Annual report and accounts 2010
Bringing
service to life
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Section 1
Overview
Section 2
Our business
Section 3
Our performance
Section 4
Governance
Section 5
Financial statements
01
Who we are
02
Serco in brief
How we performed – 2010 highlights 04
06
What we offer our customers
07
Our business drivers
08
Our strategy and KPIs
10
Our business model
A values-led and responsible business 12
14
How Serco is structured
Chairman’s Statement
Chief Executive’s Statement
Market opportunities and drivers
Operating Review
Finance Review
People
Corporate responsibility
Resources
Principal risks and uncertainties
Corporate Governance Report
Directors’ Report
Directors’ Responsibilities
Directors’ pro(cid:192)les
Remuneration Report
16
18
22
26
52
60
64
68
70
80
86
89
90
92
105
104
105
Independent Auditors’ Report
Consolidated Income Statement
Consolidated Statement of
Comprehensive Income
Consolidated Statement of
106
Changes in Equity
107
Consolidated Balance Sheet
Consolidated Cash Flow Statement 108
Notes to the Consolidated
Financial Statements
UK GAAP Audit Report –
Parent Company
Company Balance Sheet
Notes to the Company
Financial Statements
Supplementary information
Directors, Secretary and Advisors
Shareholder information
Financial calendar
163
169
170
171
IBC
161
162
109
Serco in brief
p02-03
A values-led and
responsible business
p12
Chief Executive’s
Statement
p18-21
(cid:47)(cid:82)(cid:82)(cid:78)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:68)(cid:74)(cid:72)(cid:3)(cid:85)(cid:72)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)(cid:82)(cid:85)(cid:3)(cid:193)(cid:68)(cid:74)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)
additional content throughout the text
to help with cross referencing. Links are
illustrated with the following markers:
Cross reference to a page with more information
Further information available online
Operating Review
p26-51
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Section 1
Who we are
Serco delivers essential frontline services that matter to millions of people around
the world.
Our work for national and local governments involves us in the most important
areas of public service, including transport, defence, science, employment,
offender management, IT, BPO and education. Our private sector customers
are industry leaders.
We have nearly 50 years’ experience of helping our customers achieve their goals.
Many want us to improve their productivity and service quality. Others need us
to support their rapid growth. Governments face crucial issues such as economic
stability and development, congestion, security, health and climate change.
They value the innovation and passion we bring to these challenges and the
collaborative, (cid:193)exible and imaginative way we work.
Serco is a values-led company and our culture and ethos are at the heart of
everything we do. We give our people real responsibility, so they can put their ideas
into practice and make a difference for our customers and the public. Our approach
has made us one of the world’s leading service companies and our vision is to be
the world’s greatest.
Our focus on service means that our customers come back to us again and again.
These long-term relationships help us to meet their changing needs and to do what
we do best...
...bringing service to life.
More information on how we bring service
to life is available on pages 26 to 51
Serco Group plc Annual report and accounts 2010
01
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Section 1
Serco in brief
What we offer
We use our core capability – people-led service delivery and change
management – to improve the quality and ef(cid:192)ciency of essential
frontline services. Because this capability is so widely applicable,
we can operate in a broad and growing range of markets around
the world.
We start by analysing a customer’s problems and producing a
bespoke solution, with improved people management at its heart.
This means that we design organisations to remove bureaucracy,
enhance processes, instil our values and free people to deliver
their best.
Building long-term customer relationships is fundamental to us.
We devolve responsibility to our contract directors, allowing them to
anticipate and respond to customers’ needs. The Serco Management
System, which controls how we operate, ensures these actions are
also in Serco’s best interests.
For more on what we offer and how we work,
see page 6
More information on the Serco Management System
is available on our website
Our vision and strategy
Our vision is to be the world’s greatest service company.
Everyone in Serco discovers their own interpretation of ‘greatest’,
which supports what they do every day. However, it is not about
revenues, pro(cid:192)tability or growth. It means being the best at what
we do and how we do it – what we call ‘bringing service to life’.
Our strategy for achieving this vision has four elements:
1
Building 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 (cid:193)uctuations, enables
us to select the best opportunities whichever market they are in,
and allows us to transfer expertise from one market to another.
2
Delivering excellent service: This 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. 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.
02
Serco Group plc Annual report and accounts 2010
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3
Making strategic acquisitions: While we are primarily focused on
organic growth, we make acquisitions to gain skills which will be
important for future growth and to enter markets where we see
strong opportunities.
4
Developing new models: We respond to emerging opportunities
by (cid:192)nding new ways to deliver services. This may mean collaboration
between our divisions, bringing together skills and experience which
few other companies can replicate, or partnering with our customer
or the voluntary sector. Our ability to lead change keeps us at the
forefront of our markets.
For more on our strategy,
see pages 8 and 9
Our track record of success
Implementing our strategy – and in particular our emphasis on
bringing service to life for customers – leads directly to our (cid:192)nancial
success. The focus on service excellence underpins our win rates
of 90% of rebids and one in two new bids, which in turn drive our
revenue growth.
Since we listed in 1988, we have rapidly increased our revenue,
primarily through organic growth. By securing higher margin
contracts and managing our cost base, we have been able
to increase our margins. At the same time, we have delivered
signi(cid:192)cant improvements in our free cash (cid:193)ow.
Our success is recognised by others in the many awards we win
for operational excellence.
For more on our recent performance, see the operating review
on pages 26 to 51 and the (cid:192)nance review on pages 52 to 59
The future
Customers around the world are looking for help in transforming
the quality and ef(cid:192)ciency of essential frontline services. This creates
opportunities for Serco in new and existing markets and geographies.
Our con(cid:192)dence in our prospects is supported by the high revenue
visibility provided by our order book, our existing pipeline of
opportunities and the growth potential we see across our business.
For more on our markets and opportunities,
see page 22
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Serco Group plc Annual report and accounts 2010
03
Section 1
How we performed – 2010 highlights
Strong performance, portfolio of growth
opportunities ahead
(cid:54)(cid:88)(cid:69)(cid:86)(cid:87)(cid:68)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:71)(cid:72)(cid:80)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:72)(cid:73)(cid:192)(cid:70)(cid:76)(cid:72)(cid:81)(cid:87)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:86)(cid:86)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)
(cid:73)(cid:85)(cid:82)(cid:81)(cid:87)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)
£5.6bn of contract awards spread internationally
(cid:3)(cid:79) Economic environment and reform of public services create
opportunities in new and existing markets
(cid:3)(cid:79) Service quality supports high win rates. Continue to win one
in two new bids and 90% of rebids and extensions
(cid:3)(cid:79) Customers seeking help to build, protect and improve frontline
services and increase ef(cid:192)ciency
(cid:3)(cid:79) During 2010, signed £4.2bn of contracts and appointed preferred
bidder for £1.4bn of contracts
(cid:3)(cid:79) Headwinds in UK during 2011 as Government austerity measures
(cid:3)(cid:79) 40% of revenue generated outside the UK, with strong growth
in the Americas and AMEAA
and reforms are shaped
(cid:3)(cid:79) Exposure to different economies through portfolio provides
resilience and overall growth potential
(cid:54)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)
(cid:3)(cid:79) Revenue growth of 9.0% (7.6% excluding currency)
(cid:53)(cid:72)(cid:76)(cid:87)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:74)(cid:88)(cid:76)(cid:71)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:81)(cid:3)(cid:75)(cid:76)(cid:74)(cid:75)(cid:3)(cid:85)(cid:72)(cid:89)(cid:72)(cid:81)(cid:88)(cid:72)(cid:3)(cid:89)(cid:76)(cid:86)(cid:76)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
substantial pipeline of opportunities
(cid:3)(cid:79) Ad(cid:77)usted operating pro(cid:192)t margin increase of 19 basis points to
(cid:3)(cid:79) Order book of £16.6bn at 31 December 2010 (£17.1bn at
6.0% (16 basis points excluding currency)
(cid:3)(cid:79) Group free cash (cid:193)ow exceptionally strong at £185.8m
31 December 2009); visibility of 92% of planned revenue for 2011,
77% for 2012 and 66% for 2013
(2009: £137.3m)
(cid:3)(cid:79) Substantial £29bn pipeline of identi(cid:192)ed opportunities
(cid:3)(cid:79) Total dividend up 17.6% to 7.35p, re(cid:193)ecting growth in earnings
(cid:3)(cid:79) In 2011, expect good organic revenue growth and progress
towards our 2012 margin guidance and continue to expect an
increase in revenue to approximately £5bn and in Ad(cid:77)usted
operating pro(cid:192)t margin to approximately 6.3% by the end of 2012(cid:13)
(cid:13) excluding material acquisitions, disposals and currency effects, based on 2008 exchange rates
Note: Ad(cid:77)usted operating pro(cid:192)t and Ad(cid:77)usted earnings per share shown above 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 (cid:193)ow is free cash (cid:193)ow from subsidiaries and dividends received from (cid:77)oint ventures and is reconciled in Section 3 of the (cid:192)nance review.
Performance excluding currency has been calculated by translating non-Sterling revenue and earnings for the year to 31 December 2010 into Sterling at the average exchange rates for those
currencies in 2009.
The order book is the value of future revenues based on all existing signed contracts. It excludes contracts at the preferred bidder stage and excludes Inde(cid:192)nite Delivery, Inde(cid:192)nite (cid:52)uantity
(IDI(cid:52)) contract vehicles where we are one of a number of companies able to bid for speci(cid:192)c task orders within the IDI(cid:52).
The pipeline is the estimated value of all future potential opportunities that are clearly de(cid:192)ned and identi(cid:192)able.
News January–December
Merseyrail named
as record breaking
train operator
Serco partnership to
help the UK tackle
climate change
through offshore
wind energy
Serco Americas
sends mobile
hospital to
support Haiti
earthquake victims
Serco wins
Operator and
Service Excellence
Award in Australia
for Acacia Prison
National Awards for
Outstanding Safety
for Northern Rail
and the National
Nuclear Laboratory
04
Serco Group plc Annual report and accounts 2010
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Revenue (2009: £3,970m)
£4,327m
+9.0%
Adjusted earnings per share (2009: 29.53p) 34.69p
+17.5%
Ad(cid:77)usted operating pro(cid:192)t (2009: £229.7m) £258.7m
+12.6%
Earnings per share (2009: 26.76p)
Operating pro(cid:192)t (2009: £212.1m)
£241.3m
+13.8%
Dividend per share (2009: 6.25p)
31.88p
+19.1%
7.35p
+17.6%
Pro(cid:192)t before tax (2009: £177.1m)
£213.9m
+20.8%
Group free cash (cid:193)ow (2009: £137.3m) £185.8m
+35.3%
News July–December
Barclays Cycle Hire
launches in London
First anniversary
of Dubai Metro
Duncan Mackison,
who leads our
ACCESS joint venture
with Glasgow City
Council, named
Outsourcing
Professional of
the Year in the UK
Serco voted UK’s
second Most
Admired Company
and Most Admired
Services Company
John Biggin,
director of HMP
(cid:9) YOI Doncaster,
named Guardian
Public Servant
of the Year
Serco Group plc Annual report and accounts 2010
05
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Section 2
What we offer our customers
Serco is able to operate in a broad and growing
range of markets because our core capability
– people-led service delivery and change
management – can be applied so widely.
Our customers want more reliable, ef(cid:192)cient and
productive services. We start by analysing their
problems and producing a bespoke solution,
with improved people management at its heart.
This means that we design organisations to:
(cid:3)(cid:79) remove bureaucracy
(cid:3)(cid:79) enhance processes
(cid:3)(cid:79) instil our values, and
(cid:3)(cid:79) free people to deliver their best.
In particular, we:
(cid:3)(cid:79) use technology to increase ef(cid:192)ciency
(cid:3)(cid:79) invest throughout the contract’s life, so our services keep pace
with developments
(cid:3)(cid:79) make the best use of our customers’ assets, so we are as cost
effective as possible, and
(cid:3)(cid:79) share best practice and compare performance across contracts,
to help us constantly improve.
For more on our business model,
see pages 10 and 11
Specialist and transferable skills
We combine our core capability with the specialist skills we need
to deliver great service in each of our markets.
For example, we know exactly what it takes to run a safe and punctual
metro system, to keep a customer’s procurement costs on budget,
to maximise a helicopter’s time on the frontline and to ensure a
laboratory delivers world-leading research.
We can transfer our specialist skills between markets, so that
customers gain from expertise we have honed elsewhere, and we
bring together unique combinations of skills from across Serco,
to create innovative solutions to customers’ problems.
Focus on excellent service
Our focus is always on delivering excellent service for customers.
We devolve responsibility to our contract directors, so they can act
quickly and decisively to meet our customers’ needs.
How we work is as important to us as what we do. The Serco
Management System sets out our approach to everything from
health and safety to our business ethics. And our Governing Principles
(see page 12) underpin the thousands of decisions our people make
each day, ensuring that we always act responsibly. Our culture and
way of working frees our people to put their service ethos into action.
Building long-term relationships
Our focus on excellent service comes with a passion for improvement.
We are always looking to do better, to be more productive and to (cid:192)nd
new ways to help our customers.
We aim to build long-term and mutually bene(cid:192)cial relationships with
our customers. The closer we are, the better we understand their
goals. When our contracts come up for rebid or extension, we retain at
least 90% of them, re(cid:193)ecting the value that we deliver for customers.
Our customers also frequently expand our contracts, as they see the
bene(cid:192)ts of our work (cid:192)rst hand.
We have provided air traf(cid:192)c control services in Dubai since the 1960s.
Transferring capabilities from the UK has helped us succeed in the
Australian home affairs market.
06
Serco Group plc Annual report and accounts 2010
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Our business drivers
Improving health outcomes is a signi(cid:192)cant challenge for governments.
Our capabilities in traf(cid:192)c management help to reduce congestion.
Increasing demand for high-quality services
Governments around the world face unrelenting demand for better
services to the public. They must also address signi(cid:192)cant challenges,
such as economic development and stability, congestion, security,
health and climate change. At the same time, many governments
face budget de(cid:192)cits which will take years to rectify.
The scale of these issues is encouraging governments to make
transformational changes, driving innovation and broadening
our markets.
Our private sector customers are also seeking help to improve
their service quality, ef(cid:192)ciency and productivity.
Our competitive environment
Competition is necessary for our markets to operate, as it:
(cid:3)(cid:79) encourages customers to put services out to tender
(cid:3)(cid:79) provides a benchmark to ensure they are getting best value, and
(cid:3)(cid:79) drives innovation.
Because of the breadth of our business, we have a large number
of competitors. However, while we see effective competitors in every
market, no organisation competes with us in all of them and only
a few operate in more than one.
(cid:54)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:83)(cid:82)(cid:87)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:87)(cid:75)
Our markets are large but still have signi(cid:192)cant scope for growth.
For example:
Our competitors are mainly companies but they can include public-
sector bodies. We have, for example, competed against government-
owned railway companies and UK National Health Service Trusts.
(cid:3)(cid:79) in the UK, one of the world’s most developed markets, the public
services industry accounts for only £80bn out of total government
spending of £620bn
As we enter new markets, we meet competitors who specialise in
those areas. Competition in our established markets has remained
steady as our customers focus on trusted providers.
(cid:3)(cid:79) the US federal government services market accounts for around
10% of total federal government expenditure.
The number of markets we can address also expands as we broaden
our skills, either by combining skills from around our business,
through acquisitions or by partnering with other companies, the
voluntary sector or our customers.
The scale of our markets means that we can be selective about the
opportunities we bid for. It also means that our share of any one
market does not affect our ability to grow.
For more on our prospects in our individual markets,
see page 22
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Serco Group plc Annual report and accounts 2010
07
Section 2
Our strategy and key performance indicators (KPIs)
Each element of our strategy
contributes to reducing our
exposure to market (cid:193)uctuations,
strengthening our position in
our markets and developing
new skills and capabilities for
the future.
Strategy
Description
Key achievements in 2010
Building a balanced portfolio
We aim to reduce risk and increase opportunities
by building a balanced contract portfolio, spread
across markets. This reduces our exposure to
market (cid:193)uctuations, enables us to select the
best opportunities whichever market they are in,
and allows us to transfer expertise from one
market to another.
We bene(cid:192)ted from the breadth of our portfolio
during the year, with strong growth in AMEAA,
the Americas and UK Civil Government offsetting
other slower UK markets.
We continued to strengthen our portfolio with
£4.2bn of contract wins, and were appointed
preferred bidder for a further £1.4bn of contracts.
Transferring our skills around the world enabled
us to enter new markets. We won our (cid:192)rst home
affairs contract in New Zealand, to manage the
Mt Eden and Auckland Central Remand Prison,
and were appointed preferred bidder for our
(cid:192)rst Australian health contract, at Fiona Stanley
Hospital in Perth. We won a contract with a new
customer in the US, the Department of Veterans
Affairs, and were awarded a number of transport
consultancy contracts in new countries,
including Saudi Arabia.
We use the following KPIs
to monitor our performance
over time. They are split
between (cid:192)nancial and
non-(cid:192)nancial measures.
KPIs
Financial
Financial
Financial
Revenue (£m)
(cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(£m)
Adjusted earnings per share (EPS) (p)
Revenue represents the amounts due for
the services we provided during the year,
and includes our share of revenue from
joint ventures.
Adjusted operating pro(cid:192)t is our operating pro(cid:192)t
before the amortisation of intangibles arising
on acquisition. We believe it is the most
appropriate measure for assessing the
pro(cid:192)tability of our business.
Adjusted EPS is our pro(cid:192)t for the (cid:192)nancial year,
excluding the post-tax charge for the
amortisation of intangibles arising on acquisition,
divided by the weighted average number of
shares in issue during the year. Adjusted EPS
provides a measure of shareholder return
that is comparable over time. The details of
the calculation are shown in note 12 to the
(cid:192)nancial statements.
4,327
3,970
258.7
229.7
34.69
29.53
2,811
2,548
3,124
165.2
142.0
122.8
22.20
18.57
15.92
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
The 9% growth in the year represents good
performance against our strategic objectives.
Excluding currency effects, revenue growth
was 7.6%.
Adjusted operating pro(cid:192)t increased by 12.6%
during 2010, representing an increase in margin
of 19 basis points to 6.0%.
Adjusted EPS increased by 17.5%, to 34.69p
per share.
08
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Delivering excellent service
Making strategic acquisitions
Developing 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.
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.
The quality of our service is re(cid:193)ected in our
high bid win rates, which we maintained at 90%
for rebids and extensions, and one in two for
new bids.
During the year, we were named Britain’s
most-admired service company and the second
most-admired company overall by Management
Today. Other recognition included:
(cid:135) the Operator and Service Excellence award
in Australia
(cid:135) 23 awards and commendations from the
Royal Society for the Prevention of Accidents
in the UK, and
(cid:135) the Defense Enterprise Architecture
Achievement Award and the ‘None in
a Million’ Federal Aviation Administration
award in the US.
While we are primarily focused on organic
growth, we make acquisitions to gain skills which
will be important for future growth and to enter
markets where we see strong opportunities.
We respond to emerging opportunities by
(cid:192)nding 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
voluntary sector. Our ability to lead change
keeps us at the forefront of our markets.
In 2010, we acquired RB Solutions, a successful
provider in the UK revenues and bene(cid:192)ts
market. This strengthened our position in
this market and enabled us to win (cid:192)ve new
contracts, including Dacorum Borough Council
and Dudley Metropolitan Borough Council,
to provide bene(cid:192)ts processing services.
The partnering model we pioneered to deliver
welfare to work services under the UK’s Flexible
New Deal – drawing on private and voluntary
sector providers – will form the basis for the
Government’s new Work Programme. This is
a tribute to the success of this model as well
as a substantial opportunity for Serco.
We also continued to gain from the acquisitions
we have made in recent years, which have
provided a strong platform for organic growth.
For example, our US business, which we
expanded with the acquisition of SI International
in 2008, has delivered high organic growth.
The success of the model at GSTS Pathology,
our ground-breaking joint venture with Guy’s
and St Thomas’ NHS Foundation Trust, was
demonstrated when it became the UK’s largest
provider of pathology services during 2010, with
the addition of King’s College Hospital NHS
Foundation Trust to the joint venture.
We also created a strategic partnership with
Hertfordshire County Council. This will improve
its service delivery and go beyond the scope of
previous contracting models, by offering services
to other public-sector bodies in the area,
including district councils and the police authority.
Financial
(cid:49)(cid:82)(cid:81)(cid:16)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)
(cid:49)(cid:82)(cid:81)(cid:16)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)
(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:73)(cid:85)(cid:72)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:3)(£m)
Reportable incident rate
(per 100,000 employees)
Carbon dioxide emissions
(tonnes of CO2/£m revenue)
Group free cash (cid:193)ow represents the free cash
(cid:193)ow generated by our subsidiaries plus the
dividends we receive from joint ventures. It
represents the cash (cid:193)ow to which the Group has
access. The calculation of Group free cash (cid:193)ow
is shown in the (cid:192)nance review on page 54.
Reportable incidents include work-related
fatalities, major injuries, injuries resulting in
absences from work of more than three days,
work-related diseases and near-miss accidents.
The incident rate measures our success in
providing a safe and secure working environment.
Reducing our carbon dioxide emissions is a key
aim for Serco. We measure our emissions in
relation to our revenue, to take account of the
growth in our business.
185.8
1,070
1,084
999
71.1
68.7
65.9
137.3
85.4
97.6
94.2
679
711
2006
2007
2008
2009
2010
2006
2007
2008
2009
2010
2008
2009
2010
Group free cash (cid:193)ow increased by 35%.
The reportable incident rate increased slightly
during 2010 but remained substantially below
earlier years.
In 2010, we achieved a 7.3% reduction in
tonnes of CO2/£m of revenue, compared to
our 2008 baseline.
Serco Group plc Annual report and accounts 2010
09
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Section 2
Our business model
The Business Lifecycle Governance Process
formalises our approach to value creation and
managing the associated risks. It helps us to:
1
Selecting markets
We look for markets that:
(cid:3)(cid:79) are politically and economically stable
(cid:3)(cid:79) offer multiple contracts and good growth
(cid:3)(cid:79) provide appropriate margins and cash (cid:193)ow, and
(cid:3)(cid:79) allow us to differentiate ourselves from the competition.
We also analyse many other factors, including:
(cid:3)(cid:79) the market’s drivers
(cid:3)(cid:79) our understanding of the customers and the way they procure
(cid:3)(cid:79) ethical and human-rights issues, and
(cid:3)(cid:79) whether we can provide an attractive working environment
for our people.
In new markets, we also consider our entry strategy and whether
we need an innovative contracting model.
2
Identifying opportunities
Once we know the market is attractive, we identify opportunities
to pursue. We then test the quality of each opportunity, including:
(cid:3)(cid:79) our understanding of the customer’s business and vision
(cid:3)(cid:79) their funding for the project, and
(cid:3)(cid:79) how likely they are to procure.
We also compare opportunities against each other, to determine
the best use of our resources.
(cid:3)(cid:79) determine the markets we want to be in
(cid:3)(cid:79) bid successfully for contracts that add most value
(cid:3)(cid:79) transition these contracts to deliver this value, and
(cid:3)(cid:79) retain and grow them.
Summary of the Business Lifecycle
Governance Process
1
Selecting
markets
2
Identifying
opportunities
3
Bidding
selectively
4
Transitioning
effectively
5
Delivering operational
excellence
6
Deciding
to rebid
Yes
No
7
Rebidding
8
Exit
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3
Bidding selectively
Bidding can be expensive and take many months, so we only bid
for opportunities that meet our criteria and where we have a strong
chance of winning.
The bidding stage has numerous steps, from our initial submission,
to being shortlisted, to our (cid:192)nal bid. During the process, we develop
a detailed solution for the customer and test it thoroughly. At every
step, we review the opportunity and con(cid:192)rm that we want to proceed.
Once the customer selects us, the (cid:192)nal step is to negotiate and
sign the contract.
4
Transitioning effectively
Effectively transitioning a new contract is vital.
We ensure that we have the right planning and controls in place to
start work seamlessly on day one, as we implement the solution we
developed during bidding. We also transfer knowledge from the bid
team to the contract management, and continue to strengthen our
customer and stakeholder relationships.
6
Deciding to rebid
As we near the end of a contract, we decide whether or not to rebid it.
Although we usually rebid, we occasionally decide to exit a contract.
We might do this if, for example:
(cid:3)(cid:79) the market has stopped growing or become too price
competitive, or
(cid:3)(cid:79) we can get a greater return elsewhere.
7
Rebidding
Our long-term relationships and service quality help us retain around
90% of our contracts at rebid and extension.
We approach the rebid as if it were a new contract, designing ways
to deliver even greater quality and productivity. Often the customer
requests more services over a longer term, so a rebid can be
considerably larger than the original contract.
Once we have secured the rebid, we return to the transition phase,
bedding-in our innovations and any new services we have taken on.
5
Delivering operational excellence
We aim to deliver operational excellence and continual improvement.
Devolving responsibility to our contract directors allows them to
innovate and respond to our customers’ needs. It also makes our
business scalable, enabling us to manage a growing contract portfolio.
The Serco Management System sets out our control framework,
ensuring we work safely and responsibly, and safeguarding the needs
of our stakeholders and Serco. Every decision we make must be in
line with our Governing Principles (see page 12).
Working in the right way helps us to build long-term relationships.
This often leads to the customer expanding our contract during its
life, which is important for our growth. It also positions us to win the
contract at rebid.
8
Exit
When we (cid:192)nish a contract, we do so in the right way.
Where appropriate, we work closely with the incoming contractor
to protect the interests of both the customer and the people who
will transfer from us when our contract ends. This is also important
because we may have other contracts with the customer or want
to work with them in the future.
Serco_AR10_Section2.indd 11
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Serco Group plc Annual report and accounts 2010
11
Section 2
A values-led and responsible business
A values-led business
Serco could not succeed without the skill and dedication of our
people around the world. They embody our culture and live our
values, which truly differentiate us from our competition and underpin
the way we run the company.
Our values, which are encapsulated in our Governing Principles, are
central to our culture and inform every decision we make. By living
these values, we ensure that we deliver the excellent service on which
our success depends.
A responsible business
Our Governing Principles emphasise the importance of corporate
responsibility to Serco. We want to be good corporate citizens but
acting responsibly also makes sound business sense and is essential
to our strategy. Only by working in the right way can we deliver
excellent service, continue to build our balanced contract portfolio
and attract the partners with whom we create new contracting models.
We divide corporate responsibility into four pillars – health and 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.
Pages 64 to 67 give more details about our approach to corporate
responsibility and how we performed during the year.
Our Governing Principles
1
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.
2
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, ideas and potential to contribute.
3
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 pro(cid:192)t.
4
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.
12
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Serco Group plc Annual report and accounts 2010
13
Section 2
How Serco is structured
At the start of 2010, we created
(cid:192)ve new divisions based around
our principal markets, so that
we could maximise our focus on
growth and opportunities, and
maintain a (cid:193)exible and devolved
organisation which responds
to our customers’ needs.
Civil Government
Defence, Science and Nuclear
Revenue by division 2010
Revenue by division 2009
11%
26%
22%
21%
20%
■ Civil
Government
■ Defence,
Science
and Nuclear
■ Local
Government
and Commercial
■ Americas
■ AMEAA
9%
26%
22%
23%
20%
■ Civil
Government
■ Defence,
Science
and Nuclear
■ Local
Government
and Commercial
■ Americas
■ AMEAA
Revenue by geography 2010
Revenue by geography 2009
20%
20%
60%
■ United
Kingdom
■ United States
■ Other
countries
15%
21%
64%
■ United
Kingdom
■ United States
■ Other
countries
2010 revenue
£1,126.9m
+9.8% 2009: £1,026.3m
Civil Government includes our UK and European operations
in home affairs (custodial, immigration and (cid:192)eld services, and
border security and control), transport (rail, metro and roads),
welfare to work and health.
2010 revenue
£910.8m
–1.1% 2009: £921.2m
Defence, Science and Nuclear brings together our UK
and European businesses providing operational support
in the defence market, our science-based businesses,
our energy market operations and our nuclear safety
and assurance business.
14
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Local Government and Commercial
2010 revenue
Americas
AMEAA
£853.9m
+5.5% 2009: £809.2m
Local Government and Commercial incorporates our UK
and European IT and business process outsourcing (BPO)
operations, integrated and environmental services, leisure,
education, consulting and commercial businesses.
