares of the Company are detailed in the following table.

Kevin Beeston
Leonard V. Broese van Groenou
Margaret Ford
Christopher Hyman
Andrew Jenner
David Richardson
Tom Corcoran

Note
1, 2

3
3

Ordinary shares of 2p each fully
paid at 1 January 2009
100,000
5,375
14,481
166,440
104,874
15,000
4,000

Ordinary shares of 2p each fully
paid at 31 December 2009
293,925
5,375
14,481
735,510
198,075
15,000
4,000

Notes:
1. As at 9 March 2010, Margaret Ford held 6,481 shares and Andrew Jenner held 301,117 shares. The shareholdings of the remaining Directors were unchanged as

at that date.

2. Ordinary shares are beneficial holdings which include the Directors’ personal holdings and those of their spouses and minor children.
3.

38,303 of Christopher Hyman’s and 22,331 of Andrew Jenner’s shares are held in trust on their behalf under the terms of their participation in the Deferred Bonus
Plan. Provided such shares remain in trust for three years and subject to certain performance conditions, they are also granted an award over matching shares
equivalent to two times the gross bonus initially used for the share purchase. Security has been granted to Christopher Hyman’s bank over 85,564 ordinary
shares held in his name.

Share-based incentives

This section has been audited by Deloitte LLP. The total share options granted to each person who has served as a Director of
the Company at any time in the financial year were as follows:

(i) Serco Group plc 2003 Deferred Bonus Scheme (DBS)
Conditional rights to receive matching shares over Serco Group plc’s ordinary shares under the DBS held by Directors at 31
December 2009 were as follows:

Christopher Hyman
Andrew Jenner

Awards
held at
1 January
2009
17,749
10,649

Market
price
at grant
(pence)
334
334

Vested
during
the period
17,749
10,649

Market
price on
vesting
(pence)
356
356

Awards
held at 31
December
2009
-
-

Performance period
Vesting date
22 Mar 2009
1 Jan 2006 - 31 Dec 2008
1 Jan 2006 - 31 Dec 2008 22 Mar 2009

Notes:
1.
2.
3.

The DBS has now been closed and no further awards will be made under its terms.
The performance condition for matching shares is TSR relative to the companies comprising the FTSE 350 and is measured over the three-year deferral period.
The performance condition attached to the awards made on 22 March 2006 ended on 31 December 2008. TSR performance relative to the comparator group
was in the upper quartile (93rd percentile). A one for one match of shares deferred was made in March 2009.
The aggregate of the total theoretical gains on options exercised by Directors during 2009 amounted to £0.1m. This is calculated by reference to the difference
between the closing mid-market price of the shares on the date of exercise and the exercise price of the options, disregarding whether such shares were sold or
retained on exercise, and is stated before tax. Of the 28,398 shares exercised, 17,098 were retained.

(ii) Serco Group plc Deferred Bonus Plan (DBP)
Conditional rights to receive matching shares over Serco Group plc’s ordinary shares under the DBP held by Directors at 31
December 2009 were as follows:

Christopher Hyman
Andrew Jenner

Awards
held at
1 January
2009
-
-

Market
price
at grant
(pence)
404
408

Granted
during
the period
130,754
76,232

Awards
held at 31
December
2009
130,754
76,232

Performance period
1 Jan 2009 - 31 Dec 2011
1 Jan 2009 - 31 Dec 2011

Vesting date
12 Jun 2012
11 Jun 2012

Notes:
1.
2.

The awards shown in the table are the maximum number of shares that can vest under the performance conditions.
The performance conditions attached to the awards are described on page 71.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 76

(iii) Serco Group plc Performance Share Plan (PSP)
The conditional rights to Serco Group plc ordinary shares under the PSP held by Directors at 31 December 2009 were as follows:

Christopher Hyman
Andrew Jenner

Awards
held at
1 January
2009
-
-

Market
price
at grant
(pence)
408
408

Granted
during
the period
315,789
162,790

Awards
held at 31
December
2009
315,789
162,790

Latest
exercise
date
1 Jan 2009 - 31 Dec 2011 22 Jun 2012 21 Jun 2019
1 Jan 2009 - 31 Dec 2011 22 Jun 2012 21 Jun 2019

Earliest
vesting
date

Performance period

Notes:
1. Awards take the form of nominal cost options.
2. Awards made are calculated at a face value on grant of 200% and 175% of base salary for the Chief Executive and Finance Director respectively.
3.

The performance conditions attached to the awards are described on page 72.

(iv) Serco Group plc 2006 Long Term Incentive Plan (LTIP)
The LTIP has been replaced by the PSP. The conditional rights to Serco Group plc ordinary shares under the LTIP held by
Directors at 31 December 2009 were as follows:

Kevin Beeston

Awards Market
price
held at
at grant
1 January
(pence)
2009
349
147,928
373
145,205
349
Christopher Hyman 147,928
373
145,205
456
122,874
349
88,757
373
89,589
456
75,699

Andrew Jenner

Vested
during
the period
295,856
-
295,856
-
-
177,514
-
-

Awards
Market
price on
held at 31
vesting December
2009
(pence)
-
371
- 145,205
-
- 145,205
- 122,874
-
89,589
75,699

371
-
-

371

Earliest
vesting
date
5 May 2009

Latest
exercise
date
Performance period
1 Jan 2006 - 31 Dec 2008
4 May 2016
1 Jan 2007 - 31 Dec 2009 31 Dec 2009 28 Nov 2016
1 Jan 2006 - 31 Dec 2008
4 May 2016
1 Jan 2007 - 31 Dec 2009 31 Dec 2009 28 Nov 2016
1 Jan 2008 - 31 Dec 2010 31 Dec 2010 11 Nov 2017
1 Jan 2006 - 31 Dec 2008
4 May 2016
1 Jan 2007 - 31 Dec 2009 31 Dec 2009 28 Nov 2016
1 Jan 2008 - 31 Dec 2010 31 Dec 2010 11 Nov 2017

5 May 2009

The final award to Executive Directors under this plan was made in November 2007.

Notes:
1.
2. Awards take the form of nominal cost options.
3. Awards made are calculated at 100% of salary at the time of grant.
4.

The TSR performance condition is measured relative to the top 250 companies in the FTSE, as ranked by market capitalisation, excluding those in certain sectors
which are not comparable with the Group.

5. No awards were granted or lapsed during the period.
6.
The performance conditions attached to the awards which vested on 5 May 2009 achieved top decile performance resulting in 200% of the award vesting.
7. On 31 December 2009 the performance conditions attached to the awards made on 29 November 2006 were satisfied. Performance between upper quartile and

upper decile was achieved resulting in 195.42% of the award vesting.

8. Awards held by Kevin Beeston relate to his tenure as an Executive Director prior to September 2007.
9.

The aggregate of the total theoretical gains on options exercised by Directors during 2009 amounted to £2.85m. This is calculated by reference to the difference
between the closing mid-market price of the shares on the date of exercise and the exercise price of the options, disregarding whether such shares were sold or
retained on exercise, and is stated before tax. Of the 769,226 options exercised, 473,370 shares were retained.

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Remuneration Report

(v) Serco Group plc Long Term Incentive Scheme (LTIS)
The LTIS was superseded by the LTIP. The conditional rights to Serco Group plc ordinary shares under the LTIS held by Directors
at 31 December 2009 were as follows:

Kevin Beeston

Christopher Hyman

Andrew Jenner

Awards
held at
1 January
2009
103,467*
119,411
32,868
43,540*
35,056*
103,467*
173,142*
119,411
62,081*
105,138*
76,101

Market
price
at grant
(pence)
153
231
426
490
465
153
175
231
153
175
231

Market
price on
vesting
(pence)
314
462
153
172
240
314
382
462
314
382
462

Awards
held at 31
December
2009
-
-
-
-
-
-
-
-
-
-
-

Performance period

Date
Earliest
of expiry
vesting
of awards
date
1 Jan 2003 - 31 Dec 2005 31 Dec 2005
5 May 2013
1 Jan 2005 - 31 Dec 2007 31 Dec 2007 21 Dec 2014
1 Jan 2000 - 31 Dec 2002 31 Dec 2002
4 Apr 2010
1 Jan 2001 - 31 Dec 2003 31 Dec 2003 23 Nov 2010
1 Jan 2002 - 31 Dec 2004 31 Dec 2004 15 Nov 2011
1 Jan 2003 - 31 Dec 2005 31 Dec 2005
5 May 2013
1 Jan 2004 - 31 Dec 2006 31 Dec 2006 26 Nov 2013
1 Jan 2005 - 31 Dec 2007 31 Dec 2007 21 Dec 2014
5 May 2013
1 Jan 2003 - 31 Dec 2005 31 Dec 2005
1 Jan 2004 - 31 Dec 2006 31 Dec 2006 26 Nov 2013
1 Jan 2005 - 31 Dec 2007 31 Dec 2007 21 Dec 2014

Notes:
1.
2.
3.

The last award to Executive Directors under the LTIS was made in June 2005.
The awards shown in the table have all vested.
For awards made in relation to performance periods commencing up to and including 1 January 2002 the extent to which an award will vest is measured by
reference to the absolute growth in the Group’s EPS over the performance period of three financial years. For awards granted on or after 1 January 2003,
achievement of the performance is measured by reference to the Group’s TSR performance relative to the companies comprising the FTSE 350 at the start of the
performance period.

4. No awards were awarded or lapsed during the year.
5.

For those awards marked with an (*) approximately 14.67% (13.50% for prior year grants) of the options granted under the LTIS represent supplementary awards,
granted for the sole purpose of compensating participants for agreeing to bear the Company’s liability to employers’ National Insurance Contributions upon the
exercise of the underlying LTIS awards. These awards can only be exercised in conjunction with and to the extent of the underlying award.

6. Awards take the form of nominal cost options.
7. Awards made are calculated at 100% of salary at the time of grant.
8. Awards held by Kevin Beeston relate to his tenure as an Executive Director prior to September 2007.
9.

The aggregate of the total theoretical gains on options exercised by Directors during 2009 amounted to £3.57m. This is calculated by reference to the difference
between the closing mid-market price of the shares on the date of vesting and the exercise price of the options, disregarding whether such shares were sold or
retained on exercise, and is stated before tax. Of the 973,682 options exercised, 233,303 shares were retained.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 78

(vi) Serco Group plc 1998 and 2005 Executive Option Plan (EOP)
Options over Serco Group plc ordinary shares granted under the 1998 EOP and the 2005 EOP and held by Directors at 1 January
2009 and 31 December 2009 were as follows:

Kevin Beeston

Christopher Hyman

Andrew Jenner

Awards
held at
1 January
2009
58,764
91,321*
135,768*
289,515*
219,320*
183,404
147,492
120,798
40,812
49,830
78,275*
116,373*
289,515*
219,320*
183,404
147,492
120,798
123,076
12,336
18,524*
69,824*
173,709*
133,178*
116,885
88,495
74,530
75,824

Exercised
during
period
58,764
91,321
135,768
289,515
219,320
183,404
147,492
-
40,812
49,830
-
-
-
-
-
-
-
-
12,336
-
-
-
-
-
-
-
-

Awards
held at 31
December
2009
-
-
-
-
-
-
-
120,798
-
-
78,275
116,373
289,515
219,320
183,404
147,492
120,798
123,076
-
18,524
69,824
173,709
133,178
116,885
88,495
74,530
75,824

Market
price on
exercise
date
(pence)
503
503
348
348
348
503
503
-
358
524
-
-
-
-
-
-
-
-
523
-
-
-
-
-
-
-
-

Exercise

price

Date from
(pence) which exercisable
5 Apr 2003
28 Mar 2004
3 May 2005
6 May 2006
3 Mar 2007
29 Apr 2008
5 May 2009
19 Mar 2010
1 Apr 2002
5 Apr 2003
28 Mar 2004
3 May 2005
6 May 2006
3 Mar 2007
29 Apr 2008
5 May 2009
19 Mar 2010
27 Feb 2011
5 Apr 2003
28 Mar 2004
3 May 2005
6 May 2006
3 Mar 2007
29 Apr 2008
5 May 2009
19 Mar 2010
27 Feb 2011

426
435
264
153
217
235
339
439
245
426
435
264
153
217
235
339
439
455
426
435
264
153
217
235
339
439
455

Date of expiry
of options
4 Apr 2010
27 Mar 2011
2 May 2012
5 May 2013
2 Mar 2014
28 Apr 2015
4 May 2016
18 Mar 2017
31 Mar 2009
4 Apr 2010
27 Mar 2011
2 May 2012
5 May 2013
2 Mar 2014
28 Apr 2015
4 May 2016
18 Mar 2017
26 Feb 2018
4 Apr 2010
27 Mar 2011
2 May 2012
5 May 2013
2 Mar 2014
28 Apr 2015
4 May 2016
18 Mar 2017
26 Feb 2018

Notes:
1.
2.
3.

The final award to Executive Directors under this plan was made in February 2008.
The awards shown in the table are the maximum number of shares that can vest under the performance conditions.
The extent to which an award will vest is measured by reference to the Group’s Earnings Per Share (EPS) performance relative to the Retail Prices Index (RPI)
over the three-year performance period.
For those options marked with an (*) approximately 14.67% (13.50% for prior year grants) of the options granted under the Plan represent supplementary options,
granted for the sole purpose of compensating participants for agreeing to bear the Company’s liability to employers’ National Insurance Contributions upon the
exercise of the underlying Plan awards. These options can only be exercised in conjunction with and to the extent of the underlying option.

5. No payment was made for the grant of the awards.
6. Grants of options under the EOP are calculated at 100% of salary at the time of grant.
7.

The market price of the Company’s ordinary shares at the close of business on 31 December 2009 was 530.00p and the range during the year to 31 December
2009 was 349.00p to 540.00p.
For options granted which completed their performance period on 31 December 2009, the Group’s EPS growth was 24.42% per annum over the three-year
performance period which resulted in 100% of options vesting. The level at which maximum vesting would occur was 11.98% per annum.

9. Awards held by Kevin Beeston relate to his tenure as an Executive Director prior to September 2007.
10. The aggregate of the total theoretical gains on options exercised by Directors during 2009 amounted to £1.91m. This is calculated by reference to the difference
between the closing mid-market price of the shares on the date of exercise and the exercise price of the options, disregarding whether such shares were sold or
retained on exercise, and is stated before tax. Of the 1,228,562 options exercised, 320,555 shares were retained.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 79

Remuneration Report

Comparison of total shareholder returns

Serco Group plc total shareholder return (TSR) vs FTSE 350 Total Return Index
Value of investment of £100 on 31 December 2004

250

225

200

175

150

125

100

31 Dec 04

31 Dec 05

31 Dec 06

31 Dec 07

31 Dec 08

31 Dec 09

Serco

FTSE 350 Index

In drawing this graph, it has been assumed that all dividends paid have been reinvested. The TSR level shown at 31 December
each year is the average of the closing daily TSR levels for the 30-day period up to and including that date. The Company’s TSR
is compared to that of the FTSE 350 Index, which is a broad equity market index of which it is a constituent.
TSR is defined as the return shareholders would receive if they held a notional number of shares, and received dividends on
those shares over a period of time. It measures the percentage growth in the Company’s share price together with the value of
any dividends paid, assuming that the dividends are reinvested into the Company’s shares.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 80

Pensions and life assurance

This section has been audited by Deloitte LLP.
The Directors receive pension and life assurance benefits consistent with those provided by other leading companies.
The details of the defined benefit schemes operated by the Group are set out in the note on page 117. In the event of death in
service, the Serco Supplementary Death Benefit Scheme provides for a lump sum payment.
The accrued pension benefits of all Directors under the Serco Pension and Life Assurance Scheme, which is a defined benefit
scheme, are as follows:

Transfer
value of
accrued
benefits
at 31
December
2009
(1)
£

Transfer
value
of accrued
benefits
at 31

Director’s
December contributions
for the year
(3)
£

2008
(2)
£

Increase
in transfer
value during
the year
(4) =
(1)-(2)-(3)
£

Gross
increase
in accrued
pension
during
the year
(5)
£ p.a.

Increase
in accrued
pension
during
the year, net
of inflation
(6)
£ p.a.

Value of
increase in
accrual over
the year
(7)
£

Total
accrued
pension
at year end
(8)
£ p.a.

Kevin Beeston
Christopher Hyman
Andrew Jenner

3,564,341 3,591,340
1,702,542 1,275,901
628,494

857,573

-
-
-

-26,999
426,641
229,079

774
25,037
14,624

9,874
399,386
209,587

279,460
106,731
59,837

Notes:
a.

The total accrued pension shown is that which would be paid annually on retirement, based on pensionable service to the end of this year, or for Kevin Beeston,
to 5 April 2006 when he opted out of the scheme. The increase in accrued pension during the year is normally shown both as a gross increase and excluding any
increase in respect of inflation. In the measurement year used for 2009 inflation has been negative and so the figures shown assume that none of the pension
increase over the year is due to inflation. Hence the increase in accrued pension over the year, net of inflation, shown in (6), is the same as the gross increase in
pension shown in (5).
The increase in the accrued pensions of Christopher Hyman and Andrew Jenner allow for both the increase in their pensionable salaries over the year and for the
accrual of a further year’s pensionable service as a result of a further year’s active membership of the scheme.
The pension which Kevin Beeston had accrued up to 5 April 2006 is increased in line with his final pensionable remuneration (averaged over the best three years)
since 5 April 2006. There is a small increase in his accrued pension over the year to 31 December 2009 due to the method of calculating his pensionable
remuneration.
Transfer values have been calculated in accordance with the current transfer value regulations. The assumptions to be used for calculating transfer values have
been agreed by the Trustees and the methodology for setting these assumptions has remained the same as for last year’s calculations. The difference between
the transfer values at the beginning and end of the year, shown in (4), includes not only the effect of the increase in accrual and salaries, but also the effect of
fluctuations in the transfer value due to factors beyond the control of the Company and the Directors, such as stock market movements. (The effect of market
movements on the transfer value assumptions over the year has resulted in a slight decrease in the transfer value for Kevin Beeston.)
The value of the net increase in accrual represents the incremental value to the Director of his service during the year, calculated on the assumption that his
service terminated at the year end, or 5 April 2006 in the case of Kevin Beeston. It is based on the increase in the accrued pension.
The transfer values disclosed do not represent the sum paid or payable to the individual Director. Instead, they represent a potential liability of the pension
scheme.

g. All Directors who are currently active members of the scheme have opted to have their contributions paid by the Company under a salary sacrifice arrangement

and hence no contributions were paid by the Directors during the year.

Share dilution

Awards granted under the Serco Group plc share plans are met either by the issue of new shares or by shares held in trust when
awards vest. The Committee monitors the number of shares issued under its various share plans and their impact on dilution
limits. The relevant dilution limits established by the Association of British Insurers in respect of all share plans (10% in any
rolling ten-year period) and discretionary share plans (5% in any rolling ten-year period) were, based on the Company’s issued
share capital at 31 December 2009, 5.72% and 4.43% respectively.
The Group has an employee benefit trust which is administered by an independent trustee and which holds ordinary shares in the
Company to meet various obligations under the share plans. In November 2009 a loan of £2.4m was made to the Employee
Benefit Trust to ensure sufficient shares were available to meet its ongoing liabilities.
The Trust held 5,650,253 and 3,436,547 ordinary shares at 1 January 2009 and 31 December 2009 respectively.
Approved by the Board of Directors and signed on its behalf by:

Joanne Roberts
Secretary
25 February 2010

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 81

Independent Auditors’ Report

Independent Auditors’ Report to the members
of Serco Group plc

Opinion on other matters prescribed by the
Companies Act 2006

In our opinion the information given in the Directors’ Report for
the financial year for which the financial statements are
prepared is consistent with the Group Financial Statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to
you if, in our opinion:

•

certain disclosures of Directors’ remuneration specified by
law are not made; or

• we have not received all the information and explanations

we require for our audit.

Under the Listing Rules we are required to review:

•

the Directors’ statement contained within the Corporate
Governance Report in relation to going concern; and

the part of the Corporate Governance Statement relating to
the Company’s compliance with the nine provisions of the
June 2008 Combined Code specified for our review.

Other matter

We have reported separately on the parent Company
Financial Statements of Serco Group plc for the year ended
31 December 2009 and on the information in the Remuneration
Report that is described as having been audited.

Nigel Mercer (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditors
London, UK
25 February 2010

We have audited the Group Financial Statements of Serco Group
plc for the year ended 31 December 2009 which comprise the
Consolidated Income Statement, the Consolidated Statement
of Comprehensive Income, the Consolidated Statement of
Changes in Equity, the Consolidated Balance Sheet, the
Consolidated Cash Flow Statement and the related notes 1 to
36. The financial reporting framework that has been applied in
their preparation is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union.
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 auditors’ 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.

Respective responsibilities of Directors and Auditors

As explained more fully in the Directors’ Responsibilities
statement, the Directors are responsible for the preparation of
the Group financial statements and for being satisfied that they
give a true and fair view. Our responsibility is to audit the
Group financial statements in accordance with applicable law
and International Standards on Auditing (UK and Ireland).
Those standards require us to comply with the Auditing
Practices Board’s (APB’s) Ethical Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error.
This includes an assessment of: whether the accounting
policies are appropriate to the Group’s circumstances and have
been consistently applied and adequately disclosed; the
reasonableness of significant accounting estimates made by
the Directors; and the overall presentation of the financial
statements.

Opinion on the Group Financial Statements

In our opinion the Group Financial Statements:

• give a true and fair view of the state of the Group’s affairs
as at 31 December 2009 and of its profit for the year then
ended;

• have been properly prepared in accordance with IFRSs as

adopted by the European Union; and

• have been prepared in accordance with the requirements of

the Companies Act 2006 and Article 4 of the IAS
Regulation.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 82

Consolidated Income Statement
For the year ended 31 December 2009

Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Other expenses – amortisation of intangibles arising on acquisition
Total administrative expenses
Operating profit
Investment revenue
Finance costs
Profit before tax
Tax
Profit for the year
Attributable to:
Equity holders of the parent
Minority interest
Earnings per share (EPS)
Basic EPS
Diluted EPS

Consolidated Statement of Comprehensive Income
For the year ended 31 December 2009

Profit for the year
Other comprehensive income for the year:
Net actuarial (loss)/gain on defined benefit pension schemes1
Actuarial gain on reimbursable rights1
Net exchange (loss)/gain on translation of foreign operations2
Fair value (loss)/gain on cash flow hedges during the year2
Tax credit/(charge) on items taken directly to equity
Recycling of cumulative net hedging reserve2
Total comprehensive income for the year
Attributable to:
Equity holders of the parent
Minority interest

1. Recorded in Retirement benefit obligations reserve in the Consolidated Statement of Changes in Equity.
2. Recorded in Hedging and translation reserve in the Consolidated Statement of Changes in Equity.

Note

4,5

5,6
8
9

2009
£m

2008
£m

3,970.0
(3,383.2)
586.8
(357.1)
(17.6)
(374.7)
212.1
2.7
(37.7)
177.1
(46.9)
130.2

3,123.5
(2,666.7)
456.8
(291.6)
(9.2)
(300.8)
156.0
8.2
(28.1)
136.1
(36.5)
99.6

130.2
-

99.5
0.1

12
12

26.76p
26.45p

20.49p
20.18p

Note

26
26

2009
£m
130.2

(259.0)
117.1
(9.9)
(6.3)
45.2
0.2
17.5

17.5
-

2008
£m
99.6

8.7
50.6
54.1
14.2
(21.3)
(0.7)
205.2

205.1
0.1

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 83

Consolidated Statement of Changes in Equity
For the year ended 31 December 2009

Financial Statements

Capital
premium redemption
reserve
account
£m
£m
0.1
299.3

Retirement
benefit
Retained obligations
reserve
earnings
£m
£m
(90.2)
260.6

Share-
based
payment
reserve
£m
34.6

Own

Hedging
and
shares translation
reserve
reserve
£m
£m
(1.8)
(15.1)

Total
equity
£m
497.2

Minority
interest
£m
1.3

Share
capital
£m
9.7

1.8

99.5

42.5

(0.6)

63.7

205.1

0.1

(21.6)

(1.0)

4.6

7.0

(9.2)

5.4

(21.6)

7.0

(9.2)

At 1 January 2008
Total comprehensive income
for the year

Shares transferred to option
holders on exercise of
share options

Dividends paid

Expense in relation to
share-based payment

Purchase of own shares for
employee benefit trust (ESOP)

Acquisition of minority interest
by joint venture
At 1 January 2009
Total comprehensive income
for the year

-
9.7

-
301.1

Shares transferred to option
holders on exercise of
share options

0.1

3.0

Dividends paid

Expense in relation to
share-based payment

-
0.1

1.3
339.8

-
(47.7)

-
40.0

-
(19.7)

-
61.9

1.3
685.2

(1.3)
0.1

130.2

(102.3)

4.2

(14.6)

17.5

(25.9)

(1.8)

9.1

7.2

10.4

(25.9)

7.2

Purchase of own shares for
employee benefit trust (ESOP)
At 31 December 2009

-
9.8

-
304.1

-
0.1

-
444.1

-
(150.0)

-
49.6

(2.4)
(13.0)

-
47.3

(2.4)
692.0

-
0.1

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 84

Consolidated Balance Sheet
At 31 December 2009

Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Trade and other receivables
Retirement benefit asset
Deferred tax assets
Derivative financial instruments

Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Derivative financial instruments

Total assets
Current liabilities
Trade and other payables
Current tax liabilities
Obligations under finance leases
Loans
Derivative financial instruments

Non-current liabilities
Trade and other payables
Obligations under finance leases
Loans
Derivative financial instruments
Retirement benefit obligations
Provisions
Deferred tax liabilities

Total liabilities
Net assets
Equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings
Retirement benefit obligations reserve
Share-based payment reserve
Own shares reserve
Hedging and translation reserve
Equity attributable to equity holders of the parent
Minority interest
Total equity

*Note 15

Note

2009
£m

13
14
16
19
26
22
25

18
19
20
25

23
21
25

24
23
21
25
26
27
22

28
29

30
30
30
30

898.4
164.4
129.2
181.4
-
48.0
2.5
1,423.9

65.9
720.9
319.4
1.4
1,107.6
2,531.5

(771.6)
(14.1)
(6.0)
(110.7)
(5.5)
(907.9)

(23.1)
(18.0)
(543.2)
(1.7)
(294.2)
(42.3)
(9.0)
(931.5)
(1,839.4)
692.1

9.8
304.1
0.1
444.1
(150.0)
49.6
(13.0)
47.3
692.0
0.1
692.1

Restated*
2008
£m

963.2
192.7
115.4
121.1
62.4
20.0
5.6
1,480.4

50.2
725.7
250.8
5.0
1,031.7
2,512.1

(756.2)
(19.5)
(4.5)
(36.8)
(4.2)
(821.2)

(32.7)
(12.7)
(710.9)
(0.4)
(177.1)
(45.9)
(25.9)
(1,005.6)
(1,826.8)
685.3

9.7
301.1
0.1
339.8
(47.7)
40.0
(19.7)
61.9
685.2
0.1
685.3

The financial statements were approved by the Board of Directors on 25 February 2010 and signed on its behalf by:

Christopher Hyman
Chief Executive

Andrew Jenner
Finance Director

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 85

Consolidated Cash Flow Statement
For the year ended 31 December 2009

Net cash inflow from operating activities
Investing activities
Interest received
Disposal of investments/business undertakings
Proceeds from disposal of property, plant and equipment
Acquisition of subsidiaries, net of cash acquired
Purchase of other intangible assets
Purchase of property, plant and equipment
Net cash outflow from investing activities
Financing activities
Interest paid
Dividends paid
Repayment of loans
Repayment of non recourse loans
New loan advances
Other financing
Capital element of finance lease repayments
Purchase of own shares for employee benefit trust (ESOP)
Proceeds from issue of share capital and exercise of share options
Net cash (outflow)/inflow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Net exchange (loss)/gain
Cash and cash equivalents at end of year

Financial Statements

Note
31

2009
£m
235.1

2.1
0.6
3.7
(14.7)
(17.3)
(38.9)
(64.5)

(33.6)
(25.9)
(66.8)
(6.5)
33.8
-
(5.7)
(2.4)
10.4
(96.7)
73.9
250.8
(5.3)
319.4

2008
£m
162.6

7.3
1.9
17.5
(322.2)
(20.4)
(32.6)
(348.5)

(30.3)
(21.6)
(78.6)
(7.5)
397.4
(17.0)
(8.6)
(9.2)
5.4
230.0
44.1
185.0
21.7
250.8

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 86

Notes to the Consolidated Financial Statements

1. General information

Serco Group plc (the Group) is a company incorporated in the
United Kingdom under the Companies Act 2006. The address
of the registered office is Serco House, 16 Bartley Wood
Business Park, Bartley Way, Hook, Hampshire, RG27 9UY.
These Consolidated Financial Statements (the Financial
Statements) are presented in pounds Sterling because this is
the currency of the primary economic environment in which the
Group operates. Foreign operations are included in accordance
with the policies set out in note 2.

2. Significant accounting policies

Basis of accounting
These Financial Statements on pages 82 to 133 have been
prepared in accordance with International Financial Reporting
Standards (IFRSs) adopted for use in the European Union (EU)
and therefore the Group financial statements comply with
Article 4 of the EU IAS regulation.
The Financial Statements have been prepared on the historical
cost basis. The following principal accounting policies adopted
have been applied consistently in the current and preceding
financial year except as separately stated below.
As discussed in more detail in the Finance Review, these
Financial Statements have been prepared on the going
concern basis.

Adoption of new and revised Standards
In the current year, the following new and revised Standards
and Interpretations have been adopted and have affected the
amounts reported in these financial statements.

IAS 1 (revised 2007) - Presentation of Financial Statements
IAS 1 (revised 2007) requires the presentation of a statement of
changes in equity as a primary statement, separate from the
income statement and statement of comprehensive income.
As a result, a statement of changes in equity has been
included in the primary statements, showing changes in each
component of equity for each period presented. In addition,
IAS 1 (revised 2007) requires the presentation of a balance
sheet as at the beginning of the earliest comparative period
when an entity applies an accounting policy retrospectively
or makes a retrospective restatement of items in its financial
statements, or when it reclassifies items in its financial statements.
As described in note 15, the Consolidated Balance Sheet for
31 December 2008 has been restated for the finalisation of
provisional fair value adjustments. An opening balance sheet
as at 1 January 2008 has not been presented in these
accounts as it is unadjusted from the previously
published version.

IFRS 8 Operating Segments
IFRS 8 requires operating segments to be identified on the
basis of internal reports about components of the Group that
are regularly reviewed by the Group’s Chief Operating Decision
Maker (the Chief Executive and Executive Board) in order to
allocate resources to the segments and to assess their
performance. The information previously disclosed under the
predecessor standard (IAS 14 Segment Reporting) required
the Group to identify two sets of segments (business and
geographical), using a risks and rewards based approach.
The Directors have reviewed the business segments identified
under IAS 14 and, although management information is
presented in a variety of ways, consider that these segments
continue to be appropriate under IFRS 8 as the principal way
in which information is reported, however, the requirements of
IFRS 8 have resulted in certain changes to the disclosures.

Improving Disclosures about Financial Instruments
(amendments to IFRS 7 Financial Instruments: Disclosures)
The amendments to IFRS 7 expand the disclosures required in
respect of fair value measurements and liquidity risk.

The following new and revised Standards and Interpretations
have been adopted in the current year. Their adoption has not
had any significant impact on the amounts reported in these
Financial Statements but may impact the accounting for future
transactions and arrangements.

Amendment to IFRS 2 Share-based Payment – Vesting
Conditions and Cancellations (part of Improvements
to IFRSs (2008))
The amendments clarify the definition of vesting conditions for
the purposes of IFRS 2, introduce the concept of ‘non-vesting’
conditions and clarify the accounting treatment for cancellations.
The amendment has been applied retrospectively in accordance
with the relevant transitional provisions.

IAS 23 (revised 2007) - Borrowing Costs
The principal change to the Standard was to eliminate the
option to expense all borrowing costs when incurred.

IFRIC 16 Hedges of a Net Investment in a Foreign Operation
The Interpretation provides guidance on the detailed
requirements for net investment hedging for certain hedge
accounting designations.

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Financial Statements

For the purpose of impairment testing, goodwill is allocated to
each of the Group’s cash-generating units expected to benefit
from the synergies of the combination. Cash-generating units
to which goodwill has been allocated are tested for impairment
annually, or more frequently when there is an indication that
the unit may be impaired. If the recoverable amount of the
cash-generating unit is less than the carrying amount of the
unit, the impairment loss is allocated first to reduce the
carrying amount of any goodwill allocated to the unit and
then to the other assets of the unit pro-rata on the basis of the
carrying amount of each asset in the unit. An impairment loss
recognised for goodwill is not reversed in a subsequent period.
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 amounts
subject to being tested for impairment at that date. 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.

Investments in joint ventures
The Group’s investments in joint ventures are reported in the
financial statements using the proportionate consolidation
method, whereby the Group’s share of each of the assets,
liabilities, income and expenses of its joint ventures is
combined line by line with similar items in the Group’s financial
statements or reported as separate line items within the
Group’s financial statements.

Property, plant and equipment
Assets held for use in the rendering of services, or for
administrative purposes, are stated in the balance sheet
at cost, net of accumulated depreciation and any provision
for impairment.
Depreciation is provided on a straight-line basis at rates to
reduce the assets to their residual value over their estimated
useful lives.

The principal annual rates used are:
Freehold buildings
Short-leasehold building
improvements
Machinery
Motor vehicles
Furniture
Office equipment
Leased equipment

2.5%
The higher of 10% or the rate
produced by the lease term
15% - 20%
10% - 50%
10%
20% - 33%
The higher of the rate produced
by the lease term or useful life

The gain or loss arising on the disposal or retirement of an
asset is determined as the difference between the sales
proceeds and the carrying amount of the asset and is
recognised in the income statement.

2. Significant accounting policies continued

Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company, entities controlled by the
Company (its subsidiaries) and entities jointly-controlled by
the Company (its joint ventures) made up to 31 December
each year. Control is achieved where the Company has the
power to govern the financial and operating policies of an
investee entity so as to obtain benefits from its activities.
The results of subsidiaries and joint ventures acquired or
disposed of during the year are included in the consolidated
income statement from the effective date of acquisition or up
to the effective date of disposal as appropriate.
Where necessary, adjustments are made to the financial
statements of subsidiaries and joint ventures to bring
accounting policies used into line with those used by
the Group.
All intra-Group transactions, balances, income and expenses
are eliminated on consolidation.
Minority interests represent the portion of profit or loss and
net assets in subsidiaries that is not held by the Group and
is presented within equity in the consolidated balance sheet,
separately from parent shareholders’ equity.

Business combinations
The acquisition of subsidiaries is accounted for using the
purchase method. The cost of the acquisition is measured at
the aggregate of the fair values, at the date of exchange, of
assets given, liabilities incurred or assumed, and equity
instruments issued by the Group in exchange for control of the
acquiree, plus any costs directly attributable to the business
combination. The acquiree’s identifiable assets, liabilities and
contingent liabilities that meet the conditions for recognition
under IFRS 3 Business Combinations are recognised at their
fair value at the acquisition date.
Goodwill arising on acquisition is recognised as an asset and
initially measured at cost, being the excess of the cost of the
business combination over the Group’s interest in the net fair
value of the identifiable assets, liabilities and contingent
liabilities recognised. If, after reassessment, the Group’s
interest in the net fair value of the acquiree’s identifiable
assets, liabilities and contingent liabilities exceeds the cost of
the business combination, the excess is recognised
immediately in the income statement.
The interest of minority shareholders in the acquiree is initially
measured at the minority’s proportion of the net fair value of
the assets, liabilities and contingent liabilities recognised,
unless there is an unconditional obligation to purchase the
remaining shares and the minority has no right to future
dividend flows.

Goodwill
Goodwill arising on consolidation represents the excess of the
cost of acquisition over the Group’s interest in the fair value of
the identifiable net assets and liabilities of a subsidiary,
associate or jointly-controlled entity, at the date of acquisition.
Goodwill is initially recognised as an asset at cost and is
subsequently measured at cost less any accumulated
impairment losses. Goodwill which is recognised as an asset is
reviewed for impairment at least annually. Any impairment is
recognised immediately in profit or loss and is not
subsequently reversed.

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2. Significant accounting policies continued

Other intangible assets
Customer relationships represent the value of contracts
acquired on the acquisition of subsidiaries and are amortised
over the average length of contracts.
Development expenditure is capitalised as an intangible asset
only if all of the following conditions are met:

•

an asset is created that can be separately identified;

it is probable that the asset created will generate future
economic benefits; and

the development cost of the asset can be measured
reliably.

Development expenditure is amortised over the period in
which the Group is expected to benefit. This period is between
three and eight years, or the length of the contract if longer.
Provision is also made for any impairment. All other
development expenditure is written off as incurred. Assets
under the course of construction are not depreciated.
Licences comprise premiums paid for the acquisition of
licences, which are amortised on a straight-line basis over
the life of the licence.
Franchises represent costs incurred in obtaining franchise
rights and franchise goodwill arising on the acquisition of
franchises. These are amortised on a straight-line basis over
the life of the franchise.
Pension related intangibles represent assets arising in relation
to the Group’s right to manage and operate contracts where
there is a defined benefit pension scheme and it is not virtually
certain that contributions will be recovered from the customer
but where the Group’s obligation to contribute to the scheme
ends when the contract ends. The intangible assets represent
the Group’s share of scheme net liabilities on the date that
contracts commence and are amortised on a straight-line
basis over the contract life.

Impairment of tangible and intangible assets
Annually, the Group reviews the carrying amounts of its
tangible and intangible assets to determine whether there is
any indication that those assets have suffered an impairment
loss. If any such indication exists, the recoverable amount of
the asset is estimated in order to determine the extent of the
impairment loss (if any). Where the asset does not generate
cash flows that are independent from other assets, the Group
estimates the recoverable amount of the cash-generating unit
(CGU) to which the asset belongs. A CGU is the smallest
group of assets that generates cash inflows from continuing
use that are largely independent of the cash flows of other
assets or groups of assets. The goodwill acquired in a
business combination, for the purpose of impairment testing,
is allocated to CGUs that are expected to benefit from the
synergies of the combination.
Recoverable amount is the higher of fair value less costs to
sell and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value using a
pre-tax discount rate that reflects current market assessments
of the time value of money and the risks specific to the asset for
which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or CGU) is estimated
to be less than its carrying amount, the carrying amount of
the asset (or CGU) is reduced to its recoverable amount.
An impairment loss is recognised as an expense immediately.
Impairment losses recognised in respect of CGUs are allocated
first to reduce the carrying amount of any goodwill allocated to
the units and then to reduce the carrying amount of the other
assets in the unit (group of units) on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In
respect of other assets, impairment losses recognised in prior
periods are assessed at each reporting date for indications that
the loss has decreased or no longer exists. Where an impairment
loss subsequently reverses, the carrying amount of the asset
(or CGU) 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,
net of depreciation or amortisation, had no impairment loss
been recognised for the asset (or CGU) in prior years. A reversal
of an impairment loss is recognised as income immediately.
Impairment losses and reversals are included within other
expenses within the income statement.

Revenue recognition
Revenue is measured at the fair value of the consideration
received or receivable and represents amounts due for goods
and services provided in the normal course of business, net of
discounts, VAT and other sales-related taxes.
Sales of goods are recognised when goods are delivered and
title has passed.
Interest income is accrued on a time basis, by reference to the
principal outstanding and at the effective interest rate
applicable, which is the rate that exactly discounts estimated
future cash receipts through the expected life of the financial
asset to that asset’s net carrying amount.
Dividend income from investments is recognised when the
shareholders’ rights to receive payment have been established.
Revenue on repeat service-based contracts is recognised as
services are provided.
Revenue from long-term project-based contracts is recognised
in accordance with the Group’s accounting policy below.

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Financial Statements

2. Significant accounting policies continued

Long-term project-based and repeat service contracts
The Group has a number of long-term contracts for the
provision of complex, project-based services. Where the
outcome of such long-term project-based contracts can be
measured reliably, revenue and costs are recognised by
reference to the stage of completion of the contract activity at
the balance sheet date in accordance with IAS 18 Revenue
and IAS 11 Construction Contracts. This is measured by the
proportion that contract costs incurred for work performed to
date bear to the estimated total contract costs, except where
this would not be representative of the stage of completion.
Variations in contract work, claims and incentive payments are
included to the extent that they have been agreed with the
customer, or are virtually certain of being received.
Where the outcome of a long-term project-based contract
cannot be estimated reliably, contract revenue is recognised
to the extent of contract costs that it is probable will be
recovered. Contract costs are recognised as expenses in the
period in which they are incurred.
When it is probable that the total contract costs will exceed
total contract revenue, the expected loss is recognised as an
expense immediately.
All bid costs are expensed through the income statement up
to the point where contract award (or full recovery of costs) is
virtually certain. Bid costs incurred after this point are then
capitalised within trade and other receivables. On contract
award these bid costs are amortised through the income
statement over the contract period by reference to the stage
of completion of the contract activity at the balance sheet
date. Phase in costs directly related to phase in programmes
of contracts are treated as an integral part of contract costs
and are recognised on a straight-line basis over the life of
the contract.

Segmental information
Segmental information is based on internal reports about
components of the Group that are regularly reviewed by the
Group’s Chief Operating Decision Maker (the Chief Executive
and Executive Board) in order to allocate resources to the
segments and to assess their performance.
Items excluded from segments comprise corporate
expenses. Specific corporate expenses are allocated to
the corresponding segments. Segment assets comprise
goodwill, other intangible assets, property, plant and
equipment, inventories, trade and other receivables and
retirement benefit asset (excluding corporation tax
recoverable). Liabilities comprise trade and other payables
and retirement benefit obligations.

Inventories
Inventories are stated at the lower of cost and net realisable
value and comprise service spares, parts awaiting installation
and long-term project-based contract balances. Cost
comprises direct materials and, where applicable, direct labour
costs that have been incurred in bringing the inventories to
their present location and condition.

Leases
Leases are classified as finance leases whenever the terms of
the lease transfer substantially all the risks and rewards of
ownership to the lessee. All other leases are classified as
operating leases.
Assets held under finance leases are recognised as assets of
the Group at fair value or, if lower, at the present value of
minimum lease payments determined at the inception of the
lease. The corresponding liability to the lessor is included in
the balance sheet as a finance lease obligation. Lease
payments are apportioned between finance charges and
reduction of the lease obligation so as to achieve a constant
rate of interest on the remaining balance of the liability. Finance
charges are charged directly against income, unless they are
directly attributable to a qualifying asset, in which case they
are capitalised in accordance with the Group’s general policy
on borrowing costs (see below).
Total rentals payable under operating leases are charged
to income on a straight-line basis over the term of the
relevant lease.