2010 revenue
£953.9m
+9.3% 2009: £872.6m
Americas provides professional, technology and management
services focused on the US federal government, including
every branch of the military, key civilian agencies and the
intelligence community.
2010 revenue
£481.2m
+41.2% 2009: £340.7m
AMEAA consists of our operations in Africa, Middle East,
Asia (including Hong Kong and India) and Australasia, through
which we provide a range of services including rail and metro
transport, aviation, offender management, immigration, health,
defence, BPO, local government and commercial.
More information on the services provided by each of our divisions
is included in the operating review, which begins on page 26
Serco Group plc Annual report and accounts 2010
15
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Section 3
Chairman’s Statement
their values but it is much more demanding
to ingrain these in the culture of the
organisation, especially one employing some
70,000 people around the world, such that
one sees them being lived each day in the
decisions that management make, the service
provided to customers, and the manner in
which the business deals with its people.
Shortly after taking the chair, I attended
our 2009 Pulse Awards that recognised
individuals and teams who have excelled
during the preceding year in living our
Governing Principles, focused on
achievements in innovation, commitment,
impact and leadership. Those who won
awards were impressive testament to the
many at Serco for whom their job is much
more than just turning up for work each
morning. Examples were our staff at
Lowdham Grange prison, whose projects
helped forge new bonds between offenders
and their children and thereby reduce the
probability of re-offending, and those at our
Family Services business unit in North
America, who gave up weekends and
holidays to build a Licensed Clinical Social
Worker practice to help members
of the US armed forces cope with issues
such as post-traumatic stress disorder.
Complementing this ethos of public service,
I have also found an equally strong
entrepreneurial drive to deliver against
objectives, create value and develop
innovative solutions to problems. Serco has
a ‘can do’ mentality but one built on the
foundations of a strong management system
that ensures rigorous analysis of potential
opportunities and their inherent risks,
meticulous implementation of the transition
and transformation stages of new contracts,
and effective governance of ongoing
activities. In 2010 we implemented the
Barclays Cycle Hire scheme for Transport for
London; in just 11 months from being granted
the contract to the launch on 30 July,
we had 5,000 specially-designed bicycles
in place across 315 sites, together with the
supporting infrastructure and membership
and billing systems.
Serco’s breadth is, in my view, one of our
great strengths. We now have signi(cid:192)cant
interests outside the UK – our Americas
business turned over £0.95bn in 2010, whilst
in Australia we are a major employer. This
geographic reach allows us to bene(cid:192)t from
the strong economic growth being
experienced in Australia, the Middle East
In my (cid:192)rst statement since
being appointed Chairman
in May 2010, I thought I might
give some initial impressions
of our business.
Since joining, I have sought to gain as broad
as possible an exposure to and understanding
of the diverse activities that now comprise
Serco. Travelling around the United States,
the Middle East, India and Australia, as well
as extensively within the UK, I have visited
over 30 of our sites across very different
business streams such as defence, offender
management, education, transport and
health. Before being approached to join the
Board of Serco, I obviously knew the name
but had only limited awareness of the range
of activities undertaken by the Group, from
setting Greenwich Mean Time at the National
Physical Laboratory to providing air traf(cid:192)c
control services at Dubai International Airport.
Despite this diversity, what I have found are
very strong unifying competencies and values
that set the company apart. Having served for
many years as a non-executive director of
government departments, I recognise clearly
the public service ethos – a deep-seated
desire to make a difference – within the Serco
staff I have met in prisons, schools and
hospitals to name a few. Many businesses
talk about guiding principles and publish
16
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examples of the contributions that we
make, can be found in our Corporate
Responsibility Review on our website.
We are also very aware of the impact
of what we do on our environment and
considerations as to how best to lessen
this impact are an integral part of the
planning of each of our activities.
Serco is a learning organisation, seeking
to improve what it does by listening to
feedback from its stakeholders and its
people. If we make mistakes, we put them
right and learn from them. The Board is
no exception and each year we undertake
an evaluation of what the Board does
and how it does it, this evaluation being
facilitated externally every third year.
As Chairman, I will also undertake an
annual development review with each
Director and my own performance will
be appraised by my Board colleagues
led by David Richardson, who takes over
the role of Senior Independent Director.
May I (cid:192)nish by thanking everyone who has
contributed to making Serco the business
it is today: I am very proud to have been
invited to become its Chairman.
Alastair Lyons CBE
Chairman
and India, to offset the more challenging
environment of the UK and, to a lesser
degree, the US. Equally our breadth of
activities allows us to take advantage of
developing thinking in different countries
towards delivering services to the public,
outsourcing and contracting. When
proposing for new opportunities, we can
reference existing successes elsewhere,
a good example being the contribution our
hospital services activities in the UK made
to our selection as preferred bidder for the
substantial Fiona Stanley hospital contract
in Perth, Western Australia – our (cid:192)rst major
health activity in Australia. We recognise,
in the way in which we have designed our
management structure, the value that can
be created by people across different parts
of our business working together to share
experience, skills and ideas. When visiting
our immigration and offender management
sites in Australia, I met employees with
experience in our UK prisons and detention
centres, some on secondment, others who
had decided to take their careers forward in
that region. Such inter-operability played a
signi(cid:192)cant role in Serco being awarded a
NZ(cid:7)300m prison management contract in
New Zealand.
Whilst the (cid:192)nancial crisis has imposed
short-term constraints on Government
spending in the UK, I am con(cid:192)dent in
our substantial pipeline of identi(cid:192)ed bid
opportunities across the world and strong
order book, hence maintaining our forward
guidance. We have sought to be innovative in
our thinking as to how to derive better service
outcomes. An example is our approach to
the welfare to work market in the UK, in which
we partner with small companies and
charities with vital local knowledge and
expertise, to deliver tailored solutions to the
needs of individual bene(cid:192)t recipients in order
to get them back into work quickly and
remain off bene(cid:192)t. The underlying need to
deliver frontline public services more
ef(cid:192)ciently and economically will, I believe,
create signi(cid:192)cant new opportunities for
our business.
Our achievements in 2010, as discussed in
detail by Chris Hyman in his Chief Executive’s
Statement, are ones of which Chris and his
executive team, our wider management and
employees can be justi(cid:192)ably proud. Growing
our business by 9.0% and our pro(cid:192)t before
tax by 20.8% during this period demonstrates
the resilience of our business model and
the capability of our people. Against this
backdrop I am pleased to be able to propose
a (cid:192)nal dividend for 2010 of 5.15p per share,
an increase of 17.0% on last year’s (cid:192)nal,
which would bring our total dividend
for 2010 to 7.35p per share, 17.6% up
on 2009. Over the past (cid:192)ve years, Serco
has delivered a total shareholder return
consistently ahead of the average for
the FTSE 100.
Not only has the last year seen the retirement
of Kevin Beeston, my predecessor as
Chairman, but 2010 also marked the
retirement of both Margaret Ford, our Senior
Independent Director since 2003, and Tom
Corcoran, who had been a Non-Executive
Director for the last three years, bringing
speci(cid:192)c US insight to the Board. We owe
much to all three for their contribution to the
successful progress of Serco during their
time on the Board, and in particular to Kevin
who started with the company in 1985 and
was progressively Finance Director, Chief
Executive and Executive Chairman, prior
to his assuming the role of Non-Executive
Chairman in 2007. May I take this opportunity
to extend them our best wishes for the future.
At the same time I would like to welcome
Paul Brooks to our Board. In such a multi-
faceted business, I believe it is important
to plan ahead for succession to key roles,
bringing individuals on to the Board early
to allow them to learn the business ahead
of assuming particular functions. David
Richardson has chaired our Audit Committee
since 2003 and will, therefore, come to the
end of his allotted nine years in 2012. I am
therefore delighted that Paul has agreed
to join us and assume the role of audit chair
following David’s retirement. Paul is very well
quali(cid:192)ed for this, having been Group Chief
Financial Of(cid:192)cer of Experian, the FTSE 50
global information services company, since
2001. We will shortly return the Board
to its previous size once we complete the
current recruitment process.
As an employer of some 70,000 people
across the world, Serco is deeply conscious
of its responsibilities to the communities in
which employees live and work, and we seek
to support them in their involvement in
activities to help those less fortunate than
they. In this context I would like to say how
delighted we all were to see the recent award
of a CBE to Chris Hyman for both his
charitable work and his business
achievements. A summary of our approach
to corporate responsibility, and some
Serco_AR10_Section3a.indd 17
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Serco Group plc Annual report and accounts 2010
17
Section 3
Chief Executive’s Statement
Overview of the year
2010 was a successful year for Serco, thanks
to the commitment of our people to delivering
quality essential services that matter to
millions of people. Our continued focus
on excellent service for our customers
resulted in high win rates and strong
operational and (cid:192)nancial performance in very
challenging times.
(cid:54)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)
Serco delivered a strong (cid:192)nancial
performance in 2010, with revenue growth of
9.0% to £4,326.7m. Organic growth was
7.6%, excluding currency effects.
This growth demonstrated the capability,
resilience and bene(cid:192)ts of our portfolio,
and our ability to develop new sectors and
geographies as economic headwinds began
to be felt in the UK. Revenue growth was
particularly strong in AMEAA and we
achieved a very good second half in the
Americas. In the UK, good momentum from
wins in 2009 drove growth in civil government
markets while austerity measures began to
be felt, particularly in the defence and local
government markets.
Adjusted operating pro(cid:192)t rose by 12.6% to
£258.7m, re(cid:193)ecting a 19 basis point increase
in Adjusted operating pro(cid:192)t margin to 6.0%
(16 basis points increase excluding currency).
The Group delivered exceptionally strong
free cash (cid:193)ow of £185.8m, compared with
£137.3m in 2009. Cash bene(cid:192)ted by around
£20m from asset sale proceeds, a particularly
high level of joint venture dividends and low
tax payments.
Our policy is to increase the total dividend
each year broadly in line with the increase
in underlying earnings. Adjusted earnings
per share rose 17.5% to 34.69p per share.
Re(cid:193)ecting this growth, the Board has
proposed a (cid:192)nal dividend of 5.15p per share,
bringing the total dividend for the year to
7.35p, up 17.6% compared with the previous
year. The (cid:192)nal dividend will be paid, subject
to shareholder approval, on 17 May 2011 to
shareholders on the register on 11 March 2011.
Our colleagues across the
world deliver essential services
and their achievements have
led to a strong (cid:192)nancial
performance in very challenging
times. We expect Serco’s
position in new, diverse and
expanding international markets
to deliver ongoing bene(cid:192)ts.
Our agility and capacity
to innovate underpin our
con(cid:192)dence in continued growth
across all our regions.
18
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(cid:133)(cid:24)(cid:17)(cid:25)(cid:69)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:3)(cid:68)(cid:90)(cid:68)(cid:85)(cid:71)(cid:86)(cid:3)
(cid:86)(cid:83)(cid:85)(cid:72)(cid:68)(cid:71)(cid:3)(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:79)(cid:92)
In 2010, we signed contracts valued at
£4.2bn across a wide range of markets,
and were appointed preferred bidder for
a further £1.4bn of contracts. Our wins
included signi(cid:192)cant contract extensions
and expansions, as well as new contracts
in existing and new geographies and sectors.
The value of these wins does not include
a number of Inde(cid:192)nite Delivery, Inde(cid:192)nite
(cid:52)uantity (IDI(cid:52)) contracts in the US, which
we quali(cid:192)ed for and which have a combined
ceiling value of US(cid:7)4bn. These enable us to
compete against other appointed companies
for one or more of the speci(cid:192)c task orders
within the IDI(cid:52).
Among the notable expansions and
extensions to contracts during the year were:
(cid:3)(cid:79) a £200m, eight-year strategic partnership
with Hertfordshire County Council, and
(cid:3)(cid:79) a (cid:192)ve-year transportation management
contract with the State of Georgia
Department of Transportation, valued
at US(cid:7)50m.
Transferring our skills and capabilities across
our business helps us to expand into new
geographies and sectors, and we had further
success during 2010. Of particular note,
we were:
(cid:3)(cid:79) awarded our (cid:192)rst home affairs contract
in New Zealand, to manage the Mt Eden
and Auckland Central Remand Prison,
valued at up to NZ(cid:7)300m (£140m) over
ten years, and
(cid:3)(cid:79) appointed preferred bidder for our (cid:192)rst
(cid:3)(cid:79) a two-year extension to our joint venture’s
Northern Rail contract, valued to Serco
at approximately £530m
contract in the Australian health market –
a substantial ten-year contract to provide
services at Fiona Stanley Hospital in Perth.
(cid:3)(cid:79) a renewed and expanded ten-year £100m
contract to provide services at RAF Halton
and RAF High Wycombe
(cid:3)(cid:79) a renewed and expanded US(cid:7)170m,
(cid:192)ve-year air traf(cid:192)c control contract with
the US Federal Aviation Administration
(cid:3)(cid:79) one renewed contract and one new
contract with the US Navy to provide
hazardous materials management,
valued at approximately US(cid:7)84m over
3(cid:245) years and US(cid:7)88m over (cid:192)ve years,
respectively, and
(cid:3)(cid:79) a renewed ten-year contract with the Royal
Australian Navy for our 50:50 joint venture
with P(cid:9)O, valued to Serco at A(cid:7)250m.
We had a number of important contract wins
during 2010. These included:
(cid:3)(cid:79) a 25-year, £650m environmental services
contract with Sandwell Metropolitan
Borough Council
(cid:3)(cid:79) a £415m, 26(cid:245) year contract to provide
and operate a new prison at Belmarsh
West, London
(cid:3)(cid:79) a ten-year contract with King’s College
Hospital NHS Foundation Trust for our
GSTS Pathology joint venture, valued at
around £110m to Serco
In addition there were many smaller contracts
won by transferring capabilities, including
a (cid:192)ve-year contract with a new US customer,
the Department of Veterans Affairs, to provide
human capital solutions, and transport
consultancy including a contract for the
Makkah Metro in Saudi Arabia.
For more details of these and other contract
awards, see the operating review on pages
26 to 51
For details of some of the many smaller and
medium-sized contract wins, see our contract
news updates
(cid:54)(cid:88)(cid:69)(cid:86)(cid:87)(cid:68)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)(cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:71)(cid:72)(cid:80)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)
(cid:72)(cid:73)(cid:192)(cid:70)(cid:76)(cid:72)(cid:81)(cid:87)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:72)(cid:86)(cid:86)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:79)(cid:3)
(cid:73)(cid:85)(cid:82)(cid:81)(cid:87)(cid:79)(cid:76)(cid:81)(cid:72)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)
The economic environment, reform of public
services and nation building are driving strong
demand for the ef(cid:192)cient delivery of essential
frontline services, creating opportunities for
Serco in both new and existing markets. Our
broad capabilities and track record of delivery
allow us to support customers as they look
for help in transforming the quality and
ef(cid:192)ciency of these services, and in tackling
key challenges such as economic stability
and development, congestion, security,
health and climate change.
We launched the Barclays Cycle Hire
scheme just 11 months after winning the
contract.
We continue to grow our presence in the
Australasian home affairs market.
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Serco Group plc Annual report and accounts 2010
19
Section 3
Chief Executive’s Statement
In the UK, the Government’s Comprehensive
Spending Review has created a pressing
need for public services to increase their
ef(cid:192)ciency in the face of reduced budgets
and our markets are not immune. We signed
a Memorandum of Understanding with the
Cabinet Of(cid:192)ce in November to deliver cost
savings on a number of contracts this year,
further developing our strong partnership
with the UK Government. While these savings
are not material to the Group results, they
combine with other headwinds, including the
cancellation of one prison, the phasing out of
the Business Link contracts and the pending
developments in public service reform,
to create a challenging environment in 2011.
The UK Government has stated that the public
sector does not have to deliver the services
it commissions. This is paving the way for the
private and voluntary sectors to participate
more fully in newer markets, such as welfare
to work and offender rehabilitation, and for
the development of new delivery models,
such as mutual organisations. We also expect
to see service providers increasingly paid for
the results they deliver, a model with which
we already have considerable experience,
particularly in the Flexible New Deal contracts
which are now planned to end in
June 2011. These are to be replaced by the
Work Programme framework and we have
been selected as a bidder for contracts in
seven of the 11 regions.
We continue to work positively with our
customers in the UK as they look for solutions
to their (cid:192)nancial and operational challenges.
We are con(cid:192)dent that our opportunities to
support those needs will become clearer later
this year and we expect these to drive further
growth. We are anticipating that a
forthcoming parliamentary white paper on
Open Public Services will outline in more
depth how private and voluntary sector
organisations could deliver additional UK
public services.
Our international portfolio, spread across
many expanding economies and markets,
remains an important and proven element
of our strategy. Our businesses outside the
UK now account for 40% of our revenues
and we are bene(cid:192)ting from the broader
capabilities and contract portfolios we have
developed in recent years. Our progress
in establishing home markets in the US,
Australia and the Middle East gives us strong
international platforms from which to grow
organically and bene(cid:192)t from the potential for
rapid expansion of those markets. We also
see signi(cid:192)cant potential in India, where we
have recently established our presence.
The US is the largest government contracting
market in the world and our skills and
capabilities, enhanced by those of our 2008
acquisition of SI International, enable us to
participate successfully.
We are well positioned to grow our share
of the addressable federal services market,
which is valued at over US(cid:7)150bn per
annum. While the Government is seeking
to reduce expenditure in certain areas, such
as large weapons programmes, we expect
to see substantial opportunities in emerging
priority areas such as IT infrastructure,
cybersecurity, federal health and energy-
ef(cid:192)cient IT.
In Asia Paci(cid:192)c, we have an active bid pipeline,
driven by the need for better infrastructure
and services, in a (cid:192)scally conservative
environment. Governments in Australia
are aiming to return their budgets to
surplus, helping to build a solid pipeline
of opportunities in areas such as health,
justice and defence.
In markets such as the Middle East and India,
we continue to expect further opportunities
arising from the demand for new services,
including public transport systems, facilities
management, education, health services
and national security.
While we are primarily focused on organic
growth, we will continue to acquire new
skills and capabilities where they bring
opportunities for growth in new markets
and sectors, such as the US federal market
and international BPO markets.
(cid:37)(cid:85)(cid:76)(cid:81)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)
During 2010, we set a new vision for Serco –
to be the world’s greatest service company.
Being the greatest is not about the size
of our revenues, pro(cid:192)ts or growth. It means
being the best at what we do and how we
do it, so we deliver maximum bene(cid:192)t for
our customers. Everyone in Serco discovers
their own interpretation of ‘greatest’, which
supports what they do every day – bringing
service to life.
We are well positioned to grow our share of
the addressable US federal services market.
We expect further opportunities in the Middle
East arising from the demand for new
services.
20
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Bringing service to life describes what we
do in two ways. It captures how we breathe
new life into services, transforming their
ef(cid:192)ciency, productivity and effectiveness.
And it recognises that the services we deliver
make a difference to millions of lives around
the world.
In this report, we have highlighted just
a few examples of how we bring service
to life. These examples typify our approach
to service, the commitment and passion
of our people and the outcomes we deliver
for our customers.
People
Serco has some 70,000 people delivering
essential services around the world. Our
success is not only the result of their hard
work but also their commitment to our values
and service ethos. I thank them for their
outstanding contribution to Serco and to
our customers in 2010.
We have a clear strategy for managing and
developing our people, which in turn supports
our overall strategy and vision: to be the
world’s greatest service company, we have
to be the best at managing people.
Our people strategy is to:
(cid:3)(cid:79) develop leaders who are (cid:192)t for the future
and who will thrive as Serco grows
(cid:3)(cid:79) have people who bring service to life,
who are fully integrated and engaged
with Serco, and whom we can develop
to achieve their full potential, and
(cid:3)(cid:79) make it easier to manage our people,
by continually enhancing our systems
and processes.
We made further good progress against each
part of this strategy in 2010.
For more information on our people, see
pages 60 to 63
Reiterating guidance
Our guidance re(cid:193)ects the growth potential we
see across all our regions, supported by our
high revenue visibility and substantial pipeline
of opportunities.
Our Northern Rail joint venture was 2010 Train
Operator of the year.
Serco’s success is a result of the hard work,
values and service ethos of our people.
We have excellent visibility of future revenue
due to the signed contracts that make up
our order book, contracts we expect to
extend and rebid, and contracts at the
preferred bidder stage which we expect to
sign. At 31 December 2010, our order book
stood at £16.6bn, compared with £17.1bn
at the end of 2009, re(cid:193)ecting our contract
signings during year, the ending of our UK
Flexible New Deal contracts and the cost
savings on a number of contracts we have
delivered to the UK Cabinet Of(cid:192)ce. We had
visibility, at 31 December, of 92% of planned
revenue for 2011, 77% for 2012 and 66%
for 2013. Our pipeline of opportunities is
currently £29bn.
For 2011, we expect good organic revenue
growth and progress towards our 2012
margin guidance. Whilst this re(cid:193)ects the
contracts we have won in 2010 and the
opportunities we expect to see across our
regions during 2011, we have also taken into
account the headwinds in the UK. We expect
the opportunities arising from the changed
economic environment in the UK to begin
to emerge from late 2011.
Prospects beyond the current year are
encouraging and we continue to expect, by
the end of 2012, an increase in revenue to
approximately £5bn and in Adjusted operating
pro(cid:192)t margin to approximately 6.3%(cid:13).
Christopher Hyman CBE
Chief Executive
Note: (cid:13)excluding material acquisitions, disposals and
currency effects, and based on 2008 exchange rates.
We help UK councils increase recycling
rates and reduce waste sent to land(cid:192)ll.
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Serco Group plc Annual report and accounts 2010
21
Section 3
Market opportunities and drivers
At the start of 2010, we created
(cid:192)ve new divisions based
around our principal markets.
This allowed us to maximise
our focus on growth and
opportunities and maintain
a (cid:193)exible and devolved
organisation which responds
to our customers’ needs.
Both the sections on market opportunities
and drivers, and the operating review,
are presented according to these divisions:
(cid:3)(cid:79) Civil Government
(cid:3)(cid:79) Defence, Science and Nuclear
(cid:3)(cid:79) Local Government and Commercial
(cid:3)(cid:79) Americas, and
(cid:3)(cid:79) AMEAA (Africa, Middle East, Asia,
and Australasia).
Our markets offer a broad range of
opportunities, as governments address
substantial budget de(cid:192)cits and face continued
pressure to improve public services. Some
governments are implementing de(cid:192)cit
reduction programmes and require ongoing
ef(cid:192)ciencies in the delivery of essential
frontline services, which others are seeking
to invest in creating or improving services.
All are addressing signi(cid:192)cant challenges
including unemployment and economic
development, ageing and growing
populations, migration, security, congestion
and climate change.
Faced with this, governments are increasingly
recognising the bene(cid:192)ts of opening new
areas of public service to competition.
Studies have demonstrated that competition
can reduce the cost of public services by
10-30% and stimulate innovation in delivery.
UK
In the UK, the economic environment has
created a pressing need for more ef(cid:192)cient
public services in the face of reduced
budgets. In its Comprehensive Spending
Review, the Government stated its intention
to move from being a deliverer of services
to becoming a procurer, and is now looking
to promote choice, increase accountability
and devolve powers away from the centre.
The competed public services market has
potential to increase signi(cid:192)cantly in pursuit
of ef(cid:192)ciency; it was estimated in 2008 to
be valued at some £80bn, representing only
one third of the Government’s expenditure
on services.
We are anticipating headwinds in the current
year whilst decisions on reform are resolved
and customers develop their plans for future
spending. However, a number of government
reviews including those into defence and
security, transport and welfare, and a
forthcoming parliamentary white paper on
Open Public Services, may result in new
opportunities for the private and voluntary
sector organisations to deliver services. We
expect further clarity as the year progresses.
(cid:38)(cid:76)(cid:89)(cid:76)(cid:79)(cid:3)(cid:42)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)
Welfare is an area of signi(cid:192)cant UK
Government expenditure. The Work
Programme is Britain’s biggest employment
programme for decades and will also be the
(cid:192)rst major move to a system of payment by
results. The contracts are substantially larger,
longer and have greater scope than the
current Flexible New Deal contracts, as they
will extend support to other groups including
the 2.5 million people claiming Incapacity
Bene(cid:192)t. The Work Programme will be let
through framework agreements to allow for
faster and more (cid:193)exible procurement, and
will adopt the model we have successfully
pioneered of subcontracting frontline delivery
to networks of providers. There is also
potential for other employment-related
support services contracts to be let through
this framework over the next (cid:192)ve years,
including subsequent contracts that attract
European Social Fund support.
In home affairs, the (cid:192)rst three existing
public-sector prisons are being market-tested
in 2011. We also see opportunities arising
from the drive to manage the existing prison
estate more effectively, reduce re-offending
and improve the ef(cid:192)ciency of probation,
where a £1.6bn market is opening up.
In addition, we are well placed to help with
the proposed move to more community
sentences for offenders, for example through
our capabilities in electronic monitoring and
rehabilitation of offenders.
The UK health budget is approximately
20% of government spending, at more than
£100bn per annum, and reforms are focused
on greater ef(cid:192)ciency and improved
Serco has made a successful start in the
growing welfare to work market.
We see opportunities to grow our pathology
joint venture.
22
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outcomes. We see opportunities to grow
our pathology joint venture and provide
facilities management and support services
to healthcare establishments and GP
commissioners. We will also look at further
opportunities to manage NHS hospitals
and expand in offender healthcare.
(cid:39)(cid:72)(cid:73)(cid:72)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3)(cid:54)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:49)(cid:88)(cid:70)(cid:79)(cid:72)(cid:68)(cid:85)
In the UK defence market, the Government
has moved to a ‘National Security’ policy
with the publication of the Strategic Defence
and Security Review (SDSR) in October 2010,
bringing together a number of markets
in which we currently have presence and are
increasing our potential. The SDSR also
identi(cid:192)ed target reductions to the number
of civil servants and the armed forces over
the next (cid:192)ve years, involving new ways of
working and a more radical approach to
the delivery of both back-of(cid:192)ce services
and procurement. Implementation of these
changes is likely to provide opportunities
for Serco to support the Ministry of Defence
(MOD) in change management, transition
and the provision of complex integrated
services. We are one of two bidders awaiting
the decision on the Recruiting Partnering
Project for the Army, and one of three bidders
on the Future Outsourced Activities
Programme for Royal Navy recruits.
In wider security and civil resilience markets,
we are pursuing opportunities such as the
long-term provision of outsourced training
services to the London Fire and Emergency
Planning Authority.
The UK’s scienti(cid:192)c establishments have a
critical role in addressing challenges such
as economic recovery, climate change and
national and energy security. We are in a
strong position to contribute given our
experience of managing the National Physical
Laboratory, the National Nuclear Laboratory,
the Atomic Weapons Establishment and our
nuclear assurance business. Our partnership
with the MOD on the Chemical, Biological,
Radiological and Nuclear Protection Delivery
Team also enables us to bid for further
partnerships within the MOD.
In the energy sector, the UK Government
faces signi(cid:192)cant challenges in securing the
country’s long-term needs while tackling
climate change. Our participation ranges from
delivering regulatory and technical services in
the nuclear new-build programme to reducing
the radar interference of windfarms. We are
also exploring how we can apply our
operations and maintenance capability in
critical national infrastructure to the wider
renewable energy market and establishing
a Centre for Carbon Measurement.
(cid:47)(cid:82)(cid:70)(cid:68)(cid:79)(cid:3)(cid:42)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:72)(cid:85)(cid:70)(cid:76)(cid:68)(cid:79)
In UK local government, councils are under
signi(cid:192)cant pressure from reductions in central
government grants, a freeze on council tax
increases, reductions in business rates and
increased service demands from citizens.
This is driving interest in strategic partnering,
service sharing, process re-engineering,
personalisation of services and in some
areas, engagement with the voluntary sector.
We are currently in discussions with more
than 20 local authorities about how we can
help them to transform service delivery. Our
successful bids into En(cid:192)eld Borough Council,
Hertfordshire County Council and Sandwell
Metropolitan Borough Council are examples
of how we have applied our broad and deep
capabilities. We are committed to partnering
with the voluntary sector and small and
medium-sized enterprises, to develop
solutions which address our customers’ needs.
We are also engaging actively with a number
of local authorities to discuss models for
the outsourcing of education and children’s
services, in the wake of the spending review
and Education white papers. Our partnership
models, offering shared revenue and pro(cid:192)t,
have been well received. We anticipate a
number of opportunities coming to market
in 2011.