Foreign currencies
Transactions in currencies other than pounds Sterling are
recorded at the rates of exchange on the dates of the
transactions. At each balance sheet date, monetary assets
and liabilities that are denominated in foreign currencies are
retranslated at the rates prevailing on the balance sheet date.
Non-monetary assets and liabilities carried at fair value that
are denominated in foreign currencies are translated at the
date when the fair value was determined. Gains and losses
arising on retranslation are included in the net profit or loss
for the period, except for exchange differences arising on
non-monetary assets and liabilities where the changes in fair
value are recognised directly in equity in the statement of
comprehensive income (SOCI).
On consolidation, the assets and liabilities of the Group’s
overseas operations are translated at exchange rates prevailing
on the balance sheet date. Income and expense items are
translated at the average exchange rates for the period.
Exchange differences arising, if any, are recognised directly
within equity in the Group’s hedging and translation reserve.
Such translation differences are recognised as income or
expenses in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition
of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate.

Borrowing costs
Borrowing costs directly attributable to the acquisition,
construction or production of qualifying assets, which are
assets that necessarily take a substantial period of time to get
ready for their intended use or sale, are added to the cost of
those assets, until such time as the assets are substantially
ready for their intended use or sale. No such borrowing costs
have been capitalised in the current or prior years.
All other borrowing costs are recognised as an income or
expense in the period in which they are incurred.

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2. Significant accounting policies continued

Retirement benefit costs
Payments to defined contribution pension schemes are
charged as an expense as they fall due.
For defined benefit pension 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 outside
the income statement and are presented in the SOCI.
The current service cost represents the increase in the present
value of the plan liabilities expected to arise from employee
service in the current period.
Past service cost is recognised immediately to the extent
that the benefits are already vested, and is amortised on a
straight-line basis over the average period until the benefit
becomes vested. Gains and losses on curtailments or
settlements are recognised in the period in which the
curtailment or settlement occurs.
The retirement benefit obligation recognised in the balance
sheet represents the present value of the defined benefit
obligation as adjusted for unrecognised past service costs,
and as reduced by the fair value of scheme assets. Any asset
resulting from this calculation is limited to past service cost,
plus the present value of available refunds and reductions in
future contributions to the plan.
The economic benefit from refunds is only recognised
to the extent that the Group has an unconditional right to
receive a refund.
To the extent that an economic benefit is available as a
reduction in contributions and there is a minimum funding
requirement, the economic benefit available as a reduction in
contributions is calculated at the present value of:

the estimated future service cost in each year; less

the estimated minimum funding contributions required in
respect of the future accrual and benefits in that year.

Defined benefit obligations arising from contractual
obligations
Where the Group takes on a contract and assumes the
obligation to contribute variable amounts to the defined benefit
pension scheme throughout the period of the contract and it is
not virtually certain that the contributions will be recovered
from the customer, the Group’s share of the defined benefit
obligation less its share of the pension scheme assets that it
will fund over the period of the contract is recognised as a
liability at the start of the contract with a corresponding
amount being recognised as an intangible asset. The intangible
asset, which reflects the Group’s right to manage and operate
the contract, is amortised over the contract period. The
Group’s share of the scheme assets and liabilities is calculated
by reducing the scheme assets and liabilities by a franchise
adjustment. The franchise adjustment represents the amount of
scheme deficits that will be funded outside the contract period.
Subsequent actuarial gains and losses in relation to the
Group’s share of pension obligations are recognised outside
the income statement and are presented in the SOCI.

Where the Group takes on a contract and assumes the
obligation to contribute variable amounts to the defined benefit
pension scheme throughout the period of the contract and it is
virtually certain that the contributions will be recovered from the
customer, the Group’s share of the defined benefit obligation
less its share of the pension scheme assets are recognised as
a liability at the start of the contract with a corresponding
amount being recognised as a financial asset at fair value,
being the fair value of the reimbursable rights. In the income
statement, the expense relating to the defined benefit plan is
presented net of the amount recognised for reimbursement.
Subsequent actuarial gains and losses in relation to the
Group’s share of pension obligations are recognised outside
the income statement and are presented in the SOCI. The
change in fair value of the reimbursable rights that is not
presented in the income statement is reported in the SOCI.

Multi-employer pension schemes
Multi-employer pension schemes are classified as a defined
contribution pension scheme or a defined benefit pension
scheme under the terms of the scheme.
When sufficient information is not available to use defined
benefit accounting for a multi-employer defined benefit
pension scheme, the Group accounts for the scheme as if it
were a defined contribution scheme.

Taxation
The tax expense represents the sum of current tax expense
and deferred tax expense.
Current tax expense is based on taxable profit for the year.
Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense
that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible. The
Group’s liability for current tax is calculated using tax rates that
have been enacted or substantively enacted by the balance
sheet date.
Deferred tax is provided, using the liability method, on
temporary differences at the balance sheet date between the
tax bases of assets and liabilities and their carrying amounts
for accounting purposes.
Deferred tax liabilities are generally recognised for all taxable
temporary differences. Deferred tax assets are generally
recognised for all deductible temporary differences, carry
forward of unused tax credits and unused tax losses, to the
extent that it is probable that taxable profit will be available
against which these items can be utilised.
Deferred tax assets and liabilities are not recognised if the
temporary difference arises from goodwill or from the initial
recognition of an asset and liability in a transaction other than
a business combination and, at the time of the transaction,
affects neither the tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary
differences arising on investments in subsidiaries and joint
ventures, except where the Group is able to control the
reversal of the temporary difference and it is probable that the
temporary difference will not reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no
longer probable that sufficient taxable profits will be available
to allow all or part of the asset to be utilised.

Financial Statements

Significant financial difficulties of the debtor, probability that
the debtor will enter bankruptcy or financial reorganisation,
and default or delinquency in payments are considered
indicators that a trade receivable is impaired. The amount of
the provision is based on management’s best estimate of the
likelihood of the recoverable amount. The carrying amount of
the asset is reduced through the use of a bad debt provision
account and the amount of the loss is recognised in the
income statement within administrative expenses. When a
trade receivable is uncollectible, it is written off against the
bad debt provision account for trade receivables. Subsequent
recoveries of amounts previously written off are credited
against administrative expenses.

Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and balances
with banks and similar institutions, which are readily convertible
to known amounts of cash and which are subject to insignificant
changes in value and have a maturity of three months or less.
This definition is also used for the cash flow statement.

Dividends
Dividends are recorded in the Group’s consolidated financial
statements in the period in which they are approved by the
Group’s shareholders.

Loans
Loans are initially stated at the amount of the net proceeds
after deduction of issue costs. The carrying amount of loans
hedged by derivatives is increased by the finance cost in
respect of the accounting period and reduced by payments
made in the period. Loans which are unhedged are stated at
amortised cost with accrued interest recorded separately from
the associated borrowings within current liabilities.
Loans are described as non recourse loans and classified as
such only if no Group company other than the relevant
borrower has an obligation, under a guarantee or other
arrangement, to repay the debt.

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2. Significant accounting policies continued

Taxation continued
Deferred tax is measured at the tax rates that are expected
to apply in the period when the liability is settled or the asset
is realised, based upon tax rates and legislation that have
been enacted or substantively enacted at the balance sheet
date. Deferred tax is charged or credited in the income
statement, except where it relates to items charged or credited
directly to equity, in which case the deferred tax is also
recognised in equity.
Deferred tax assets and liabilities are offset when there is a
legal enforceable right to set off current tax assets against
current tax liabilities and when they relate to income taxes
levied by the same tax authority where the Group intends to
settle its current tax assets and liabilities on a net basis.

Research and development costs
Expenditure on research is recognised as an expense in the
period in which it is incurred. Development costs are expensed
in the period in which the costs are incurred unless the criteria
for capitalisation is met (see Other intangible assets policy).

Share-based payment
The Group has applied the requirements of IFRS 2 Share-based
Payment (amended January 2008). In accordance with the
transitional provisions, IFRS 2 has been applied to all grants
of equity instruments after 7 November 2002 that were not fully
vested as of 1 January 2005.
The Group issues equity-settled share-based payments to
certain employees and operates an HMRC approved Save As
You Earn (SAYE) share option scheme open to eligible
employees which allows the purchase of shares at a discount.
These are measured at fair value at the date of grant. The fair
value is expensed on a straight-line basis over the vesting
period, based on the Group’s estimate of shares that will
eventually vest. SAYE options are treated as cancelled when
employees cease to contribute to the scheme, resulting in an
acceleration of the remainder of the related expense.
Where the fair value of share options requires the use of a
valuation model, fair value is measured by use of the Black
Scholes, Binomial Lattice or Monte Carlo Simulation models
depending on the type of scheme, as set out in note 33. The
expected life used in the models has been adjusted, based on
management’s best estimate, for the effects of non-transferability,
exercise restrictions, and behavioural considerations. Where
relevant, the value of the option has also been adjusted to take
account of market conditions applicable to the option.

Trade receivables
Trade receivables are recognised initially at fair value and
subsequently measured at amortised cost using the effective
interest method, less provision for impairment. A provision for
impairment of trade receivables is established when there is
objective evidence that the Group will not be able to collect all
amounts due according to the original terms of the contract.

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2. Significant accounting policies continued

Derivative financial instruments and hedging activities
The Group enters into a variety of derivative financial
instruments to manage the exposure to interest rate and
foreign exchange risk, including foreign exchange forward
contracts and interest rate swaps. Further details of derivative
financial instruments are given in note 25.
Derivatives are initially recognised at fair value at the date a
derivative contract is entered into and are subsequently
remeasured to their fair value at each balance sheet date.
A derivative with a positive fair value is recognised as a
financial asset whereas a derivative with a negative fair value
is recognised as a financial liability. The resulting gain or loss is
recognised in profit or loss immediately unless the derivative
is designated and effective as a hedging instrument, in which
event the timing of the recognition in profit or loss depends on
the nature of the hedge relationship. The Group designates
certain derivatives as either hedges of the fair value of recognised
assets or liabilities or term commitments (fair value hedges),
hedges of highly probable forecast transactions or hedges
of foreign currency risk of firm commitments (cash flow
hedges), or hedges of net investments in foreign operations.
A derivative is presented as a non-current asset or a non-current
liability if the remaining maturity of the instrument is more than
12 months and it is not expected to be realised or settled
within 12 months. Other derivatives are presented as current
assets or current liabilities.

Embedded derivatives
Derivatives embedded in other financial instruments or other
host contracts are treated as separate derivatives when their
risks and characteristics are not closely related to those of the
host contracts and the host contracts are not measured at fair
value through profit or loss.

Hedge accounting
The Group designates certain hedging instruments, which
include derivatives, embedded derivatives and non-derivatives
in respect of foreign currency risk, as either fair value hedges,
cash flow hedges, or hedges of net investments in foreign
operations. Hedges of foreign exchange risk on firm
commitments are accounted for as cash flow hedges.
At the inception of the hedge relationship, the entity
documents the relationship between the hedging instrument
and the hedged item, along with its risk management
objectives and its strategy for undertaking various hedge
transactions. Furthermore, at the inception of the hedge and
on an ongoing basis, the Group documents whether the
hedging instrument that is used in a hedging relationship is
highly effective in offsetting changes in fair values or cash
flows of the hedged item.
Details of the fair values of the derivative instruments used for
hedging purposes and movements in the hedging and
translation reserve in equity are detailed in the SOCI and
described in note 25.

Fair value hedges
Changes in the fair value of derivatives that are designated and
qualify as fair value hedges are recorded in profit or loss
immediately, together with any changes in the fair value of the
hedged item that is attributable to the hedged risk. The change
in the fair value of the hedging instrument and the change in
the hedged item attributable to the hedged risk are recognised
in the line of the income statement relating to the hedged item.
Hedge accounting is discontinued when the Group revokes the
hedging relationship, the hedging instrument expires or is sold,
terminated, exercised, or no longer qualifies for hedge
accounting. The adjustment to the carrying amount of the
hedged item arising from the hedged risk is amortised to profit
or loss from that date.

Cash flow hedges
The effective portion of changes in the fair value of derivatives
that are designated and qualify as cash flow hedges are
deferred in equity. The gain or loss relating to the ineffective
portion is recognised immediately in profit or loss.
Amounts deferred in equity are recycled in profit or loss in the
periods when the hedged item is recognised in profit or loss,
in the same line of the income statement as the recognised
hedged item. However, when the forecast transaction that
is hedged results in the recognition of a non-financial asset
or a non-financial liability, the gains and losses previously
deferred in equity are transferred from equity and included in
the initial measurement of the cost of the non-financial asset
or non-financial liability.
Hedge accounting is discontinued when the Group revokes the
hedging relationship, the hedging instrument expires or is sold,
terminated, exercised, or no longer qualifies for hedge
accounting. Any cumulative gain or loss deferred in equity at
that time remains in equity and is recognised when the forecast
transaction is ultimately recognised in profit or loss. When a
forecast transaction is no longer expected to occur, the
cumulative gain or loss that was deferred in equity is recognised
immediately in profit or loss.

Provisions
Provisions are recognised when the Group has a present
obligation as a result of a past event, and it is probable that the
Group will be required to settle that obligation. Provisions are
measured at the Directors’ best estimate of the expenditure
required to settle the obligation at the balance sheet date.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 93

Financial Statements

2. Significant accounting policies continued

3. Critical accounting judgements and key sources

New standards and interpretations not applied
At the date of authorisation of these Financial Statements,
the following Standards and Interpretations which have not
been applied in these financial statements were in issue but
not yet effective (and in some cases had not yet been adopted
by the EU):

IFRS 1 (amended) / IAS 27
(amended)

IFRS 3 (revised 2008)
IAS 27 (revised 2008)

IAS 28 (revised 2008)
Improvements to IFRSs
(April 2009)
IFRIC 17

Cost of an Investment in a
Subsidiary, Jointly Controlled
Entity or Associate
Business Combinations
Consolidated and Separate
Financial Statements
Investments in Associates

Distributions of Non-cash
Assets to Owners

The Directors do not anticipate that the adoption of these
standards and interpretations will have a material impact on
the Group’s financial statements in the period of initial
application, with the exception of the treatment of acquisition
of subsidiaries when IFRS 3 (revised 2008) comes into effect
for business combinations for which the acquisition date is on
or after the beginning of the first annual period beginning on or
after 1 July 2009. If IFRS 3 (revised 2008) had been adopted in
these accounts, directly attributable acquisition costs of £2.0m
(2008: £8.0m) would have been expensed during the year.

of estimation uncertainty

Critical judgements in applying the Group’s accounting
policies
In the process of applying the Group’s accounting policies,
which are described in note 2, management has made the
following judgements that have the most significant effect
on the amounts recognised in the financial statements (apart
from those involving estimations which are dealt with below).

Revenue and profit recognition of long-term project-based
contracts
Revenue and profit is recognised for certain long-term
project-based contracts based on the stage of completion
of the contract activity. This is measured by the proportion of
costs incurred to estimated whole-life contract costs except
where this would not be representative of the stage
of completion.

Key sources of estimation uncertainty
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 goodwill
Determining whether goodwill is impaired requires an
estimation of the value in use of the CGUs to which goodwill
has been allocated. The value in use calculation involves an
estimation of the future cash flows of CGUs and also the
selection of appropriate discount rates, which involves
judgement, to use to calculate present values (note 13). The
carrying value of goodwill is £898.4m (2008: £963.2m restated)
at the balance sheet date.

Retirement benefit obligations
The calculation of retirement benefit obligations is dependent
on material key assumptions including discount rates, future
returns on assets and future contribution rates (note 26). The
value of retirement benefit obligations at the balance sheet
date is £294.2m (2008: £177.1m). The value of retirement
benefit assets is £nil (2008: £62.4m). Details of the impact
of changes in assumptions relating to retirement benefit
obligations are disclosed in the Finance Review (page 44).

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 94

4. Revenue

An analysis of the Group’s revenue is as follows:

Rendering of services
Revenue from long-term project-based contracts
Revenue as disclosed in the Consolidated Income Statement
Investment revenue (note 8)
Total revenue as defined in IAS 18

2009
£m
3,824.0
146.0
3,970.0
2.7
3,972.7

2008
£m
2,950.3
173.2
3,123.5
8.2
3,131.7

5. Segmental information

Information reported to the Group’s Chief Operating Decision Maker (the Chief Executive and the Executive Board) for the
purposes of resource allocation and assessment of segment performance focuses on the categories of customer identified using
their respective markets. Details of the different products and services provided to each operating segment are provided in the
Our business and Our performance sections. The Group’s reportable operating segments under IFRS 8 are:

Reportable segments
Civil Government

Operating segments
- home affairs, welfare to work, healthcare, integrated services, IT and BPO, education

Defence

Transport
Science

and children’s services and consulting

- provision of operational support services to the armed forces of the UK, the US,

Canada, Germany and Australia

- provision of transport services in the UK, Australia, the Middle East and the US
- science-based business including scientific research and nuclear industries

The following is an analysis of the Group’s revenue and results by operating segment in the year ended 31 December 2009.

Reportable segments

Year ended 31 December 2009

Revenue
Result
Segment result
Corporate expenses
Operating profit
Investment revenue
Finance costs
Profit before tax
Tax
Profit for the year

Capital expenditure including acquisitions
Property, plant and equipment
Goodwill
Intangible assets: segments
Intangible assets: corporate

Depreciation and amortisation
Depreciation
Amortisation: segments
Amortisation: corporate

Segment assets
Reportable segment assets
Corporate assets

Segment liabilities
Reportable segment liabilities
Corporate liabilities

Civil
Government
£m
1,556.1

Defence
£m
1,019.9

Transport
£m
788.7

Science
£m
605.3

Total
£m
3,970.0

77.8

78.3

36.0

63.7

32.3
6.2
9.1

21.6
14.4

7.2
-
1.5

5.2
5.3

9.4
-
-

6.1
10.0

2.9
-
-

1.5
1.1

1,110.6

496.6

205.6

316.1

(376.2)

(138.6)

(152.7)

(282.8)

255.8
(43.7)
212.1
2.7
(37.7)
177.1
(46.9)
130.2

51.8
6.2
10.6
6.9
17.5

34.4
30.8
9.7
40.5

2,128.9
30.0
2,158.9

(950.3)
(138.6)
(1,088.9)

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 95

Financial Statements

5. Segmental information continued

Reportable segments

Year ended 31 December 2008

Revenue
Result
Segment result
Corporate expenses
Operating profit
Investment revenue
Finance costs
Profit before tax
Tax
Profit for the year

Civil
Government
£m
1,127.3

Defence
£m
785.8

Transport
£m
670.8

Science
£m
539.6

Total
£m
3,123.5

55.2

59.1

29.7

51.6

Capital expenditure including acquisitions
Property, plant and equipment
Goodwill (as previously stated)
Fair value adjustments in respect of 2008 acquisitions (note 15)
Goodwill (restated)
Intangible assets: segments (as previously stated)
Fair value adjustments in respect of 2008 acquisitions (note 15)
Intangible assets: segmental (restated)
Intangible assets: corporate

Depreciation and amortisation
Depreciation
Amortisation: segments
Amortisation: corporate

Segment assets
Reportable segment assets (as previously stated)
Fair value adjustments in respect of 2008 acquisitions (note 15)
Reportable segment assets (restated)
Corporate assets

Segment liabilities
Reportable segment liabilities (as previously stated)
Fair value adjustments in respect of 2008 acquisitions (note 15)
Reportable segment liabilities (restated)
Corporate liabilities

34.0
233.4
(1.5)
231.9
39.8
1.4
41.2

6.4
134.2
-
134.2
25.3
-
25.3

13.5
14.7

4.1
0.7

11.2
-
-
-
1.7
-
1.7

4.6
4.9

0.7
-
-
-
0.8
-
0.8

3.8
1.5

1,138.2
(1.4)
1,136.8

585.6
-
585.6

168.5
-
168.5

260.2
-
260.2

(382.0)
1.3
(380.7)

(175.7)
-
(175.7)

(141.2)
-
(141.2)

(249.9)
-
(249.9)

195.6
(39.6)
156.0
8.2
(28.1)
136.1
(36.5)
99.6

52.3
367.6
(1.5)
366.1
67.6
1.4
69.0
7.0
76.0

26.0
21.8
7.5
29.3

2,152.5
(1.4)
2,151.1
67.6
2,218.7

(948.8)
1.3
(947.5)
(18.5)
(966.0)

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 96

5. Segmental information continued

Segment assets comprise:
Goodwill
Other intangible assets
Property, plant and equipment
Trade and other receivables: non-current
Retirement benefit assets
Inventories
Trade and other receivables: current excluding Corporation tax recoverable

*Note 15

Segment liabilities comprise:
Trade and other payables: current
Trade and other payables: non-current
Retirement benefit obligations

*Note 15

Geographical information

United Kingdom
United States
Other countries

As previously
stated
2008
£m

2009
£m

898.4
164.4
129.2
181.4
-
65.9
719.6
2,158.9

964.7
191.3
115.4
121.1
62.4
50.2
715.0
2,220.1

Restated*
2008
£m

963.2
192.7
115.4
121.1
62.4
50.2
713.7
2,218.7

As previously
stated
2008
£m

2009
£m

(771.6)
(23.1)
(294.2)
(1,088.9)

(754.7)
(35.5)
(177.1)
(967.3)

Restated*
2008
£m

(756.2)
(32.7)
(177.1)
(966.0)

Year ended
31 December 2009

Year ended
31 December 2008

Revenue
£m
2,541.9
819.2
608.9
3,970.0

Non-current
assets*
£m
734.9
404.8
233.7
1,373.4

Revenue
£m
2,334.6
311.4
477.5
3,123.5

Non-current
assets*
£m
674.3
484.5
233.6
1,392.4

*Non-current assets exclude financial instruments, deferred tax assets and retirement benefit assets.

Revenues from external customers are attributed to individual countries on the basis of the location of the customer.

Information about major customers
The Group has two major governmental customers which each represent more than ten per cent of Group revenues.
The customers’ revenues were respectively £2,351.6m (2008: £2,174.9m) across all reported segments and £796.1m
(2008: £293.6m) across all reported segments other than the Science segment.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 97

6. Operating profit

Operating profit is stated after charging/(crediting):

Net foreign exchange (gains)/losses
Research and development costs
Loss/(profit) on disposal of property, plant and equipment
Depreciation and impairment of property, plant and equipment (note 16)
Amortisation of intangible assets – arising on acquisition (note 14)
Amortisation and impairment of intangible assets – other (note 14)
Staff costs (note 7)
Bad debt provision charged to income statement (note 19)
Fair value adjustment on financial instruments:
- recycling of amounts on discontinued cash flow hedges (note 25(e))
- forward foreign exchange contracts: non-designated hedges (note 25(a))
Operating lease payments
Operating lease income

Financial Statements

2009
£m
(3.4)
47.1
2.0
34.4
17.6
22.9
1,628.4
1.4

0.2
3.0
104.5
(0.1)

2008
£m
1.0
43.2
(4.6)
26.0
9.2
20.1
1,306.0
1.3

0.1
(1.3)
81.7
(0.1)

Amounts payable to Deloitte LLP and their associates by the Company and its subsidiary undertakings in respect of audit and
non-audit services are shown below.

Fees payable to the Company’s auditors for the audit of the Company’s annual accounts
Fees payable to the Company’s auditors and their associates for other services to the Group:
- audit of the Company’s subsidiaries pursuant to legislation
Total audit fees
Other services pursuant to legislation
Tax services
Other services
Total non-audit fees

7. Staff costs

The average monthly number of employees (including executive directors) was:

Civil Government
Defence
Transport
Science
Unallocated

2009
£m
0.9

0.7
1.6
0.1
0.2
0.3
0.6

2008
£m
0.9

0.7
1.6
0.2
0.2
0.4
0.8

2009
Number
33,392
12,555
8,073
3,424
266
57,710

2008
Number
19,380
11,564
7,595
3,882
263
42,684

Average monthly numbers of employees for joint ventures are included on a proportionately consolidated basis in the
table above.

Aggregate remuneration comprised:

Wages and salaries
Social security costs
Other pension costs (note 26)

Share-based payment expense (note 33)
Total staff costs

2009
£m
1,402.1
126.7
92.4
1,621.2
7.2
1,628.4

2008
£m
1,114.0
99.1
85.9
1,299.0
7.0
1,306.0

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 98

Investment revenue

Net fair value adjustments on derivative financial instruments
Interest receivable by PFI companies
Interest receivable on other loans and deposits

9. Finance costs

Interest payable on non recourse loans
Interest payable on obligations under finance leases
Interest payable on other loans
Movement in discount on provisions and deferred consideration
Net interest payable on retirement benefit obligations (note 26)

10. Tax

10(a) Income tax recognised in the income statement

Current income tax
Current income tax expense
Adjustments in respect of prior years
Deferred tax
Current year
Adjustments in respect of prior years

The tax expense for the year can be reconciled to the profit in the Consolidated Income Statement as follows:

Profit before tax
Tax calculated at a rate of 28% (2008: 28.5%)
Expenses not deductible for tax purposes
Unrelieved tax losses
Effect of the use of unrecognised tax losses
Untaxed income
Overseas rate differences
Tax incentives
Adjustments in respect of prior years
Tax charge

10(b) Income tax recognised in the SOCI

Current tax
Relating to cash flow hedges
Recorded in Retirement benefit obligations reserve
Recorded in Share-based payment reserve
Deferred tax
Relating to cash flow hedges
Recorded in Retirement benefit obligations reserve
Recorded in Share-based payment reserve

2009
£m
-
-
2.7
2.7

2009
£m
1.6
1.8
26.8
1.2
6.3
37.7

2009
£m

56.2
(9.1)

(2.0)
1.8
46.9

2009
£m
177.1
49.6
3.8
2.1
(0.4)
(0.9)
3.4
(3.4)
(7.3)
46.9

2009
£m

0.3
(0.5)
(3.2)

(1.7)
(39.1)
(1.0)
(45.2)

2008
£m
0.3
1.0
6.9
8.2

2008
£m
2.7
1.3
23.5
-
0.6
28.1

2008
£m

32.7
(2.8)

8.9
(2.3)
36.5

2008
£m
136.1
38.8
5.9
0.4
(1.9)
(0.7)
2.3
(3.2)
(5.1)
36.5

2008
£m

-
-
(0.9)

3.9
16.8
1.5
21.3

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 99

Financial Statements

11. Dividends

Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2008 of 3.52p per share on 481.1 million ordinary shares
(2008: final dividend for the year ended 31 December 2007 of 3.02p per share on 480.2 million
ordinary shares)

Interim dividend for the year ended 31 December 2009 of 1.85p per share on 489.0 million ordinary
shares (2008: interim dividend for the year ended 31 December 2008 of 1.48p per share on 480.3 million
ordinary shares)

Proposed final dividend for the year ended 31 December 2009 of 4.40p per share on 487.5 million
ordinary shares (2008: 3.52p on 481.1 million ordinary shares)

2009
£m

2008
£m

16.9

14.5

9.0
25.9

21.4

7.1
21.6

16.9

The proposed final dividend for 2009 is subject to approval by shareholders at the Annual General Meeting and has not been
included as a liability in these financial statements. A dividend waiver is effective for those shares held on behalf of the Company
by its Employee Share Ownership Trust (note 30(c)).

12. Earnings per share

Basic and diluted earnings per ordinary share (EPS) have been calculated in accordance with IAS 33 Earnings per Share. EPS is
shown both before and after amortisation of intangible assets arising on acquisition (note 14) to assist in the understanding of the
underlying performance of the business.

The calculation of the basic and diluted EPS is based on the following data:

Number of shares

Weighted average number of ordinary shares for the purpose of basic EPS
Effect of dilutive potential ordinary shares: share options
Weighted average number of ordinary shares for the purpose of diluted EPS

Earnings

Earnings for the purpose of basic EPS being net profit attributable to the
equity holders of the parent
Add back:
Amortisation of intangible assets arising on acquisition, net of tax
of £4.1m (2008: £0.9m)
Adjusted earnings before amortisation of intangible assets arising on acquisition
Earnings for the purpose of basic EPS
Effect of dilutive potential ordinary shares
Diluted EPS

2009
Millions
486.6
5.6
492.2

2008
Millions
485.7
7.3
493.0

Earnings
2009
£m

Per share
amount
2009
Pence

Earnings
2008
£m

Per share
amount
2008
Pence

130.2

26.76

99.5

20.49

13.5
143.7
130.2
-
130.2

2.77
29.53
26.76
(0.31)
26.45

8.3
107.8
99.5
-
99.5

1.71
22.20
20.49
(0.31)
20.18

At 31 December 2009 options over 894,000 (2008: 1,955,000) shares were excluded from the weighted average number of shares
used for calculating diluted EPS because their exercise price was above the average share price for the year and they were,
therefore, anti-dilutive.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 100

100

13. Goodwill

Cost

At 1 January 2008
Additions
Exchange differences
At 31 December 2008 (as previously stated)
Fair value adjustments on 2008 acquisitions (note 15)
At 1 January 2009 (restated)
Additions
Reduction in deferred consideration payable on Amtech Private Limited (Infovision)
Exchange differences
At 31 December 2009

£m
542.1
367.6
55.0
964.7
(1.5)
963.2
6.2
(16.5)
(54.5)
898.4

Additions during the year include goodwill in respect of the acquisitions of Sandrunner Limited and GSTS Pathology LLP (note 15).

The goodwill acquired in business combinations is allocated, at acquisition, to the cash-generating units (CGUs) that are
expected to benefit from that business combination. Goodwill has been allocated to CGUs in the following reportable segments:

Cost

Civil Government
Defence
Transport
Science
At 31 December

*Note 15

As previously
stated
2008
£m
548.4
280.6
21.4
114.3
964.7

2009
£m
509.4
257.7
21.1
110.2
898.4

Restated*
2008
£m
546.9
280.6
21.4
114.3
963.2

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The
recoverable amount of each CGU is based on value in use calculations.

Key assumptions
The value in use calculations use cash flow projections based on financial plans approved by senior management covering a
five-year period. The key assumptions used are discussed below.

Short-term growth rates
Short-term revenue growth rates used in each CGU five-year plan are based on internal data regarding the current pipeline of
opportunities and published industry forecasts for the relevant market.
Short-term growth rates are tailored for each CGU taking into account the long-term contractual nature of revenues generated by
the Group. As at 31 December 2009, the Group as a whole had revenue visibility of 91% for the next 12 month period based
upon the order book. Visibility of planned 2011 and 2012 revenues are already 76% and 64% respectively.
Current identified opportunities at 31 December 2009 total £17.1bn. Appropriate new bid and re-bid win rates are included within
each CGU forecast. Group wide, these rates are 50% and 90% respectively.
Further discussion of the Group’s order book and pipeline is provided in the Our business and Our performance sections.

Terminal growth rates
The cash flows subsequent to the five-year period are based upon management’s estimate of the growth rates of the sectors in
which the CGUs operate. The terminal growth rates applied vary between 1.1% and 6.0%.
These rates do not exceed the average long-term growth rates forecast for the individual market sectors.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:14 Page 101

Financial Statements

101

13. Goodwill continued

Capital expenditure
Forecast capital expenditure is based on past practices, expectations of revenue growth and future expected capital
requirements of existing opportunities within the pipeline for each CGU.

Discount rate
The underlying discount rate is based on the UK ten-year gilt rate adjusted for an equity risk premium and the systematic risk of
the Company. Management uses this pre-tax discount rate and adjusts for the risks specific to each of the CGUs, including
consideration of:

• Customer type

90% of the Group’s revenues are derived from government contracts and the Group’s management of credit risk is disclosed
in note 25(h). In preparation of the impairment reviews an additional premium is added for new, non government customers, if,
in management’s view, the credit risk is higher than other contracts within our portfolio.

• Contract length

The majority of the Group’s contracts within the CGUs are long-term in nature and the average length remaining on our
significant contracts is nine years. For CGUs with contracts of a shorter duration, management consider whether it is
appropriate to add a contract length premium to the base discount rate.

• Acquisition

A higher discount rate is applied to acquisitions to reflect any implementation risks within the acquisition business model until
these entities have been fully integrated into the Group structure.

• Geographic

Consideration is given to the country in which a CGU operates, and an adjustment is applied if management considers that
the economic risk is greater than that implicit in the base discount rate.

• Technology

If a CGU is reliant upon new technology implementations to secure future revenue streams, an appropriate technology
premium is added to the base discount rate.

The discount rate ranges applied are disclosed below:

Civil Government
Defence
Transport
Science

2009
%
10.6 – 11.8
10.6 – 11.6
11.1 – 11.6
10.6 – 11.8

2008
%
10.6 – 11.8
10.6 – 11.6
11.1 – 13.1
10.6 – 11.8

Sensitivities
Sensitivity analysis has been undertaken on each goodwill impairment review, by increasing the risk element of the discount rate,
and other applicable variables for each CGU. The following CGU impairment tests were noted:

• The principal CGU within the Civil Government segment is our core technology business. The goodwill attributable to this

CGU as at 31 December 2009 was £274.5m. Due to the potential impact of the adverse market conditions currently affecting
the IT sector, the Group has undertaken extensive impairment testing. Consistent with the testing conducted for the year
ended 31 December 2008, this has included adjustments to growth rates, discount rates and a reduction in significant
contract wins. None of these impairment sensitivities, either individually or combined, resulted in the carrying value of
goodwill in respect of this business being reduced to the recoverable amount.

• The Transport segment contains six CGUs including a CGU involved in the provision of aviation ground handling services and

a CGU involved in the provision of tourist rail travel.

• The goodwill attributable to the provision of aviation ground handling services is £4.8m. As stated in the Annual Review

and Accounts for the year ended 31 December 2008, sensitivity analysis indicated a future possible impairment if market
conditions deteriorated. During 2009, adverse market conditions have continued to prevail and the cash flow of the
business is dependent upon successfully securing a number of business opportunities. Should these not be secured, a
goodwill impairment charge may be required.

• The goodwill attributable to the provision of tourist rail travel is £7.7m. At the beginning of the financial period, the fair
value of goodwill was substantially in excess of the book value. During 2009, the challenging economic environment
affected the tourism industry and, to a lesser extent, the financial performance of this CGU. While management is
confident of the ability of this business to generate future cash flows in excess of goodwill, an extended period of reduced
passenger yields could result in the CGU requiring a goodwill impairment charge.

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102

14. Other intangible assets

Cost
At 1 January 2009 (restated)
Arising on acquisition
Additions
Disposals
Reclassifications to property, plant and equipment
Exchange differences
At 31 December 2009
Amortisation and impairment
At 1 January 2009
Charge for the year
Disposals
Exchange differences
At 31 December 2009
Net book value
At 31 December 2009

Acquisition related

Other

Software

Customer
relationships
£m

Licences

and
and development
expenditure
£m

franchises
£m

77.5
0.2
-
-
-
(6.0)
71.7

12.1
10.9
-
(0.5)
22.5

68.1
-
-
(1.8)
-
3.2
69.5

36.9
6.7
(1.8)
2.3
44.1

120.8
-
17.3
(4.2)
(0.5)
0.5
133.9

39.1
19.9
(4.2)
0.7
55.5

Pension
related
intangibles
£m

26.7
-
-
-
-
(0.1)
26.6

12.3
3.0
-
(0.1)
15.2

Total
£m

293.1
0.2
17.3
(6.0)
(0.5)
(2.4)
301.7

100.4
40.5
(6.0)
2.4
137.3

49.2

25.4

78.4

11.4

164.4

Acquisition related

Other

Software

Cost
At 1 January 2008
Arising on acquisition
Additions
Exchange differences
At 31 December 2008 (as previously stated)
Fair value adjustment arising on 2008 acquisitions (note 15)
At 31 December 2008 (restated)
Amortisation and impairment
At 1 January 2008
Charge for the year
Exchange differences
At 31 December 2008
Net book value
At 31 December 2008 (restated)

Customer
relationships
£m

22.4
53.7
-
1.4
77.5
-
77.5

8.4
3.1
0.6
12.1

65.4

Licences

and
and development
expenditure
£m

franchises
£m

62.0
-
-
6.1
68.1
-
68.1

27.7
6.1
3.1
36.9

31.2

93.9
0.5
20.4
4.6
119.4
1.4
120.8

20.2
17.1
1.8
39.1

81.7

Pension
related
intangibles
£m

26.7
-
-
-
26.7
-
26.7

9.3
3.0
-
12.3

14.4

Total
£m

205.0
54.2
20.4
12.1
291.7
1.4
293.1

65.6
29.3
5.5
100.4

192.7

Customer relationships acquired during the year are amortised over the average length of contracts acquired.
Amortisation of intangibles arising on acquisition consists of amortisation in relation to Customer relationships, and Licences and
franchises and totals £17.6m (2008: £9.2m).
The Group is carrying £78.4m (2008: £81.7m restated) in relation to Software and development expenditure which includes
assets relating to Formula 100, the Group’s global SAP rollout, of £32.8m (2008: £37.6m). The amortisation period of this asset
has five years (2008: six years) remaining. The Group is carrying £49.2m (2008: £65.4m) in relation to Customer relationships of
which the principal component is £39.2m (2008: £51.8m) relating to SI International, Inc.. The remaining average life of these
Customer relationship intangible assets is approximately six years.

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Financial Statements

103

15. Acquisitions

During the year, the Group paid £5.9m and £3.7m of acquisition related costs and deferred purchase consideration in relation to
its acquisitions in December 2008 of SI International, Inc. (SI) and Amtech Private Limited (Infovision), respectively.
During the year, the Group acquired shareholdings in two companies:

a) On 28 January 2009, the Group acquired 100% of the share capital of Sandrunner Limited. Net assets acquired total £0.2m
purchased for consideration of £1.3m, consisting of £0.3m of cash and £1.0m in deferred consideration resulting in £1.1m of
goodwill relating to future opportunities in consulting. Sandrunner Limited is a management consultancy based in the UK.

b) On 2 February 2009, the Group acquired a 50% interest in GSTS Pathology LLP (GSTS) from Pathology Services Limited, a

subsidiary of the Guy’s and St Thomas’ NHS Foundation Trust (the Trust). GSTS provides pathology services to the Trust and
various third parties. Related net cash outflows on acquisition were £4.8m consisting of £5.5m consideration (including
directly attributable costs) and £0.7m of cash acquired. Net assets acquired total £0.4m. Goodwill of £5.1m has been
recognised relating to future opportunities in pathology services.

These transactions have been accounted for in accordance with IFRS 3 Business Combinations.

Amendments to provisional fair value adjustments
During December 2008, Serco acquired SI and Infovision. Due to the proximity of the transactions to the year end, the fair values
of the acquired companies’ assets, liabilities and contingent liabilities, as disclosed in the 2008 Financial Statements, were
determined provisionally.
The fair value adjustments arising from the acquisition of SI and Infovision were finalised in the current year, with adjustments
made to the previously published fair values. The Consolidated Balance Sheet at 31 December 2008 has been restated to reflect
the finalisation of the fair value adjustments.

Net liabilities on acquisition

Intangible assets
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Loans
Deferred tax liabilities
Provisions
Net liabilities acquired

Provisional
fair value
£m
51.8
5.3
91.5
13.2
(62.0)
(69.9)
(14.2)
(25.1)
(9.4)

Final fair
value
adjustments
£m
-
-
7.5
-
-
-
0.1
(7.6)
-

Fair
value
£m
51.8
5.3
99.0
13.2
(62.0)
(69.9)
(14.1)
(32.7)
(9.4)

The fair value adjustments represent management’s best estimate of the adjustments required to restate the assets and liabilities of
SI to fair value at acquisition. The fair value adjustments principally relate to the finalisation of the acquisition related taxation position.

Infovision

Net assets on acquisition

Intangible assets
Property, plant and equipment
Trade and other receivables
Deferred tax assets
Trade and other payables
Loans
Provisions
Net assets acquired

Provisional
fair value
£m
2.1
5.4
9.9
0.2
(10.4)
(3.0)
(2.2)
2.0

Final fair
value
adjustments
£m
1.4
-
(1.3)
0.3
1.3
-
(0.2)
1.5

Fair
value
£m
3.5
5.4
8.6
0.5
(9.1)
(3.0)
(2.4)
3.5

The fair value adjustments represent management’s best estimate of the adjustments required to restate the assets and liabilities
of Infovision to fair value at acquisition. The fair value adjustments principally relate to recognition of intangible assets and
restatement of trade receivables to reflect their recoverability.

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104

16. Property, plant and equipment

Cost
At 1 January 2009
Additions
Reclassification from intangible assets
Disposals
Arising on acquisition
Exchange differences
At 31 December 2009
Accumulated depreciation and impairment
At 1 January 2009
Charge for the year
Disposals
Exchange differences
At 31 December 2009
Net book value
At 31 December 2009

Cost
At 1 January 2008
Additions
Disposals
Arising on acquisition
Exchange differences
At 31 December 2008
Accumulated depreciation and impairment
At 1 January 2008
Charge for the year
Disposals
Exchange differences
At 31 December 2008
Net book value
At 31 December 2008

Freehold
land and
buildings improvements
£m

Short-
leasehold

Machinery,
motor
vehicles,
building furniture and
equipment
£m

£m

Total
£m

293.0
50.7
0.5
(35.3)
1.1
9.7
319.7

177.6
34.4
(29.6)
8.1
190.5

Total
£m

241.2
41.3
(24.0)
11.0
23.5
293.0

146.1
26.0
(11.2)
16.7
177.6

39.0
11.0
-
(2.6)
-
(0.3)
47.1

17.9
4.9
(2.0)
(0.6)
20.2

246.4
39.6
0.5
(32.7)
1.1
10.3
265.2

156.4
29.3
(27.6)
8.9
167.0

26.9

98.2

129.2

29.3
5.9
(1.0)
2.6
2.2
39.0

14.0
3.5
(0.8)
1.2
17.9

205.5
35.3
(22.9)
8.4
20.1
246.4

129.6
22.2
(10.3)
14.9
156.4

21.1

90.0

115.4

7.6
0.1
-
-
-
(0.3)
7.4

3.3
0.2
-
(0.2)
3.3

4.1

6.4
0.1
(0.1)
-
1.2
7.6

2.5
0.3
(0.1)
0.6
3.3

4.3

Freehold
land and
buildings
£m

Short-
leasehold
building
improvements
£m

Machinery,
motor
vehicles,
furniture and
equipment
£m

The carrying amount of the Group’s Machinery, motor vehicles, furniture and equipment includes an amount of £22.1m
(2008: £17.0m) in respect of assets held under finance leases.
The carrying amount of the Group’s Short-leasehold building improvements includes an amount of £3.0m (2008: £2.4m) in
respect of assets held under finance leases.