We are seeing a revolution in the way
health services are delivered, increased
opportunities to build on our integrated
facilities management offering to acute
hospital trusts and reaching into middle of(cid:192)ce
services such as human resources and
(cid:192)nance. Our success in transferring these
skills as part of our proposition for Fiona
Stanley Hospital in Australia, where we are
preferred bidder, demonstrates the value of
our experience.
UK councils are looking for help with
transforming service delivery.
The scienti(cid:192)c establishments we run will help
the UK Government address challenges
such as climate change and energy security.
Serco Group plc Annual report and accounts 2010
23
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Section 3
Market opportunities and drivers
AMEAA
In Australia and New Zealand, there
is a growing range of opportunities.
In the justice sector, we are seeing a number
of new-build and existing prisons being
put to the market, as governments challenge
the traditional approach.
We also continue to pursue the emerging
health market in both Australia and Hong
Kong, as governments encourage the private
and voluntary sectors to challenge traditional
service delivery models for the build, (cid:192)nance
and operation of hospitals.
Our defence strategy in Australia continues
to develop, with opportunities in areas
such as logistics and garrison support.
The Government’s Strategic Reform
Programme will support the creation
of some of these opportunities, through
reviews of warehousing, distribution and
equipment maintenance.
Serco’s operations in the Middle East centre
on the United Arab Emirates. This region
remains buoyant for Serco as governments
progress with infrastructure and public
service projects in transport, education and
health. We continue to build on our core
markets in the region, particularly in facilities
management, transport and aviation, and
are well placed to move into new markets
of health, education and defence with a
strong pipeline of opportunities for the
foreseeable future.
In India, we continue to develop our presence
in the domestic BPO market. In addition,
our Global Transport team is shaping
signi(cid:192)cant opportunities in both the Middle
East and India including rail, road and traf(cid:192)c
management, marine services and aviation.
(cid:36)(cid:80)(cid:72)(cid:85)(cid:76)(cid:70)(cid:68)(cid:86)
The US market, which is the largest
government contracting market in the world,
offers Serco opportunities in both the federal
defense and federal civilian markets.
In the US federal services market, of which
our addressable share is valued at US(cid:7)150bn
per annum out of a total of US(cid:7)300bn, we
expect the increasing reliance on information
technology to continue to present signi(cid:192)cant
opportunities for Serco. IT is essential for
successful government operations and we
expect increasing demand in areas where
we have strong capabilities, such as systems
engineering, cybersecurity, program
management, command and control,
and logistics systems modernisation.
Additionally, the federal government
continues to face workforce shortages and to
rely on contractors. Serco expects to grow in
managed services including human capital
management, military personnel support
services, records management, business
process outsourcing and logistics supply
operations. With our scale, capabilities and
past performance, we are well positioned to
bid and win larger contracts.
We quali(cid:192)ed on a number of Inde(cid:192)nite
Delivery, Inde(cid:192)nite (cid:52)uantity (IDI(cid:52)) contract
vehicles, where we are one of a number of
companies able to bid for speci(cid:192)c task orders
within the IDI(cid:52). Notable examples awarded
during 2010 included a (cid:192)ve-year personnel
support services IDI(cid:52) contract with the US
Army, allowing us to compete with 16 other
awardees for up to US(cid:7)2.6bn of task orders.
We are also eligible to compete with 11 other
awardees for task orders within a studies
and analysis IDI(cid:52) contract with the US Army,
amounting to US(cid:7)1.3bn over (cid:192)ve years. In
addition, we, along with 13 other companies,
are signed up to a (cid:192)ve-year Recruiting and
Retention IDI(cid:52) contract for up to US(cid:7)274m
of task orders, to provide program analysis,
information technology, counselling and
training with the US Army.
Since the year end, the US Navy’s Space and
Naval Warfare Systems Command has
named Serco as one of four winners for an
IDI(cid:52) contract to support the Navy in the
installation and testing of Command, Control,
Communications, Computers, Intelligence,
Surveillance and Reconnaissance (C4ISR)
systems. The contract has a ceiling value
of US(cid:7)1.4bn over a three-year base period,
with a two-year option period.
The US is the world’s largest government
contracting market.
Transport is one of the markets where we
see further opportunities in the Middle East.
24
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Serco Group plc Annual report and accounts 2010
25
Section 3
Operating Review Civil Government
Bringing service
to life...
The Barclays Cycle Hire scheme, London
26
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…in transport
During 2010, we launched a brand new way of travelling round
the streets of London – the Barclays Cycle Hire scheme. In just
a few months, the distinctive bikes have become an integral part of
the city’s streetscape. By the end of the year, customers had made
2.15 million journeys and the scheme had 112,000 registered
members. In a survey, 91% of members said they were happy with
the service, which we deliver on behalf of Transport for London.
Barclays Cycle Hire is the (cid:192)rst such scheme in the UK and
demonstrates our ability to take on new challenges for our customers.
We were able to draw on operational, (cid:192)nancial, commercial and
transition expertise from around Serco to launch the service within
just 11 months of signing the contract. This success was re(cid:193)ected
in Serco being highly commended at the Mayor’s Procurement
Awards 2010.
The scheme has made a big difference to the lives of those travelling
around London but we have also been able to make life better for the
communities we work in, by creating jobs in areas of London with
high unemployment. We placed our call centre in En(cid:192)eld and our
operations centre in Islington, and then recruited around three
quarters of our 280 staff through JobCentre Plus, which helps
people of working age get off welfare and into work.
We are also helping young people into work with our
apprenticeships. In total, we have 27 apprentices aged 18 to 25.
They are learning mechanical and engineering skills, undertaking
routine maintenance and keeping our bikes roadworthy. The next
step is for them to train to become quali(cid:192)ed mechanics.
There will be further bene(cid:192)ts for customers and more scope for
job creation as Barclays Cycle Hire extends towards east London
in readiness for the 2012 Olympics. The planned expansion will
increase the area covered to 65km², with around 8,000 hire bikes
available from 600 docking stations.
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Serco Group plc Annual report and accounts 2010
27
Section 3
Operating Review Civil Government
The operating review outlines
contract wins which are
signi(cid:192)cant because of their
value or their contribution to
our business development.
We also won numerous other
smaller and medium-sized
contracts, details of some of
which can be found on our
website at www.serco.com.
Further information available online
We are a key provider of transport services
in the UK including traf(cid:192)c management.
The Docklands Light Railway carried more
than 75 million passengers in 2010.
Our work in Civil Government
covers the home affairs,
health, transport and welfare
to work sectors.
employment. We have been awarded a place
on the framework to deliver the Government’s
new Work Programme in seven regions, the
maximum number that could be awarded to
one organisation.
2010 Performance
Civil Government’s revenue grew 9.8%
to £1,126.9m (2009: £1,026.3m) and
represented 26% of Group revenue in both
2010 and 2009. The growth, which was
particularly strong considering the change
in accounting for Train Operating Company
track access charges, which reduced
revenue by £26.5m, derived principally from
the large contracts awarded in 2009 which
became operational during 2010. These
included the Flexible New Deal contracts
under the welfare to work programme, which
started in October 2009, and the Barclays
Cycle Hire scheme in London. We also
bene(cid:192)ted from contract wins during 2010 such
as the expansion, in September, of the GSTS
Pathology joint venture to include King’s
College Hospital NHS Foundation Trust.
Transport – Rail and Metro
We run three of the best performing
train operating contracts in the UK.
Both Northern Rail and Merseyrail, joint
ventures with Abellio, continued to deliver
strong operating performances.
Northern Rail achieved 90.8% punctuality
as of the last period and overall satisfaction
in the National Passenger Survey was 82%
– unchanged from the previous year. It has
recently been awarded Train Operator of the
Year in the Rail Business Awards, recognising
the investment made by Serco and Abellio
above and beyond the franchise requirements.
In addition, Northern Rail received two top
national awards and four commendations
in the Railway Industry Innovation Awards,
as well as the top transport title from the
Royal Society for the Prevention of Accidents
for the second year running.
In home affairs, we are the UK’s leading
private provider of custodial accommodation,
operating four prisons with a (cid:192)fth, Belmarsh
West, under construction. We also run a
young offender institution and a secure
training centre. We provide court escort
and custody services as well as electronic
monitoring of offenders and individuals
released on bail. We run two immigration
removal centres and provide immigration
control, case management, homeland
security and technology services.
In health, our groundbreaking pathology
joint venture with Guy’s and St Thomas’ and
King’s College Hospital NHS Foundation
Trusts combines their clinical excellence with
our management expertise. We are one of the
UK’s leading providers of occupational health
services, supporting the health and well-
being of over 450,000 of our customers’
employees nationwide. We are also the
leading independent provider of custodial
health services, providing for thousands of
people in custody across the UK. We deliver
unscheduled care services in Cornwall,
providing reliable access to doctors and
appropriate medical assistance outside
normal working hours.
We are a key provider of transport in the
UK through our rail, metro, road and ferry
services. With our partner Abellio we run
both Northern Rail, the UK’s largest train
franchise, and Merseyrail, the UK’s most
punctual train operator. In London, we
operate the Docklands Light Railway, the
Woolwich Ferry and the East London Traf(cid:192)c
Control System. We designed, implemented
and operate Transport for London’s award-
winning Barclays Cycle Hire scheme.
We deliver national motorway traf(cid:192)c
infrastructure services, install and maintain
road safety cameras, and run the National
Traf(cid:192)c Control Centre.
We began operations as a leading prime
contractor of welfare to work services in
October 2009. Since then, our delivery
network has helped approximately 18,000
long-term unemployed people into
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Merseyrail was the UK’s most punctual
railway during 2010, with 95.2% of trains on
time over the year, and was also the
highest-rated train operating company, with a
93% satisfaction rating in the independent
National Passenger Survey.
On the Docklands Light Railway, the roll out
of a full three-carriage service has increased
capacity by 50%. Customer satisfaction was
95.4% for overall service and 96.3% for safety
and security in the fourth quarter of 2010.
Increased service reliability resulted in 97.1%
of trains running to schedule, on the most
recent (cid:192)gures. Passenger numbers grew
again in 2010, and were 9.3% higher at
75.2 million journeys.
Northern Rail signed a two-year extension
to its franchise, on the same terms as its
existing contract. Serco’s share of the
extension to September 2013 is valued
at approximately £530m.
In Rail Technology, we have completed our
contracted development work on the Asset
Inspection Train for the London Underground
and, following earlier delays, now look
forward to the (cid:192)nal handover.
We launched Barclays Cycle Hire for
Transport for London. By the end
of the year, over 110,000 members had
registered and the scheme is also now
available to casual users. In total, over
2 million journeys have been made to date
and in a survey, 91% of members said they
were happy with the service. The scheme’s
success has resulted in plans to extend it
towards east London in readiness
for the 2012 Olympics, increasing the area
covered to 65km². Around 8,000 hire bikes
will be available from 14,400 docking points,
spread across 600 docking stations.
We are the UK’s leading independent provider
of custodial health services.
Our Merseyrail joint venture is the UK’s most
punctual railway.
The Barclays Cycle Hire scheme saw more
than 2 million journeys in just (cid:192)ve months.
Serco Group plc Annual report and accounts 2010
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Section 3
Operating Review Civil Government
Bringing service
to life...
A theatre workshop at HMP & YOI Doncaster
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…in offender
management
HMP & YOI Doncaster holds an offender on average for just
12-16 weeks, making its population one of the hardest to
rehabilitate. When John Biggin took over as the prison’s director,
he was prepared for the challenge. “I had a vision for the prison
and the difference it could make to people’s lives,” he says.
John sharpened the prison’s focus on reducing re-offending,
introducing innovative schemes and a zero tolerance for violence
and drugs. Research shows that offenders with strong family ties
are six times less likely to re-offend, so new fathers now have a
separate visiting area, helping them to bond with, feed and bathe
their babies. Visits take place outside in summer and the prison
arranges family activities.
A new directorate brings outside groups into the prison, helping
Doncaster achieve more without extra funding. One example
is the theatre work with the Central School of Speech and Drama.
“Our restorative justice project gave the men a real insight into
their impact on victims,” says John. “When they performed in the
houseblocks, the audience also got the message.”
To help offenders re-enter the community, Doncaster’s team helps
them access housing, bene(cid:192)ts, employment or training. Charity
Catch22 provides round-the-clock mentoring after an offender
leaves prison.
John’s initiatives have produced a sharp drop in violence, drug use
and smuggling by visitors. The next step will be payment by results,
with part of our revenue at Doncaster dependent on reduced
re-offending six months after release.
In recognition of his achievements, John was voted the 2010
Guardian Public Servant of the (cid:60)ear. Underpinning his success
is Serco’s way of working. “I was encouraged to have a vision and
to realise it,” he says. “Serco gave me the chance to get Doncaster
ahead of the game.”
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Serco Group plc Annual report and accounts 2010
31
Section 3
Operating Review Civil Government
Home Affairs
We signed a contract with the Ministry of
Justice to provide and operate a new prison
at Belmarsh West, London. The contract has
a value to us of approximately £415m over
26½ years. The prison will be built by our
construction partner Skanska, with equity
and debt (cid:192)nance secured from third parties,
and is on track to be completed in the (cid:192)rst
half of 2012. Belmarsh West is the (cid:192)rst UK
prison contract to be awarded to an alliance
of the private and voluntary sectors. With our
partners, Turning Point and Catch22, we will
focus on cost-effective care and successful
rehabilitation, creating an environment that
prepares those in our care for release.
We were disappointed to be informed that,
having been appointed preferred bidder
to provide and operate a further prison at
Maghull, the project would not go ahead
as a result of the Comprehensive Spending
Review. We fully understand the decision and
look forward to working with the Government
on its proposals to deliver innovative,
effective rehabilitation to reduce re-offending.
We were awarded a number of contract
extensions, including a two-year extension,
valued at £38m, to our contract to run
Colnbrook Immigration Removal Centre, and
a three-year, £32m extension to our contract
to manage Yarl’s Wood Immigration Removal
Centre. We were also awarded an additional
two years for our electronic monitoring
contract for Scotland, valued at around £10m,
and signed a one-year extension to our
electronic monitoring contract for England
and Wales, valued at an additional £38m of
revenue at current levels.
In border security and control, the Home
Of(cid:192)ce has announced the termination of its
e-Borders contract with Raytheon, the prime
supplier of this advanced border control
and security services programme to the
UK Border Agency. As a subcontractor on
the programme, we are continuing to ful(cid:192)l
our obligations to operate key parts of the
existing service, and continue to work with
the UK Border Agency on how we can
best support them in the future on the
e-Borders programme.
We were delighted that John Biggin, director
of HMP & YOI Doncaster, was named Public
Servant of the Year at the Guardian Public
Service Awards. This is the (cid:192)rst time a private
sector employee has received such an
award. We also received a British Safety
Council Five Star Health and Safety Audit
Award for HMP Dovegate, and recognition
in the Healthcare 100 awards for our work
at Yarl’s Wood Immigration Removal Centre.
Welfare to Work
We have made a successful start in the
welfare to work market. As prime contractor,
under our three Flexible New Deal (FND)
contracts with the Department for Work and
Pensions (DWP), we help people claiming
Jobseeker’s Allowance, who have been
unemployed for more than 12 months, to (cid:192)nd
sustainable work. We achieve this through our
unique model of subcontracting to networks
of successful providers, including private,
public and voluntary sector organisations.
Since the start of these contracts in October
2009, we have enabled nearly 18,000 people
to move back into employment.
These existing FND contracts, and all other
existing back-to-work schemes, will now end
in June 2011 and be replaced by the Work
Programme, which will be substantially larger,
longer and have greater scope. It will extend
support to additional groups including those
who have been unemployed for less than
12 months and those claiming incapacity
bene(cid:192)ts. Contracts are being tendered for
in 2011 and let through a new framework on
which we are placed in seven out of eleven
available regions across the UK. Each region
is made up of between one and three
Contact Package Areas, in which there will
be at least two suppliers. This offers the
opportunity for us to substantially extend
our footprint in the market.
Our welfare to work team has expanded
into an adjacent market, winning a number
of contracts, valued in aggregate at around
£19m, to implement Job Deal which helps
ex-offenders (cid:192)nd jobs. The programme is
jointly funded by the European Social Fund
and the DWP, and is managed by the National
Offender Management Service.
We extended our electronic monitoring
contracts for England and Wales, and
Scotland.
We have helped nearly 18,000 people into
employment through our welfare to work
contracts.
Serco is the UK’s leading private provider of
custodial accommodation.
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Our joint venture is now the UK’s largest
provider of pathology services.
Health
King’s College Hospital NHS Foundation
Trust (King’s) joined GSTS Pathology, our
joint venture with Guy’s & St Thomas’ NHS
Foundation Trust, and awarded it a contract
to provide pathology services. This will
result in incremental revenue to Serco of
approximately £110m over ten years. King’s
has one of the largest integrated automated
laboratories in Europe and will further
enhance the range of tests available to GSTS
Pathology’s customers.
GSTS Pathology is now the UK’s largest
pathology service provider and has achieved
considerable success in improving service
levels. Among a wide range of improvements,
cervical cancer screening times and the
turnaround times for some forms of diabetic
monitoring tests have been halved. We have
achieved even better results for HIV
genotyping assays, reducing the time taken
from 28 to 10 days.
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Serco Group plc Annual report and accounts 2010
33
Section 3
Operating Review Defence, Science and Nuclear
Bringing service
to life...
The depth maintenance facility at RNAS Culdrose
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…in UK defence
Royal Naval Air Station Culdrose, in Cornwall, UK, is Europe’s
largest military helicopter unit. Serco has a crucial role, helping to
maximise the time those helicopters are available for deployment.
We have two contracts at Culdrose. Under our multi-activity contract
with the Fleet Air Arm of the Navy Command, our wide range of
services includes supporting the Sea King helicopters used in search
and rescue missions and providing jet pilots for training exercises.
Our second contract is to provide a deep maintenance facility for
Merlin helicopters on behalf of their manufacturer, AgustaWestland.
Serco began operating at Culdrose in 1996. Since then, our services
have grown substantially. From 26 employees at the start, we now
have more than 350 at the base. As one indication of the scale of our
work, we deliver 10 million litres of fuel each year, ensuring the
helicopters are ready to (cid:193)y.
Our services are mission-critical, so we form a team with our
customers, to ensure they get what they need. We then employ
people with a real depth of knowledge and the service ethos
to make this happen.
We encourage innovation to overcome our customers’ issues.
For example, Peter Morrissey, an aircraft welder on the Merlin
support contract, invented a new way to repair Merlin exhausts
when spare parts were in short supply. By preventing the need
for slow and costly off-site repairs, Peter made sure the helicopters
were available for the Royal Navy and saved more than £2.6m
over four years.
The outcome of our approach is that helicopters spend more time
on the frontline and we get excellent feedback from our customers.
As well as receiving numerous awards and commendations,
the Culdrose team scored an average of nine out of ten in a recent
Ministry of Defence customer satisfaction survey.
Serco Group plc Annual report and accounts 2010
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Section 3
Operating Review Defence, Science and Nuclear
Defence, Science and Nuclear
(DSN) delivers services to the
UK and German governments.
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,
the Emergency Planning College 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 Germany, we have supported the German
armed forces for over 40 years, delivering
training, logistics and operational support
services. We also provide facilities
management, prison and IT services to
commercial companies and the German
Government.
We manage the National Physical Laboratory,
one of the world’s major scienti(cid:192)c
establishments. With our partners Battelle
and the University of Manchester, we also
manage 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. Our joint
venture with Lockheed Martin and Jacobs
Engineering manages the UK Atomic
Weapons Establishment (AWE), which
provides the warheads for the UK’s nuclear
deterrent. In addition we have provided
nuclear safety advice to the Royal Navy’s
submarine (cid:193)eet 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. We support the operation of
over 20 nuclear reactors.
2010 Performance
DSN’s revenue reduced by 1.1% to £910.8m
(2009: £921.2m) which represented 21%
of Group revenue (2009: 23%). This decline
re(cid:193)ected a slowdown in advance of the
UK election and the Strategic Defence
and Security Review during 2010, both in
decision making and in major
contract awards.
Key awards last year included a renewed and
expanded multi-activity contract valued at
£100m over ten years, to provide services at
RAF Halton, which we have served since
1997, and RAF High Wycombe, the home of
Headquarters Air Command. At RAF Brize
Norton, the main gateway for British military
personnel on overseas operations, the
Ministry of Defence (MOD) awarded us a
contract for up to six years to deliver essential
support services, worth approximately £35m.
We have supported the RAF there since 1997
and this contract con(cid:192)rms and reinforces our
position supporting the MOD’s Programme
Future Brize, which will see RAF Brize Norton
develop into the core Air Transport and
Air Re-fuelling station.
Utilising our scienti(cid:192)c capabilities, our joint
venture to manage and operate AWE
continues to achieve excellent delivery
against key milestones. The AWE
transformation programme is delivering
signi(cid:192)cant bene(cid:192)ts, working with the MOD to
reduce costs while maintaining performance
levels. In addition, we have delivered the
Project Orion laser facility, a world-leading
high energy density physics experimental
facility, on time and to the MOD’s
requirements. We are delighted that
a team from AWE has been awarded
a Commendation by the MOD’s Chief
Scienti(cid:192)c Advisor, for work on collaborative
arms veri(cid:192)cation with Norway.
Bridging the defence and energy markets,
a new eight-year contract with the MOD,
valued at around £20m to Serco, will help
the UK tackle climate change through
off-shore wind energy. As prime contractor,
we are working with Lockheed Martin to
introduce radar technology that resists
interference from wind farms, removing a
signi(cid:192)cant obstacle to the roll out of off-shore
wind power across the UK. This new
technology has already been commended for
innovation at the 2010 National Buying &
Selling Energy Awards.
Serco has supported the RAF at Brize
Norton since 1997.
We manage scienti(cid:192)c establishments,
including the world-leading National Physical
Laboratory.
We enable the Royal Navy to move in and
out of port at its three main UK bases.
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The National Physical Laboratory grew its
commercial revenues to more than 30% of its
overall income.
In the civil energy market, Westinghouse
appointed Serco as its lead nuclear safety
advisor in the UK. Serco’s role is to lead
a team of experts to help Westinghouse
complete Step 4 of the Generic Design
Assessment for the AP1000, a critical stage in
the reactor design approval process being
conducted by the UK Nuclear Regulators
which is due to complete in 2011. The
contract is strategically important for Serco,
coming at the beginning of a new
era for nuclear energy in the UK.
Our European defence operations secured
over £50m in new business and renewals
of existing contracts, including several with the
German Ministry of Defence. This included the
planning and installation of communications
and laboratory equipment and a contract to
deliver deployable network solutions.
National Physical Laboratory (NPL)
commercial revenues have expanded and
they now represent more than 30% of its
overall income. This includes orders from
the environmental and sustainability sectors,
responding to environmental legislation
and the growing sustainability agenda.
Customers include E.ON, BP, Veolia
Environment and the Department of Food
and Rural Affairs. The business case for a
Centre for Carbon Measurement has been
developed and is being considered with
our stakeholder community. It will support
national and international efforts to
understand and mitigate climate change
through accelerating the development of
the low-carbon technology sector. NPL also
received the highest recognition after a paper
co-authored by NPL scientists was cited in
support of the Nobel Prize in Physics.
In the expanding training market, we secured
a 15-year contract worth more than £55m to
manage and operate the Emergency Planning
College (EPC) on behalf of the Cabinet Of(cid:192)ce,
placing us at the heart of UK civil resilience
and positioning us well for future opportunities.
We manage all services at the EPC, including
training delivery and support, sales and
marketing, (cid:192)nance, estate management, ICT
and security.
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Serco Group plc Annual report and accounts 2010
37
Section 3
Operating Review Local Government and Commercial
Bringing service
to life...
…in local
government
(cid:55)(cid:72)(cid:70)(cid:75)(cid:81)(cid:82)(cid:79)(cid:82)(cid:74)(cid:92)(cid:3)(cid:75)(cid:72)(cid:79)(cid:83)(cid:86)(cid:3)(cid:70)(cid:82)(cid:88)(cid:81)(cid:70)(cid:76)(cid:79)(cid:86)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:72)(cid:73)(cid:192)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:76)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:3)
(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:76)(cid:87)(cid:76)(cid:93)(cid:72)(cid:81)(cid:86)(cid:17)(cid:3)
Serco has delivered information and communication technology
(ICT) services to the London Borough of En(cid:192)eld since 1999. In 2010,
we signed a new contract with En(cid:192)eld to provide ICT services for
up to nine years. Under this contract, we provide IT support, operate
the council’s IT network, data centre and helpdesk, and deliver
programme management for projects.
The contract guarantees 20% cost savings for En(cid:192)eld. We will realise
these ef(cid:192)ciencies by introducing new services, such as helping
council employees increase their effectiveness through (cid:193)exible and
mobile working.
We will also help the council transform the way it interacts with the
local community, increasing access to services and improving the
council’s ability to offer a more focused and personalised approach.
As part of this, En(cid:192)eld – like all local authorities – wants more citizens
to access its services online. This reduces costs and makes services
available quickly and easily to users, at a time that suits them.
Enabling safe and secure access is vital. That is why En(cid:192)eld has
adopted a pioneering new service we have created in partnership
with Microsoft and identity management specialists GB Group.
Users will only have to register their details the (cid:192)rst time they use
the system. Once their identity has been veri(cid:192)ed, they are issued
with a unique electronic identity (cid:182)token’ for all their online
transactions with the council.
“We are incredibly pleased with the potential bene(cid:192)t this service
provides to our citizens, in terms of secure access and safe
transactions,” says Councillor Andrew Stafford, Cabinet Member
for Finance at En(cid:192)eld. “It marks a step change in our approach to
using technology to improve the customer experience and to save
money, which we can use to protect frontline services.”
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(cid:44)(cid:38)(cid:55)(cid:3)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)(cid:15)(cid:3)(cid:47)(cid:82)(cid:81)(cid:71)(cid:82)(cid:81)(cid:3)(cid:37)(cid:82)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:82)(cid:73)(cid:3)(cid:40)(cid:81)(cid:192)(cid:72)(cid:79)(cid:71)
Serco Group plc Annual report and accounts 2010
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Section 3
Operating Review Local Government and Commercial
In the UK, Local Government
and Commercial (LG(cid:9)C)
delivers essential services for
more than 100 local authorities,
helping them to serve their
communities.
We improve services for our customers,
increasing productivity and delivering better
outcomes for them and the public. We listen,
so we can innovate and tailor our solutions
to meet our customers’ aspirations,
building long-term strategic partnerships
in the process.
Our solutions meet a wide range of local
government’s current and emerging needs,
with services covering streetscene, waste
management and recycling, e-government,
leisure, education and children’s services,
economic development and enterprise
support, and information and
communications technology (ICT).
We also implement service transformation
programmes, employing technology
to deliver more effective, ef(cid:192)cient and
responsive services.
Our business in the private sector is
dominated by multi-service facilities
management contracts, delivering a range
of services from helpdesk operations to
buildings maintenance, reception services,
catering, cleaning, chauffeur services and
stores management – in fact, any activity
that is non-core for our customers.
(cid:21)(cid:19)(cid:20)(cid:19)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)
The revenue of LG&C increased by 5.5% to
£853.9m (2009: £809.2m), which represented
20% of Group revenue in both 2010 and 2009.
Growth was driven by a number of 2009
wins which became operational during 2010,
including a full range of environmental
services for the London Borough of Bexley;
expanding our presence in integrated
services markets with the Plymouth Hospitals
NHS Trust and Airbus; as well as support
services for The European Space Agency
and Peterborough City Council’s ICT services.
This performance was robust given Business
Link services, provided for the London and
South East Regional Development Agencies,
were reduced in scope and some customers
delayed decisions on discretionary project
work following the outcome of the
Comprehensive Spending Review.
(cid:44)(cid:55)(cid:3)(cid:9)(cid:3)(cid:37)(cid:51)(cid:50)
We signed a new contract with Hertfordshire
County Council to deliver a ground-breaking
strategic partnership. The contract, due to
commence in April 2011, is valued at up to
£200m over eight years and will achieve
ef(cid:192)ciency savings for the Council of at least
£25m. We will provide front and back of(cid:192)ce
operations including ICT services, business
processes such as (cid:192)nance, payroll and
human resources, and support services such
as facilities management, customer contact
centres and occupational health. These
services will also be offered to other public
sector bodies in the area, including
Hertfordshire’s ten district councils and the
county’s police authority. The new contract
builds on our 18-year track record of working
with the Council and is signi(cid:192)cantly larger
than the existing £8m per annum service.