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Financial Statements

105

17. Joint ventures

The Group’s interests in joint ventures are reported in the consolidated financial statements using the proportionate
consolidation method.
The effect of the Group’s joint ventures on the Consolidated Income Statement and Consolidated Balance Sheet is as follows:

Income statement

Revenue
Expenses
Operating profit
Investment revenue
Finance costs
Profit before tax
Tax
Share of post-tax results of joint ventures

Operating profit is after allocating £2.8m (2008: £4.7m) of costs incurred by Group.

Balance sheet

Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets

18. Inventories

Service spares
Parts awaiting installation
Long-term project-based contract balances

2009
£m
786.0
(724.5)
61.5
1.0
(0.5)
62.0
(14.9)
47.1

2008
£m
719.7
(671.4)
48.3
5.1
(0.7)
52.7
(13.2)
39.5

2009
£m
186.4
145.4
(129.8)
(162.5)
39.5

2008
£m
128.8
117.7
(115.8)
(103.7)
27.0

2009
£m
22.6
18.0
25.3
65.9

2008
£m
16.4
11.9
21.9
50.2

As at 31 December 2009, £nil (2008: £nil) of advances received from customers were included within Long-term project-based
contract balances. As at 31 December 2009, the Group had £nil (2008: £nil) of contract retentions held by customers.

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106

19. Trade and other receivables

Trade and other receivables: non-current
Amounts owed by joint ventures
Amounts recoverable on retirement benefit obligations (note 26)
Other debtors

Trade and other receivables: current
Trade receivables
Other amounts recoverable on contracts
Prepayments and accrued income
Other debtors

Corporation tax recoverable

*Note 15

2009
£m

2.7
144.3
34.4
181.4

2008
£m

1.9
89.6
29.6
121.1

As previously
stated
2008
£m

Restated*
2008
£m

525.1
61.5
84.1
44.3
715.0
4.5
719.5

523.2
61.5
84.1
44.9
713.7
12.0
725.7

2009
£m

514.7
65.2
81.4
58.3
719.6
1.3
720.9

The Directors estimate that the carrying amount of trade receivables approximates to their fair value.
As at 31 December 2009, trade receivables of £4.6m (2008: £2.7m) were considered to be impaired. Impairments to trade
receivables are based on specific estimated irrecoverable amounts and general provisions on outstanding balances greater
than a year old unless there is firm evidence that the balance is recoverable. The amount of the provision was £3.4m as at
31 December 2009 (2008: £2.7m) primarily because our customers either have a sovereign credit rating being government
organisations or are blue chip private sector companies.
The ageing of trade receivables is as follows:

Neither billed, impaired nor past due
Not impaired but overdue by less than 30 days
Not impaired but overdue by between 30 and 60 days
Not impaired but overdue by more than 60 days
Impaired
Bad debt provision

*Note 15

Movements in the Group bad debt provision are as follows:

At 1 January
Charged to income statement
Utilised
Arising on acquisition
Exchange differences
At 31 December

As previously
stated
2008
£m
463.3
37.3
12.3
12.2
2.7
(2.7)
525.1

2009
£m
438.5
40.9
11.8
22.3
4.6
(3.4)
514.7

Restated*
2008
£m
463.3
37.3
10.4
12.2
2.7
(2.7)
523.2

2009
£m
2.7
1.4
(0.6)
-
(0.1)
3.4

2008
£m
1.4
1.3
(0.6)
0.3
0.3
2.7

The maximum exposure to credit risk in relation to trade receivables at the reporting date is the fair value of trade receivables.
The Group does not hold any collateral as security.

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Financial Statements

107

20. Cash and cash equivalents

Cash of project companies securing credit obligations*
Customer advance payments*
Other cash and short-term deposits
Total cash and cash equivalents

Sterling
2009
£m
-
-
200.8
200.8

Other
currencies
2009
£m
4.3
6.9
107.4
118.6

Total
2009
£m
4.3
6.9
308.2
319.4

Sterling
2008
£m
-
-
108.8
108.8

Other
currencies
2008
£m
4.1
6.3
131.6
142.0

Total
2008
£m
4.1
6.3
240.4
250.8

*Cash of project companies and customer advance payments totalling £11.2m (2008: £10.4m) are encumbered cash balances.

Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at
bank and other short-term highly liquid investments with a maturity of three months or less.

21. Loans

Loans are repayable as follows:
On demand or within one year
Between one and two years
Between two and five years
After five years

Less: amount due for settlement within one year
(shown within current liabilities)
Amount due for settlement after one year

Non
recourse
loans
2009
£m

7.2
7.3
14.5
-
29.0

(7.2)
21.8

Other
loans
2009
£m

103.5
145.8
351.4
24.2
624.9

Total
2009
£m

110.7
153.1
365.9
24.2
653.9

(103.5)
521.4

(110.7)
543.2

Non
recourse
loans
2008
£m

6.5
6.8
20.8
-
34.1

(6.5)
27.6

Other
loans
2008
£m

30.3
64.6
571.0
47.7
713.6

(30.3)
683.3

Total
2008
£m

36.8
71.4
591.8
47.7
747.7

(36.8)
710.9

The carrying amounts and fair values of the loans are as follows:

Non recourse loans
Other loans

Carrying amount

2009
£m
29.0
624.9
653.9

2008
£m
34.1
713.6
747.7

Fair value
2009
£m
31.3
638.8
670.1

2008
£m
38.0
728.8
766.8

The fair values are based on cash flows discounted using a rate based on the borrowing rate associated with the loan. All loans
are held at amortised cost.

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108

22. Deferred tax

Deferred income taxes are calculated in full on temporary differences under the liability method using local substantively enacted
tax rates.

The gross movement on the deferred income tax account is as follows:

At 1 January – liability/(asset)
Income statement (credit)/charge (note 10)
Acquisitions/disposals
Items recognised in equity and in other comprehensive income
Exchange differences
At 31 December – (asset)/liability

*Note 15

The movement in deferred tax assets and liabilities during the year was as follows:

As previously
stated
2008
£m
(29.6)
6.6
7.1
22.2
-
6.3

2009
£m
5.9
(0.2)
-
(41.8)
(2.9)
(39.0)

Restated*
2008
£m
(29.6)
6.6
6.7
22.2
-
5.9

At 1 January 2009 (restated)
Charged/(credited) to income statement
Items recognised in equity and in other
comprehensive income
Exchange differences
At 31 December 2009

Temporary
differences
on assets/
intangibles
£m
26.5
(0.5)

Share-based
payment
and
employee
benefits
£m
(18.7)
1.5

Retirement
benefit
schemes
£m
7.5
6.2

Derivative
financial
instruments
£m
0.6
0.1

Other
temporary
differences
£m
(10.0)
(7.5)

-
(3.4)
22.6

(1.0)
0.4
(17.8)

(39.1)
-
(25.4)

(1.7)
-
(1.0)

-
0.1
(17.4)

Total
£m
5.9
(0.2)

(41.8)
(2.9)
(39.0)

The movement in deferred tax assets and liabilities during the previous year, as restated, was as follows:

At 1 January 2008
Charged/(credited) to income statement
Acquisitions/disposals
Items recognised in equity and in other
comprehensive income
At 31 December 2008 (restated)

*Note 15

Temporary
differences
on assets/
intangibles
Restated*
£m
8.0
2.4
21.4

Share-based
payment
and
employee
benefits
Restated*
£m
(19.7)
(2.7)
(3.1)

Retirement
benefit
schemes
£m
(15.4)
6.1
-

Derivative
financial
instruments
£m
(3.0)
-
(0.3)

Other
temporary
differences
Restated*
£m
0.5
0.8
(11.3)

Total
Restated*
£m
(29.6)
6.6
6.7

(5.3)
26.5

6.8
(18.7)

16.8
7.5

3.9
0.6

-
(10.0)

22.2
5.9

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against
current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following is the analysis of the
deferred tax balances (after offset) for financial reporting purposes:

Deferred tax liabilities
Deferred tax assets

*Note 15

As previously
stated
2008
£m
25.9
(19.6)
6.3

2009
£m
9.0
(48.0)
(39.0)

Restated*
2008
£m
25.9
(20.0)
5.9

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Financial Statements

109

22. Deferred tax continued

At the balance sheet date, the Group did not recognise deferred tax assets of £5.6m (2008: £9.7m) which principally relate to
unused tax losses of £26.1m (2008: £28.0m). Losses of £1.3m expire within five years, losses of £2.1m expire within six to ten
years, losses of £11.6m expire within 15 to 20 years and losses of £11.1m may be carried forward indefinitely.
At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries
for which deferred tax liabilities have not been recognised was £0.4m (2008: £7.5m). No liability has been recognised in respect
of these differences because the Group is in a position to control the timing of the reversal of the temporary differences and it is
probable that such differences will not reverse in the foreseeable future. The temporary differences at 31 December 2009 are
significantly reduced from the previous year as a result of a change to UK tax legislation which largely exempts from UK tax,
overseas dividends received on or after 1 July 2009. The temporary differences at 31 December 2009 represent only the
unremitted earnings of those overseas subsidiaries where remittance of those earnings may still result in a tax liability, principally
as a result of dividend withholding taxes levied by the overseas tax jurisdictions in which these subsidiaries operate.

23. Obligations under finance leases

Amounts payable under finance leases:
Within one year
Between one and five years
After five years

Less: future finance charges
Present value of lease obligations
Less: amount due for settlement within one year (shown under current liabilities)
Amount due for settlement after one year

Minimum
lease
payments
2009
£m

Present
value of
minimum
lease
payments
2009
£m

Minimum
lease
payments
2008
£m

Present
value of
minimum
lease
payments
2008
£m

7.5
17.6
3.0
28.1
(4.1)
24.0
(7.5)
16.5

6.0
15.3
2.7
24.0
-
24.0
(6.0)
18.0

5.8
12.6
2.3
20.7
(3.5)
17.2
(5.8)
11.4

4.5
10.7
2.0
17.2
-
17.2
(4.5)
12.7

Finance lease obligations are secured by the lessors’ title to the leased assets.
The Directors estimate that the fair value of the Group’s lease obligations approximates their carrying amount.

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110

24. Trade and other payables

Trade and other payables: current
Trade creditors
Other creditors
Accruals and deferred income
Amounts owed to joint ventures

*Note 15

As previously
stated
2008
£m

Restated*
2008
£m

225.0
132.6
397.1
-
754.7

226.5
132.6
397.1
-
756.2

2009
£m

197.7
126.4
447.0
0.5
771.6

The average credit period taken for trade purchases is 32 days (2008: 28 days). The Directors estimate that the fair value of trade
creditors approximates to their carrying amount.

Trade and other payables: non-current
Other creditors
Amounts owed to joint ventures

*Note 15

25. Financial risk management

The Group held the following financial instruments at 31 December:

Financial assets
Derivative financial instruments at fair value
Loans and receivables at amortised cost - Trade receivables (note 19)

- Other financial assets (note 25(f))
- Cash and cash equivalents (note 20)

Financial liabilities
Derivative financial instruments at fair value
At amortised cost

- Loans (note 21)
- Trade creditors (note 24)
- Obligations under finance leases (note 23)

Net financial instruments

*Note 15

As previously
stated
2008
£m

Restated*
2008
£m

35.4
0.1
35.5

32.6
0.1
32.7

2009
£m

23.1
-
23.1

Carrying
amount
Carrying As previously
amount
stated
2009
2008
£m
£m

Carrying
amount
Restated*
2008
£m

3.9
514.7
0.8
319.4
838.8

(7.2)
(653.9)
(197.7)
(24.0)
(882.8)
(44.0)

10.6
525.1
1.4
250.8
787.9

(4.6)
(747.7)
(225.0)
(17.2)
(994.5)
(206.6)

10.6
523.2
1.4
250.8
786.0

(4.6)
(747.7)
(226.5)
(17.2)
(996.0)
(210.0)

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Financial Statements

111

25(a) Derivative financial instruments

(i) Fair value of derivative financial instruments
The fair values of derivative financial instruments are calculated based on a discounted cash flow analysis using appropriate
quoted interest rates for the duration of the instruments as noted below.

• Currency swaps and interest rate swaps

Measured at the present value of estimated future cash flows. The present value of foreign currency balances are converted
at the year end exchange rate.

• Forward foreign exchange contracts

Measured using quoted forward exchange rates matching the maturities of the contracts.

• Commodity futures contracts

Measured at the present value of estimated cash flows with reference to quoted forward prices for Gas Oil. Where forward
prices are not available for Gas Oil the equivalent forward price data for Brent Crude has been used as the two prices are
closely related.

The classification of the fair value measurement falls into three levels, based on the degree to which the fair value is observable.
The levels are as follows:

Level 1: derived from unadjusted quoted prices in active markets for identical assets or liabilities;

Level 2: derived from other observable market data for the assets or liabilities; and

Level 3: derived from valuation techniques using data that is not based on observable market data.

Based on the above, the derivative financial instruments are considered to fall into Level 2. There were no transfers between
Level 1 and 2 during the year.

(ii) Movement in derivative financial instruments
The fair valuation of derivative financial instruments results in a net liability of £3.3m (2008: £6.0m net asset), comprising
non-current assets of £2.5m (2008: £5.6m), current assets of £1.4m (2008: £5.0m), current liabilities of £5.5m (2008: £4.2m)
and non-current liabilities of £1.7m (2008: £0.4m).

Currency swaps
Forward foreign exchange contracts
Interest rate swaps
Commodity futures contracts

Movement
in fair
value of

Movement
in fair value
of non-
cash flow designated
hedges
£m
-
(3.0)
-
-
(3.0)

hedges
£m
(4.7)
(1.5)
(2.1)
2.0
(6.3)

1 January
2009
£m
4.2
2.2
-
(0.4)
6.0

Cash flow

hedges 31 December
2009
£m
(0.5)
(2.3)
(2.1)
1.6
(3.3)

disposed of
£m
-
-
-
-
-

Movement
in fair
value of
cash flow
hedges
£m
10.5
5.2
0.8
(2.4)
14.1

Movement
in fair value
of non-
designated
hedges
£m
-
1.3
0.3
-
1.6

1 January
2008
£m
(6.3)
(4.3)
(2.0)
2.0
(10.6)

Cash flow

hedges 31 December
2008
£m
4.2
2.2
-
(0.4)
6.0

disposed of
£m
-
-
0.9
-
0.9

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112

25(b) Financial risk

The Board is ultimately responsible for ensuring that financial and non-financial risk arising from financial instruments is
monitored and managed within acceptable and known parameters. The Board delegates authority to the executive team to
manage financial risks. The Group’s treasury function acts as a service centre and operates within clearly defined guidelines and
policies that are approved by the Board. The guidelines and policies: define the financial risks to be managed; specify the
objectives in managing these risks; delegate responsibilities to those managing the risks; and establish a control framework to
regulate treasury activities to minimise operational risk.

25(c) Credit facilities

The Group maintains committed credit facilities to ensure that it has sufficient liquidity to maintain its ongoing operations. The
Group’s main facility is a £400m revolving credit facility, expiring in September 2013. As at 31 December 2009 drawings were US
Dollar 195m. As at 31 December 2008, the bank facility comprised of term loans of £26m and US Dollar 229m. The Group also has
facilities consisting of a £35m revolving credit facility and US Dollar 488m term loan facility, both fully drawn at 31 December 2009
and at 31 December 2008. The £35m facility expires in December 2011, whilst the US Dollar 488m facility amortises from 2010
and expires in September 2013. These facilities were principally raised to finance the acquisition of SI.
The banking facilities are unsecured and have financial and non-financial covenants and obligations typical of
these arrangements.
The Group has outstanding private placements of £117m which amortise in equal annual instalments from 2011 to 2015. The
private placements comprise a tranche of £83m and a tranche of US Dollar 55m, which is hedged by two cross currency swaps
(note 25(e)).

25(d) Liquidity risk management

The Group’s financial liabilities will be settled on a net basis based on the remaining period from the balance sheet date to the
contractual maturity date. The amounts disclosed below are the contractual undiscounted cash flows based on the earliest date
on which the Group can be required to pay.

Trade creditors
Finance leases
Loans
Loan interest
Derivative financial liabilities
At 31 December 2009

Trade creditors (as previously stated)
Fair value adjustments relating to 2008 acquisitions (note 15)
Trade creditors (restated)
Finance leases
Loans
Loan interest
Derivative financial liabilities
At 31 December 2008 (restated)

On demand
or within
one year
£m
197.7
7.5
110.7
26.0
5.7
347.6

On demand
or within
one year
£m
225.0
1.5
226.5
5.8
36.8
28.1
1.3
298.5

Between
one
and two
years
£m
-
7.8
153.1
20.5
1.2
182.6

Between
one
and two
years
£m
-
-
-
6.2
71.4
26.9
0.2
104.7

Between
two
and five
years
£m
-
9.8
365.9
28.3
0.4
404.4

Between
two
and five
years
£m
-
-
-
6.4
591.8
53.1
0.2
651.5

After five
years
£m
-
3.0
24.2
1.2
-
28.4

After five
years
£m
-
-
-
2.3
47.7
3.6
-
53.6

Total
£m
197.7
28.1
653.9
76.0
7.3
963.0

Total
£m
225.0
1.5
226.5
20.7
747.7
111.7
1.7
1,108.3

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Financial Statements

113

25(d) Liquidity risk management continued

The maturity of the fair value of derivative financial instruments is as follows:

On demand or within one year
Between one and two years
Between two and five years
After five years
At 31 December 2009

Forward
foreign
exchange
contracts
£m
(1.7)
(0.3)
(0.3)
-
(2.3)

Interest
rate swaps
£m
(3.1)
0.5
0.5
-
(2.1)

Commodity
futures
contracts
£m
0.8
0.8
-
-
1.6

Currency
swaps
£m
(0.1)
(0.2)
(0.2)
-
(0.5)

Forward foreign exchange contracts comprise a non-current asset of £0.6m (2008: £1.0m), a current asset of £0.6m
(2008: £4.8m), a current liability of £2.3m (2008: £3.4m), and a non-current liability of £1.2m (2008: £0.2m).

On demand or within one year
Between one and two years
Between two and five years
After five years
At 31 December 2008

25(e) Foreign exchange risk

Forward
foreign
exchange
contracts
£m
1.5
0.2
0.5
-
2.2

Interest
rate swaps
£m
-
-
-
-
-

Commodity
futures
contracts
£m
(0.8)
-
0.4
-
(0.4)

Currency
swaps
£m
0.2
0.2
2.3
1.5
4.2

Total
£m
(4.1)
0.8
-
-
(3.3)

Total
£m
0.9
0.4
3.2
1.5
6.0

(i) Transactional
The Group’s business does not involve a significant amount of cross-border trade and therefore the Group is not exposed to
substantial foreign currency transaction risk as sales and costs are closely matched within each overseas operation. Any material
transactional exposures that do arise are hedged by the Group’s treasury function using forward foreign exchange contracts.

(ii) Translational
The foreign exchange exposure on the US Dollar tranche of the private placements has been fully hedged into Sterling. The
exposure on US Dollar drawings under the bank facilities is hedged against the net investment in our US business.
Central funding of individual businesses gives rise to monetary assets and liabilities. The currency of funding is selected to
ensure that any foreign exchange risk resides with Group. This risk is then managed by the Group’s treasury function, using
forward foreign exchange contracts and any natural hedge positions that may exist.

(iii) Forward foreign exchange contracts and currency swaps
The Group utilises currency derivatives to hedge significant future transactions and cash flows. The Group is party to a variety of
foreign currency forward contracts and swap contracts in the management of its exchange rate exposures. These contracts are
primarily denominated in the currencies of the Group’s principal markets.

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114

25(e) Foreign exchange risk continued

At the balance sheet date, the net total notional amount of outstanding forward foreign exchange and currency swap contracts to
which the Group is committed is £74.8m (2008: £99.7m). These arrangements are mainly designed to address significant
exchange exposures for the next six years (2008: seven years).

Cash flow hedges
At 31 December 2009, the Group held a number of currency swaps designated as cash flow hedges. Fixed interest cash flows
denominated in US Dollars are exchanged for fixed interest cash flows denominated in Sterling. The profile of these currency
swaps held by the Group is as follows:

Maturity
August 2015
August 2015

Receivable

Payable
Notional USD interest GBP interest
rate
amount
2009
2009
%
USDm
5.7
35.0
5.7
20.0

rate
2009
%
5.7
5.7

Receivable

Payable
Notional USD interest GBP interest
rate
amount
2008
2008
%
USDm
5.7
35.0
5.7
20.0

rate
2008
%
5.7
5.7

The Group also held a number of forward foreign exchange contracts designated as cash flow hedges with a notional amount of
£21.3m (2008: £52.2m).
All currency derivatives designated as cash flow hedges are highly effective and the fair value loss of £6.2m (2008: £15.7m gain)
has been deferred in equity. No balances in relation to ineffectiveness have been recognised in the Consolidated Income Statement
except for a previously discontinued cash flow hedge. Amounts in the hedging reserve are recycled to the income statement as
the hedged transactions affect the income statement. A loss of £0.2m (2008: £0.1m) has been included in the Consolidated
Income Statement, and the remaining loss of £0.4m (2008: £0.6m) is expected to be recognised in the Consolidated Income
Statement in future periods.