We successfully rebid our contract to provide
ICT support services to the London Borough
of En(cid:192)eld. The new contract will deliver
guaranteed cost savings of 20% for the
Council, improve services for its employees
and improve communication and interaction
with residents. The initial (cid:192)ve-year contract
is valued at £24m, with an option to extend
for a further four years.
The replacement of Regional Development
Agencies with Local Enterprise Partnerships
and related funding cuts will see our regional
Business Link services close by the end of
2011. Although there may be new
opportunities with the introduction of
business support programmes from national
and local government, it is not yet clear when
these will start to emerge.
In March 2010, we acquired RB Solutions, a
successful provider in the revenues and
bene(cid:192)ts market. This gave us an additional
capability in this market, enabling us to win
(cid:192)ve new contracts including Dacorum
Borough Council and Dudley Metropolitan
Borough Council, to provide bene(cid:192)ts
processing services.
Technology helps councils improve
ef(cid:192)ciency and service quality.
We help UK councils increase recycling
rates and reduce the waste sent to land(cid:192)ll.
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We secured two contracts with the European
Space Agency (ESA) valued at €35m over the
(cid:192)rst three years, strengthening our position as
a leading service provider to Europe’s space
and technology agencies. Under the (cid:192)rst
contract, we are leading a consortium to
provide operations and maintenance to
ESA’s Earth Observation programme.
The second is an expansion of an existing
contract, covering engineering and
management support for the ESA Earth
Observation payload data ground segment.
We were delighted that Duncan Mackison,
who leads our highly-successful ACCESS
joint venture with Glasgow City Council, was
named Outsourcing Professional of the Year
by the National Outsourcing Association.
(cid:44)(cid:81)(cid:87)(cid:72)(cid:74)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)
(cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:54)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:86)
Sandwell Metropolitan Borough Council
awarded us its new 25-year Waste
Improvement Plan contract, valued at
around £650m. We are providing refuse and
recycling collection services, street cleansing
services and delivering waste processing and
disposal, including the construction of
a new waste transfer station. Our innovative
approach will increase recycling rates and
signi(cid:192)cantly reduce the amount of waste
sent to land(cid:192)ll. This will help the Council
meet Government recycling targets and
reduce costs such as land(cid:192)ll taxes.
Norfolk and Norwich University Hospital
extended our contract for a further (cid:192)ve years
until 2016. The extension, under which we will
continue to provide a full range of integrated
non-clinical support services, is valued
at £75m.
We also began our contract to provide
facilities management services to the new
Forth Valley Royal Hospital in Scotland,
one of the most modern and well-equipped
hospitals in Europe. Our services include
operating and maintaining a team of robotic
vehicles, which help to keep patient areas
free of trolleys and other related items,
reduce infection risks and free up our staff
to focus on patients’ priorities. The contract
is valued at £600m over 30 years.
Our education contracts continue to deliver
good results for pupils.
We are a leading provider to Europe’s space
and technology agencies.
(cid:40)(cid:71)(cid:88)(cid:70)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
Our education services contracts in Bradford
and Walsall continued to perform well.
We were delighted that our Bradford contract
continues to deliver signi(cid:192)cant improvements.
At Key Stage two, 73% of pupils are now
achieving Level 4 or higher in English and
Maths (combined), equivalent to the national
average. At GCSE level, more than twice as
many of the district’s 16-year-olds gained 5
A*-C grades in 2010 (71.9%) compared with
2001 (34.3%) when Serco was asked to
manage education services in Bradford. In
July our ten-year contract with Bradford
Council comes to an end and we will transfer
the responsibility for all education services
back to the Council.
In Walsall we are continuing to see signi(cid:192)cant
improvements at both Key Stage two and four.
At Key Stage two, pupils are achieving above
national averages in ‘Level four and above’
for English and Maths, and at Key Stage four,
improvements in the most important measure
of (cid:192)ve good GCSEs including English and
Maths continue to outpace national
improvements by some margin.
Norfolk and Norwich University Hospital
extended our integrated support services
contract for a further (cid:192)ve years.
Serco Group plc Annual report and accounts 2010
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Section 3
Operating Review Americas
Bringing service
to life...
…in US defence
(cid:58)(cid:75)(cid:72)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:56)(cid:54)(cid:3)(cid:49)(cid:68)(cid:89)(cid:92)(cid:3)(cid:69)(cid:72)(cid:70)(cid:82)(cid:80)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:89)(cid:82)(cid:79)(cid:89)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:82)(cid:81)(cid:193)(cid:76)(cid:70)(cid:87)(cid:3)(cid:82)(cid:85)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:86)(cid:3)
(cid:75)(cid:88)(cid:80)(cid:68)(cid:81)(cid:76)(cid:87)(cid:68)(cid:85)(cid:76)(cid:68)(cid:81)(cid:3)(cid:68)(cid:76)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:86)(cid:72)(cid:81)(cid:71)(cid:3)(cid:87)(cid:72)(cid:80)(cid:83)(cid:82)(cid:85)(cid:68)(cid:85)(cid:92)(cid:3)(cid:75)(cid:82)(cid:86)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:90)(cid:75)(cid:72)(cid:85)(cid:72)(cid:89)(cid:72)(cid:85)(cid:3)
(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:72)(cid:71)(cid:17)(cid:3)Our logistics team, based in Williamsburg,
Virginia, works with the US Navy Expeditionary Medical Support
Command to make this happen.
Having a clean, modern hospital for Navy doctors to work in
means that lives are saved and communities have somewhere
to go for their urgent medical needs. These hospitals might be
meeting military requirements in isolated areas of Afghanistan
or responding to humanitarian crises in the aftermath of natural
disasters. Because they have to be prepared for many different
situations, the equipment our team organises includes everything
from ambulances and generators to scalpels and CT-scanners.
As well as an eye for detail, the ability to respond quickly is vital.
Just days after the earthquake struck Haiti, our team had assembled
16,000 items of supplies, to set up a 150-bed hospital.
We also maintain and repair the high-tech equipment used to give
more complex medical attention. Items like life-support machines,
laboratory equipment and refrigerators for blood all need looking
after as they leave one (cid:192)eld hospital, pass back through our
warehouses and then go on to their next destination.
Less than a year after our contract began we have been given a
Bravo (cid:61)ulu award by our customer’s Commanding Of(cid:192)cer. Bravo
(cid:61)ulu refers to the signal (cid:193)ags of the letters B and (cid:61). When (cid:193)own
together from a Navy ship’s mast, they traditionally mean ‘well done’.
42
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(cid:47)(cid:82)(cid:74)(cid:76)(cid:86)(cid:87)(cid:76)(cid:70)(cid:86)(cid:3)(cid:87)(cid:72)(cid:68)(cid:80)(cid:15)(cid:3)(cid:58)(cid:76)(cid:79)(cid:79)(cid:76)(cid:68)(cid:80)(cid:86)(cid:69)(cid:88)(cid:85)(cid:74)(cid:15)(cid:3)(cid:57)(cid:76)(cid:85)(cid:74)(cid:76)(cid:81)(cid:76)(cid:68)
Serco Group plc Annual report and accounts 2010
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Section 3
Operating Review Americas
We are a leading provider of
professional, technology and
management services focused
on the US federal government.
We provide mission-critical
services to every branch of the
US military, key federal civilian
agencies and the intelligence
community. We are ranked in
the top 30 US federal
government contractors.
We apply our award-winning enterprise
architecture to de(cid:192)ne, design and satisfy
defense agencies’ Command, Control,
Communications, Computer and Intelligence
requirements. We provide communication
system installations for the US Navy’s (cid:193)eet
and are one of the largest systems
contractors for the US Air Force Space
Command, supporting a wide range of
military satellite systems.
Our support for wounded soldiers ensures
they have the medical attention, bene(cid:192)ts and
services they need. We help soldiers
transition to civilian life and provide personnel
and family services to two million soldiers and
their families. We designed software and
provide systems, data centers and call
centers to support four million government
employees with their retirement plans. We
issue more than 1.2 million identi(cid:192)cation
cards to defense personnel.
We process over 20 million visa transactions
each year for the Department of State and
manage more than 62 million active records
and handle applications received by the
Department of Homeland Security US
Citizenship and Immigration Services. We
have installed detection systems in over 100
locations in 30 countries, to help prevent a
nuclear threat from entering the US.
Our work includes overseeing the pre-
classi(cid:192)cation of all US patents. We also
provide web-based support for USA.gov
and other e-government initiatives.
We manage 65 Federal Aviation
Administration control towers and have
received (cid:192)ve safety and excellence awards.
Our transportation business includes a
contract with the Georgia Department of
Transportation to manage, install and
maintain its intelligent transportation system.
2010 Performance
Revenue grew 9.3%, (8% excluding currency
effects) to £953.9m (2009: £872.6m). This
represented 22% of Group revenue both in
2010 and 2009. Growth in the second half of
the year was very strong following lower growth
in the (cid:192)rst half, largely re(cid:193)ecting a particularly
strong prior period. This strong organic growth
arose from new task orders in both federal
defence and civilian contracts, including
program management work for an intelligence
agency and the Canadian Driver Examination
Services, as it recovered the backlog
following strike action. We also bene(cid:192)ted in
the second half from 109 task orders valued
at US$80m under the Government-wide
single-award IDIQ for Command, Control,
Computer, Communications, Intelligence,
Information Technology, Surveillance and
Reconnaissance (C4I2TSR).
A key focus during the year was to increase
collaboration between our business units and
leverage our wide range of capabilities across
our customer base. Several of our business
units came together to win new work with the
Department of Veterans Affairs, valued at
approximately US$20m over its (cid:192)rst one-year
base period with additional funding expected
for the four option years. We will provide
programme management; a knowledge
management-based web portal with job hiring
tools, e-Learning elements and simulations,
videos and chat rooms; mobile web technologies;
a call centre; and career coaching.
Other examples of integrated working include
expanding the use of our ‘Command, Control,
Communications and Computer’ skills across
all branches of the military, the Department
of Homeland Security and the intelligence
community. We are also using our enterprise
architecture capabilities to support more
Department of Defense agencies and
commands, exploring opportunities to use
our economic cost analysis expertise with the
US Air Force and the intelligence community,
and looking to expand our logistics support
to additional military customers.
Many government agencies use IDIQ
contract vehicles, where we are one of a
number of companies able to bid for task
orders. To leverage our position fully, we have
increased resources to respond to key
opportunities under these vehicles, which
include Alliant, HRsolutions, Seaport-e, Of(cid:192)ce
of Personnel Management’s Training and
Management Assistance Program and
several General Services Administration
Our logistics team in Williamsburg, Virginia,
equips temporary hospitals for the US Navy.
We help the US military with its critical
communications.
We support the US Navy’s procurement,
handling and disposal of hazardous
materials.
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department schedules, including facilities
management and IT. We have also
strengthened our business development
team, re(cid:193)ecting our greater concentration
on larger prime contracts.
Other awards included the renewal of a
single award IDIQ (where there are no other
awardees) contract with the US Navy’s
Commander, Fleet and Industrial Supply
Centers to support the procurement,
management, issuance and disposal of
hazardous materials (HAZMAT). The contract
has a six-month base period with three
one-year option periods and is valued at
approximately US$84m, including the options.
We also received a new single award IDIQ
contract to perform HAZMAT management
services and provide consolidated HAZMAT
reutilisation and inventory management to the
US Navy’s Fleet and Industrial Supply Center
Norfolk. The contract has a one-year base
period with four one-year option periods
and is valued at approximately US$88m,
if all option years are exercised.
The Naval Operational Logistics Support
Center awarded us a new single-award IDIQ
contract to provide program management
and technical services. The contract has
a one-year base period and four one-year
options, with a ceiling value of US$44m
if all option years are exercised.
We strengthened our position on major US
Government programs through an award by
the US Army of an IDIQ contract to compete
for task orders supporting the Assistant
Secretary of the Army Manpower and Reserve
Affairs. We are among 12 awardees on this
US$1.3bn contract, allowing us to compete
for work in areas such as business planning
and research and evaluation. The contract
has a (cid:192)ve-year term, comprising a one-year
base period and four one-year option periods.
Within the civilian arena we were awarded
a contract to provide air traf(cid:192)c control
services to the Federal Aviation
Administration Contract Tower Program,
valued at approximately US$170m over (cid:192)ve
years. We are also contracted to provide
comprehensive management, installation
and maintenance of the Georgia Department
of Transportation’s intelligent transportation
system, valued at approximately US$50m
over (cid:192)ve years.
We provide air traf(cid:192)c control services at 65
towers for the Federal Aviation Administration.
We were pleased to receive the 2010
Defense Enterprise Architecture Achievement
Award, for supporting the Air Force Space
Command’s Joint Space Operations Center
Mission System programme. We also won
the ‘None in a Million’ Federal Aviation
Administration award for achieving – for the
second time – one million error-free
operations at Goodyear, Arizona air traf(cid:192)c
control, as well as the Bravo Zulu Award
for exceptional work on behalf of the Navy
Expeditionary Medical Support Command,
for relief efforts in Haiti.
We run Georgia’s intelligent transportation
system.
Serco Group plc Annual report and accounts 2010
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Section 3
Operating Review AMEAA
Bringing service
to life...
The Dubai Metro, United Arab Emirates
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…in metro services
The Serco-run Dubai Metro launched in September 2009
and has grown rapidly. During 2010, it carried 38.8 million
passengers and expanded from 10 stations to 26. Despite this level
of change, the Metro’s performance has been exceptional for a new
system. During 2010, we achieved availability and punctuality of
99.6% and 97.9% respectively, and in December, 100% of trains
hit their punctuality targets.
Managing growth while delivering to the highest standards requires
the right processes and procedures, and a partnership approach
to working with our customer and contractors. Ultimately, though,
it is our culture and our people’s desire to improve that make
the difference.
Some issues may be escalated to our management forum and
become part of broader initiatives, such as our ‘zero delay days’.
These campaigns select one issue, such as delays caused by
platform screen doors, and aim to have one day where none occurs.
We then measure our performance and feed back to our people,
so they understand that what they do has a positive impact.
We also embrace other sources of feedback. The Metro is subject to
a number of surveys including the Government’s Dubai Excellence
programme, which focuses on world-class customer service. We also
ask our customer – the Dubai Roads and Transport Authority – for its
views on how we are doing. This is essential for us to improve our
performance further.
Our internal performance ‘attribution’ process is an important tool
here. We investigate every train delay so we know what caused it
and why. We then develop actions and plans to prevent a recurrence
or reduce its impact. We repeat this process every day.
Carefully managing network projects and the system’s growth is
vital, with a further 19 stations due in 2011. Our project team treats
our operational team as its customer, so that everyone focuses on
maintaining our service standards as new stations open.
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Serco Group plc Annual report and accounts 2010
47
Section 3
Operating Review AMEAA
2010 Performance
Revenue grew 41.2% to £481.2m (2009:
£340.7m) and represented 11% of Group
revenue, up from 9% in 2009. Excluding
the impact of currency, particularly given
the strong Australian dollar, growth was 26%.
This high revenue growth re(cid:193)ects the
contracts that became operational during
late 2009 and early 2010, in our markets
in Australia, the Middle East and India.
In home affairs in Australia, we continue
to work with the Australian Department
of Immigration and Citizenship to transform
its immigration services, while expanding
capacity to support the increasing number
of people in our care. Serco has been
recognised for the transformation we have
achieved, our humane approach, the
constructive mood in the centres and the
positive relationship between our employees
and the people in our care.
In defence, our 50:50 joint venture with
P&O Maritime Services renewed its contract,
valued at A$250m to us, to provide harbour
and offshore services to the Royal Australian
Navy for ten years.
We expanded into a new market when
we were appointed preferred bidder for a
substantial ten-year contract at Fiona Stanley
Hospital in Perth. When it opens in 2014,
the 783-bed hospital will be a major tertiary
hospital for the area. We will provide all
non-clinical services, including managed
equipment services, transport, procurement,
sterilisation and clerical services, drawing on
our extensive experience of hospital support
contracts in the UK.
AMEAA includes our
businesses in Africa, the Middle
East, Asia and Australasia.
In Australia, New Zealand and Hong Kong,
we have contracts in defence, offender
management, immigration, transport, health,
infrastructure services and consulting. Our
two defence joint ventures make us a key
partner of the Australia Defence Force. We
have the only contract in New Zealand for a
privately operated prison and our two
Australian prisons have received numerous
awards and positive independent
inspections. In 2010 we successfully
transitioned additional immigration sites, with
an increase from (cid:192)ve to 23. We own and
operate Great Southern Rail in Australia and
we are the largest tunnel operator in Hong
Kong. In 2011, we will enter the Australian
health market through a contract at Fiona
Stanley Hospital.
The Middle East is home to some of Serco’s
oldest contracts in aviation, which continue to
expand as the region’s air traf(cid:192)c grows. We
are the largest international player in surface
transport in the region. Most notably, we
operate the Dubai Metro, the world’s largest
and most-advanced driverless light rail
system and the (cid:192)rst of its kind in the Gulf and
Middle East. Our Technology business serves
the telecommunications, marine and
biomedical sectors. We have also expanded
our facilities management (FM) business,
recently winning a contract to provide
integrated FM services at the New York
University in Abu Dhabi.
India is the second fastest growing economy
in the world and presents opportunities for
Serco. Our BPO operation delivers value-
driven products in the banking, insurance,
telecom and retail sectors. We also see
demand for new services in India, particularly
in transport and healthcare as we leverage
our global experience to build local capability
for these markets.
We expanded our air traf(cid:192)c control and
airside engineering services in Dubai.
Our joint venture with P&O Maritime Services
renewed its contract with the Royal
Australian Navy.
In India, our BPO operation is developing
products for banking, insurance, telecom
and retail customers.
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Great Southern Rail runs The Ghan, Australia’s
iconic transcontinental railway
We were delighted to win the Operator and
Service Provider Excellence Award at the
prestigious National Infrastructure Awards.
The award recognises our high standards
at Acacia, Western Australia’s only privately-
operated prison. Borallon Correctional Centre
was awarded two Minister’s Awards for
Excellence for its innovative recycling project
and health initiatives.
We were delighted to play our part in
the opening of Dubai’s second airport, Dubai
World Central – Al Maktoum International,
where we provide air traf(cid:192)c control and
airside engineering services. This is an
addition, valued at around £3.5m per annum,
to our existing contract with Dubai Airports
Company, which dates back to the 1960s,
with a value of approximately £250m.
Elsewhere in the Middle East, we won
a one-year, £10.5m contract to deliver
operations and maintenance consultancy
services to the Al Mashaaer Al Mugaddassah
Metro Southern Line in Makkah, Kingdom
of Saudi Arabia.
India continues to present excellent
opportunities for the future. Our BPO
operation is developing value-driving
products for banking, insurance, telecom
and retail customers.
The Dubai Metro delivered exceptional
service levels in 2010.
In December, we entered another new
market when we were appointed preferred
bidder to manage the Mt Eden and Auckland
Central Remand Prison in New Zealand.
The contract, signed in February 2011
to commence in August 2011, includes
rehabilitation and reintegration programmes
for prisoners, as well as logistics and
infrastructure management. The six-year
contract has an option for a further four years,
and is valued at around NZ$300m over the
full ten years.
In the Middle East, the Dubai Metro has
continued to achieve high levels of service,
with availability and punctuality at 99.6%
and 97.9% respectively for the year.
38.8 million passengers used the Metro
during 2010 and a further 16 stations opened,
bringing the total to 26. We also expanded
our presence in Dubai through a (cid:192)ve-year,
£15m contract to operate and maintain the
5.4km Palm Jumeirah Monorail.
We focus on the dignity, respect and
well-being of everyone we care for in 23
Australian immigration centres.
Serco Group plc Annual report and accounts 2010
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Section 3
Operating Review AMEAA
Bringing service
to life...
…in immigration
management
Controlling borders is a key task for governments. In Australia,
we support the Department of Immigration and Citizenship through
our contract to manage immigration centres throughout the country.
The number of people we employ has also risen sharply, requiring
us to spend more than A$1m on training. We have lived up to
our commitment to employ local people, including more
Indigenous Australians.
Unrest in countries such as Afghanistan, Iran and Sri Lanka has
seen the number of people in our care surge to unprecedented
levels. At the end of 2010, there were around 6,500 people in
detention, more than four times the number when we began the
contract. The (cid:192)ve facilities we ran have expanded to 23.
Coping with this increase in demand for our services has required
(cid:193)exibility, innovation and plenty of hard work. We created a
commissioning team, so we could react quickly when new facilities
were opened, and called on the support of our Civil Government
colleagues in the UK. This allowed our contract management team
to concentrate on the smooth operation of all the centres.
Working in the right way has always been a fundamental part of
what we do, so we ensured that we did not compromise on our
decency agenda – focusing on the dignity, respect and well-being
of the people in our care. For example, every client is allocated a
client support of(cid:192)cer to look after their needs while they stay with us.
We also provide activities such as English lessons, sport, art and
living skills classes. Serco exceeds the contract’s requirements for
providing these activities and programmes.
We have received recognition from visitors for the transformation
we have achieved, along with our humane approach, the
constructive mood and the positive relationship between our
employees and the people in our care.
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Immigration services, Australia
Serco Group plc Annual report and accounts 2010
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Section 3
Finance Review
Overview
Our business delivered
a strong (cid:192)nancial
performance in 2010, with
revenue growing 9.0% and
adjusted operating pro(cid:192)t
increasing by 12.6%. Our
adjusted operating margin
increased by 19 basis
points. Adjusted EPS grew
by 17.5% to 34.69p. Free
cash (cid:193)ow grew by 35.3%
to £185.8m, and Group
recourse net debt reduced
by £84.1m to £303.6m.
1. Income statement
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 pro(cid:192)t
Administrative expenses
Adjusted operating pro(cid:192)t
Investment revenue and (cid:192)nance costs
Adjusted pro(cid:192)t before tax
Amortisation of acquired intangibles
Pro(cid:192)t before tax
Tax
Pro(cid:192)t for the year
Effective tax rate
Adjusted earnings per share
Earnings per share
Dividend per share
2010
£m
2009
£m
Increase
4,326.7
3,970.0
644.3
(385.6)
258.7
(27.4)
231.3
(17.4)
213.9
(57.1)
156.8
26.7%
34.69p
31.88p
7.35p
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
9.0%
9.8%
8.0%
12.6%
18.8%
20.8%
21.7%
20.4%
17.5%
19.1%
17.6%
52
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1.1 Revenue
Revenue grew by 9.0% to £4,326.7m (7.6% excluding currency effects). Organic revenue
growth, excluding currency effects, was 7.6% and re(cid:193)ects the growth of existing contracts
and the contribution of new contracts started in 2009 and 2010.
1.(cid:21) (cid:36)(cid:71)(cid:77)uste(cid:71) o(cid:83)erating (cid:83)ro(cid:192)t
Adjusted operating pro(cid:192)t increased by 12.6% to £258.7m representing an adjusted operating
pro(cid:192)t margin of 6.0%. Adjusted operating pro(cid:192)t margin increased by 19 basis points (16 basis
points excluding currency effects).
1.(cid:22) Investment revenue an(cid:71) (cid:192)nance costs
Investment revenue and (cid:192)nance costs totalled a net cost of £27.4m (2009: £35.0m),
a decrease of £7.6m. The decrease excluding currency effects was £7.4m. The principal
reasons for this decrease were reduced average borrowings during the year, lower interest
rates and a decrease in the net pension (cid:192)nance cost.
1.(cid:23) (cid:36)(cid:71)(cid:77)uste(cid:71) (cid:83)ro(cid:192)t (cid:69)e(cid:73)ore ta(cid:91)
Adjusted pro(cid:192)t before tax was £231.3m, an increase of 18.8%. Excluding currency effects
the adjusted pro(cid:192)t before tax margin was 5.3%, an increase of 40 basis points.
1.(cid:24) (cid:55)a(cid:91)
The tax charge of £57.1m (2009: £46.9m) represents an effective rate of 26.7%, compared with
26.5% in 2009. The slight increase in the rate is principally due to changes in the mix of taxable
pro(cid:192)ts across the Group.
1.6 Earnings per share (EPS)
Adjusted EPS rose by 17.5% to 34.69p. EPS grew by 19.1% to 31.88p. EPS and adjusted
EPS are calculated on an average share base of 491.5m during the year (2009: 486.6m).
The increase in the average share base principally resulted from a full weighting of shares
issued during 2009.
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Serco Group plc Annual report and accounts 2010
53
Section 3
Finance Review
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 (cid:192)nal dividend of 5.15p per share,
representing an increase on the 2009 (cid:192)nal dividend of 17.0%, and bringing the total dividend
for the year to 7.35p, a growth of 17.6%. The (cid:192)nal dividend will be paid, subject to shareholder
approval, on 17 May 2011 to shareholders on the register as at 11 March 2011.
(cid:22)(cid:17)(cid:3)(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)
The Group generated an exceptionally strong free cash performance with an in(cid:193)ow of £185.8m
(2009: £137.3m), an increase of 35.3%. This included bene(cid:192)ts of around £20m from asset
sales proceeds, a particularly high level of joint venture dividends and low tax payments.
Figure 2 analyses the cash (cid:193)ow. As in previous years, we have designed the analysis to show
the underlying cash performance of the Group – the cash (cid:193)ows generated by subsidiaries
plus the dividends received from joint ventures. It therefore differs from the consolidated
cash (cid:193)ow on page 108, which proportionately consolidates the cash (cid:193)ows of joint ventures.
The adjustment line in Figure 2 reconciles the movement in Group cash to the consolidated
cash (cid:193)ow.
Figure (cid:21): (cid:38)ash (cid:193)o(cid:90)
Year ended 31 December
Operating pro(cid:192)t excluding joint ventures
Non cash items
Group EBITDA
Working capital movement
Group operating cash (cid:193)ow
Interest
Tax
Net expenditure on tangible and intangible assets
Dividends from joint ventures
(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:73)(cid:85)(cid:72)(cid:72)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)
Disposal of investments/subsidiaries
Acquisition of subsidiaries
Financing
Special pension contribution
Dividends paid
Group net (decrease)/increase in cash and cash equivalents
Adjustment to include joint venture cash impacts
Net (decrease)/increase in cash and cash equivalents
2010
£m
176.7
79.2
255.9
(30.6)
225.3
(25.2)
(24.0)
(41.8)
51.5
185.8
–
(2.3)
(188.1)
(20.0)
(32.3)
(56.9)
8.7
(48.2)
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
Note: Group EBITDA is earnings from subsidiaries (excluding joint ventures) before interest, tax, depreciation, intangible
amortisation and other non cash items.
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(cid:22).1 (cid:42)roup operating cash (cid:193)o(cid:90)
Group operating cash (cid:193)ow of £225.3m (2009: £198.8m) re(cid:193)ects a conversion of Group
EBITDA into cash of 88.0% (2009: 88.0%). The working capital movement of £30.6m
re(cid:193)ects the requirements of a growing business.
3.2 Interest
Net interest paid was £25.2m, compared to £31.5m in 2009 re(cid:193)ecting the reduction in Group
recourse net debt since 2009 and lower interest rates.
3.3 (cid:55)a(cid:91)
Tax paid was £24.0m (2009: £26.5m). The reduction in tax paid during 2010 is due to increases
in accelerated capital allowances and other timing differences in the period, additional tax relief
on the December 2010 special pension contribution and tax refunds received during the year.
In 2011, we expect the cash tax rate to trend closer to our effective tax rate. This is principally
as a result of a higher proportion of overseas taxable pro(cid:192)ts which more than offsets the
bene(cid:192)t of the tax relief on the special pension contribution.
3.(cid:23) (cid:49)et e(cid:91)pen(cid:71)iture on tangi(cid:69)(cid:79)e an(cid:71) intangi(cid:69)(cid:79)e assets
Net expenditure on tangible and intangible assets in the year was £41.8m (2009: £49.8m).
Gross expenditure, excluding disposals, was £51.1m (2009: £52.3m) representing 1.4%
of Group revenue excluding joint ventures (2009: 1.6%).
On 30 June 2010, as part of forming a strategic partnership with Patni Computer Systems Ltd.
(Patni), a leading global provider of Information Technology services and business solutions,
to provide services in education and e-learning in the UK and Irish markets, we disposed
of a Learning software product to Patni. Cash realised from the sale was £7.0m and pro(cid:192)t
on disposal of this asset was £1.4m.