(iv) Hedges of net investments in foreign entities
The Group has US Dollar denominated borrowings, some of which have been designated as a hedge of part of the net
investment in its acquired subsidiaries in the US, and Euro denominated borrowings, some of which have been designated as a
hedge of part of the net investment in its subsidiaries in Europe. The carrying value of the designated borrowings was £386.2m
(2008: £426.0m). The foreign exchange gain of £47.0m (2008: £16.1m loss) on translation into Sterling of the borrowings has
been recognised within the Group’s Hedging and translation reserve. The hedge is highly effective. No amounts have been
recognised in the income statement.

(v) Currency sensitivity
The Group’s currency exposures that result in net currency gains and losses in the income statement and equity arise
principally from US Dollar and Canadian Dollar financial instruments. At 31 December 2009, if the US Dollar had weakened
by ten per cent against Sterling, with all other variables held constant, post-tax profit for the year would have been £0.1m lower
(2008: £0.1m higher) mainly as a result of movements on working capital. Equity would have been £31.2m higher (2008: £34.8m)
mainly due to exchange gains on net investment hedges denominated in US Dollars. However, this would be predominantly offset
by exchange losses on the retranslation of the net assets of the US subsidiaries. At 31 December 2009, if the US Dollar had
weakened by ten per cent against the Canadian Dollar, with all other variables held constant, post-tax profit for the year would
have been unaffected (2008: £0.3m lower). Equity would have been £0.6m higher (2008: £0.5m) due to Canadian Dollar
denominated non-current intercompany borrowings.

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Financial Statements

115

25(f) Interest rate risk

The Group’s policy is to hedge core borrowing requirements to protect against adverse interest rate movements. Exposure to
interest rate risk arises principally on changes to US Dollar and Sterling interest rates.

(i) Interest rate management
An analysis of financial assets and liabilities exposed to interest rate risk is set out below:

Financial assets

Cash and cash equivalents
Other financial assets

Financial liabilities

Non recourse Canadian Dollar loans
Sterling loans
US Dollar loans
Other loans

Floating
rate
2009
£m
319.4
0.2
319.6

Floating
rate
2009
£m
-
71.1
144.2
12.2
227.5

Weighted
average fixed
Fixed interest rate
received
2009
%

6.00

rate
2009
£m
-
0.6
0.6

Weighted
average fixed
Fixed interest rate
paid
2009
%
5.27
5.83
3.20
12.00

rate
2009
£m
29.0
118.6
278.7
0.1
426.4

Floating
rate
2008
£m
250.8
0.2
251.0

Floating
rate
2008
£m
-
48.3
534.7
7.5
590.5

Weighted
average fixed
interest rate
received
2008
%

6.00

Fixed
rate
2008
£m
-
1.2
1.2

Weighted
average fixed
interest rate
paid
2008
%
5.27
5.80
-
12.59

Fixed
rate
2008
£m
34.1
119.8
-
3.3
157.2

Exposure to interest rate fluctuations is mitigated through the use of interest rate derivatives. Excluded from the above analysis is
£24.0m of amounts payable under finance leases, which are subject to fixed rates of interest (2008: £17.2m).

(ii) Interest rate swaps
During 2009 the Group entered into interest rate swaps to manage its exposure to interest rate risk on US Dollar 450m of its debt
by swapping floating for fixed interest rates. The profile of the interest rate swaps is as follows:

Maturity
March 2011
March 2012

Payable
USD weighted
average
interest
rate
2009
%

Receivable
USD interest
rate
2009
%
1.60 3 month USD LIBOR
1.83 3 month USD LIBOR

Notional
value
2009
USDm
150
300

The swaps were designated as cash flow hedges and are highly effective. The fair value loss of £2.1m has therefore been deferred
within equity (2008: £0.8m gain). The gain in 2008 related to interest rate swaps held by Kilmarnock Prison Services Limited,
which was sold by the Group on 23 June 2008.

(iii) Interest rate sensitivity
The following sensitivity analysis has been determined on the exposure to interest rates for both derivatives and financial liabilities
at the balance sheet date and on average balances held throughout the year. A 100 basis point increase in interest rates with
all other variables held constant would have resulted in a gain on post-tax profit for the year to 31 December 2009 of £0.3m
(2008: £1.1m loss). The gain on equity due to a 100 basis point movement would have been £4.3m (2008: £1.2m) due to
movements in the fair value of derivative financial instruments held as cash flow hedges.

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116

25(g) Price risk

The Group is exposed to commodity price risk through its joint venture rail operations due to the volatility in the price of fuel. The
profile of the commodity derivatives used by the joint ventures to reduce this risk is as follows:

Maturity
September 2010
September 2011

*North West Europe price with 0.1% or 0.2% sulphur content

Maturity
September 2009
September 2010
September 2011

*North West Europe price with 0.1% or 0.2% sulphur content

Notional
value
2009
Million litres
9.4
44.9

Payable
fixed
rate
2009
p per litre
33.80
28.95

Receivable
floating
rate*
2009
USD
0.1% NWE
0.2% NWE

Notional
value
2008
Million litres
9.4
12.5
71.3

Payable
fixed
rate
2008
p per litre
34.10
33.80
28.95

Receivable
floating
rate*
2008
USD
0.1% NWE
0.1% NWE
0.2% NWE

All commodity derivatives were designated as cash flow hedges and were highly effective. The £2.0m gain (2008: £2.4m loss) in
the fair value has therefore been deferred within equity.

Price risk sensitivity
An increase of US Dollar 0.2 per litre in the price of fuel at the balance sheet date would result in a £3.5m increase in equity
(2008: £6.5m). The sensitivity to changes in fuel prices resulting from changes in exchange rates is included within the currency
sensitivity analysis (note 25(e)).

25(h) Credit risk

The Group’s principal financial assets are cash and cash equivalents and trade and other receivables.
The Group’s credit risk is relatively low because a high proportion of our customers have a sovereign or sovereign-like credit
rating and the Group has a large number of counterparties and customers. External credit checks are completed for all new
non Government customers before signing a contract above £100,000. Credit vetting for new Government body customers is
performed by an internal review of the client’s ability to pay and timeliness of payment. The review includes a consideration of the
expected contract budget as well as economic and industry factors and the budget holders’ position within the Government
body. At quarterly intervals, a management credit worthiness review for all ongoing customers with material outstanding balances
is undertaken, including an assessment to determine if there has been any deterioration in the customer’s payment history and a
review of the total credit authorised to the customer throughout the Group.
The Group’s treasury function only transacts with counterparties that have, as a minimum, long-term public ratings from
recognised credit rating agencies of at least two ‘A’ ratings. It also ensures that no exposure to any one institution at any given
time exceeds a pre-approved exposure limit.

25(i) Capital risk management

The Group’s key objectives when managing capital are to ensure the Group has sufficient funds to meet current and future
business requirements, to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital
structure.
Access to capital takes many forms and includes access to the equity market, debt capital market and bank market. During
2009, the Group maintained sufficient debt facilities that ensured its objectives were met.

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Financial Statements

117

26. Retirement benefit schemes

The Group has accounted for pensions in accordance with IAS 19 Employee Benefits. The Group operates and is a member of a
number of defined benefit schemes and defined contribution schemes. The pension charge for the year ended 31 December 2009,
including the proportionate share of joint ventures, was £92.4m (2008: £85.9m).

26(a) Defined benefit schemes

The Group operates defined benefit schemes for qualifying employees of its subsidiaries in the UK and Europe. In addition, the
Group has interests in joint ventures, which operate defined benefit schemes for qualifying employees.
The assets of the funded plans are held independently of the Group’s assets in separate trustee administered funds. The Group’s
major plans are valued by independent actuaries annually using the projected unit credit method. This reflects service rendered
by employees to the dates of valuation and incorporates actuarial assumptions primarily regarding discount rates used in
determining the present value of benefits, projected rates of salary growth, and long-term expected rates of return for plan
assets. Discount rates are based on the market yields of high-quality corporate bonds in the country concerned. Long-term
expected rates of return for plan assets are based on published brokers’ forecasts for each category of scheme assets. Pension
assets and liabilities in different defined benefit schemes are not offset unless the Group has a legally enforceable right to use the
surplus in one plan to settle obligations in the other plan and intends to exercise this right.
The amounts recognised in the balance sheet are grouped together as follows:

Contract specific – Virtually certain costs reimbursed
The Group has an obligation to contribute to the pension scheme over the term of the contract. At rebid any deficit or surplus
would transfer to the next contractor. Throughout the contract, it is virtually certain that the Group will be reimbursed the
expenditure required to settle the defined benefit obligation. The Group’s share of the defined benefit obligation less its share of
the fair value of scheme assets that it will fund over the period of the contract has been recognised as a liability. The Group has
recognised the right to reimbursement as a separate asset.
In the income statement, the expense relating to this defined benefit plan has been presented net of the amount recognised for
the reimbursement, resulting in a nil charge to the income statement.

Contract specific – Not certain costs reimbursed
These are pre-funded defined benefit schemes. The Group has obligations to contribute variable amounts to the pension
schemes over the terms of the related contracts. At rebid any deficit or surplus would transfer to the next contractor. The Group
has recognised as a liability the defined benefit obligation less the fair value of scheme assets that it will fund over the period of
the contracts with a corresponding amount recognised as intangible assets at the start of the contracts. Subsequent actuarial
gains and losses in relation to the Group’s share of the pension obligations have been recognised in the SOCI. The intangible
assets are amortised over the term of the contracts.

Non contract specific
These consist of a pre-funded defined benefit scheme (the funding policy of which is to contribute such variable amounts, on the
advice of the actuary, as will achieve 100% funding on a projected salary basis) and an unfunded defined benefit scheme, both
of which do not relate to any specific contract. Any liabilities arising are recognised in full.

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118

26(a) Defined benefit schemes continued

The assets and liabilities of the schemes at 31 December are:

Virtually Not certain
costs
reimbursed
2009
£m

certain costs
reimbursed
2009
£m

Non
contract
specific
2009
£m

Scheme assets at fair value
Equities
Bonds except LDI
Liability driven investments (LDI)
Gilts
Property
Cash and other
Annuity policies
Fair value of scheme assets
Present value of scheme liabilities
Net amount recognised
Members’ share of surplus
Franchise adjustment
Effect of IFRIC 14
Net pension liability

Related assets
Intangible assets (note 14)
Trade and other receivables (note 19)

Scheme assets at fair value
Equities
Bonds except LDI
Liability driven investments (LDI)
Gilts
Property
Cash and other
Annuity policies
Fair value of scheme assets
Present value of scheme liabilities
Net amount recognised
Members’ share of deficit
Franchise adjustment
Effect of IFRIC 14 adoption

Analysed as:
Net pension liability
Net pension asset

Related assets
Intangible assets (note 14)
Trade and other receivables (note 19)

143.6
52.7
-
-
16.4
11.8
-
224.5
(368.8)
(144.3)
-
-
-
(144.3)

-
144.3
144.3

230.0
20.9
-
54.4
20.4
26.3
2.9
354.9
(476.3)
(121.4)
33.5
58.0
-
(29.9)

11.4
-
11.4

Virtually Not certain
costs
reimbursed
2008
£m

certain costs
reimbursed
2008
£m

102.0
45.1
-
-
14.2
16.3
-
177.6
(267.2)
(89.6)
-
-
-
(89.6)

194.4
10.6
-
48.5
19.6
22.3
1.9
297.3
(356.4)
(59.1)
17.0
17.7
-
(24.4)

Total
2009
£m

415.0
88.8
493.6
55.3
45.7
231.3
27.2
1,356.9
(1,744.4)
(387.5)
36.8
58.0
(1.5)
(294.2)

41.4
15.2
493.6
0.9
8.9
193.2
24.3
777.5
(899.3)
(121.8)
3.3
-
(1.5)
(120.0)

-
-
-

11.4
144.3
155.7

Non
contract
specific
2008
£m

163.5
13.4
480.7
0.1
9.2
24.1
28.2
719.2
(719.8)
(0.6)
1.6
-
(1.7)
(0.7)

Total
2008
£m

459.9
69.1
480.7
48.6
43.0
62.7
30.1
1,194.1
(1,343.4)
(149.3)
18.6
17.7
(1.7)
(114.7)

(89.6)
-

(24.4)
-

(63.1)
62.4

(177.1)
62.4

-
89.6
89.6

14.4
-
14.4

-
-
-

14.4
89.6
104.0

Liabilities in relation to unfunded schemes included above amount to £48.7m (2008: £51.2m).
Certain of the Group’s non contract specific schemes have a Liability Driven Investment (LDI) strategy which aims to reduce
volatility risk by better matching assets to liabilities. The main asset classes that make up the LDI investments are gilts and
corporate bonds with inflation and interest swap overlays, and the assumed expected rate of return is taken to be gilts +0.7%
(2008: gilts +0.3%).

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Financial Statements

119

26(a) Defined benefit schemes continued

In some schemes, employee contributions vary over time to meet a specified proportion of the overall costs, including a
proportion of any deficit. The liabilities recognised in the balance sheet for these schemes are net of the proportion attributed to
employees. In addition, the amounts charged to the income statement for these schemes are net of the proportion attributed
to employees. The amounts attributed to employees are shown separately in the reconciliation of changes in the fair value
of scheme assets and liabilities.
The amounts recognised in the Financial Statements for the year are analysed as follows:

Recognised in the income statement
Current service cost – employer
Past service cost
Reimbursed to employer
Recognised in arriving at operating profit
Expected return on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Reimbursed to employer
Finance cost

Included within the SOCI
Actual return on scheme assets
Less: expected return on scheme assets

Other actuarial gains and losses
Actuarial losses recognised in the SOCI
Change in IFRIC 14
Change in franchise adjustment
Change in members’ share
Reimbursed to employer
Actuarial gains on reimbursable rights
Total pension cost recognised in the SOCI

Included within the SOCI
Actual return on scheme assets
Less: expected return on scheme assets

Other actuarial gains and losses
Actuarial gains and losses recognised in the SOCI
Change in IFRIC 14
Change in franchise adjustment
Change in members’ share
Reimbursed to employer
Actuarial gains on reimbursable rights
Total pension (credit)/cost recognised in the SOCI

Virtually Not certain
costs
reimbursed
2009
£m

certain costs
reimbursed
2009
£m

Non
contract
specific
2009
£m

7.0
-
(7.0)
-
(12.2)
-
16.1
(3.9)
-

38.3
(12.3)
26.0
(85.2)
(59.2)
-
-
-
59.2
59.2
-

12.2
-
-
12.2
(14.3)
(1.1)
15.6
-
0.2

42.5
(19.9)
22.6
(89.4)
(66.8)
-
39.3
16.7
-
56.0
(10.8)

14.7
0.7
-
15.4
(35.3)
-
41.4
-
6.1

60.9
(36.3)
24.6
(157.6)
(133.0)
0.1
-
1.8
-
1.9
(131.1)

Virtually Not certain
costs
reimbursed
2008
£m

certain costs
reimbursed
2008
£m

Non
contract
specific
2008
£m

11.6
-
(11.6)
-
(17.4)
-
17.1
0.3
-

(67.6)
(17.4)
(85.0)
53.1
(31.9)
-
-
-
31.9
31.9
-

15.9
-
-
15.9
(18.4)
(1.4)
16.8
-
(3.0)

(77.3)
(26.0)
(103.3)
70.0
(33.3)
-
(1.3)
20.0
-
18.7
(14.6)

19.9
1.1
-
21.0
(43.1)
-
46.7
-
3.6

(30.8)
(44.6)
(75.4)
149.3
73.9
(1.7)
-
1.7
-
-
73.9

Total
2009
£m

33.9
0.7
(7.0)
27.6
(61.8)
(1.1)
73.1
(3.9)
6.3

141.7
(68.5)
73.2
(332.2)
(259.0)
0.1
39.3
18.5
59.2
117.1
(141.9)

Total
2008
£m

47.4
1.1
(11.6)
36.9
(78.9)
(1.4)
80.6
0.3
0.6

(175.7)
(88.0)
(263.7)
272.4
8.7
(1.7)
(1.3)
21.7
31.9
50.6
59.3

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 120

120

26(a) Defined benefit schemes continued

Cumulative actuarial losses recognised since 1 January 2004 are £53.5m (2008: gains of £88.4m).
Changes in the fair value of plan liabilities are analysed as follows:

At 1 January 2008
Adoption of IFRIC 14
Current service cost – employer
Current service cost – employee
Past service costs
Plan participants’ contributions
Interest cost – employer
Interest cost – employee
Benefits paid
Actuarial gains and losses
Exchange differences
At 1 January 2009
Current service cost – employer
Current service cost – employee
Past service costs
Plan participants’ contributions
Interest cost – employer
Interest cost – employee
Benefits paid
Actuarial gains and losses
Exchange differences
At 31 December 2009

Changes in the fair value of plan assets are analysed as follows:

At 1 January 2008
Adoption of IFRIC 14
Expected return on plan assets – employer
Expected return on plan assets – employee
Employer contributions
Contributions by employees
Benefits paid
Actuarial gains and losses
Exchange differences
At 1 January 2009
Expected return on plan assets – employer
Expected return on plan assets – employee
Employer contributions
Contributions by employees
Benefits paid
Actuarial gains and losses
Exchange differences
At 31 December 2009

Virtually Not certain
costs
reimbursed
£m
391.7
-
15.9
5.9
-
0.5
16.8
6.0
(10.4)
(70.0)
-
356.4
12.2
4.8
-
0.7
15.6
6.0
(8.8)
89.4
-
476.3

certain costs
reimbursed
£m
296.6
-
11.6
-
-
1.6
17.1
-
(6.6)
(53.1)
-
267.2
7.0
-
-
2.5
16.1
-
(9.2)
85.2
-
368.8

Virtually Not certain
costs
reimbursed
£m
362.2
-
18.4
7.6
17.0
5.8
(10.4)
(103.3)
-
297.3
14.3
5.6
17.9
6.0
(8.8)
22.6
-
354.9

certain costs
reimbursed
£m
235.9
-
17.4
-
14.3
1.6
(6.6)
(85.0)
-
177.6
12.2
-
15.4
2.5
(9.2)
26.0
-
224.5

Non
contract
specific
£m
812.6
40.4
19.9
0.6
1.1
1.3
46.7
1.2
(67.1)
(149.3)
12.4
719.8
14.7
0.6
0.7
1.1
41.4
1.1
(33.4)
157.6
(4.3)
899.3

Non
contract
specific
£m
744.7
40.4
43.1
1.5
30.0
1.8
(67.1)
(75.4)
0.2
719.2
35.3
1.0
29.1
1.6
(33.4)
24.6
0.1
777.5

Total
£m
1,500.9
40.4
47.4
6.5
1.1
3.4
80.6
7.2
(84.1)
(272.4)
12.4
1,343.4
33.9
5.4
0.7
4.3
73.1
7.1
(51.4)
332.2
(4.3)
1,744.4

Total
£m
1,342.8
40.4
78.9
9.1
61.3
9.2
(84.1)
(263.7)
0.2
1,194.1
61.8
6.6
62.4
10.1
(51.4)
73.2
0.1
1,356.9

No assets are invested in the Group’s own financial instruments, properties or other assets used by the Group.

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Financial Statements

121

26(a) Defined benefit schemes continued

History of experience gains and (losses)

Experience adjustments arising on scheme assets:
Amount (£m)
Percentage of scheme assets

Experience adjustments arising on scheme liabilities:
Amount (£m)
Percentage of the present value of scheme liabilities
Fair value of scheme assets (£m)
Present value of scheme liabilities (£m)
Deficit (£m)

2009

73.2
5%

2008

2007

2006

2005

(263.7)
(22)%

1.4
-

45.8
4%

103.6
10%

(58.2)
(3)%
1,356.9
(1,744.4)
(387.5)

0.1
-
1,194.1
(1,343.4)
(149.3)

(5.1)
-
1,342.8
(1,500.9)
(158.1)

(13.1)
(1)%
1,186.8
(1,465.1)
(278.3)

11.8
1%
992.7
(1,347.1)
(354.4)

The normal contributions expected to be paid during the financial year ending 31 December 2010 are £60.7m.
Assumptions in respect of the expected return on plan assets are based on market expectations of returns over the life of the
related obligation. Due consideration has been given to current market conditions as at 31 December 2009 in respect to inflation,
interest, bond yields and equity performance when selecting the expected return on assets assumptions.
The expected yield on bond investments with fixed interest rates is derived from their market value. The yield on equity
investments contains an additional premium (an ‘equity risk premium’) to compensate investors for the additional anticipated
returns of holding this type of investment, when compared to bond yields. Management have considered the impact of the
adverse changes and volatility in the equity market in 2009 and have concluded that an ‘equity risk premium’ of 4.1% is
appropriate at 31 December 2009 (2008: 4.1%).
The overall expected return on assets is calculated as the weighted average of the expected returns for the principal asset
categories held by scheme.