In 2011, we are planning to invest around £20m in the implementation of SAP for HR across
the Group.
3.(cid:24) (cid:39)ivi(cid:71)en(cid:71)s (cid:73)rom (cid:77)oint ventures
Dividends received from joint ventures totalled £51.5m (2009: £46.3m), re(cid:193)ecting an
uncharacteristically high conversion rate of joint ventures’ pro(cid:192)t after tax and non controlling
interests into dividends. This high rate re(cid:193)ected the impairment charge of £4.2m resulting
from our exit from the non-core South African joint venture Equity Aviation. Excluding this,
the conversion rate of dividends from joint ventures was approximately 95%. In 2011,
we expect the conversion rate to be closer to the normal rate of 80-90%.
3.6 Financing
The movement in (cid:192)nancing resulted primarily from repayments on our bank facilities and
non recourse debt.
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Serco Group plc Annual report and accounts 2010
55
Section 3
Finance Review
4. Net debt
Figure 3 analyses Serco’s net debt.
Figure 3: (cid:49)et (cid:71)e(cid:69)t
At 31 December
Group – cash and cash equivalents
Group – loans
Group – obligations under (cid:192)nance leases
Group recourse net debt
Joint venture recourse net cash
Total recourse net debt
Group non recourse debt
Total net debt
2010
£m
204.0
(482.6)
(25.0)
(303.6)
66.1
(237.5)
(23.7)
(261.2)
2009
£m
253.7
(619.1)
(22.3)
(387.7)
58.2
(329.5)
(29.0)
(358.5)
(cid:23).1 (cid:42)roup recourse net (cid:71)e(cid:69)t
Group recourse net debt decreased by £84.1m to £303.6m.
Cash and cash equivalents includes encumbered cash of £10.9m (2009: £11.2m). This is cash
securing credit obligations and customer advance payments.
(cid:23).2 (cid:42)roup non recourse (cid:71)e(cid:69)t
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 £5.3m to £23.7m, as a result of £7.6m payments
made in line with the debt repayment schedule on debt relating to our Driver Examination
Services contract in Canada, offset by £2.3m increase in non recourse debt due to
exchange movements.
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5. Pensions
The Group operates a number of de(cid:192)ned bene(cid:192)t schemes and de(cid:192)ned contribution schemes.
At 31 December 2010, the net liability included in the balance sheet arising from our de(cid:192)ned
bene(cid:192)t pension scheme obligations was £83.0m (2009: £113.6m), on a pension scheme asset
base of £1.5bn.
Figure (cid:23): (cid:39)e(cid:192)ne(cid:71) (cid:69)ene(cid:192)t pension schemes
At 31 December
Group schemes – non contract speci(cid:192)c
Contract speci(cid:192)c schemes:
– reimbursable
– not certain to be reimbursable
Net retirement bene(cid:192)t liability
Intangible assets arising from rights to operate
franchises and contracts
Reimbursable rights debtor
Deferred tax assets
Net balance sheet liabilities
2010
£m
2009
£m
(76.1)
(120.0)
(123.4)
(26.7)
(226.2)
8.9
123.4
10.9
(144.3)
(29.9)
(294.2)
11.4
144.3
24.9
(83.0)
(113.6)
The total pension charge included in operating pro(cid:192)t for the year ended 31 December 2010,
including the proportionate share of joint ventures, increased to £106.5m (2009: £92.4m).
Within this charge, the Group’s contributions to UK and other de(cid:192)ned contribution pension
schemes increased to £76.0m (2009: £64.8m). The service charge relating to the Group’s
de(cid:192)ned bene(cid:192)t schemes was £30.5m (2009: £27.6m), and the movement was principally
as a result of changes to the discount rate and in(cid:193)ation assumptions as at the end of 2009
and increases in payroll.
Serco has three main types of scheme which are accounted for as de(cid:192)ned bene(cid:192)t pension
schemes. Each type has its own accounting treatment under International Financial Reporting
Standards. These are:
(cid:3)(cid:79) Non contract speci(cid:192)c – schemes which do not relate to speci(cid:192)c contracts or franchises.
For these schemes, we charge the actuarial gain or loss for the year to the consolidated
statement of comprehensive income (the SOCI);
(cid:3)(cid:79) Reimbursable – schemes where we have a right of full cost reimbursement and therefore
include both the pension scheme de(cid:192)cit and offsetting reimbursable rights debtor in the
balance sheet; and
(cid:3)(cid:79) Not certain to be reimbursable – schemes relating to speci(cid:192)c contracts or franchises,
where the de(cid:192)cit 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
de(cid:192)cit 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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Serco Group plc Annual report and accounts 2010
57
Section 3
Finance Review
Serco has limited commercial risk in relation to the contract speci(cid:192)c schemes, due to either
the right of cost reimbursement or because the de(cid:192)cit will, in general, pass back to the
customer or on to the next contractor at the end of the contract. Among our non contract
speci(cid:192)c schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS).
At 31 December 2010, SPLAS had a de(cid:192)cit of £16.4m (2009: de(cid:192)cit of £54.7m). This de(cid:192)cit,
which is calculated under IAS 19 using market rates at the period end, re(cid:193)ects
the effect of the market conditions on investment returns in the year and the net impact of
a decrease in in(cid:193)ation assumptions offset by a decrease in the applicable discount rate.
We have now completed the regular triennial review of SPLAS. The actuarial de(cid:192)cit of SPLAS
used in the review and calculated using prudent long-term valuation assumptions, was £141m
at 6 April 2009 and was approximately £93m at 31 December 2010. Following this review,
the Group agreed with the Trustees to make a cash contribution of £60m to the scheme,
with £20m paid in December 2010 and £40m in January 2011. We continue to review the
level of bene(cid:192)ts and contributions under the scheme in the light of our business needs and
changes to pension legislation.
Figure 5 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 in(cid:193)ation, members’ salary
increases and life expectancies.
Figure 5: Pension assumption sensitivities
Discount rate
Assumption
5.4%
Price in(cid:193)ation
3.1% (RPI) and 2.6% (CPI)
Change in
assumption
Change in
liability
+0.5%
– 0.5%
+0.5%
– 0.5%
+0.5%
– 0.5%
3.5%
20.8 – 24.5*
Increase by
one year
– 9%
+10%
+8%
– 7%
+2%
– 2%
+3%
Salary
Longevity
* Post retirement mortality range for male and female, current and future pensioners.
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6. Treasury
The Group’s bank credit facilities comprise a £400.0m syndicated revolving credit facility, a
syndicated amortising term loan for US Dollar 396.4m and bilateral revolving credit facilities
for £35.0m and EUR 12.5m. The syndicated revolving credit facility matures in September 2013
whilst the syndicated term loan is repayable between September 2011 and September 2013.
The bilateral facilities mature in December 2011 and April 2012 respectively. In relation to the
syndicated term loan, the next scheduled repayment of US Dollar 138m is due in September
2011. As at 31 December 2010, £329.8m had been drawn down on these combined facilities
(2009: £457.7m). Excluding the effects of currency on the US Dollar denominated debt, the
equivalent draw down would have been £320m.
In addition to the bank credit facilities, Serco has loan notes in issue under a private placement
of £117.7m, which will be repaid evenly from 2011 to 2015. All of the credit facilities of the
Group detailed above are unsecured.
7. 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 unlikely to affect the Group as a whole. In addition, with an order book
of £16.6bn and high visibility of future revenue streams (92% in 2011; 77% in 2012 and 66%
in 2013), the Group is well placed to manage its business risks despite the current uncertain
economic climate.
In September 2008, the Group secured medium-term (cid:192)nancing by entering into a (cid:192)ve year
syndicated revolving credit facility and bilateral facilities. Including the term loan and US
private placements, the Group has in excess of £816m of committed credit facilities. As at
31 December 2010, the headroom on the facilities was approximately £369m. The next
repayment on these facilities falls due in September 2011 for an amount of US Dollar 138m.
The Group fully expects to meet this repayment through internally generated cash (cid:193)ows.
Based on the information set out above, the Directors believe that it is appropriate to prepare
the (cid:192)nancial statements on a going concern basis.
Andrew Jenner
Finance Director
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Serco Group plc Annual report and accounts 2010
59
Section 3
People
Serco’s rapid growth means
that we have a continually
increasing number of
employees around the world.
We have therefore created a
clear framework for managing
and developing our people,
so that we can help them be as
good as they can be and deliver
great service to our customers.
Our people strategy has three main
components. We want to:
(cid:3)(cid:79) develop leaders who are (cid:192)t for the future
and who will thrive as Serco grows
(cid:3)(cid:79) have 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
(cid:3)(cid:79) 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 growth
and creating the environment in which our
people 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
components 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 in(cid:193)uence 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.
During 2010, we extended the H³ model
to managers beyond our leadership group.
We also completed our global talent review,
which we began in 2009. This involved every
business unit around the world identifying its
current and future leaders, enabling us to
create comprehensive succession plans and
talent pipelines to support our growth. As part
of this, we have built a customised talent
database and established cross-divisional
talent pools in our corporate functions. For
example, we have a global talent pool in
(cid:192)nance and a UK-wide pool in business
development.
2010 also saw us introduce or expand a
range of other initiatives to help our leaders
develop. For example, we rolled out the
Management Foundations programme,
developed by our Civil Government business,
to other parts of our business, initially the UK
divisions and corporate functions.
Management Foundations will be accredited
by the Chartered Management Institute and
helps our people to be values-led managers.
We also introduced a broad range of toolkits
for talent and performance management,
which are available through the online Serco
Business Academy. The Business Academy
aims to make learning accessible to all of
our people.
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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 ne(cid:90) peop(cid:79)e
Serco’s growth means that several thousand
people join us every year. We typically (cid:192)nd
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 action.
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.
To help new joiners become part of Serco,
we have developed the Welcome Experience.
This is a range of materials and events which
ensure that joining Serco is welcoming and
engaging, and is in addition to any induction
at a local level.
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Serco Group plc Annual report and accounts 2010
61
Section 3
People
The new materials we have created include:
(cid:3)(cid:79) Discover Serco Passports, which help
guide and direct new people. We have
one for leaders and another for managers,
with a third version being developed for
all employees
(cid:3)(cid:79) the People Pack, which helps new leaders
understand the importance of their role
and the tools available to enable them to
be a great leader
(cid:3)(cid:79) Discover Serco e-learning, which is
available for any new employee through
the Serco Business Academy, and
(cid:3)(cid:79) Discover Serco contract visits.
Engaging (cid:90)ith our peop(cid:79)e
We once again undertook our annual global
employee survey, called Viewpoint. This gives
us important insights into how we can run
Serco better, particularly at a local level,
resulting in greater engagement with our
people and enhanced service for customers.
We were pleased that the response rate to the
survey rose and are working to drive actions
that arise from the feedback we receive.
We introduced a number of innovations in
2010 to improve engagement with existing
and potential new employees, such as:
(cid:3)(cid:79) our US Serco Scholars program, which
provides educational grants to the
children of employees
(cid:3)(cid:79) payroll giving in North America and India
(cid:3)(cid:79) the UK Bike4work scheme, to encourage
people to use environmentally friendly
forms of transport when travelling to and
from work, as well as getting (cid:192)tter, and
(cid:3)(cid:79) enhancing the recruitment section of our
website, both to raise the calibre of
recruits and to improve the visitor
experience.
We continued our relationship with David
MacLeod and Nita Clarke, following the 2009
launch of their review Engaging for Success,
which examined employee engagement
and how to enable it. Our Civil Government
division has also carried out research
on establishing links between employee
engagement and business performance.
(cid:39)eve(cid:79)oping our peop(cid:79)e
Enabling our people to excel is one of
our Governing Principles, meaning their
development is key. That development ranges
from informal on-the-job training through to
specialist and technical training. Increasingly
we are moving to a “blended learning”
approach, with an appropriate balance
of face-to-face and web-based learning.
During the year, we enhanced our
performance management process, creating
new toolkits for managers and leaders to
enable them to become even better at setting
objectives, creating development plans and
reviewing performance. This will allow us to
set individual objectives for our people and
to manage them in line with those objectives.
We have also developed a performance
calibration process, enabling us to identify
high achievers and those who need help
to improve their 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 2010,
we recognised 152 individuals and teams
with an award.
Managing our people
We continually look to improve our ef(cid:192)ciency,
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 therefore developing a new platform,
called ‘Empower – Transforming People
Management’, which will transform how we
manage people across our business. This is
our (cid:192)rst ever global change programme and
builds on a successful pilot we undertook in
our Dubai Metro contract. The programme
commenced in January 2011 and will
complete in 2012.
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Objectives and performance
2010 Objective
Result
Comment
To develop leaders
who are (cid:192)t for
the future
Ongoing
To engage and
motivate employees
to bring service
to life
Ongoing
We pro(cid:192)led 200 of our most senior leaders.
Career and development planning is under
way and will be incorporated into the 2011
objective setting and appraisal process.
This process has been extended to our
emerging leaders. We undertook
succession planning across the whole
business and our divisions have focused
on developing their talent pipeline.
An online module called ‘Discover Serco’
was launched company-wide during 2010.
We have also developed an online induction
toolkit which launched on our internet in
January 2011. The company-wide
Viewpoint Survey was conducted again in
2010 and 78% of employees responded, an
increase of 2 percentage points over 2009.
Work has progressed to link engagement
to performance and contributed to the UK
Government-sponsored task force on
employee engagement.
To make it easier
to manage people
Ongoing
We invested in a new platform, as
described in ‘Managing our people’ above
2011 Objectives
(cid:3)(cid:79) To make it easier to manage people. The
focus will be to develop and implement the
programme called ‘Empower – Transforming
People Management’.
(cid:3)(cid:79) To develop leaders who are (cid:192)t for the
future. We will be looking to further embed
the talent review and succession-planning
process across a wider proportion of our
management population.
(cid:3)(cid:79) To engage and motivate employees to
bring service to life. We will continue to
research and analyse the link between
engagement and performance.
The new platform will give us a standard
approach to managing people, with a
common set of processes for each part of
the employee lifecycle. This is supported
by a suite of self-service online tools for both
managers and employees, such as starters
and leavers forms, annual leave requests and
rostering tools for shift working, which
will enable us to plan more ef(cid:192)ciently and
increase utilisation but also take into account
each employee’s preferences. The platform
will also streamline and standardise our
approach to recruitment and help us to
manage absenteeism in a more consistent
and effective way.
The outcome will be a simpler and more
effective system, freeing up time for our
managers to focus on delivering to
customers. The platform will also support
our growth, for example by enabling
us to transition contracts more quickly
and effectively.
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Serco Group plc Annual report and accounts 2010
63
Section 3
Corporate responsibility
Achieving our vision to be
the world’s greatest service
company requires us to work in
the right way and to meet our
responsibilities to our
customers, the public, our
employees, our partners and
suppliers. As a result, corporate
responsibility (CR) is part of
who we are and how we
behave.
We divide our approach into four pillars –
people, health and safety, community
and the environment. Our work for our
customers encompasses all of these areas,
but there are many things we do which go
beyond our contractual or legal requirements.
Our approach to managing our
responsibilities is summarised below.
We also publish a Corporate Responsibility
Review each year, which gives more details of
our activities and the way we embed CR in
our business.
Our people
Pages 60 to 63 explain our people strategy,
our 2010 initiatives to improve the ways in
which we develop, engage, motivate and
manage them, and our objectives for 2011.
Health and safety
Our aspiration is zero harm to our people
and customers. This means we set high
standards – often above our legal
requirements – so that we do everything
we can to prevent incidents.
Embedded in the Serco Management
System, our framework for how we manage
our business, are our health and safety
policies and standards. We audit ourselves
against these standards, building on good
practice and addressing performance that
falls short.
Some of the biggest challenges we face
are routine risks to health and safety.
Slips, trips and falls are the most common
incidents and prevention requires diligence
and dedication. This year saw a number of
notable achievements.
The UK’s National Physical Laboratory, for
example, logged more than 1.6 million
working hours without a reportable injury.
Our contract at BlueScope Steel in Illawarra,
Australia, reported 1.1 million such hours.
In the Americas, our Lost Days Incident Rate
has dropped 10% year-on-year, continuing
our strong and improving safety record in
the region.
Serious incidents are rare. When they do
happen, we learn from them. In April 2010,
Serco was found guilty of breaching the
Health and Safety at Work etc Act 1974, for
failing to ensure that automatic trains did not
hit unauthorised persons on the tracks
at the Docklands Light Railway in London. This
(cid:192)nding followed the death of Robert Carter at
All Saints Station in 2007. Immediately after
the incident, we undertook thorough reviews
of the circumstances and implemented new
procedures so that this particular type of
accident could be avoided in the future.
Looking forward, we will continue to
strengthen our safety culture through
leadership, oversight, stakeholder
engagement and effective policies, systems
and processes. To support the achievement
of our safety targets, our priorities are:
(cid:3)(cid:79) to reduce the amount of lost time due
to incidents, through active rehabilitation
(cid:3)(cid:79) offering a consistent level of occupational
health support to all Serco employees
(cid:3)(cid:79) monitoring KPIs for muscoskeletal, mental
and behavioural and reportable diseases
(cid:3)(cid:79) a continued focus on reducing
reportable incidents
(cid:3)(cid:79) developing systems and processes
to manage and monitor near-misses
(cid:3)(cid:79) embedding a single health, safety and
environmental management system and
standard operating procedures across
all of our operations, and
(cid:3)(cid:79) ensuring competency in health and
safety management and consistent
training standards.
Our contract at BlueScope Steel, Australia,
logged 1.1 million working hours without a
reportable injury.
Apprentices at our contract with the London
Borough of Newham learn new skills which
prepare them for the future.
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Objectives and performance
2010 Objective
Result
Comment
Our RI rate was 711 per 100,000
employees. This achieves our 2010 target
and is only 1.2% short of our 2012 target.
It also demonstrates good performance
against external benchmarks. The UK’s
Labour Force Survey for all-industries
benchmark is 820 per 100,000.
At an average of 18.6 days in 2010 we
are not on track, having shown a year
on year increase in lost time. This partly
re(cid:193)ects an increase in higher-risk
business operations. Signi(cid:192)cant
management effort is being put in
to redress this situation, with a focus
on: early intervention to rehabilitate
employees and help them back to work;
more timely handling of long-term
disability cases; and root-cause analysis.
Work is ongoing to establish the systems
and processes to deliver this.
To continue focusing on
reducing reportable incidents,
(RIs) to achieve our target of
a 30% reduction in our staff
RI rate by the end of 2012
against the 2008 benchmark
of 998. The target for 2010
was a 20% reduction to 799.
To reduce the amount of lost
time as a result of incidents,
through active rehabilitation.
Our challenging target is for
a 50% reduction by the end
of 2012 against 2008
baseline (average 15 days).
Target
met
Target
off
track
To develop systems and
processes to manage and
monitor near-miss events
more effectively. Our target
is to establish a baseline for
future improvements for 2012.
Target
on
plan
2011 Objectives
(cid:3)(cid:79) To continue focusing on reducing the
amount of time lost as a result of
incidents, to achieve our target. We aim to
be back on trajectory to reach our target
of a 50% reduction in lost time per incident
(against the 2008 benchmark) by 2012.
(cid:3)(cid:79) To continue focusing on reducing
reportable incidents. Based on current
performance, we have revised our target
to 599 to re(cid:193)ect a 40% reduction in staff RI
rate by 2012 against the 2008 benchmark.
(cid:3)(cid:79) To develop systems and processes to
manage and monitor near-miss events
more effectively. Our target remains to
establish a baseline for future
improvements for 2012.
Divers inspecting pontoons at our marine
services contract in Davenport, UK.
Fire training delivered by Serco at the
International Fire Training Centre in the UK.
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Section 3
Corporate responsibility
Community
The work we do often directly serves our
local communities. Many of our people
also live in these communities and we
want them to be proud of what we give
back to society. Whether it is money or
management skills, work experience or
interview training to help young people
(cid:192)nd jobs, there are hundreds of projects
run by Serco people that enhance our
reputation as an organisation and,
quietly and without fanfare, improve
life for local people.
How we offer support is largely down to
our divisions and contracts. They are in
the best position to understand the needs
of their communities, how those needs
align with our customers’ objectives and
how they relate to our employees.
The result is a wide range of activities, from
fundraising for the Royal Flying Doctor
Service in Australia or for orphans in India,
to providing student work placements at
HMP & YOI Doncaster in the UK.
We also encourage our businesses to think
long-term. For example, in the US we have
worked with the Military Child Education
Coalition since 2007 and in the UK we
have supported Project Search since 2008.
Project Search, which involves our customer
– the Norfolk and Norwich University Hospital
– and other organisations, helps people
with learning dif(cid:192)culties to develop their
con(cid:192)dence and skills in the workplace.
During the last three years we have provided
work placements to 35 students and 9 people
have found employment in the hospital.
We have now expanded the programme
to three more of our UK hospital contracts.
Overall, we are committed to investing 1%
of our pre-tax pro(cid:192)ts every year in projects
to help our communities. This year we have
donated £2,271,575, which represents 1.1%.
Objectives and performance
2010 Objective
Result
Comment
To provide employment
opportunities for the
long-term unemployed and
young people.
On
plan
To build trust in the
communities in which we
operate, through responsible
business operations and
behaviour.
On
plan
We expanded Project Search from one
UK hospital to four. This is a partnership
with the National Health Service and
other organisations to help people with
learning dif(cid:192)culties into the workplace.
We initiated a project in our UK divisions
to identify work placement opportunities
for students and to encourage the
creation of new and meaningful
opportunities. A survey identi(cid:192)ed current
practice and data to help future planning.
This will be an ongoing objective.
During 2010 we were able to better
identify our current UK practices in
relation to working with the voluntary
sector. In December 2010, we
participated in a pilot project to help build
the capacity of Black and Asian Minority
organisations in Manchester (see case
study in the Marketplace section of our
2010 Corporate Responsibility Review).
At HMP & YOI Doncaster, we help offenders
strengthen bonds with their families.
To continue to invest in the
communities in which we
work and serve.
Target
met
We invested £2,271,575 into society,
which equates to 1.1% of our pre-tax
pro(cid:192)ts in 2010.
2011 Objectives
(cid:3)(cid:79) To continue to invest 1% of our pre-tax
pro(cid:192)ts into society
(cid:3)(cid:79) To continue to promote the theme
of employability
(cid:3)(cid:79) To continue to develop our relationships
with charities, social enterprise and
community organisations
(cid:3)(cid:79) To promote employee volunteering
(cid:3)(cid:79) To promote payroll giving.
We encourage offenders to take part in
community projects at Acacia Prison,
Australia.
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It was a considerable task, but in January
2011 we reached our target. This makes
us one of only 530 companies so far – of
around 5,000 required to participate in the
Carbon Reduction Commitment Energy
Ef(cid:192)ciency Scheme (CRC) – to have
Carbon Trust Standard certi(cid:192)cation.
The certi(cid:192)cation covers all of Serco’s UK
sites required to participate in the CRC,
and will enhance our score and placement
in the CRC Performance League Table, to
be published by the Environment Agency
in October 2011.
One challenge in meeting our aspirations
is that we often share our customers’
facilities. Without full control over our
workplace, we are unable to capture
information relating to our impact and
we are limited in the measures we can
put in place to reduce our footprint.
In those instances, we work with our
customers to reduce impact.
Improvement does not come overnight or
by edict, but gradually, through the efforts
of thousands of people around the world,
united by the conviction that this is worth
doing – and doing well.
Environment
Our zero-harm aspiration applies as much
to the environment as it does to health and
safety. Our policy places a clear responsibility
on everyone in Serco to minimise our
environmental impact.
This policy has three drivers. The (cid:192)rst is
ethical: safeguarding the planet for current
and future generations is the right thing
to do. Second, irreproachable environmental
credentials are now a commercial imperative.
The third driver is (cid:192)nancial.
Re(cid:193)ecting our devolved nature, the best
place to manage our impact is locally.
For example, in the United Arab Emirates we
are a member of the Emirates Environmental
Group, which encourages tree planting and
recycling. In Australia, through our actions,
use of potable water in Melbourne’s parks
and gardens dropped by 75%.
However, as we have developed our Group
strategy we have had to understand our
overall impact as a business. Given the sheer
range and diversity of our work this has been
a challenge. To address it, in 2010 we
introduced Acco2unt carbon management
software. This gives us the data we need
and helped us to join the best-performing
10% of FTSE 350 organisations, according
to the Carbon Disclosure Project.
We can now see where we generate
carbon dioxide emissions, which helps us
to prioritise areas for action. We set ourselves
the objective of achieving Carbon Trust
Standard certi(cid:192)cation, which required us
to demonstrate:
(cid:3)(cid:79) a minimum of 2.5% year-on-year reduction
in our carbon footprint relative to revenue,
for two consecutive years
(cid:3)(cid:79) effective carbon measurement, and
(cid:3)(cid:79) effective carbon management at all sites.
Objectives and performance
2010 Objective
Result
Comment
To achieve a 10% reduction
in CO² tonnes/£m revenue
by end 2010, against the
2008 benchmark.
To embed a single
environmental management
system and operating
procedures across
all operations.
To implement a carbon
accounting system to ensure
accurate consumption
reporting on energy, fuel
used for business, travel,
waste and water.
Target
missed
Target
met
Target
met
In the UK, we achieved a reduction of
7.26% in CO² tonnes/£m against 2008.
We were pleased to achieve the UK’s
Carbon Trust Standard, requiring a 2.5%
year-on-year reduction in CO² emissions.
The environmental management system
is an integral part of our revised Serco
Management System (launched 2011)
and applies globally.
The Greenstones Acco2unt enterprise
system went live in the UK in 2010 and
will be implemented across the rest of
our business in 2011.
2011 Objectives
(cid:3)(cid:79) To achieve a 15% reduction in CO²
tonnes/£m revenue against the 2008
benchmark by end of 2012
(cid:3)(cid:79) To retain the Carbon Trust Standard.
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Serco Group plc Annual report and accounts 2010
67
Section 3
Resources
Business relationships
Customers
Our ability to develop long-term relationships
with our customers is a central part of our
business model. Day-to-day responsibility for
meeting our customers’ needs lies with our
contract directors. Our approach to working
with our customers is set out in our Governing
Principles (see page 12), which aim to
empower our contract directors and ensure
that we deliver high-quality service.
We maintain relationships at all levels with
our customers, so 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.
Our reputation with our existing customers is
also vital in winning new work. Many factors
in(cid:193)uence our reputation, including:
(cid:3)(cid:79) the quality of our service
(cid:3)(cid:79) our values and public-service ethos
(cid:3)(cid:79) our capacity to innovate, and
(cid:3)(cid:79) 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
Effective procurement signi(cid:192)cantly
contributes to achieving our vision and
delivering effective service to our customers.
We aim to be professional in all our dealings
with suppliers and to establish mutually
bene(cid:192)cial relationships, in which suppliers
want repeat business with us and have us
as their ‘customer of choice’.
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 businesses have many common
purchasing needs. For this reason, we aim
to work with carefully chosen preferred
suppliers, enabling us to achieve better terms
and conditions and make the most of our
economies of scale. Our teams are also able
to procure locally when appropriate, drawing
on the expertise of our divisional procurement
specialists to manage the process effectively.
We continue to focus on developing our
relationships with all of our suppliers,
including small and medium-sized
enterprises (SMEs). In 2011, we will
be looking at ways to enhance this further.
We have a longstanding programme in
place to improve the way we work with
our suppliers. Following the public attention
on our relationships with our suppliers in
November 2010, we looked again at the
improvement programme we had in place
and introduced a number of additional steps,
including support to SMEs who often supply
the specialist or local knowledge we need to
deliver services to our customers.
Serco is a member of Minority Supplier
Development UK, a not-for-pro(cid:192)t organisation
which provides a direct link between
companies and ethnic-minority businesses,
to enable the building of mutually bene(cid:192)cial
business relationships.
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Strategic partners
We often deliver services 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.
Our values and the open and honest way
in which we work also make us an attractive
partner for voluntary-sector organisations,
who often lack the scale and experience
to access major government programmes.
Examples include:
(cid:3)(cid:79) our model for providing welfare to work
services in the UK, which utilises a
network of commercial and voluntary-
sector partners, and
(cid:3)(cid:79) our contract to run Belmarsh West prison,
in alliance with voluntary-sector partners
Turning Point and Catch22.
Responsibility for relationships with our
strategic partners lies with the relevant
contract and divisional management.
Joint venture partners
Serco has a number of joint ventures with
commercial partners and customers.
Our joint ventures with Abellio run Northern
Rail, which is the country’s largest train
franchise, and Merseyrail, the UK’s most
punctual train operator.
AWE Management Limited, our highly
successful joint venture with Lockheed
Martin and Jacobs Engineering Group
Inc., manages the UK’s Atomic Weapons
Establishment.
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 also have successful joint ventures with
customers. We created GSTS Pathology with
Guy’s and St Thomas’ NHS Foundation Trust,
to transform its pathology services. In 2010,
King’s College Hospital NHS Foundation
Trust also became a partner in the joint
venture. ACCESS is our joint venture with
Glasgow City Council, designed to streamline
and maximise the use of the Council’s
property and ICT assets.
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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69
Section 3
Principal risks and uncertainties
Serco has a well-established
and embedded system of
internal control, including
(cid:192)nancial, 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.
Risk management is fundamental to how we
manage the business. 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
de(cid:192)ned policy standards.
During the year we have implemented the
recommendations resulting from the risk
management review completed in 2009.
This has seen the establishment of the Group
Risk Management Committee, a formal
Committee of the Executive Committee,
which provides governance and oversight of
risk. Further, we have changed and improved
the approach to the assessment of risk as
well as standardising and enhancing the
reporting format.
These enhancements to our risk management
processes have been incorporated within
our risk management policies, systems and
processes which conform to the Combined
Code’s requirements and form part
of the Serco Management System (SMS).
A comprehensive review of the SMS was
completed in 2010. The revised SMS has
been approved and reissued by the Board.
Such 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
con(cid:192)rms that this process has been in place
for the year under review and up to the date of
approval of the annual report and accounts.
Our approach to risk within the
Serco Management System
The 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
and our assets and reputation. At each level
within our business, risk management
processes re(cid:193)ect the nature of the activities
being undertaken and the business and
operational risks inherent in them, and
therefore the level of control considered
necessary to protect our interests and those
of our stakeholders.
These risk management processes were
subject to comprehensive review during
2010, as part of a broader review of the SMS.
This ensures that they re(cid:193)ect 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: Identi(cid:192)cation, Assessment,
Planning and Control, and Monitoring,
so that we:
(cid:3)(cid:79) identify business objectives that re(cid:193)ect
the interests of all stakeholders, and the
risks associated with the achievement
of these objectives
(cid:3)(cid:79) regularly assess our exposure
to risk, including through the regular
measurement of key risk indicators
(cid:3)(cid:79) control and reduce risk as far
as reasonably practicable or
achievable through cost-effective
risk treatment options
(cid:3)(cid:79) identify new risks as they arise and remove
those risks that are no longer relevant
Ris(cid:78) i(cid:71)enti(cid:192)cation
In identifying the potential risks associated
with the achievement of our business
objectives, we consider both external factors
arising from the environment within which
we operate, and internal risks arising from
the nature of our business, its controls and
processes, and our management decisions.
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Once identi(cid:192)ed, we document risks in risk
registers, which are maintained 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 re(cid:193)ect the current key
risks. We review risk registers at least
quarterly and more frequently as required.
The Group Risk Management Committee
reviews the Group risk register quarterly
ahead of formal review by the Board.
Risk assessment
We assess the potential effect of each
identi(cid:192)ed 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. This is assessed from
three perspectives:
(cid:3)(cid:79) the risk’s signi(cid:192)cance to the achievement
of our business objectives
(cid:3)(cid:79) the risk’s signi(cid:192)cance to society, including
on public safety and the environment, and
(cid:3)(cid:79) our ability to in(cid:193)uence, 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. In 2010 an
updated risk assessment matrix has been
implemented, providing improved clarity in
the de(cid:192)nition of probability assessment.
Risk planning and control
We assign each identi(cid:192)ed 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 speci(cid:192)c 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
identi(cid:192)ed risks before they can affect the
contract or project. We consider options to
eliminate, reduce or control the risks as part
of the risk identi(cid:192)cation and analysis process.
Risk mitigation involves us identifying
appropriate measures, including contingency
plans, to reduce the severity of the impact
of the risks, should they occur. This includes
developing crisis management plans in
response to risks whose potential impact
warrants a speci(cid:192)c management process.
The SMS requires every contract to develop
a risk management plan re(cid:193)ecting 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.
Principal risks
The Group risk register identi(cid:192)es the principal
risks facing the business, including those
that are managed directly at a Group level.
They are managed through a formal process.
This identi(cid:192)es the business objectives and
the interests of shareholders and other
stakeholders that are likely, directly or
indirectly, to in(cid:193)uence 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
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 pages 64 to 67.
The most signi(cid:192)cant risks relate to our
reputation, and to operational and (cid:192)nancial
performance. A number of our risks re(cid:193)ect
social, environmental and ethical issues, but
these do not currently represent signi(cid:192)cant
threats to our strategy.
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71
Section 3
Principal risks and uncertainties
Summarised on the following pages are the
key risks we have identi(cid:192)ed that could have a
material impact on our reputation, our
operations, or our (cid:192)nancial performance.
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 active 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 suf(cid:192)ciently
de(cid:192)ned 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 pro(cid:192)le.
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 de(cid:192)ned in the SMS are set
out below:
(cid:3)(cid:79) our operating processes fully re(cid:193)ect the
principles of clear delegation of authority
and segregation of duties
(cid:3)(cid:79) our Group Risk Management Committee
meets quarterly to ensure that risks,
internal control and business assurance
are effectively managed and reviewed
(cid:3)(cid:79) comprehensive business review
processes ensure we meet customer
expectations, regulatory requirements,
and performance criteria including
operational effectiveness, investment
returns, cash (cid:193)ow requirements
and pro(cid:192)tability
(cid:3)(cid:79) we monitor and regularly review key
performance indicators. These include
analysis of business performance and
variances from plan, occupational health
and safety incidents, and error and
exception reporting
(cid:3)(cid:79) selective recruitment, succession
planning and other human resource
policies and practices ensure that staff
skills are aligned with Serco’s current
and future needs
(cid:3)(cid:79) 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
(cid:3)(cid:79) 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 signi(cid:192)cant capital expenditure
(cid:3)(cid:79) 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
(cid:3)(cid:79) the Directors’ Report describes
our approach to health, safety and
environmental protection. Quali(cid:192)ed and
experienced staff in each business unit
provide advice and support on health,
safety and environmental issues and
undertake regular audits
(cid:3)(cid:79) 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
(cid:3)(cid:79) the Chief Information Of(cid:192)cer is responsible
for ensuring that systems and processes
are in place to ensure the con(cid:192)dentiality,
integrity and availability of sensitive
information and the associated
information systems that support our
business activities
72
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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.
The Head of Internal Audit oversees the
internal audit process, as well as acting as
the conduit for sharing best practice, and
(cid:193)agging emerging risks to ensure each part
of the business bene(cid:192)ts 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 external audits. This third-party scrutiny
signi(cid:192)cantly increases the scope of auditing
conducted across the Group each year.
The Board con(cid:192)rms that the actions it
considers necessary are being taken to
remedy the failings and weaknesses which
it has determined to be signi(cid:192)cant from its
review of the internal controls across the
Group. The Board con(cid:192)rms that it has not
been advised of material weaknesses in
(cid:192)nancial reporting as part of the review
of the internal control system.
(cid:3)(cid:79) our Ethics Committee has responsibility
for the review of ethical issues that may
arise from our current and future activities
(cid:3)(cid:79) the Company Secretary manages a
con(cid:192)dential reporting service, to which
staff can report illegal, dangerous,
dishonest or unethical activities. This
process was enhanced and relaunched
at the end of 2010
(cid:3)(cid:79) we have crisis and business continuity
plans in place to manage crisis events,
both within divisions and the Group.
Internal audit
An integral part of risk management is
assurance that the controls identi(cid:192)ed to
manage risks are operating and effective.
The Head of Internal Audit is responsible for
delivery of the assurance strategy, ensuring
our assurance programme remains aligned
to test the key controls managing the Group’s
risks. Internal audit is delivered at three levels
across the business:
(cid:3)(cid:79) Group internal audit
(cid:3)(cid:79) functional internal audit, and
(cid:3)(cid:79) divisional internal audit.
The Head of Internal Audit leads the
Group internal audit programme, which
is independently delivered by KPMG LLP.
Its (cid:192)ndings 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 (cid:192)nance 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 systems and
security policy compliance.
Serco_AR10_Section3g.indd 73
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Serco Group plc Annual report and accounts 2010
73
Section 3
Principal risks and uncertainties
Market risks
Risk
(cid:54)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:42)(cid:82)(cid:89)(cid:72)(cid:85)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:83)(cid:82)(cid:79)(cid:76)(cid:70)(cid:76)(cid:72)(cid:86)(cid:15)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:87)(cid:88)(cid:85)(cid:72)(cid:3)(cid:79)(cid:72)(cid:89)(cid:72)(cid:79)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:88)(cid:71)(cid:74)(cid:72)(cid:87)(cid:68)(cid:85)(cid:92)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:68)(cid:76)(cid:81)(cid:87)(cid:86)
Description/Comment
Impact
Mitigation
As a major proportion of Serco’s customers are governments and
governmental agencies, a substantial part of the business is dependent
on government policies, budget priorities and regulatory or political
constraints, in particular those regarding maintaining and improving public
infrastructure, which could have a signi(cid:192)cant impact on the size, scope,
timing and duration of contracts and orders under them and therefore
on the level of business that we may win. As such, these businesses
are susceptible to changes in government, government policy, budget
allocations and the political environment, primarily in the UK and the US.
Any reduction in such government expenditure and funding could result
in a suspension, cancellation, termination or non-renewal of contracts.
Revenues may also be adversely affected by changes to the UK
Government’s or US Government’s policy in respect of outsourcing.
(cid:3)(cid:79) Reduction in market opportunities
(cid:3)(cid:79) Changes to terms of existing
or new contracts
(cid:3)(cid:79) Failure to meet growth
or pro(cid:192)t expectations
(cid:3)(cid:79) Business strategy
(cid:3)(cid:79) Diverse business across
geographies and markets
(cid:3)(cid:79) Business signi(cid:192)cantly focused
on developed markets with
strong and established legal
systems providing protection
to changes in contract terms
Risk
(cid:41)(cid:68)(cid:76)(cid:79)(cid:88)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:90)(cid:76)(cid:81)(cid:3)(cid:68)(cid:3)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:74)(cid:76)(cid:70)(cid:3)(cid:82)(cid:85)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:69)(cid:76)(cid:71)(cid:3)(cid:82)(cid:85)(cid:3)(cid:85)(cid:72)(cid:69)(cid:76)(cid:71)
Description/Comment
Impact
Mitigation
Failure to win material bids or renew material contracts could restrict
growth opportunities for the future or have an adverse impact on Serco’s
business, (cid:192)nancial condition and results of operations. Further, a
signi(cid:192)cant number of Serco’s contracts with the UK Government, the US
Government and other public sector customers, including renewals and
extensions of previous contracts, are awarded through formal competitive
bidding processes. Competitive bidding processes present a number
of risks, including substantial cost and management time and effort to
prepare bids and proposals for contracts that may not be won. In addition,
there is often a long period between a successful competition tender offer
and entering into de(cid:192)nitive contractual documentation and (cid:192)nancial close,
and in some cases (cid:192)nancial close may not occur.
(cid:3)(cid:79) Failure to meet growth
or pro(cid:192)t expectations
(cid:3)(cid:79) Signi(cid:192)cant (cid:192)nancial loss
or cost overrun
(cid:3)(cid:79) Damage to reputation
resulting in loss of existing
or new business
(cid:3)(cid:79) Impact on strategic objectives
(cid:3)(cid:79) Business Lifecycle Governance
process embedded in SMS
(cid:3)(cid:79) Governance structure managed
through Investment Committee,
programme and project boards,
divisional and contract boards
(cid:3)(cid:79) Business strategy and targets
managed through internal boards
(cid:3)(cid:79) Regular review and monitoring
of risk registers
(cid:3)(cid:79) Gate review and formal
sign-off process
74
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Operational risks
Risk
Any harm to the Company’s reputation could adversely impact business
Description/Comment
Impact
Mitigation
The Company is dependent on maintaining its reputation in each
jurisdiction in which it operates in order to maintain and grow its business.
It is exposed to the risk that litigation, misconduct, operational failures and
negative publicity could harm its reputation. In addition, the Company’s
reputation could also be adversely affected if its services, or the services
performed by its subcontractors, do not perform as expected. Any harm
to its reputation could have a material adverse effect on its business,
(cid:192)nancial condition and results of operations.
(cid:3)(cid:79) Failure to meet growth
or pro(cid:192)t expectations
(cid:3)(cid:79) Signi(cid:192)cant (cid:192)nancial loss
or cost overrun
(cid:3)(cid:79) Loss of contract revenue
related to operations and
service charges
(cid:3)(cid:79) Damage to reputation
resulting in loss of existing
or new business
(cid:3)(cid:79) Robust bidding and contract
review process including
(cid:192)nancial, technical and
commercial reviews
(cid:3)(cid:79) Governance structure managed
through Investment Committee,
programme and project boards,
divisional and contract boards
(cid:3)(cid:79) Business strategy and targets
(cid:3)(cid:79) Regular review and monitoring
(cid:3)(cid:79) Impact on strategic objectives
of risk registers
(cid:3)(cid:79) Gate review and formal
sign-off process
(cid:3)(cid:79) Quality management systems
Risk
(cid:41)(cid:68)(cid:76)(cid:79)(cid:88)(cid:85)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:86)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:83)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:80)(cid:72)(cid:86)(cid:15)(cid:3)(cid:76)(cid:81)(cid:70)(cid:79)(cid:88)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:76)(cid:81)(cid:3)(cid:68)(cid:74)(cid:85)(cid:72)(cid:72)(cid:71)(cid:3)(cid:192)(cid:91)(cid:72)(cid:71)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)
Description/Comment
Impact
Mitigation
Serco has a number of complex programmes which it is contracted
to deliver for the customer. These are often let on a (cid:192)xed price basis
irrespective of the actual costs incurred, and therefore if costs exceed
the contract ceiling the Company may not be able to obtain full
reimbursement. Further, some projects require delivery in accordance
with speci(cid:192)ed milestones on agreed dates. Signi(cid:192)cant adverse (cid:192)nancial
consequences can be imposed where milestones are not met or a project
is not delivered on time. The length and complexity of such projects mean
that management estimates can be particularly dif(cid:192)cult to make and could
turn out to be inaccurate.
(cid:3)(cid:79) Failure to meet growth
or pro(cid:192)t expectations
(cid:3)(cid:79) Signi(cid:192)cant (cid:192)nancial loss
or cost overrun
(cid:3)(cid:79) Loss of contract revenue
related to operations and
service charges
(cid:3)(cid:79) Damage to reputation
resulting in loss of existing
or new business
(cid:3)(cid:79) Impact on strategic objectives
(cid:3)(cid:79) Robust bidding and contract
review process including
(cid:192)nancial, technical and
commercial reviews
(cid:3)(cid:79) Governance structure managed
through Investment Committee,
programme and project boards,
divisional and contract boards
(cid:3)(cid:79) Robust cost accounting
(cid:3)(cid:79) Internal audit
(cid:3)(cid:79) Business strategy and targets
(cid:3)(cid:79) Regular review and monitoring
of risk registers
(cid:3)(cid:79) Gate review and formal
sign-off process
(cid:3)(cid:79) Quality management systems
Risk
(cid:41)(cid:68)(cid:76)(cid:79)(cid:88)(cid:85)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:72)(cid:73)(cid:192)(cid:70)(cid:76)(cid:72)(cid:81)(cid:70)(cid:92)
Description/Comment
Impact
Mitigation
To deliver our commitments we must ensure that we have ef(cid:192)cient
operations. Our operational ef(cid:192)ciency programme facilitates delivery
of operational change and sustainable margin improvement. Failure to
deliver may impact our ability to deliver business commitments.
(cid:3)(cid:79) Erosion of pro(cid:192)t
(cid:3)(cid:79) Impact on competitiveness
(cid:3)(cid:79) Damage to reputation
resulting in loss of existing
or new business
(cid:3)(cid:79) Failure to meet customer
expectations and
business strategy
(cid:3)(cid:79) Business strategy and
supporting plans
(cid:3)(cid:79) Internal governance structure
(cid:3)(cid:79) Business review
(cid:3)(cid:79) Internal audit
(cid:3)(cid:79) LEAN/Continuous Improvement
programme
(cid:3)(cid:79) Quarterly management reporting
Serco_AR10_Section3g.indd 75
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Serco Group plc Annual report and accounts 2010
75
Section 3
Principal risks and uncertainties
Operational risks continued
Risk
Major information security breach
Description/Comment
Impact
Mitigation
Serco must comply with restrictions on the use of con(cid:192)dential and
classi(cid:192)ed data and provide for secure transmission of such information.
This is a heightened risk particularly with respect to government
contracts due to the sensitive and con(cid:192)dential nature of government
data. Despite controls to ensure the con(cid:192)dentiality of such information,
Serco may breach restrictions or be subject to attack from computer
programmes that attempt to penetrate its network security and
misappropriate con(cid:192)dential information.
(cid:3)(cid:79) Damage to reputation resulting
in loss of existing or new
business (disquali(cid:192)cation from
future tenders, contract
termination, etc.)
(cid:3)(cid:79) Impact on strategic objectives
(cid:3)(cid:79) Costly to rectify and potential for
dilution of shareholder returns
(cid:3)(cid:79) Criminal and civil action
(cid:3)(cid:79) Contract and business external
accreditations withdrawn
(cid:3)(cid:79) Signi(cid:192)cant media attention
and future scrutiny
(cid:3)(cid:79) Information Systems policy,
systems and embedded
governance structure
(cid:3)(cid:79) Think Privacy campaign to raise
awareness and strengthen
control processes
(cid:3)(cid:79) User and data management
including data encryption,
information classi(cid:192)cation,
data cleansing and
password controls
(cid:3)(cid:79) ISO 27000 certi(cid:192)cation
(cid:3)(cid:79) Internal and external audit
Risk
Major IT failure or prolonged loss of critical IT systems
Description/Comment
Impact
Mitigation
The IT Strategy is focused on standardising common processes,
establishing common business systems and enabling ways of working by
providing and embedding tools that support what we do. Within this the
Company has de(cid:192)ned enterprise applications. These are key information
technology based business systems within Serco. They include SAP for
Finance, Procurement and Human Resources; Payroll, Risk Management,
Safety Assurance, email, intranet and Nimbus Control for Process
Excellence systems. Failings in the systems have the potential to seriously
impact the management of the business.
(cid:3)(cid:79) Damage to reputation
resulting in loss of existing
or new business
(cid:3)(cid:79) Impact on strategic objectives
(cid:3)(cid:79) Inability to meet contract
requirements or perform core
business processes
(cid:3)(cid:79) Costly to rectify and potential for
dilution of shareholder returns
(cid:3)(cid:79) Signi(cid:192)cant media attention and
future scrutiny
(cid:3)(cid:79) Information policies and
systems and governance
structure
(cid:3)(cid:79) Data recovery capability
designed into systems
and periodically tested
(cid:3)(cid:79) Design out single points
of failure
(cid:3)(cid:79) Server and system performance
monitoring and reporting
(cid:3)(cid:79) Capacity management
(cid:3)(cid:79) Data back-up and business
continuity plans in place
Governance risks
Risk
(cid:54)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:76)(cid:81)(cid:70)(cid:76)(cid:71)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:69)(cid:85)(cid:76)(cid:69)(cid:72)(cid:85)(cid:92)(cid:3)(cid:82)(cid:85)(cid:3)(cid:70)(cid:82)(cid:85)(cid:85)(cid:88)(cid:83)(cid:87)(cid:3)(cid:83)(cid:85)(cid:68)(cid:70)(cid:87)(cid:76)(cid:70)(cid:72)
Description/Comment
Impact
Mitigation
Serco’s operations are principally in the UK, the US, Europe, the UAE,
Australia and India. Certain of our businesses carry out work in other
countries such as Canada, Costa Rica, Hong Kong, Afghanistan, Iraq
and China. Operating in international markets brings with it inherent risks
including bribery and corruption, particularly in certain developing nations.
We recognise that proposed UK legislation around bribery and corruption
will establish more stringent legal requirements.
(cid:3)(cid:79) Legal action and (cid:192)nes against
(cid:3)(cid:79) Policies and systems embedded
the Company
(cid:3)(cid:79) Disbarment from tender lists
(cid:3)(cid:79) Damage to reputation
resulting in loss of existing
or new business
(cid:3)(cid:79) Signi(cid:192)cant media attention
and future scrutiny
in SMS
(cid:3)(cid:79) Code of Conduct
(cid:3)(cid:79) Ethics Committee
(cid:3)(cid:79) Speak Up process
(cid:3)(cid:79) Ethics and compliance
programme and training
(cid:3)(cid:79) Risk assessment
(cid:3)(cid:79) Third-party contracts
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Risk
Major accident or incident
Description/Comment
Impact
Mitigation
It is possible that a major catastrophic event, such as a major train
derailment or air traf(cid:192)c accident, could occur at one of the projects in
relation to which Serco has provided professional design, construction,
engineering or support services. Such a catastrophic event could result
in the personal injury or death of one or more employees of the Company,
employees of other subcontractors working on the project or members
of the public, signi(cid:192)cant, actionable environmental harm, and/or extensive
damage to third-party property. In the event that such a catastrophic event
is found or perceived to be caused by the negligence of Serco, it could
subject the Company to claims for personal injury, wrongful death,
property damage by customers, subcontractors, governments, employees
or members of the public, which could lead to the payment of extensive
damages and result in signi(cid:192)cant adverse publicity and reputational
harm. Such adverse publicity and reputational harm could lead to a loss
of business.
(cid:3)(cid:79) Deaths or serious injuries to
employees or third parties
(cid:3)(cid:79) Major environmental damage
(cid:3)(cid:79) Severe (cid:192)nancial impact
((cid:192)ne by regulators, suspension
of operating licence,
compensation, clean up, etc.)
(cid:3)(cid:79) Loss of business (disquali(cid:192)cation
from future tenders, contract
termination, etc.)
(cid:3)(cid:79) Robust management systems
subject to external, regulatory
and internal audit
(cid:3)(cid:79) System certi(cid:192)cation and
regulatory approval
(cid:3)(cid:79) Formal oversight through Group
Risk Management Committee,
Health Safety and Environment
Oversight Group, divisional
and internal boards
(cid:3)(cid:79) Contract and business external
(cid:3)(cid:79) Crisis management and business
accreditations withdrawn
(cid:3)(cid:79) Signi(cid:192)cant media attention/
future scrutiny
continuity plans in place
(cid:3)(cid:79) Insurance
(cid:3)(cid:79) Strategy, objectives, targets
(cid:3)(cid:79) Criminal and civil action against
and regular reporting
Company or individuals
(cid:3)(cid:79) Formal assurance structure
operating within de(cid:192)ned
competencies
(cid:3)(cid:79) Staff induction and training
Risk
(cid:54)(cid:76)(cid:74)(cid:81)(cid:76)(cid:192)(cid:70)(cid:68)(cid:81)(cid:87)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:72)(cid:81)(cid:72)(cid:85)(cid:74)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:85)(cid:69)(cid:82)(cid:81)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)
Description/Comment
Impact
Mitigation
We must understand our environmental impacts, manage them and
measure our performance to demonstrate improvement. Fuel poverty
is likely to signi(cid:192)cantly impact energy prices. Increases in energy costs
are conservatively estimated at 10% per year for many years to come.
We need to make sure we are managing our consumption to minimise
the cost and reduce our carbon emissions. We also need to recognise
and respond to increasing legislation. For example the UK Government’s
Carbon Reduction Commitment.
(cid:3)(cid:79) Legal action and (cid:192)nes against
(cid:3)(cid:79) Environmental policy
the Company
(cid:3)(cid:79) Signi(cid:192)cant (cid:192)nancial loss
(cid:3)(cid:79) Disbarment from tender lists
(cid:3)(cid:79) Damage to reputation
resulting in loss of existing
or new business
(cid:3)(cid:79) Signi(cid:192)cant media attention
and future scrutiny
and systems
(cid:3)(cid:79) Environment Oversight Group
(cid:3)(cid:79) Aspects and impacts
assessment
(cid:3)(cid:79) ISO 14001
(cid:3)(cid:79) Carbon Trust Standard
(cid:3)(cid:79) Reporting methodology
and systems
(cid:3)(cid:79) Environmental strategy
objectives and targets
Risk
(cid:38)(cid:82)(cid:80)(cid:83)(cid:79)(cid:76)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:91)(cid:3)(cid:79)(cid:68)(cid:90)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:85)(cid:72)(cid:74)(cid:88)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)
Description/Comment
Impact
Mitigation
Serco must comply with laws and regulations relating to the formation,
administration and performance of government contracts that affect
how it does business and may impose added costs. Further, it is required
to obtain environmental and safety permits from various government
authorities which require periodic renewal or review of their conditions.
Failure to comply with any of these regulations could result in civil and
criminal penalties and administrative sanctions, including termination
of contracts, forfeiture of pro(cid:192)ts, harm to its reputation, suspension of
payments, (cid:192)nes and suspension or debarment from doing business
with government.
(cid:3)(cid:79) Substantial monetary damages
(cid:3)(cid:79) Policies and systems embedded
or criminal violations
(cid:3)(cid:79) Damage to reputation
resulting in loss of existing
or new business
(cid:3)(cid:79) Disbarment from tender lists
(cid:3)(cid:79) Signi(cid:192)cant media attention
and future scrutiny
in SMS
(cid:3)(cid:79) Code of Conduct
(cid:3)(cid:79) Risk assessment
(cid:3)(cid:79) Third-party contracts
(cid:3)(cid:79) System certi(cid:192)cation and
regulatory approval
(cid:3)(cid:79) Internal board and
governance structure
(cid:3)(cid:79) Staff induction and training
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77
Section 3
Principal risks and uncertainties
People risks
Risk
Failure to attract and retain senior management and other key employees
Description/Comment
Impact
Mitigation
The success of the Company depends on the efforts, abilities, experience
and expertise of the senior management teams and on recruiting,
retaining, motivating, effectively communicating with and developing
highly skilled and competent people at all levels of the organisation.
There can be intense competition for personnel from other companies and
organisations and there may at any time be shortages in the availability of
appropriately skilled people at all levels within Serco. Further, the Company
cannot guarantee the retention of such key executives and technical
personnel. The failure of the Company to retain and/or recruit additional
or substitute senior managers and/or other key employees could have
a material adverse effect on its business.
(cid:3)(cid:79) Increased cost in recruitment
activity and time taken to
(cid:192)ll roles
(cid:3)(cid:79) Instability and loss of
business continuity
(cid:3)(cid:79) Dilution of brand and values
(cid:3)(cid:79) Reduced employee
engagement through loss
of compelling leadership
(cid:3)(cid:79) Strengthen competitors
(loss of leaders to them)
(cid:3)(cid:79) Impact on business –
risk of not achieving level
of planned growth
(cid:3)(cid:79) People policies and
systems, strategy and targets
supported by governance
structure including
Remuneration Committee
(cid:3)(cid:79) Succession planning
(cid:3)(cid:79) Leadership model
(cid:3)(cid:79) Annual external (independent)
remuneration review
(cid:3)(cid:79) Job structure and
grading system
(cid:3)(cid:79) Talent database and leadership
development programme
(cid:3)(cid:79) Employment engagement
strategy including annual
staff survey
Risk
Failure to manage union/industrial relations
Description/Comment
Impact
Mitigation
A signi(cid:192)cant number of Serco’s employees are members of trade unions
in the United Kingdom and a number are members of trade unions in the
United States and other countries. These include operations where a
failure to manage relationships may result in industrial action by Serco
staff in high-pro(cid:192)le business operations, i.e. where there will be signi(cid:192)cant
reputational damage, client or media attention. Some sectors of the
business are subject to union recognition agreements. The Company
maintains a number of relationships with trade unions and staff through
work councils and other bodies.