Main assumptions:
Rate of salary increases
Rate of increase in pensions in payment
Rate of increase in deferred pensions
Inflation assumption
Discount rate

Expected rates of return on scheme assets:

Equities
Bonds except LDI
LDI
Gilts
Property
Cash and other
Annuity policies

Post-retirement mortality:

Current pensioners at 65 – male
Current pensioners at 65 – female
Future pensioners at 65 – male
Future pensioners at 65 – female

2009
%

3.70
3.30
3.30
3.30
5.80

8.60
5.80
5.20
4.50
5.75
0.50
5.80

2009
Years

20.3
23.2
21.6
24.4

2008
%

3.10
2.60
2.60
2.60
6.00

7.95
6.00
4.15
3.85
5.10
2.00
6.00

2008
Years

20.3
23.2
21.6
24.4

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 122

122

26(b) Defined contribution schemes

The Group paid employer contributions of £49.4m (2008: £34.7m) into UK and other defined contribution schemes, foreign state
pension schemes and multi-employer schemes, including those of joint ventures.

Pre-funded defined benefit schemes treated as defined contribution
Serco accounts for certain pre-funded defined benefit schemes relating to contracts as defined contribution schemes because
the contributions are fixed until the end of the current concession and at rebid any surplus or deficit would transfer to the next
contractor. Cash contributions are recognised as pension costs and no asset or liability is shown on the balance sheet.

27. Provisions

At 1 January 2008
Arising from acquisitions
Charged to income statement
Released to income statement
Utilised during the year
Exchange differences
At 31 December 2008 (as previously stated)
Fair value adjustments on 2008 acquisitions (note 15)
At 1 January 2009 (restated)
Charged to income statement
Released to income statement
Utilised during the year
Movement in discount rate
Exchange differences
At 31 December 2009

Employee
related
£m
9.0
-
0.6
(3.7)
(0.7)
0.7
5.9
-
5.9
2.4
-
(0.6)
-
-
7.7

Property
£m
4.7
9.3
-
(4.3)
(0.1)
0.2
9.8
-
9.8
-
-
(1.2)
0.4
(1.0)
8.0

Contract
£m
4.7
7.4
-
(1.0)
-
0.1
11.2
-
11.2
0.9
(0.5)
(0.7)
0.3
(0.8)
10.4

Other
£m
0.2
10.6
0.3
-
(0.1)
0.2
11.2
7.8
19.0
1.9
-
(2.8)
-
(1.9)
16.2

Total
£m
18.6
27.3
0.9
(9.0)
(0.9)
1.2
38.1
7.8
45.9
5.2
(0.5)
(5.3)
0.7
(3.7)
42.3

Employee related provisions relate to long-term service awards and terminal gratuities liabilities which have been accrued and are
based on contractual entitlement together with an estimate of the probabilities that employees will stay until retirement and
receive all relevant amounts.
Property provisions relate to leased properties which are either under utilised or vacant and where the unavoidable costs
associated with the lease exceed the economic benefits expected to be gained. Management has calculated the provision based
on the discounted cash outflows required to settle the lease obligations.
Contract provisions primarily relate to SI where, as required under IAS 37, a provision has been taken for a loss making onerous
contract. Management has used the present value of the estimated future cash outflows required to settle the contract obligations
in determining the provision.
Other provisions are held for legal and other costs that the Group expects to incur over an extended period. These costs
are based on past experience of similar items and other known factors and represent management’s best estimate of the
likely outcome.

28. Share capital

Issued and fully paid:
486,764,440 (2008: 485,051,557) ordinary shares of 2p each at 1 January
Issued on the exercise of share options
490,912,075 (2008: 486,764,440) ordinary shares of 2p each at 31 December

2009
£m

9.7
0.1
9.8

Number
2009
Millions

486.8
4.1
490.9

2008
£m

9.7
-
9.7

Number
2008
Millions

485.1
1.7
486.8

At the Company’s 2009 Annual General Meeting shareholders approved the deletion of the Company’s Authorised Share Capital
provisions from the Company’s Articles of Association with effect from 1 October 2009, taking advantage of changes implemented
by the Companies Act 2006. The Company had 550,000,000 authorised shares as at 31 December 2008.
The Company has one class of ordinary shares which carry no right to fixed income.
During the year, 4,147,635 (2008: 1,712,883) ordinary shares of 2p each were allotted to the holders of options or their personal
representatives using newly listed shares.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 123

29. Share premium account

At 1 January
Premium on shares issued
At 31 December

30. Reserves

30(a) Retirement benefit obligations reserve

Financial Statements

123

2009
£m
301.1
3.0
304.1

2008
£m
299.3
1.8
301.1

The Retirement benefit obligations reserve represents the actuarial gains and losses recognised in respect of annual actuarial
valuations for defined benefit retirement schemes, the fair value adjustments on reimbursable rights and the related movements
in deferred tax balances.

30(b) Share-based payment reserve

The Share-based payment reserve represents credits relating to equity-settled share-based payment transactions granted after
7 November 2002, but not fully vested as of 1 January 2005, and any gain or loss on the exercise of share options satisfied by
own shares.

30(c) Own shares reserve

The Own shares reserve represents the cost of shares in Serco Group plc purchased in the market and held by the Serco Group plc
Employee Share Ownership Trust (ESOP) to satisfy options under the Group’s share option schemes. At 31 December 2009, the
ESOP held 3,436,547 (2008: 5,650,253) shares equal to 0.7% of the current allotted share capital (2008: 1.2%). The market value
of shares held by the ESOP as at 31 December 2009 was £18,213,699 (2008: £25,454,390).

30(d) Hedging and translation reserve

The Hedging and translation reserve represents foreign exchange differences arising on translation of the Group’s overseas
operations and movements relating to cash flow hedges.

31. Notes to the consolidated cash flow statement

Reconciliation of operating profit to net cash inflow from operating activities

Operating profit for the year
Adjustments for:
Share-based payment expense
Depreciation of property, plant and equipment
Amortisation and impairment of intangible assets
Loss/(profit) on disposal of property, plant and equipment
Profit on disposal of business undertakings
Movement in provisions
Operating cash inflow before movements in working capital
(Increase)/decrease in inventories
(Increase)/decrease in receivables
Increase/(decrease) in payables
Cash generated by operations
Tax paid
Net cash inflow from operating activities

2009
£m
212.1

7.2
34.4
40.5
2.0
-
(0.6)
295.6
(15.1)
(31.1)
24.8
274.2
(39.1)
235.1

2008
£m
156.0

7.0
26.0
29.3
(4.6)
(2.7)
(9.0)
202.0
0.9
11.0
(26.4)
187.5
(24.9)
162.6

Additions to fixtures and equipment during the year amounting to £11.9m (2008: £8.9m) were financed by new finance leases.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 124

124

31. Notes to the consolidated cash flow statement continued

Analysis of net debt

Cash and cash equivalents
Non recourse loans
Other loans
Obligations under finance leases

Cash and cash equivalents
PFI non recourse loans
Non recourse loans
Other loans
Obligations under finance leases

At
1 January
2009
£m
250.8
(34.1)
(713.6)
(17.2)
(514.1)

At
1 January
2008
£m
185.0
(22.5)
(36.8)
(271.6)
(16.4)
(162.3)

Cash flow Acquisitions
£m
0.9
-
(2.5)
-
(1.6)

£m
73.0
6.5
33.0
5.7
118.2

Exchange

Non cash
differences movements
£m
-
-
-
(11.9)
(11.9)

£m
(5.3)
(1.4)
58.2
(0.6)
50.9

Cash flow
£m
33.0
1.6
5.9
(318.8)
8.6
(269.7)

Acquisitions/
disposals
£m
11.1
20.9
-
(72.9)
-
(40.9)

Exchange
Non cash
differences movements
£m
-
-
-
-
(8.9)
(8.9)

£m
21.7
-
(3.2)
(50.3)
(0.5)
(32.3)

At 31
December
2009
£m
319.4
(29.0)
(624.9)
(24.0)
(358.5)

At 31
December
2008
£m
250.8
-
(34.1)
(713.6)
(17.2)
(514.1)

Non cash movements in 2008 and 2009 relate to finance leases.

32. Capital and other commitments

Capital expenditure contracted but not provided:
- Property, plant and equipment

2009
£m

5.5

2008
£m

0.5

Included within the balances above is joint venture capital expenditure contracted but not provided in relation to property, plant
and equipment of £1.2m (2008: £0.3m).
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
Between one and five years
After five years

2009
£m
106.7
207.3
123.5
437.5

2008
£m
104.9
264.8
150.0
519.7

Principal lease commitments are within the Transport segment, with future minimum lease payments totalling £181.0m
(2008: £239.4m). These leases relate primarily to administrative and operational buildings, track and rolling stock within the train
operating companies. The length of the leases is concurrent with the period of the franchises and the terms of the leases are
fixed during this period.

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Financial Statements

125

33. Share-based payment expense

The Group recognised the following expenses related to equity-settled share-based payment transactions:

Executive Option Plan
Long Term Incentive Scheme and Plan
Sharesave 2008
Transformational Share Scheme
Performance Share Plan
Deferred Bonus Plan

2009
£m
0.5
4.5
1.8
0.1
0.2
0.1
7.2

2008
£m
0.7
5.3
1.0
-
-
-
7.0

Executive Option Plan (EOP)
Options granted under the EOP may be exercised after the third anniversary of grant, dependent upon the achievement of a
financial performance target over three years. The options are granted at market value and awards made to eligible employees
are based on between 50% and 100% of salary as at 31 December prior to grant. If the options remain unexercised after a
period of ten years from the date of grant, the options expire. Furthermore, options may be forfeited if the eligible employee
leaves the Group before the options vest. Details of the movement in all EOP options are as follows:

Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December

Number
of options
2009
Thousands
10,948
88
(3,634)
(545)
6,857

Weighted
average
exercise
price
2009
£
2.65
3.88
2.50
2.98
2.72

Number
of options
2008
Thousands
13,724
334
(2,520)
(590)
10,948

Weighted
average
exercise
price
2008
£
2.53
4.55
2.29
2.36
2.65

Of these options, 5,992,295 (2008: 9,606,125) were exercisable at the end of the year, with a weighted average exercise
price of £2.48 (2008: £2.46).
The options outstanding at 31 December 2009 had a weighted average contractual life of 3.66 years (2008: 4.22 years). The
exercise prices for options outstanding at 31 December 2009 ranged from £1.39 to £4.90 (2008: £1.39 to £4.90).
The weighted average share price at the date of exercise approximates to the weighted average share price during the year,
which was £4.41 (2008: £4.20).
The fair value of options granted under the EOP is measured by use of the Binomial Lattice model. The Binomial Lattice model is
considered to be the most appropriate for valuing options granted under this scheme as it allows exercise over a longer period of
time between the vesting date and the expiry date.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 126

126

33. Share-based payment expense continued

The inputs into the Binomial Lattice model for options granted during the year are:

Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividends

2009
395p
388p
26.4%
5 years
2.5%
1.3%

2008
453p
455p
27.5%
5 years
4.4%
0.9%

Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous five 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.

Long Term Incentive Scheme (LTIS) and Long Term Incentive Plan (LTIP)
Awards made to eligible employees under the above schemes are structured as options with a zero exercise price and may be
exercised after the third anniversary of grant. The extent to which an award vests (and therefore becomes exercisable) is
measured by reference to the growth in the Group’s earnings per share (EPS) or total shareholder return (TSR) over the
performance period of three financial years.
If the options remain unexercised after a period of ten years from the date of grant, the options expire. Furthermore, options may
be forfeited if the eligible employee leaves the Group before the options vest. Details of the movement in all LTIS and LTIP
options are as follows:

Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December

Number
of options
2009
Thousands
8,214
351
(2,383)
(559)
5,623

Weighted
average
exercise
price
2009
£
Nil
Nil
Nil
Nil
Nil

Number
of options
2008
Thousands
7,040
2,224
(592)
(458)
8,214

Weighted
average
exercise
price
2008
£
Nil
Nil
Nil
Nil
Nil

Of these options, 896,487 (2008: 1,293,356) were exercisable at the end of the year.
The options outstanding at 31 December 2009 had a weighted average contractual life of 7.59 years (2008: 8.11 years).
During the year, two grants of LTIP options were made: one grant with TSR performance conditions, the other with EPS growth
performance conditions. The Monte Carlo Simulation model is considered to be the most appropriate for valuing options granted
under schemes where there are changes in performance conditions by which the options are measured, such as for the TSR
based awards.
The inputs into the Monte Carlo Simulation model for options granted during the year are:

Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividends

2009
374p
Nil
28.9%
3 years
1.8%
1.3%

2008
402p
Nil
23.2% - 26.8%
1 - 5 years
2.5% - 5.0%
0.9% - 1.1%

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 127

Financial Statements

127

33. Share-based payment expense continued

Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three 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.
For the LTIP options with EPS growth performance conditions, the fair value is considered to be their face value less the present
value of any dividend payments not received over the vesting period.
The assumptions for options granted during the year with EPS growth performance conditions are:

Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividends

2009
456p
Nil
N/A
3 years
N/A
1.2%

Transformational Share Scheme
Awards made to eligible employees under the Transformational Share Scheme are structured as options with a nominal exercise
price and are exercisable after the third anniversary of the grant.
The employee must exercise the options no later than 30 days after the vesting date. Furthermore, if the eligible employee leaves
the Group before the options vest, the options may be forfeited.

Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December

Number
of options
2009
Thousands
39
53
-
(6)
86

Weighted
average
exercise
price
2009
£
Nil
Nil
Nil
Nil
Nil

Number
of options
2008
Thousands
-
46
-
(7)
39

Weighted
average
exercise
price
2008
£
Nil
Nil
Nil
Nil
Nil

None of these options were exercisable at the end of the year.
The options outstanding at 31 December 2009 had a weighted average contractual life of 1.28 years (2008: 2.33 years).
The fair value of options granted under the Transformational Share Scheme is considered to be equal to their face value as at the
grant date less the present value of any dividend payments not received over the vesting period. This model is considered to be
the most appropriate for valuing options granted under this scheme as the options have a £nil exercise price and are not subject
to any performance conditions.
The assumptions for determining the face value less any dividends are:

Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividends

2009
366p
Nil
N/A
2 years
N/A
1.4%

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 128

128

33. Share-based payment expense continued

Performance Share Plan (PSP)
Under the PSP, eligible employees have been granted options with a £nil exercise price. Awards vest after the performance
period of three years and are subject to the achievement of two performance measures. The primary performance measure is
TSR and the secondary performance measure is based on EPS growth.

Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December

Number
of options
2009
Thousands
-
479
-
-
479

Weighted
average
exercise
price
2009
£
Nil
Nil
Nil
Nil
Nil

None of these options were exercisable at the end of the year.
The options outstanding at 31 December 2009 had a weighted average contractual life of 9.48 years.
In the year, two grants were made with 70% of the options granted subject to TSR performance conditions and 30% subject to
EPS growth performance conditions.
The options subject to TSR performance conditions were valued using the Monte Carlo Simulation model. The options subject to
EPS growth performance conditions were deemed to have fair values equal to their face value less the present value of any
dividend payments not received over the vesting period.
The Monte Carlo Simulation model is considered to be the most appropriate for valuing options granted under schemes where
there are changes in performance conditions by which the options are measured, such as for the TSR based awards.
The inputs into the Monte Carlo Simulation model for options granted during the year with TSR performance conditions are:

Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividends

2009
406p
Nil
28.8%
3 years
2.2%
1.2%

Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividends

2009
406p
Nil
N/A
3 years
N/A
1.2%

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 129

Financial Statements

129

33. Share-based payment expense continued

Deferred Bonus Plan (DBP)
Under the DBP, eligible employees are entitled to use up to 50% of their earned annual bonus to purchase shares in the Group
at market price. Provided they remain in employment for this period, the shares are retained for that period and the two
performance measures (which are the same as the PSP scheme, being TSR and EPS growth) have been met, the Group will
make a matching share award. For shares purchased by employees in 2009 the match was on a basis of two times the gross
bonus deferred.

Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December

Number
of options
2009
Thousands
28
207
(28)
-
207

Weighted
average
exercise
price
2009
£
Nil
Nil
Nil
Nil
Nil

Number
of options
2008
Thousands
44
-
(16)
-
28

Weighted
average
exercise
price
2008
£
Nil
Nil
Nil
Nil
Nil

None of these options were exercisable at the end of the year.
The options outstanding at 31 December 2009 had a weighted average contractual life of 2.45 years (2008: 0.22 years).
In the year, two grants were made with 50% of the deferred bonus subject to TSR performance conditions and 50% subject to
EPS growth performance conditions.
The portion subject to TSR performance conditions was valued using the Monte Carlo Simulation model. The portion subject to
EPS growth performance conditions was deemed to have a fair value equal to their face value less the present value of any
dividend payments not received over the vesting period.
The Monte Carlo Simulation model is considered to be the most appropriate for valuing options granted under schemes where
there are changes in performance conditions by which the options are measured, such as for the TSR based awards.
The inputs into the Monte Carlo Simulation model for options granted during the year with TSR performance conditions are:

Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividends

2009
404p
Nil
28.9%
3 years
1.8% - 2.4%
1.2%

Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk-free rate
Expected dividends

2009
404p
Nil
N/A
3 years
N/A
1.2%

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 130

130

33. Share-based payment expense continued

Sharesave 2008
The Sharesave 2008 scheme provides for a purchase price equal to the daily average market price on the date of grant less ten
per cent. The options can be exercised for a period of six months following their vesting. Details of the movement in Sharesave
2008 options are as follows:

Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December

Number
of options
2009
Thousands
6,760
-
(5)
(649)
6,106

Weighted
average
exercise
price
2009
£
4.0
Nil
4.0
4.0
4.0

Number
of options
2008
Thousands
-
6,976
-
(216)
6,760

Weighted
average
exercise
price
2008
£
Nil
4.0
Nil
4.0
4.0

None of these options were exercisable at the end of the year.
The options outstanding at 31 December 2009 had a weighted average contractual life of 2.12 years (2008: 3.12 years). Given
that options granted under the Sharesave scheme can be exercised at any time after vesting, management consider the Binomial
Lattice model to be appropriate to value the options granted under this scheme. The Binomial Lattice model allows exercise over
a window in time, from vesting date to expiry date, and assumes option holders make economically rational exercise decisions.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 131

Financial Statements

131

34. Related party transactions

Transactions between the Company and its wholly owned subsidiaries, which are related parties, have been eliminated on
consolidation and are not disclosed in this note. Transactions between the Group and its joint venture undertakings are disclosed
below, with the relevant proportion being eliminated on consolidation. Transactions between the Company and its subsidiaries
and joint ventures are disclosed in the Company’s separate financial statements.

Trading transactions
During the year, Group companies entered into the following material transactions with joint ventures:

Royalties and management fees receivable
Dividends receivable

The following receivable balances relating to joint ventures were included in the Consolidated Balance Sheet:

Current:
Loans

Non-current:
Loans

2009
£m
1.6
46.3
47.9

2009
£m

0.6

2009
£m

2.2

2008
£m
1.4
37.2
38.6

2008
£m

1.2

2008
£m

0.7

Joint venture receivable and loan amounts outstanding have arisen from transactions undertaken during the general course of
trading, are unsecured, and will be settled in cash. Interest arising on loans is based on LIBOR, or its equivalent, with an
appropriate margin. No provisions are required for doubtful debts in respect of the amounts owed by the joint ventures.

Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts and
directors’ liability insurance.
The remuneration of the key management personnel of the Group is set out below in aggregate for each of the categories
specified in IAS 24 Related Party Disclosures:

Short-term employee benefits
Termination arrangements
Post-employment benefits
Share-based payment expense

2009
£m
3.2
-
0.4
1.5
5.1

2008
£m
3.6
0.7
0.4
1.9
6.6

The key management personnel comprise the Executive Directors, Non-Executive Directors and key members of the Global
Management Board.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 132

132

35. List of principal undertakings

The companies listed below are, in the opinion of the Directors, the principal undertakings of Serco Group plc as at 31 December 2009.
The percentage of equity capital directly or indirectly held by Serco Group plc is shown. The voting rights are the same as the
percentage holding. The companies are incorporated and principally operate in the countries stated below.

Principal subsidiaries
United Kingdom

Europe and Middle East
Belgium

France

Germany

Ireland

Italy

Serco Limited
Serco-IAL Limited
NPL Management Limited
Serco Leisure Operating Limited
Serco Regional Services Limited
Serco Manchester Leisure Limited

Serco Belgium SA

Serco SARL
Serco SAS

Serco GmbH

Serco Services Ireland Limited

Serco SpA

Luxembourg

Serco Luxembourg SA

The Netherlands

Serco Facilities Management BV

Spain

Switzerland

Asia Pacific
Australia

Serco Gestion de Negocios SL

Serco Switzerland SA

Serco Australia Pty Limited
Great Southern Rail Travel Pty Limited
Great Southern Rail Limited
Serco Traffic Camera Services (Vic) Pty Limited

Hong Kong

Serco Group (HK) Limited

North America
Canada

USA

India

Serco Facilities Management, Inc.
Serco DES, Inc.

Serco, Inc.
Serco Services, Inc.

2009
100%
100%
100%
100%
100%
81%

2008
100%
100%
100%
100%
100%
81%

100%

100%
100%

100%

100%
100%
100%
100%

100%

100%
100%

Serco BPO Private Limited

60%

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 133

35. List of principal undertakings continued

Joint venture undertakings
United Kingdom

Asia Pacific
Australia

United Arab Emirates

Other
Bahrain

South Africa

AWE Management Limited
Merseyrail Services Holding Company Limited
Northern Rail Holdings Limited
GSTS Pathology LLP

Defence Maritime Services Pty Limited
Serco Sodexo Defence Services Pty Limited

Khadamat Facilities Management Company LLC
International Aeradio (Emirates) LLC (Dubai)
International Aeradio (Emirates) LLC (Abu Dhabi)

Aeradio Technical Services WLL

Equity Aviation Services (Pty) Limited

Financial Statements

133

2009
33%
50%
50%
50%

50%
50%

49%
49%
49%

49%

50%

2008
33%
50%
50%
-

50%
50%

49%
49%
49%

49%

50%

All joint ventures are accounted for using the proportionate consolidation method. All the subsidiaries of the Group have
been consolidated.
At 31 December 2009, Group companies had branches in the United Arab Emirates, Bahrain, South Africa, Luxembourg
and Gibraltar.
All the principal subsidiaries of Serco Group plc and its joint venture undertakings are engaged in the provision of
support services.

36. Contingent liabilities

The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures up to a maximum value of
£7.0m (2008: £4.6m). The actual commitment outstanding at 31 December 2009 was £4.3m (2008: £3.5m).
In addition to this, the Company and its subsidiaries have provided performance guarantees, and indemnities relating to
performance bonds and letters of credit issued by its banks on its behalf, in the ordinary course of business. These are not
expected to result in any material financial loss.
Further details of the contingent liabilities of Serco Group plc are contained in note 14 to the Serco Group plc Company
Financial Statements.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 134

134

UK GAAP Audit Report – Parent Company

Independent Auditors’ Report to the members
of Serco Group plc

Opinion on other matters prescribed by the
Companies Act 2006

In our opinion:

•

the part of the Directors’ Remuneration Report to be
audited has been properly prepared in accordance with the
Companies Act 2006; and

the information given in the Directors’ Report for the
financial year for which the financial statements are
prepared is consistent with the parent Company Financial
Statements.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters
where 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.

Other matter

We have reported separately on the Group Financial
Statements of Serco Group plc for the year ended
31 December 2009.

Nigel Mercer (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditors
London, UK
25 February 2010

We have audited the parent Company Financial Statements
of Serco Group plc for the year ended 31 December 2009
which comprise the Company Balance Sheet and the related
notes 1 to 15. The financial reporting framework that has been
applied in their preparation is applicable law and United
Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice).
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 auditors’ 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.

Respective responsibilities of Directors and Auditors

As explained more fully in the Directors’ Responsibilities
Statement, the Directors are responsible for the preparation of
the parent Company Financial Statements and for being
satisfied that they give a true and fair view. Our responsibility is
to audit the parent Company Financial Statements in
accordance with applicable law and International Standards on
Auditing (UK and Ireland). Those standards require us to
comply with the Auditing Practices Board’s (APB’s) Ethical
Standards for Auditors.

Scope of the audit of the financial statements

An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error.
This includes an assessment of: whether the accounting
policies are appropriate to the parent Company’s
circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant
accounting estimates made by the Directors; and the overall
presentation of the financial statements.

Opinion on the parent Company Financial Statements

In our opinion the parent Company Financial Statements:

• give a true and fair view of the state of the parent
Company’s affairs as at 31 December 2009;

• have been properly prepared in accordance with United
Kingdom Generally Accepted Accounting Practice; and

• have been prepared in accordance with the requirements of

the Companies Act 2006.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 135

Company Balance Sheet
At 31 December 2009

Fixed assets
Investments in subsidiary undertakings

Current assets
Amounts owed by subsidiary companies due after more than one year
Debtors: amounts due within one year
Debtors: amounts due after more than one year
Derivative financial instruments due within one year
Derivative financial instruments due after more than one year
Cash at bank and in hand

Creditors: amounts falling due within one year
Bank loans and overdrafts
Loans
Amounts owed to subsidiary companies
Trade creditors
Other creditors including taxation and social security
Derivative financial instruments
Accruals and deferred income

Net current assets
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Amounts owed to subsidiary companies
Derivative financial instruments
Net assets
Capital and reserves
Called up share capital
Share premium account
Capital redemption reserve
Share-based payment reserve
Hedging and translation reserve
Profit and loss account
Shareholders’ funds

Financial Statements

135

Note

4
4
7
7

6
6

5
7

9
10

11
12
13

2009
£m

805.5
805.5

758.8
21.5
14.6
0.5
1.4
-
796.8

(65.7)
(10.0)
(223.1)
(0.3)
(1.1)
(5.2)
(4.7)
(310.1)
486.7
1,292.2
(518.5)
(251.1)
(1.7)
520.9

9.8
304.1
0.1
35.9
(1.5)
172.5
520.9

2008
£m

799.6
799.6

725.4
34.2
14.3
4.6
5.0
8.1
791.6

-
(10.0)
(168.1)
(0.3)
(1.0)
(3.3)
(7.9)
(190.6)
601.0
1,400.6
(678.4)
(237.5)
(0.2)
484.5

9.7
301.1
0.1
28.7
3.9
141.0
484.5

The Financial Statements of the Company (registered number 2048608) were approved by the Board of Directors on
25 February 2010 and signed on its behalf by:

Christopher Hyman
Chief Executive

Andrew Jenner
Finance Director

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 136

136

Notes to the Company Financial Statements

1. Accounting policies

The principal accounting policies adopted are set out below
and have been applied consistently throughout the current and
preceding year.

Basis of accounting
These financial statements have been prepared in accordance
with UK GAAP and applicable UK law.
As discussed in more detail in the Finance Review, these
financial statements have been prepared on a going
concern basis.

Accounting convention
These accounts have been prepared under the historical
cost convention.

Fixed asset investments
Investments held as fixed assets are stated at cost less
provision for any impairment in value.

Share-based payment
The Company has applied the requirements of FRS 20
Share-based Payment. In accordance with the transitional
provisions, FRS 20 has been applied to all grants of equity
instruments after 7 November 2002 that were not fully vested
as of 1 January 2005.
The Company issues equity-settled share-based payments
to certain employees and operates an HMRC approved Save
As You Earn (SAYE) share option scheme open to eligible
employees which allows the purchase of shares at a discount.
These are measured at fair value at the date of grant. The fair
value is expensed on a straight-line basis over the vesting
period, based on the Company’s estimate of shares that will
eventually vest.
Where the fair value of share options requires the use of a
valuation model, fair value is measured by use of the Black
Scholes, Binomial Lattice or Monte Carlo Simulation models
depending on the type of scheme. The expected life used in
the models has been adjusted, based on management’s best
estimate, for the effects of non-transferability, exercise
restrictions, and behavioural considerations. Where relevant,
the value of the option has also been adjusted to take account
of market conditions applicable to the option.

Dividends
Dividends are recorded in the Company’s financial statements in
the period in which they are approved by the Board of Directors.

Derivative financial instruments and hedging activities
Derivatives are initially accounted for and measured at fair
value on the date a derivative contract is entered into and
subsequently measured at fair value. The gain or loss on
remeasurement is taken to the profit and loss account except
where the derivative is a designated cash flow hedging
instrument. The accounting treatment of derivatives classified
as hedges depends on their designation, which occurs on the
date that the derivative contract is committed to. The
Company designates derivatives as:

•

a hedge of the fair value of an asset or liability (fair value
hedge);

a hedge of the income/cost of a highly probable forecast
transaction or commitment (cash flow hedge); and

a hedge of a net investment in a foreign entity.

•
Gains and losses on fair value are recorded in the profit and
loss account with the gain or loss on the hedged item
attributable to the hedged risk.
Gains or losses on cash flow hedges that are regarded as
highly effective are recognised in equity. Where the forecast
transaction results in a financial asset or liability, only gains
or losses previously recognised in equity are reclassified
to profit or loss in the same period as the asset or liability
affects profit or loss. Where the forecast transaction or
commitment results in a non-financial asset or liability, any
gains or losses previously deferred in equity are included in the
cost of the related asset or liability if the forecast transaction or
commitment results in future income or expenditure. Gains and
losses deferred in equity are transferred to the profit and loss
account in the same period as the underlying income or
expenditure. The ineffective portion of the gain or loss
on the hedging instrument is recognised in the profit
and loss account.
For the ineffective portion of hedges or transactions that are
not designated for hedge accounting under FRS 26: Financial
Instruments - Recognition and Measurement, any change in
assets or liabilities is recognised immediately in the profit and
loss account. Where a hedge no longer meets the
effectiveness criteria, any gains or losses deferred in equity are
only transferred to the profit and loss account when the
committed or forecast transaction is recognised in the profit
and loss account. However, where cash flow hedge accounting
has been applied for a forecast or committed transaction that
is no longer expected to occur, then the cumulative gain or
loss that was deferred in equity is recognised immediately in
profit and loss.
Where the Company hedges net investments in foreign
entities through currency borrowings, the gains or losses on
the translation of the borrowings are recognised in equity.
Gains and losses accumulated in equity are included in the
profit and loss account when the foreign operation is
disposed of.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 137

Financial Statements

137

1. Accounting policies continued

Current tax
Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws
that have been enacted or substantially enacted at the balance sheet date.

Deferred tax
The charge for taxation takes account of taxation deferred because of differences between the timing of recognition of certain
items for taxation purposes and for accounting purposes. Deferred tax is recognised in respect of all timing differences that have
originated but not reversed at the balance sheet date where the transactions or events that give rise to an obligation to pay more
or less tax in the future have occurred by the balance sheet date. A deferred tax asset is recognised only when it is considered
more likely than not that it will be recovered.
Deferred tax is recognised on a non-discounted basis using tax rates in force at the date the timing differences are expected
to reverse.

2. Auditors’ remuneration

Fees payable to the Company’s auditors for the audit of the Company’s annual accounts of £10,000 (2008: £10,000) have been
borne by another group company.

Investments held as fixed assets

Shares in subsidiary companies at cost:
At 1 January 2008
Options over parent Company shares awarded to employees of subsidiaries
Additions:
Serco Holdings Limited
Disposals:
Serco Investments Limited
Cornwell Management Consultants plc
At 1 January 2009
Options over parent Company shares awarded to employees of subsidiaries
At 31 December 2009

£m

792.6
5.3

50.0

(40.0)
(8.3)
799.6
5.9
805.5

On 31 December 2008, the Company acquired one additional share in Serco Holdings Limited for £50m following the
capitalisation of long-term intercompany loans.
Full details of the principal subsidiaries of Serco Group plc can be found in note 35 to the Group’s Consolidated Financial
Statements. The Company directly owns 100% of the ordinary share capital of the following subsidiaries except where stated.

Name
Serco Holdings Limited
Serco Group (HK) Limited

4. Debtors

Amounts due within one year:
Amounts owed by subsidiary companies
Corporation tax recoverable
Other debtors

Amounts due after more than one year:
Amounts owed by joint ventures
Other debtors
Deferred tax asset (note 8)

Ownership
100%
50%

2008
£m

23.9
10.1
0.2
34.2

0.7
12.7
0.9
14.3
48.5

2009
£m

15.6
3.4
2.5
21.5

0.9
10.6
3.1
14.6
36.1

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 138

138

5. Other creditors including taxation and social security

Other creditors

6. Creditors: amounts falling due after more than one year

Loans
Less: amounts included in creditors falling due within one year – loans
Less: amounts included in creditors falling due within one year – bank loans & overdrafts
Amounts falling due after more than one year

Loans:
Within one year or on demand
Between one and two years
Between two and five years
After five years

7. Derivative financial instruments

Currency swaps
Interest rate swaps
Forward foreign exchange contracts

Analysed as:
Non-current
Current

Assets
2009
£m
-
1.1
0.8
1.9

1.4
0.5
1.9

Liabilities
2009
£m
(0.5)
(3.1)
(3.3)
(6.9)

(1.7)
(5.2)
(6.9)

2009
£m
1.1

2008
£m
1.0

2009
£m
594.2
(10.0)
(65.7)
518.5

75.7
143.8
351.1
23.6
594.2

Assets
2008
£m
4.2
-
5.4
9.6

5.0
4.6
9.6

2008
£m
688.4
(10.0)
-
678.4

10.0
64.0
567.3
47.1
688.4

Liabilities
2008
£m
-
-
(3.5)
(3.5)

(0.2)
(3.3)
(3.5)

The Company holds derivative financial instruments in accordance with the Group’s policy in relation to its financial risk
management. Details of the disclosures are set out in note 25 to the Group’s Consolidated Financial Statements.

8. Deferred tax asset

Short-term timing difference

The movement in the deferred tax asset during the year was as follows:

At 1 January
(Charged)/credited to the profit and loss account
Items taken directly to equity
At 31 December

2009
£m
3.1

2009
£m
0.9
(0.1)
2.3
3.1

2008
£m
0.9

2008
£m
4.9
0.3
(4.3)
0.9

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 139

Financial Statements

139

9. Called up share capital

2009
£m

9.7
0.1
9.8

Number
2009
Millions

486.8
4.1
490.9

2008
£m

9.7
-
9.7

Number
2008
Millions

485.1
1.7
486.8

At the Company’s 2009 Annual General Meeting shareholders approved the deletion of the Company’s Authorised Share Capital
provisions from the Company’s Articles of Association with effect from 1 October 2009, taking advantage of changes
implemented by the Companies Act 2006. The Company had 550,000,000 authorised shares as at 31 December 2008.
The Company has one class of ordinary shares which carry no right to fixed income.
During the year 4,147,635 (2008: 1,712,883) ordinary shares of 2p each were allotted to the holders of options or their personal
representatives using newly listed shares.

10. Share premium account

At 1 January
Premium on shares issued
At 31 December

11. Share-based payment reserve

2009
£m
301.1
3.0
304.1

2008
£m
299.3
1.8
301.1

At 1 January
Options over parent Company shares awarded to employees of subsidiaries
Share-based payment expense
At 31 December

2009
£m
28.7
5.9
1.3
35.9

Details of the share-based payment disclosures are set out in note 33 to the Group’s Consolidated Financial Statements.

12. Hedging and translation reserve

At 1 January
Net fair value (loss)/gain on cash flow hedges
Tax credit/(charge) on items taken directly to equity
Net exchange gain/(loss) on translation of foreign operations
At 31 December

2009
£m
3.9
(8.1)
2.3
0.4
(1.5)

2008
£m
21.7
5.3
1.7
28.7

2008
£m
(6.2)
15.4
(4.3)
(1.0)
3.9

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 140

140

13. Profit and loss account

At 1 January
Profit for the year
Equity dividends
At 31 December

2009
£m
141.0
57.4
(25.9)
172.5

2008
£m
126.5
36.2
(21.7)
141.0

As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the Company is not presented as part of
these accounts.

14. Contingent liabilities

The Company has provided certain financial guarantees and indemnities in respect of the loans, overdraft and bonding facilities,
and other financial commitments of its subsidiaries. The total commitment outstanding as at 31 December 2009 was £36.5m
(2008: £28.3m).
The Company has also guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures up to a maximum value
of £7.0m (2008: £4.6m). The actual commitment outstanding at 31 December 2009 was £4.3m (2008: £3.5m).
In addition to this, the Company has provided performance guarantees and indemnities relating to performance bonds and letters
of credit issued by its banks on its behalf, in the ordinary course of business. These are not expected to result in any material
financial loss.

15. Related parties

The Directors of Serco Group plc had no material transactions with the Company or its subsidiaries during the year other than
service contracts and directors’ liability insurance. Details of the Directors’ remuneration are disclosed in the Remuneration
Report for the Group.
The Company is exempt under the terms of FRS 8 Related party disclosure, from disclosing related party transactions with
entities that are part of the Serco Group plc group. Full details of the transactions between Serco Group plc and its related
parties can be found in note 34 to the Group’s Consolidated Financial Statements.

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 141

Shareholder information

141

Group website

Global payment services

Go to www.serco.com for the current share price, latest
news in the investors section and to read the Annual Review
and Accounts.

Registrars

Administrative enquiries about the holding of Serco Group plc
shares and enquiries in relation to the Serco Dividend
Re-investment Plan (DRIP) should be directed to:

For overseas shareholders in certain countries, Equiniti offers
an Overseas Payment Service by arrangement with Citibank
Europe PLC. This service offers shareholders the ability to
have their dividend converted into their local currency and sent
electronically to their local bank account. To sign up for this
service, please contact Equiniti on 0871 384 2932
(+44 (0) 121 415 7161 if calling from outside the UK).
Alternatively you can download an application form and terms
and conditions from the website www.shareview.co.uk.

Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA

Tel: 0871 384 2932

There is a text phone available on 0871 384 2255 for
shareholders with hearing difficulties.
(Calls to both of these numbers are charged at 8p per minute
from a BT landline. Other telephony provider costs may vary.)
Callers from outside the UK should use +44 (0) 121 415 7161.
Telephone lines are open 8.30am to 5.30pm Monday to Friday.

Dividend re-investment plan

You can elect to receive future dividends as shares rather than
cash by participating in the DRIP. To register, request further
information, or to obtain a copy of the terms and conditions
booklet and mandate form please contact Equiniti on
0871 384 2932. Alternatively, these can be downloaded from
the website www.shareview.co.uk by choosing the Dividend
Reinvestment Plan heading within the Product Centre section.

Dividends paid direct to your bank account

• Avoid the risk of cheques being lost in the post

• No need to present cheques for payment

• Dividend credited to your account on payment date.
To set up a dividend mandate or change your existing
mandated details please register with the Shareholder Centre
via the Shareview website or contact Equiniti on the number
provided above.

Electronic communication

You can register for electronic communications by visiting
www.shareview.co.uk; you will need your shareholder reference
number to sign up. After you have registered you will receive
emails alerting you to communications as they become
available. In response to our shareholders’ commitment to
electronic communication Serco is very proud to be a
Corporate Member of the Woodland Trust, the UK’s leading
woodland conservation charity, helping them to plant and care
for UK native woodland. During 2009 the Trust planted more
than half a million native trees in the UK.

Share dealing

We have arranged the following services that can be used to
buy or sell Serco shares. Alternatively, if shareholders hold a
share certificate they can also use any bank, building society
or stockbroker offering share dealing facilities. Shareholders in
any doubt about buying or selling their shares should seek
professional financial advice.

• For EU shareholders

A telephone and internet dealing service is available
through Equiniti which provides a simple way of buying and
selling Serco shares. Commission is 1.5% with a minimum
charge of £25 for telephone dealing and 1% with a
minimum charge of £20 for internet dealing. For telephone
dealing call +44 (0) 845 6037 037 between 8.30am and
4.30pm, Monday to Friday, and for internet dealing log on
to www.shareview.co.uk/dealing. You will need your 11
digit shareholder reference number which will be shown on
either your share certificate or recent dividend tax voucher.

Cazenove & Co Ltd provide a postal dealing service to buy
and sell Serco shares. All transactions are undertaken on
an execution only basis. For further information please
contact Cazenove at: Postal Share Dealing Service,
20 Moorgate, London EC2R 6DA, United Kingdom,
Tel: +44 (0) 20 7155 5155.

• For Non EU shareholders

Currently non EU shareholders may buy or sell shares
through the Cazenove postal dealing service (see above).

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 142

142

Shareholder profile
The range and size of ordinary shareholding as at 31 December 2009 is set out below:

Range of shareholdings
1 - 1,000
1,001 – 5,000
5,001 – 10,000
10,001 – 100,000
100,001 – 500,000
500,001 – 1,000,000
1,000,001 – 10,000,000
10,000,001 and above
Total

Number of
shareholders
3,977
3,010
521
629
206
69
83
10
8,505

%
46.76
35.39
6.13
7.39
2.42
0.81
0.98
0.12
100

Number
of shares
1,779,057
6,834,771
3,727,331
20,356,660
49,533,569
50,538,374
232,732,410
125,409,903
490,912,075

%
0.36
1.39
0.76
4.15
10.09
10.29
47.41
25.55
100

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 143

Notes

143

Serco R+A 2009 p36-144_Serco sample only 25/03/2010 15:15 Page 144

144

Notes

Serco AR09 Cover_Serco AR08 - Design 26/03/2010 11:52 Page 2

Contents

1
2

Introduction
2009 Highlights

Our business
Our offering
4
Our culture and values
5
A balanced portfolio
6
8
Markets
10 Our strategy
12 Managing our business lifecycle

Our performance
14 Chairman’s Statement
16 Chief Executive’s Statement
20 Operating review and case studies
36 Market Opportunities
Finance Review
38
46
Resources
50 Corporate responsibility
54

Principal risks and uncertainties

58 Directors, Secretary and Advisors
59 Corporate Governance Report
65 Directors’ Report
67 Directors’ Responsibilities
68 Directors’ profiles
70
81

Remuneration Report
Independent Auditors’ Report

141 Shareholder information
IBC Financial calendar

Financial calendar

2009 Full Year Results announcement

26 February

2010

Ex-dividend date
Record date

Last date for receipt/revocation of DRIP
dividend mandates

Interim Management Statement
Annual General Meeting
Final dividend pay date

10 March
12 March

27 April

11 May
11 May
19 May*

Half Year Results announcement

25 August**

Financial year-end

31 December

* Subject to shareholder approval
** Provisional

Printed on Cocoon Silk 50 which is certified
as an FSC product manufactured with 50%
recycled fibres and 50% virgin fibres.

Printed by The Midas Press plc.
www.midaspress.plc.uk

Serco AR09 Cover_Serco AR08 - Design 26/03/2010 13:36 Page 1

Serco Group plc
Registered Office:
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire RG27 9UY

T: +44 (0)1256 745 900
E: generalenquiries@serco.com
www.serco.com

Bringing service to life

Delivering Essential Services... Together

Serco Group plc
Annual Review and Accounts 2009

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