(cid:3)(cid:79) Failure to deliver contractual
(cid:3)(cid:79) Policies and systems embedded
requirements
(cid:3)(cid:79) Instability and loss of
business continuity
(cid:3)(cid:79) Dilution of brand and values
(cid:3)(cid:79) Reduced employee
engagement
(cid:3)(cid:79) Damage to reputation
resulting in loss of existing
or new business
(cid:3)(cid:79) Signi(cid:192)cant media attention
and future scrutiny
in SMS
(cid:3)(cid:79) Industrial Relations strategy
(cid:3)(cid:79) Industrial Relations
Working Group
(cid:3)(cid:79) Stakeholder management
of key relationships
(cid:3)(cid:79) Annual external (independent)
remuneration review
(cid:3)(cid:79) Job structure and
grading system
(cid:3)(cid:79) Employment engagement
strategy
Finance risks
Risk
The impairment of goodwill could adversely impact reported results
Description/Comment
Impact
Mitigation
Goodwill accounts for approximately one-third of the Serco Group’s
recorded total assets as at 31 December 2010. Serco evaluates goodwill
for impairment annually, or more frequently when evidence of potential
impairment exists. Any decrease in expected cash (cid:193)ows or a deterioration
in market conditions could require Serco to record future impairment
charges that could have a material impact on the (cid:192)nancial position and
results of operations.
(cid:3)(cid:79) Inability to meet pro(cid:192)t
expectations
(cid:3)(cid:79) Damage to reputation and
shareholder con(cid:192)dence
(cid:3)(cid:79) Impact on strategic objectives
(cid:3)(cid:79) Internal board and
governance structure
(cid:3)(cid:79) Strategic plans
(cid:3)(cid:79) Business plans
(cid:3)(cid:79) Business Lifecycle
Governance process
(cid:3)(cid:79) Financial review and reporting
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Risk
(cid:36)(cid:71)(cid:71)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:73)(cid:88)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:85)(cid:72)(cid:84)(cid:88)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:86)(cid:70)(cid:75)(cid:72)(cid:80)(cid:72)(cid:86)
Description/Comment
Impact
Mitigation
Serco operates de(cid:192)ned bene(cid:192)t pension schemes for qualifying employees
of its subsidiaries in the UK and other European countries. In addition,
we have interests in joint ventures, which operate de(cid:192)ned bene(cid:192)t schemes
for qualifying employees. The nature of a de(cid:192)ned bene(cid:192)t scheme means
that the funding levels of the schemes are subject to factors outside
Serco’s control which could create or impact a de(cid:192)cit in the scheme at
future actuarial valuations. If the de(cid:192)cit in the scheme increases at future
actuarial valuations, the Group may be required to make additional cash
contributions to the schemes in the future, preventing the use of cash
for other purposes, which could have a material impact on the Group’s
business, (cid:192)nancial condition and results of operations over the long term.
(cid:3)(cid:79) Inability to meet pro(cid:192)t
expectations
(cid:3)(cid:79) Actuarial assessment of
scheme liabilities
(cid:3)(cid:79) Increase in cash contributions
(cid:3)(cid:79) Appropriate investment
to our pension schemes
management
(cid:3)(cid:79) HR policy, systems and
governance structure including
Remuneration Committee
and Board of Pension Trustees
(cid:3)(cid:79) Annual external (independent)
remuneration review
(cid:3)(cid:79) Industrial Relations strategy
(cid:3)(cid:79) Independent measurement
of asset returns
(cid:3)(cid:79) Internal audit
Risk
(cid:41)(cid:79)(cid:88)(cid:70)(cid:87)(cid:88)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:73)(cid:82)(cid:85)(cid:72)(cid:76)(cid:74)(cid:81)(cid:3)(cid:70)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:70)(cid:92)(cid:3)(cid:72)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:81)(cid:82)(cid:87)(cid:3)(cid:72)(cid:73)(cid:73)(cid:72)(cid:70)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3)(cid:75)(cid:72)(cid:71)(cid:74)(cid:72)(cid:71)
Description/Comment
Impact
Mitigation
The international nature of Serco’s business means it is exposed to
(cid:193)uctuations in foreign currency exchange rates in relation to various
currencies, primarily the US dollar, the Australian dollar and the Euro,
arising from the translation of earnings. In addition, some of Serco’s
bank debt is denominated in currencies other than pound Sterling.
(cid:3)(cid:79) Material effect on the Group’s
future results of operations
and (cid:192)nancial position
(cid:3)(cid:79) The Group hedges short-term
transaction risks that are
material in value
(cid:3)(cid:79) Management of translational risk
by the part currency matching
of borrowings with the net
assets of overseas subsidiaries
Risk
Fluctuations in interest rates
Description/Comment
Impact
Mitigation
Historically, Serco has (cid:192)nanced its operations partly through cash (cid:193)ow
generated by bank debt. Adverse movements in interest rates could
therefore impact pro(cid:192)tability and net assets.
(cid:3)(cid:79) Inability to meet
pro(cid:192)t expectations
(cid:3)(cid:79) Impact on competitiveness
(cid:3)(cid:79) Impact net assets
(cid:3)(cid:79) Fixed rate debt instruments
and interest rate derivatives
that swap (cid:193)oating for (cid:192)xed rates
Serco_AR10_Section3g.indd 79
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Serco Group plc Annual report and accounts 2010
79
Section 4
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 Business
Conduct and Ethics Standard that the Company and Group have adopted.
Throughout 2010 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 the ‘Our performance’ section on pages 16 to 79 and the
Remuneration Report on pages 92 to 103, provide details of how the Company has applied the principles and complies with the provisions of
the Code.
In May 2010 the Financial Reporting Council published a new code, the UK Corporate Governance Code (the Governance Code) which
replaces the Code for (cid:192)nancial years beginning on or after 29 June 2010. The FRC has stated that changes have been made to help company
boards to become more effective and more accountable to shareholders. In light of the Governance Code we are reviewing and will introduce
additional elements of governance and internal control processes as appropriate. For example, the Board has decided that all Directors should
stand for re-election on an annual basis, commencing at the Company’s Annual General Meeting in May 2011.
The Board of Directors
Board composition
Currently the Board has six members: the Chairman, two Executive Directors and three Non-Executive Directors. Two Non-Executive Directors
retired at the end of 2010; as at the date of this report one new Non-Executive Director has been appointed and an externally-led recruitment
process is ongoing for at least one other. No individual or group of individuals dominates the Board’s decision-making. 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 pro(cid:192)les of all Directors can be found on pages 90 and 91.
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 Governance function is
tasked by the Group to develop and oversee corporate processes for the identi(cid:192)cation 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 16 to 79 details the internal control and risk policies, procedures and management framework adopted by the Group. The Corporate
Responsibility Review 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.
Con(cid:193)icts of interest
The Company’s Articles of Association, as approved by shareholders at the Company’s 2010 annual general meeting, include provisions
re(cid:193)ecting recommended practice concerning con(cid:193)icts of interest. The Board has in place procedures for Directors to report any potential
or actual con(cid:193)icts to the other members of the Board for their authorisation where appropriate. In deciding whether to authorise a con(cid:193)ict or
potential con(cid:193)ict 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 con(cid:193)icts disclosed, and authorisations given, is repeated at least annually. Any con(cid:193)icts or potential con(cid:193)icts
considered by the Board and any authorisations given are recorded in the Board minutes and in a Register of Directors’ Con(cid:193)icts 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:
(cid:79)(cid:3) Group strategy
(cid:79)(cid:3) Annual (cid:192)nancial and operating plans
(cid:79)(cid:3) Major capital expenditure, acquisitions or divestments
(cid:79)(cid:3) Annual and half-year (cid:192)nancial results
(cid:79)(cid:3) Satisfying itself as to the integrity of (cid:192)nancial information
(cid:79)(cid:3) Dividend policy
(cid:79)(cid:3) Ensuring adequate succession planning for the Board and senior management and appointing and removing Directors, the Company
Secretary and Committee members
(cid:79)(cid:3) Treasury policy
(cid:79)(cid:3) Review of the effectiveness of the Group’s system of internal control and risk management process
(cid:79)(cid:3) Training and development of the Board and the Company Secretary.
Other speci(cid:192)c responsibilities are delegated to Board Committees which operate within clearly de(cid:192)ned terms of reference. Details of the
responsibilities delegated to the Committees are given on pages 83 and 84.
80
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:27)(cid:19)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Information (cid:193)o(cid:90)
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.
Historically, Board meetings have been held four times a year over two days at a time; from 2011 onwards an additional two Board meetings will
be held for one day each which will focus on strategy development for both the Group and individual divisions. Board meetings are structured
to allow open discussion of the strategy, trading and (cid:192)nancial 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 as required.
The attendance of individual Directors at Board meetings held during the year is shown in the table on page 82.
Company Secretary and independent advice
The Company Secretary is responsible for advising the Board on all corporate governance matters, ensuring both that all Board procedures are
followed and good information (cid:193)ow 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, Alastair Lyons is responsible for:
(cid:79)(cid:3) Ensuring the effectiveness and successful operation of the Board, its agenda and processes
(cid:79)(cid:3) Promoting the highest standards of corporate governance and ensuring appropriate communication with shareholders on these standards
and the Group’s overall performance
(cid:79)(cid:3) Ensuring appropriate Director training and development takes place
(cid:79)(cid:3) Board succession planning.
The Chief Executive, Christopher Hyman, is responsible for:
(cid:79)(cid:3) The formation and implementation of the Group’s global strategy
(cid:79)(cid:3) Delivery of the Group’s business plan
(cid:79)(cid:3) Providing motivation and leadership to the operating divisions, chairing the Executive Committee and setting its style and tone
(cid:79)(cid:3) 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
(cid:79)(cid:3) Providing leadership and representation of the Group with major customers, shareholders and industry organisations.
Senior Independent Director
Following the retirement of Margaret Ford, who served as Senior Independent Director throughout 2010, David Richardson was appointed to
that role in January 2011. As part of this role, David 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 96.
Signi(cid:192)cant other commitments of the Chairman
Alastair Lyons is non-executive Chairman of Admiral Group plc, Deputy Chairman and Senior Independent Director of Bovis Homes Group PLC,
Senior Independent Director of Phoenix Group Holdings, and a non-executive director of the Towergate Insurance Group.
The Board believes that Alastair holds a well-balanced portfolio of positions which allow him to perform his duties as Chairman appropriately.
Re-election of Directors
The Company’s Articles of Association stipulate that each Director shall retire (but be eligible for re-election) at the annual general meeting
held in the third calendar year following the year in which he or she was elected or last re-elected by the Company. 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,
excluding the Chairman, who have served for more than nine years will be subject to annual re-election.
In accordance with provisions contained within the Governance Code and applying to the Company from 2011, all Directors will be retiring and
standing for re-election at the 2011 Annual General Meeting. Their names are set out in the Notice of Annual General Meeting. Furthermore, all
Directors standing for re-election will do so on an annual basis at each subsequent annual general meeting.
Serco Group plc Annual report and accounts 2010
81
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(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Section 4
Corporate Governance Report
The Non-Executive Directors
Independence
All the Non-Executive Directors are independent of management and have no cross-directorships or signi(cid:192)cant 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 page 97 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. This took place in 2010 in respect of Kevin Beeston’s
tenure as Chairman of the Company. The performance of the current Chairman will be assessed on completion of his (cid:192)rst year in position
in 2011.
Board meetings and attendance
From 2011 the Board will hold its meetings on a bi-monthly basis with ad hoc meetings in between if required. The frequency and content of
Board meetings are reviewed by the Board annually.
The attendance of the individual Directors at Board and Committee meetings of which they were members during 2010 was as follows:
Kevin Beeston
Alastair Lyons
Tom Corcoran
Christopher Hyman
Andrew Jenner
Leonard V. Broese van Groenou
Margaret Ford
David Richardson
Board
(5 meetings)
Audit
(3 meetings)
Remuneration
(4 meetings)
Nomination
(2 meetings)
2 (2)
4 (4)
5
5
5
5
5
5
n/a
n/a
3
n/a
n/a
3
3
3
n/a
n/a
3
n/a
n/a
4
4
4
- (1)
1 (1)
2
n/a
n/a
2
2
2
Notes:
1. n/a means that the speci(cid:192)ed Director is not a member of that Committee, although he or she may attend meetings at the invitation of the Chairman of
the Committee.
2. Where a number is given in brackets against a Director’s attendance, this is the number of meetings which took place during their tenure.
Board effectiveness
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 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. In 2010 Alastair Lyons completed an exceptionally thorough programme of meetings and site
visits, both in the UK and overseas, meeting management and employees of the Group as well as other key external stakeholders such as the
external auditors and Company brokers.
Continued professional development
During 2010 the Board members were all engaged in a range of training and professional development activities. In October 2010, the Audit
Committee attended an internal workshop to gain an in depth understanding of the Group-wide Internal Audit approach, its effectiveness and
relationship with the wider governance framework including the SMS and Risk Management methodology.
The Board considers the training needs of the Executive and Non-Executive Directors plus the Company Secretary. All Board members
are encouraged to attend relevant training courses at the Company’s expense. The development needs of the Directors and the Company
Secretary fall within the remit of the Chairman who reviews and agrees these individually.
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Serco Group plc Annual report and accounts 2010
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(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
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 2010. The evaluation was performed in November 2010 by all Directors through
the completion of an evaluation questionnaire followed by one-to-one meetings as appropriate. Matters covered by the Board questionnaire
included: the effectiveness and frequency of board meetings; risk and risk management; Group strategy; the structure and composition
of the Board including diversity and the skill-set and experience of its members; stakeholder engagement; and a traditional analysis of its
strengths, weakness, opportunities and threats. There was general agreement that, overall, the Board and its Committees continued to operate
effectively throughout the period. It was noted that the Board was in a transitional period, both in terms of being led by a new Chairman and
the recruitment of new Non-Executive Directors following retirements, and the effective induction and integration of the latter were cited as key
determinants of the continuing successful operation of the Board.
The Directors continue to believe the openness and experience of the Board members are key strengths. Directors feel well informed and
believe that key issues such as risk and strategy are very well managed within rigorous processes, with suf(cid:192)cient opportunity for challenge and
debate. The increased number of Board meetings proposed from 2011 onwards was noted as a development that would further strengthen the
robustness of the Company’s stewardship and deepen the understanding by, and communication between, Board members.
The gender imbalance of the Board, following the retirement of Margaret Ford, was noted as part of the evaluation. The Board is fully supportive
of the emphasis placed on diversity, in particular gender diversity, within the Governance Code and this is a focus in the current recruitment of
Non-Executive Directors to the Board.
The use of an external facilitator was considered for the evaluation of the Board and all its Committees. However, as the Board had undergone
a number of changes during 2010 it was considered to be more appropriate to undertake an externally facilitated evaluation in 2011. Further, it
is the Board’s intention to comply with the requirements of the Governance Code and carry out such an external evaluation at least once every
three years.
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 for Kevin Beeston and will be for the new Chairman, Alastair Lyons,
during 2011.
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 re(cid:193)ect 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
Leonard V. Broese van Groenou and, since February 2011, Paul Brooks. Margaret Ford and Tom Corcoran served on the Committee
throughout 2010.
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 auditor) attend meetings. The Committee meets with each of the internal auditors, external auditor 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:
(cid:79)(cid:3) To monitor the integrity of the (cid:192)nancial statements of the Company, including interim management statements, and any formal
announcements relating to the Company’s (cid:192)nancial performance, reviewing signi(cid:192)cant (cid:192)nancial reporting judgements contained in them
(cid:79)(cid:3) To monitor and review the internal audit programme and ensure that the internal audit function is adequately resourced and has appropriate
standing with the Company
(cid:79)(cid:3) To review management’s and the internal auditors’ reports on the effectiveness of systems for internal (cid:192)nancial control, (cid:192)nancial reporting and
risk management
(cid:79)(cid:3) To consider the appointment, reappointment and removal of the external auditor and assess independence and objectivity of the external
auditor, ensuring that key partners are rotated at appropriate intervals and relevant UK professional and regulatory requirements are taken
into account
(cid:79)(cid:3) To recommend the audit fee to the Board and pre-approve any fees in respect of non-audit services provided by the external auditor and to
ensure that the provision of non-audit services does not impair the external auditor’s independence or objectivity
(cid:79)(cid:3) To discuss with the external auditor, before the audit commences, the nature and scope of the audit and to review the auditor’s quality control
procedures and steps taken by the auditor to respond to changes in regulatory and other requirements
(cid:79)(cid:3) To oversee the process for selecting the external auditor 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 whistle-blowing policy and procedure which
applies throughout the Group. Responsibility for the operation of this policy has been delegated to the Company Secretary.
Serco Group plc Annual report and accounts 2010
83
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(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Section 4
Corporate Governance Report
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 auditor.
During 2010 the Audit Committee discharged fully its responsibilities listed above and, in doing so, considered the following:
(cid:79)(cid:3) Corporate Governance Report and statement of Directors’ Responsibilities for inclusion in the 2009 Annual Review and Accounts
(cid:79)(cid:3) 2010 Half-year Report and Auditor’s report thereon
(cid:79)(cid:3) 2010 external audit fees
(cid:79)(cid:3) Review of and enhancement to the whistle-blowing process
(cid:79)(cid:3) Assessment of the Audit Committee
(cid:79)(cid:3) 2010 internal audit programme and the proposed 2011 programme
(cid:79)(cid:3) The continuing independence of the external auditor.
Non-audit services: The Committee has recon(cid:192)rmed 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 (cid:192)nancial 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.
Auditor’s independence: The independence, objectivity and effectiveness of the external auditor have been examined by the Committee and
discussions were held regarding their terms of engagement and remuneration. The appointment of Senior Statutory Auditor is rotated every
(cid:192)ve years. As such the 2010 audit will be the (cid:192)rst of Richard Knights’ tenure following his appointment to the role at the end of Nigel Mercer’s
in 2010. 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 2011 Annual General Meeting. This recommendation has been
accepted and will be proposed to shareholders.
The Nomination Committee
Membership: The Nomination Committee is chaired by Alastair Lyons and comprises David Richardson, Leonard V. Broese van Groenou and
Paul Brooks. The Committee met twice during 2010. Margaret Ford and Tom Corcoran served on the Committee throughout 2010 and Kevin
Beeston was also a member during his tenure in 2010.
Responsibilities: Matters considered during the year included succession and contingency planning, Board structure and composition and the
appointment of successors to Kevin Beeston, Margaret Ford and Tom Corcoran.
The Committee has responsibility for the identi(cid:192)cation and nomination, for the approval of the Board, of candidates to (cid:192)ll 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 relevant (cid:192)rms of external executive search consultants being
engaged for the appointment of the new Chairman and new Non-Executive Directors. In consultation with the chosen search consultants,
speci(cid:192)cations were drawn up of the roles and attributes were identi(cid:192)ed that were felt to be essential for their effective performance, including
what would be considered acceptable in terms of time commitment.
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 92 to 103.
Executive Committees
Throughout 2010, a new Executive Committee has operated, which is chaired by the Chief Executive and comprises 11 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. The Committee met ten times during the year to review the Group’s activities and discuss management and operational issues.
Representatives from across the Serco business were invited to the meetings, as appropriate, to discuss aspects of their business or give
presentations on speci(cid:192)c topics.
Relationship with shareholders
The Company’s relationship with shareholders is given a high priority. The Annual report and accounts is available to all shareholders both in
hard copy and online at www.serco.com.
We no longer produce a printed report of our half-year results. Instead, a letter summarising these results is issued to shareholders and a copy
of the full stock exchange announcement is 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 signi(cid:192)cant contracts or transactions. All trading announcements are also
posted on the Group’s website www.serco.com.
84
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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. For the (cid:192)rst time, in 2010 shareholders attending the
AGM were invited to vote by means of a poll. A poll re(cid:193)ects the number of voting rights exercisable by each member and is considered by the
Board to be a more democratic method of voting. Such poll voting will again take place at the 2011 AGM. Shareholders are advised of the total
number of 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.
Institutional investors
The Chief Executive and Finance Director have regular dialogue with institutional investors. The Chairman also meets with institutional investors
from time to time as appropriate. 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, David Richardson is also available to meet shareholders, as Margaret Ford was
throughout her tenure, should it be required.
The Board receives an investor relations report at each meeting. 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
signi(cid:192)cant 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, the Corporate Responsibility Review, 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.
Business conduct
Serco Group operates within a management system that de(cid:192)nes the policies, standards and processes to be applied wherever we operate.
Integral to this is our policy on Business Conduct and Ethics that applies to all business divisions, operating companies and business units
throughout the world. This policy outlines the Group’s position on a wide range of ethical and legal issues including con(cid:193)icts of interest, (cid:192)nancial
inducements, human rights and legal and regulatory compliance. It applies 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 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, comprising members of the executive
team with a quorum of three and chaired by the Marketing Director, meets as required, usually monthly. As the leadership of the Company, the
executive team will make any (cid:192)ne judgements about what it considers acceptable or otherwise.
In 2010 Serco undertook a review of its whistle-blowing service and introduced a new, outsourced, Ethics Hotline for employees to report any
concerns they may have, or report any wrongdoing, that they do not feel able to raise with their line manager, human resources colleagues or
through other reporting channels. In addition to the Hotline, which is available toll-free worldwide in several languages, employees can also
make reports via email or the internet. The Company Secretary investigates independently any issues raised 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 Governance, details of the Group’s internal control and risk management processes are
contained in pages 70 to 79 of the ‘Our performance’ section. The Board con(cid:192)rms that the actions it considers necessary have been taken
to remedy any failings and weaknesses which it has determined to be signi(cid:192)cant 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 (cid:192)nancial reporting published by the Financial Reporting Council in
October 2009. This is discussed in the Finance Review starting on page 52.
Approved by the Board of Directors and signed on its behalf by:
Joanne Roberts
Secretary
1 March 2011
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Serco Group plc Annual report and accounts 2010
85
Section 4
Directors’ Report
Annual report and accounts
The Directors have pleasure in presenting the Annual report and accounts of the Group for the year ended 31 December 2010. Comparative
(cid:192)gures used in this report are for the year ended 31 December 2009. The Corporate Governance Report set out on pages 80 to 85 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 who seek a trusted partner with a
solid track record of providing assured service excellence. Our people offer operational, management and consulting expertise in the aviation,
BPO, defence, education, environmental services, facilities management, health, home affairs, information and communications technology,
knowledge services, local government, science and nuclear, transport, welfare to work and the commercial sectors.
The Chairman’s Statement and the remainder of the ‘Our performance’ section on pages 16 to 79 report on the activities during the year, post
balance sheet events, and likely future developments. The information in these reports which is required to ful(cid:192)l 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 are restricted to that approved at the Company’s annual general meeting.
The rules relating to 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 2.20p (2009: 1.85p) per ordinary share was paid on 15 October 2010. The Directors recommend a (cid:192)nal dividend of
5.15p (2009: 4.40p) per ordinary share which, if approved by shareholders at the Annual General Meeting, will be paid on 17 May 2011 to those
shareholders on the register at the close of business on 11 March 2011.
Substantial shareholdings
As at the date of this Report the Company had been noti(cid:192)ed 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:
Morstan Nominees Limited
Capital Research and Management Company
A(cid:59)A S.A.
Lloyds Banking Group plc
Fidelity International Limited
Baillie Gifford & Co
Newton Investment Management Limited
Legal & General Group plc
Ignis Investment Services Limited
Number of shares
(millions)
% held
25.1
25.0
25.0
24.2
23.9
24.0
23.6
19.5
15.5
5.11
5.08
5.07
4.96
4.93
4.92
4.85
3.99
3.15
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 90 and 91.
At the conclusion of the Company’s annual general meeting in May 2010, Kevin Beeston retired from the Board and Alastair Lyons was
appointed Non-Executive Chairman of Serco Group plc.
On 31 December 2010 Margaret Ford and Tom Corcoran retired from their positions as Non-Executive Directors of the Company.
On 26 January 2011, the Company announced the appointment of Paul Brooks as a Non-Executive Director of the Company with effect from
1 February 2011. Paul’s experience and knowledge will complement the skills and knowledge of the other Board members. It is the intention that
Paul will take over as Audit Committee Chairman on the eventual retirement of David Richardson.
86
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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 92 to 103.
Annual general meeting
The Annual General Meeting of the Company will be held at the Institution of Engineering and Technology (IET), Savoy Place, London
WC2R 0BL on 9 May 2011 at 11.00am.
The Notice of Annual General Meeting together with explanatory notes is sent to shareholders with this Report.
Financial risk policies
A summary of the Group’s treasury policies and objectives relating to (cid:192)nancial risk management, including exposure to associated risks, is on
pages 136 to 142.
Employment 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, whilst subject to Group-wide principles.
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 arrangements are made
wherever practicable 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 schemes, a share option scheme and a long
term incentive plan for senior management, which effectively aligns their interests with those of shareholders by requiring that performance
criteria 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 de(cid:192)ned policies in all of the areas it covers. These are applied within the context of our policies on
Business Conduct and Ethics. 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.
Creditor payment 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 2010 were 31 days (2009: 32 days).
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(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
87
Section 4
Directors’ Report
Donations
The Group continues to encourage all staff to participate in their local communities and has a process to assess both the value and type of
investment on a worldwide basis. This measure is based upon the Business in The Community (BiTC) reporting format.
The value of this investment in 2010 at £2,271,575 (2009: £1,746,261) represents 1.06% of the Group’s pre-tax pro(cid:192)t.
During the year neither the Company nor the Group made political donations and they intend to continue with this policy. Within the US business
there exists a Political Action Committee (PAC), which is funded entirely by employees and their spouses. The Serco PAC and its contributions
are administered in strict accordance with regulatory requirements. 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 ought to have taken as a Director in order to make himself 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 of(cid:192)ce 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
1 March 2011
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Directors’ Responsibilities
The Directors are responsible for preparing the Annual report, Directors’ Report, Directors’ Remuneration Report and the (cid:192)nancial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare (cid:192)nancial statements for each (cid:192)nancial year. Under that law the Directors are required by the
International Accounting Standard (IAS) Regulation to prepare the Group (cid:192)nancial statements under International Financial Reporting Standards
(IFRS) as adopted by the European Union. The Group (cid:192)nancial statements are also required by law to be properly prepared in accordance with
the Companies Act 2006 and Article 4 of the IAS Regulation.
IAS 1 requires that IFRS (cid:192)nancial statements present fairly for each (cid:192)nancial year the Group’s (cid:192)nancial position, (cid:192)nancial performance and cash
(cid:193)ows. This requires the faithful representation of the effects of transactions, other events and conditions in accordance with the de(cid:192)nitions 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.
This requires Directors to:
(cid:79)(cid:3) properly select and apply accounting policies;
(cid:79)(cid:3) present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information;
(cid:79)(cid:3) provide additional disclosures when compliance with the speci(cid:192)c requirements in IFRSs are insuf(cid:192)cient to enable users to understand the
impact of particular transactions, other events and conditions on the Group’s (cid:192)nancial position and (cid:192)nancial performance; and
(cid:79)(cid:3) make an assessment of the company’s ability to continue as a going concern.
The Directors have elected to prepare the parent company (cid:192)nancial statements in accordance with United Kingdom Generally Accepted
Accounting Practice (UK Accounting Standards and applicable law). The parent company (cid:192)nancial statements are required by law to give
a true and fair view of the state of affairs of the company and of the pro(cid:192)t or loss of the company for that period. In preparing these (cid:192)nancial
statements, the Directors are required to:
(cid:79)(cid:3) select suitable accounting policies and then apply them consistently;
(cid:79)(cid:3) make judgments and estimates that are reasonable and prudent;
(cid:79)(cid:3) state whether applicable UK accounting standards have been followed; and
(cid:79)(cid:3) prepare the (cid:192)nancial statements on the going concern basis unless it is inappropriate to presume that the company will continue in business.
The Directors are responsible for keeping proper accounting records that are suf(cid:192)cient to show and explain the company’s transactions and
disclose with reasonable accuracy at any time the (cid:192)nancial position of the company and enable them to ensure that the parent company
(cid:192)nancial 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 (cid:192)nancial information included on the Company’s website.
Legislation in the United Kingdom governing the preparation and dissemination of (cid:192)nancial statements may differ from legislation in other
jurisdictions.
Responsibility Statement
We con(cid:192)rm to the best of our knowledge:
(cid:79)(cid:3) the (cid:192)nancial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets,
liabilities, (cid:192)nancial position and pro(cid:192)t or loss of the Company and the undertakings included in the consolidation taken as a whole; and
(cid:79)(cid:3) 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
1 March 2011
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Serco Group plc Annual report and accounts 2010
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Section 4
Directors’ profiles
Alastair Lyons
Christopher Hyman
Andrew Jenner
David Richardson
Leonard V. Broese van Groenou
Paul Brooks
Alastair Lyons CBE (57)
Job title: Chairman
Appointment: Alastair was appointed a Non-Executive Director of Serco Group plc in March 2010, becoming Chairman at the conclusion of the
Company’s AGM in May 2010.
Responsibilities: Alastair is responsible for the effective operation of the Board and oversight of corporate governance. He is Chair of the
Nomination Committee.
Experience: In his executive career Alastair was Group Finance Director and subsequently Chief Executive of the National & Provincial Building
Society. When the society was acquired in 1996 by Abbey National he joined the Abbey National main Board as Managing Director of its
Insurance Division.
In 1997 he became Chief Executive of the pensions specialist NPI where he led its demutualisation and acquisition by AMP, subsequent to which
he joined NatWest in 1999 as Director of Corporate Projects.
A chartered accountant with an MA in economics from Trinity College Cambridge, Alastair has been a non-executive director of, successively,
the Department for Work & Pensions and the Department for Transport.
External appointments: Alastair has been Chairman of Admiral Group plc, the direct motor insurer, since 2000; in 2008 he was appointed
Deputy Chairman of Bovis Homes Group PLC, one of the UK’s leading quoted house builders; in March 2010 he was appointed Senior
Independent Director and Audit Chair of Phoenix Group Holdings, the UK’s largest closed life and pension fund consolidator; and in February
2011 he was appointed Non-Executive Director of the Towergate Insurance Group.
Christopher Rajendran Hyman CBE (47)
Job title: Chief Executive
Appointment: Christopher was appointed Chief Executive of Serco Group plc in 2002.
Responsibilities: Christopher is responsible for the formation and implementation of the Group’s global strategy, as well as the day-to-day
management of the business operations and our relationship with the City and key stakeholders. He provides leadership and representation of
the Group with major customers, shareholders and industry organisations.
Experience: Christopher graduated from Natal University in Durban, South Africa and quali(cid:192)ed 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.
External appointments: Christopher is chairman of the Prince of Wales’ charity In Kind Direct, and a Trustee of the Africa Foundation. He is also
a Trustee Director of the Board for Business in the Community, a member of the UK Commission for Employment and Skills and is Chairman
of The Prince’s Seeing is Believing Programme. In the 2010 Queen’s Birthday Honours Christopher was awarded a CBE for his services to
Business and Charity.
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Serco Group plc Annual report and accounts 2010
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Andrew Mark Jenner (42)
Job title: Finance Director
Appointment: Andrew was appointed Group Finance Director in May 2002.
Responsibilities: Andrew is responsible for the Group’s (cid:192)nancial management, reporting and control, operational ef(cid:192)ciency and risk
management and assurance. He shares responsibility with the Chief Executive for our relationship with our key stakeholders and the City.
Experience: Andrew, a chartered accountant, 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.
External appointments: Andrew is a Non-Executive Director of Galliford Try plc, one of the UK’s leading construction and house-building groups
and is Chairman of its Audit Committee.
David Richardson (59)
Job title: Senior Independent Director
Appointment: David joined Serco as a Non-Executive Director in June 2003.
Responsibilities: David is Chair of the Audit Committee and a member of the Remuneration and Nomination Committees.
Experience: David, a chartered accountant, 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. Until September 2010 David also served as a Non-Executive Director of Tomkins plc.
External appointments: David is the Chairman of Forth Ports plc and Director of the Supervisory Board of World Hotels AG.
Leonard V. Broese van Groenou (64)
Job title: Non-Executive Director
Appointment: Leonard joined Serco as a Non-Executive Director in April 2006.
Responsibilities: Leonard is Chair of the Remuneration Committee and a member of the Audit and Nomination Committees.
Experience: 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 spanned numerous international roles including (cid:192)nancial control, business planning,
operational management and human resources.
External appointments: Leonard is the Chairman of the Netherlands Benevolent Society.
Paul Brooks (57)
Job title: Non-Executive Director
Appointment: Paul joined Serco as a Non-Executive Director in February 2011.
Responsibilities: Paul is a member of the Audit and Nomination Committees.
Experience: Paul quali(cid:192)ed as a chartered accountant with KPMG, having graduated from Cambridge University with an economics degree. He
joined Experian in 1999 as Finance Director of its former International Division and has been Chief Financial Of(cid:192)cer of Experian since October
2001. He was appointed to its board of directors in July 2006.
External appointments: Paul is an Executive Director of Experian plc.
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Serco Group plc Annual report and accounts 2010
91
Section 4
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 2010. 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 9 May 2011.
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 through 2010 comprised Margaret Ford, David Richardson and Tom Corcoran. Margaret Ford and Tom Corcoran retired from the
Board along with the Committees of Serco Group plc on 31 December 2010.
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 82.
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, pensions, bene(cid:192)ts 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 (originally appointed in May 2008). They have provided advice to the Committee
throughout the year on the overall remuneration policy and philosophy. Consulting services have also been provided to the Group by Towers
Watson in relation to retirement bene(cid:192)ts and pay data. In this regard the Committee is satis(cid:192)ed that any potential con(cid:193)icts are appropriately
managed. The Committee has also carefully reviewed the voluntary code of conduct in relation to executive consulting in the UK. Fees paid to
Towers Watson during the period totalled £122,000, the majority of which related to services provided for executive remuneration. During the
year the Committee considered and approved the terms of engagement and remuneration of the advisors.
The Group Human Resources Director, Geoff Lloyd, also provides advice and guidance to the Committee.
Remuneration policy
In 2008 the Committee carried out a comprehensive triennial review of executive remuneration and of the principles which form the basis of
the Company’s remuneration policy. As a result of the review, changes were made to both the structure and the levels of remuneration for the
Executive Directors. These were detailed in the 2009 Annual Review and Accounts. During 2011 a further triennial review will be carried out and
any changes will be set out in detail in next year’s report.
Serco’s remuneration policy adopts the following principles which are that executive remuneration should:
(cid:79)(cid:3) Support Serco’s long-term future growth, strategy and values;
(cid:79)(cid:3) Align the (cid:192)nancial interests of executives and shareholders;
(cid:79)(cid:3) Provide market competitive reward opportunities for performance in line with expectations and deliver signi(cid:192)cant (cid:192)nancial rewards for
sustained out-performance;
(cid:79)(cid:3) Enable Serco to recruit and retain the best in all our chosen markets;
(cid:79)(cid:3) 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-(cid:192)nancial objectives relating to the annual bonus scheme, the
Remuneration Committee is able to consider corporate performance on safety, environmental, social and corporate governance matters. The
Committee retains discretion to reduce bonuses or the vesting of awards under the share plans if performance in these areas is unsatisfactory.
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Serco Group plc Annual report and accounts 2010
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(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
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
bene(cid:192)ts. The Group’s policy is to ensure that a signi(cid:192)cant proportion of the package is related to performance.
The relative proportions of the performance-related and (cid:192)xed elements of remuneration (excluding pension and other bene(cid:192)ts) for Executive
Directors - assuming ‘on-target’ remuneration - is shown below.
Remuneration for Chief Executive
Remuneration for Finance Director
41%
34%
39%
37%
25%
24%
Base salary
Performance-related annual bonus
Performance-related long-term incentives (expected value)
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. 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.
The Committee is satis(cid:192)ed that the size pro(cid:192)le of the companies in Towers Watson’s database is representative of the companies in the
FTSE 51 to 130. It also believes that it is important that the same sources of market data are used across the Company to ensure consistency.
The Committee considered carefully whether base salaries for Christopher Hyman and Andrew Jenner should be increased in 2010, having
particular regard to the following:
(cid:79)(cid:3) Serco’s continuing strong performance in 2009 and 2010 including its growth in international markets, since salaries were last increased with
effect from September 2008. In 2009 earnings per share increased by 30.6% and in the (cid:192)rst half of 2010 by 19.9%;
(cid:79)(cid:3) the strong personal contribution of both individuals towards the creation of value for shareholders;
(cid:79)(cid:3) the current dif(cid:192)cult economic environment;
(cid:79)(cid:3) relative salary levels in the comparator group;
(cid:79)(cid:3) the increased scope of the role of the Finance Director resulting from an internal reorganisation that means he is now also responsible for the
Group’s operational ef(cid:192)ciency agenda.
A comprehensive explanation of the business performance during the year has been provided in the ‘Our performance’ section on
pages 16 to 79.
With effect from 1 September 2010, the salaries of the Executive Directors were increased to £700,000 and £412,500 respectively, an increase of
8.5% in both cases.
To ensure that pay and conditions across the Group are taken into account when making decisions on Executive Directors’ pay, the
Remuneration Committee was briefed about the overall decisions on base salaries and pay bill increases for Serco’s Executive Committee
and employees across the Group. The Remuneration Committee is satis(cid:192)ed that the principles and considerations that were applied to
Executive Directors are, as far as possible, applied to all employees. Pay levels are designed to be competitive, fair and to re(cid:193)ect the skills and
performance of individual employees. Individual pay increases in excess of those granted to the Executive Directors were awarded to various
employees for reasons including promotion and increased scope of role.
The impact of these increases on the competitive market position of total remuneration (including pension) is to maintain the competitive
position established at the time of the last triennial review.
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Serco Group plc Annual report and accounts 2010
93
Section 4
Remuneration Report
Annual bonus
Bonus is earned on the basis of achievement of a mix of (cid:192)nancial and non-(cid:192)nancial 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-(cid:192)nancial measures are individually set. The three (cid:192)nancial measures for
2010 were based on turnover, adjusted pro(cid:192)t before tax and amortisation, and cash conversion. These measures re(cid:193)ect the growth and margin
improvement strategies of the business. The standards of performance set are designed to be stretching. The non-(cid:192)nancial goals set for 2010
assessed performance against a number of strategically important objectives for each individual.
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 2010, annual awards of 136.8% and 117.52% of salary have been determined. The Executive Directors
delivered a (cid:192)nancial performance that exceeded each of the quantitative targets. Serco’s (cid:192)nancial performance for the year is described in more
detail in the ‘Our performance’ section starting on page 16. The Executive Directors also delivered strongly against their personal objectives to
implement the Group’s strategy, introduce new management structures and ensure performance of key contracts. Further, the new Chairman
was inducted into the business during the period.
The bonus objectives for 2011 have been set on a similar basis.
Annual bonuses are not pensionable.
Share-based remuneration
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). 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. The measurement of the performance targets is undertaken by
Mercer for the DBP and the 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
Executive Directors can elect to defer, for three (cid:192)nancial 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 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 TSR
compared to the companies in the FTSE 51 to 130 (excluding investment trusts) and EPS growth. Relative TSR and EPS growth carry equal
weight in respect of the matching shares awarded under the DBP. The structure for vesting is the same for both measures.
TSR element:
(cid:79)(cid:3) No matching shares will be awarded if the Group does not meet or exceed the median TSR of the comparator group
(cid:79)(cid:3) An award of matching shares of one half of the gross value of the bonus deferred will vest for median or threshold performance
(cid:79)(cid:3) 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:
(cid:79)(cid:3) If the annual compound growth in EPS does not meet 9% (threshold) then no matching shares will vest
(cid:79)(cid:3) If compound growth in EPS is at 9% (threshold) then 25% of this part of the matching award will vest
(cid:79)(cid:3) For compound growth in EPS of between 9% (threshold) and 14% (maximum) then this part of the award will vest on a straight line basis
to 100%.
For the award made under the DBP and the PSP in 2009, the structure for vesting for the (cid:192)rst year of the performance period is annual growth in
EPS of 13% at threshold to 19% at maximum.
The de(cid:192)nition 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
re(cid:193)ect the underlying (cid:192)nancial performance of the Group.
In 2010 both the Chief Executive and the Finance Director elected to defer 50% of their earned bonus into the DBP.
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Serco Group plc Annual report and accounts 2010
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Performance Share Plan
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, which are independent, are TSR compared to 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. Greater weight has been placed on relative TSR to underscore the importance of longer term alignment with shareholders’
interests. 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.
Dividends will be reinvested and distributed under both plans only in respect of shares that vest at the end of the performance period.
The Committee has discretion to vary the proportion of awards that vest under the Plans, to ensure that the outcomes are fair and appropriately
re(cid:193)ect the underlying (cid:192)nancial performance of the Group.
The Committee considered the ongoing appropriateness of relative TSR and EPS as the performance measures for long-term share-based
plans and agreed that no changes should be made at this point in time. This will be reviewed once again as part of the triennial review for
executive remuneration which, as referenced above, will commence in 2011.
Prior to 2009 share-based incentive awards were made under the Serco Group plc 2006 Long Term Incentive Plan (LTIP) and the Serco Group
plc 2005 Executive Option Plan (EOP); the conditions relating to these plans are detailed below.
Long Term Incentive Plan (LTIP)
The LTIP awards granted to Executive Directors were calculated at 100% of salary at the time of grant. The vesting of awards depends on the
Group’s TSR measured relative to the top 250 companies in the FTSE, as ranked by market capitalisation, excluding those in certain sectors
such as oil and gas and (cid:192)nancial services.
The Committee has discretion to vary the proportion of awards that vest if it considers that the TSR performance measure does not
appropriately re(cid:193)ect the underlying (cid:192)nancial performance of the Group.
The (cid:192)nal award under this plan completed its performance period on 31 December 2010, the Group’s TSR performance relative to its
comparator group was between median and upper quartile, and therefore 68.77% of the awards will vest.
There is no re-testing under the LTIP.
Executive Option Plan (EOP)
Options granted under the EOP may be exercised after the third anniversary of grant, depending upon the achievement of a (cid:192)nancial
performance target over three years. The options are granted at market value and awards made to Executive Directors were based on 100% of
salary as at the 31 December prior to grant.
Achievement of the performance is measured by reference to the Group’s EPS performance relative to the Retail Price Index (RPI) over the
three-year performance period.
The vesting of the grants is based on the following schedule:
(cid:79)(cid:3) If the level of EPS growth is less than RPI + 5% per annum, none of the options may be exercised
(cid:79)(cid:3) If the level of EPS growth is equal to RPI + 5% per annum, 40% of the options may be exercised
(cid:79)(cid:3) If the level of EPS growth is equal to RPI + 10% per annum, all of the options may be exercised
(cid:79)(cid:3) For an EPS growth of between RPI + 5% and RPI + 10% per annum, a proportion of the options between 40% and 100% may be exercised.
For the (cid:192)nal option grant under this plan which completed its performance period on 31 December 2010, the Group’s EPS growth was 22.73%
per annum over the three-year performance period which resulted in all options vesting. The level at which maximum vesting would occur was
12.69% per annum.
Sharesave Scheme
The Group operates a Sharesave Scheme. No performance conditions are attached to options granted under the Scheme as it is an all-
employee scheme. Options granted to Scheme participants are normally set at a discount of 10% to the market value of shares at grant. None
of the Directors participate in the Sharesave Scheme.
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(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
95
Section 4
Remuneration Report
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:
o
Chief Executive
Finance Director
Ordinary shareholding at
31 December 2010 (555.5p)
Ordinary shareholding at
31 December 2009 (530p)
No. of shares
% of salary
No. of shares
% of salary
777,889
289,574
617%
390%
735,510
198,075
604%
276%
(cid:51)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:79)(cid:76)(cid:73)(cid:72)(cid:3)(cid:68)(cid:86)(cid:86)(cid:88)(cid:85)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)
Serco operates both de(cid:192)ned bene(cid:192)t and de(cid:192)ned contribution pension schemes. The Executive Directors participate in the Serco Pension and
Life Assurance Scheme (SPLAS). This is a funded, de(cid:192)ned bene(cid:192)t 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 sacri(cid:192)ce. 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 bene(cid:192)ts 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 bene(cid:192)ts in the pension scheme after 6 April 2006. Kevin Beeston retired at the conclusion of
the Company’s 2010 AGM on 11 May 2010.
Christopher Hyman opted to cease accruing bene(cid:192)ts in the pension scheme after 1 April 2010 and Andrew Jenner has opted to cease accrual
after 31 December 2010.
Since 1 April 2010 Christopher Hyman has been in receipt of a cash allowance equal to 33% of his base salary in lieu of further pension
provision. From 1 January 2011 Andrew Jenner will also receive a cash allowance equal to 33% of his base salary in lieu of pension provision.
The Executive Directors remain entitled to lump sum and widow’s pension bene(cid:192)ts should they die before retirement and while still employed by
Serco.
The Executive Directors receive a range of other bene(cid:192)ts which comprise 25 days’ holiday per year, a car, private medical insurance, private
health insurance, life cover, an annual allowance for independent (cid:192)nancial advice, and voluntary health checks every two years.
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.
The 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 to 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 of(cid:192)ce.
A summary of details relating to each Director who served during the year is provided below:
Name of Director
Christopher Hyman
Andrew Jenner
Date joined
Company
Date of
appointment to
the Board
Date of
contract
Unexpired term at
31 December
2010
30 August 1994
1 April 1999 10 June 2009 Rolling contract of 12 months’
notice period
4 November 1996 3 May 2002 10 June 2009 Rolling contract of 12 months’
notice period
External appointments
The Board believes that the Group can bene(cid:192)t 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 £38,000.
No other fee-paying external positions were held by any of the Executive Directors.
96
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:28)(cid:25)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
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 UK Corporate Governance Code (and formerly the Combined Code).
As at 31 December 2010, the Non-Executive Directors of the Group had no personal (cid:192)nancial interest in the matters determined by the Board,
there are no con(cid:193)icts 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 bene(cid:192)ts except as described.
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. 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
are approved by the Board.
The standard annual fees payable for the Chairman and Non-Executive Directors during the (cid:192)nancial year under review are shown in the table
below.
Chairman (1)
Chairman (2)
Board member
Senior Independent Director
Audit Committee Chairmanship
Remuneration Committee Chairmanship
1 January 2010 to 11 May 2010
£
230,000
11 May 2010 to date
£
250,000
1 January 2010 to date
£
50,000
10,000
1 January to 30 June 2010
£
1 July 2010 to date
£
10,000
10,000
12,500
10,000
(1) Prior to leaving Kevin Beeston received a range of other bene(cid:192)ts which included a car, private medical insurance, private health insurance, life cover, an annual
allowance for independent (cid:192)nancial advice, and voluntary health checks every two years.
(2) Alastair Lyons’ remuneration consists of cash fees paid monthly. In addition, reasonable travel and related business expenses are paid. No bonuses are payable.
A summary of details relating to each Non-Executive Director who served during the year is provided below:
Chairman:
Kevin Beeston (1)
Alastair Lyons (2) (4)
Non-Executive Directors (4):
Margaret Ford (5)
Leonard V. Broese van Groenou
David Richardson
Tom Corcoran (5)
Date of appointment
to the Board
Date of letter
of appointment
Unexpired term at
31 December 2010 (3)
29 February 1996
16 March 2010
1 September 2007
15 March 2010
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
-
15 months
17 months
-
(1) Kevin Beeston retired from the Board of Serco Group plc at the conclusion of the Company’s 2010 annual general meeting on 11 May 2010.
(2) Alastair Lyons was appointed as Chairman at the conclusion of the annual general meeting on 11 May 2010, and up until this date served as a
Non-Executive Director.
(3) The unexpired term relates to the current contract and is subject to shareholder approval.
(4) Non-Executive Directors have a three-month notice period and no compensation or other bene(cid:192)ts are payable on early termination.
(5) Margaret Ford and Tom Corcoran retired from the Board of Serco Group plc on 31 December 2010.
Serco Group plc Annual report and accounts 2010
97
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:28)(cid:26)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Section 4
Remuneration Report
Directors’ remuneration
This section has been audited by Deloitte LLP.
The remuneration of the Directors for the year ended 31 December 2010 was as follows:
Remuneration
£
Note
Kevin Beeston
Alastair Lyons
Christopher Hyman
Andrew Jenner
Leonard V. Broese van Groenou
Margaret Ford
David Richardson
Tom Corcoran
1,2
6
1,3,4,5
1,3,4
6
6,7
6
6,7
162,378
Nil
663,333
390,833
Nil
Nil
Nil
Nil
Fees
£
Nil
199,038
Nil
Nil
60,000
60,000
61,250
50,000
Bonus
£
Nil
Nil
957,600
484,770
Nil
Nil
Nil
Nil
Total
estimated
value of any
non cash
bene(cid:192)ts
£
23,898
Nil
72,279
72,692
Nil
Nil
Nil
Nil
Total
remuneration
excluding
pensions
2010
£
Total
remuneration
excluding
pensions
2009
£
186,276
199,038
1,858,900
948,295
60,000
60,000
61,250
50,000
286,693
Nil
1,578,682
887,843
56,700
56,700
56,700
46,700
Allowance
£
Nil
Nil
165,688
Nil
Nil
Nil
Nil
Nil
Total
1,216,544
430,288
1,442,370
168,869
165,688
3,423,759
2,970,018
Notes:
1. The value of the non cash bene(cid:192)ts relates to the provision of a car allowance (fully inclusive of all scheme costs including insurance and maintenance) and
private healthcare.
2. Kevin Beeston retired from the Board of Serco Group plc at the conclusion of the Company’s 2010 annual general meeting on 11 May 2010.
3. The bonuses shown include performance bonuses earned in the period under review, but not paid until the following (cid:192)nancial year.
4. Remuneration is shown gross of salary sacri(cid:192)ced under the SMART scheme. See page 96.
5. The allowance comprises payments made to Christopher Hyman in lieu of pension, calculated as a percentage of base salary, from which he makes his own
pension arrangements. (See page 96 for further details.)
6. In addition, reasonable travel and related business expenses are paid but are not subject to UK income tax.
7. Margaret Ford and Tom Corcoran retired from the Board of Serco Group plc on 31 December 2010.
Directors’ shareholdings
The Directors’ interests in the shares of the Company are detailed in the following table.
Kevin Beeston
Alastair Lyons
Leonard V. Broese van Groenou
Margaret Ford
Christopher Hyman
Andrew Jenner
David Richardson
Tom Corcoran
Note
1
2
3
4,5
4
3
Ordinary shares of 2p each fully
Ordinary shares of 2p each fully
paid at 31 December 2010 paid at 1 January 2010 or if later the
date of appointment as Director
or date of cessation if earlier
25
15,000
5,375
1,766
777,889
289,574
15,000
4,000
293,925
Nil
5,375
14,841
735,510
198,075
15,000
4,000
Notes:
1. Ordinary shares are bene(cid:192)cial holdings which include the Directors’ personal holdings and those of their spouses and minor children.
2. Kevin Beeston retired from the Board of Serco Group plc at the conclusion of the Company’s 2010 annual general meeting on 11 May 2010.
3. Margaret Ford and Tom Corcoran retired from the Board of Serco Group plc on 31 December 2010.
4. 80,682 of Christopher Hyman’s and 43,969 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.
5. Security has been granted to Christopher Hyman’s bank over 85,564 ordinary shares held in his name.
98
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:28)(cid:27)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
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 (cid:192)nancial year were as follows:
(i) 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 2010
were as follows:
Awards
held at
1 January
2010
Market
price
at award
(pence)
Awards
Granted held at 31
during December
2010
the period
Date of
award
Performance period
Vesting date
Christopher Hyman
Andrew Jenner
130,754
-
12 Jun 2009
29 Mar 2010
76,232
-
11 Jun 2009
29 Mar 2010
404
602
408
602
-
144,666
130,754 1 Jan 2009 – 31 Dec 2011
144,666 1 Jan 2010 – 31 Dec 2012
12 Jun 2012
29 Mar 2013
-
73,865
76,232 1 Jan 2009 – 31 Dec 2011
73,865 1 Jan 2010 – 31 Dec 2012
11 Jun 2012
29 Mar 2013
Notes:
1. The awards shown in the table are the maximum number of shares that can vest under the performance conditions.
2. The performance conditions attached to the awards are described on page 94.
3. No awards vested or were exercised during the period.
(ii) 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 2010 were as follows:
Awards
held at
1 January
2010
Market
price
at award
(pence)
Date of
award
Granted
Awards
held at 31
during December
2010
the period
Performance period
Earliest
vesting date
Latest
exercise date
Christopher Hyman
Andrew Jenner
315,789 22 Jun 2009
6 Apr 2010
-
162,790 22 Jun 2009
6 Apr 2010
-
408
604
408
604
-
213,750
-
110,190
315,789 1 Jan 2009 – 31 Dec 2011 22 Jun 2012 21 Jun 2019
5 Apr 2020
213,750 1 Jan 2010 – 31 Dec 2012
6 Apr 2013
162,790 1 Jan 2009 – 31 Dec 2011 22 Jun 2012 21 Jun 2019
5 Apr 2020
110,190 1 Jan 2010 – 31 Dec 2012
6 Apr 2013
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 95.
4. No awards vested or were exercised during the period.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:28)(cid:28)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
99
Section 4
Remuneration Report
(iii) Serco Group plc 2006 Long Term Incentive Plan (LTIP)
The LTIP has been replaced by the PSP. The last award under the LTIP was made in November 2007. The conditional rights to Serco Group plc
ordinary shares under the LTIP held by Directors at 31 December 2010 were as follows:
Awards
held at
1 January
2010
Market
price
Date of on grant
(pence)
award
Vested
during
the period
Awards
held at 31
December
2010 or
Market
price on
date of
vesting cessation
(pence)
if earlier
Performance period
Earliest
Latest
vesting date exercise date
Kevin Beeston
145,205 29 Nov 2006
373 283,760
565
- 1 Jan 2007 – 31 Dec 2009 31 Dec 2009 28 Nov 2016
Christopher Hyman 145,205 29 Nov 2006
122,874 12 Nov 2007
373 283,760
-
456
565
- 1 Jan 2007 – 31 Dec 2009 31 Dec 2009 28 Nov 2016
- 122,874 1 Jan 2008 – 31 Dec 2010 31 Dec 2010 11 Nov 2017
Andrew Jenner
89,589 29 Nov 2006
75,699 12 Nov 2007
373 175,075
-
456
565
-
- 1 Jan 2007 – 31 Dec 2009 31 Dec 2009 28 Nov 2016
75,699 1 Jan 2008 – 31 Dec 2010 31 Dec 2010 11 Nov 2017
Notes:
1. Awards take the form of nominal cost options.
2. Awards made are calculated at 100% of salary at the time of grant.
3. 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.
4. No awards were granted or lapsed during the period.
5. The performance conditions attached to the awards which vested on 31 December 2009 achieved performance between upper quartile and upper decile resulting
in 195.42% of the award vesting.
6. On 31 December 2010 the performance conditions attached to the awards made on 12 November 2007 were satis(cid:192)ed. Performance between median and upper
quartile was achieved resulting in 68.77% of the award vesting.
7. Awards held by Kevin Beeston relate to his tenure as an Executive Director prior to September 2007. Kevin Beeston retired from the Board of Serco Group plc at
the conclusion of the Company’s 2010 annual general meeting on 11 May 2010.
8. The aggregate of the total theoretical gains on options exercised by Directors during 2010 amounted to £4.19 million. 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 742,595 options exercised, 103,042 shares were retained.
100
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:19)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
(iv) Serco Group plc 1998 and 2005 Executive Option Plan (EOP)
Options over Serco Group plc ordinary shares granted under the EOP and held by Directors at 31 December 2010 were as follows:
Awards
held at
1 January
2010
Awards held at
31 December
2010 or date
of cessation
if earlier
Exercised
during period
Market price
on exercise
date (pence)
Exercise price Date from which
exercisable
(pence)
Date of expiry
of options
Kevin Beeston
120,798
120,798
-
591
439
19 Mar 2010
18 Mar 2017
Christopher Hyman
Andrew Jenner
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
-
-
-
-
-
-
-
-
18,524
-
-
-
-
-
-
-
78,275
116,373
289,515
219,320
183,404
147,492
120,798
123,076
-
69,824
173,709
133,178
116,885
88,495
74,530
75,824
-
-
-
-
-
-
-
-
574
-
-
-
-
-
-
-
435
264
153
217
235
339
439
455
435
264
153
217
235
339
439
455
28 Mar 2004
3 May 2005
6 May 2006
3 Mar 2007
29 Apr 2008
5 May 2009
19 Mar 2010
27 Feb 2011
28 Mar 2004
3 May 2005
6 May 2006
3 Mar 2007
29 Apr 2008
5 May 2009
19 Mar 2010
27 Feb 2011
27 Mar 2011
2 May 2012
5 May 2013
2 Mar 2014
28 Apr 2015
4 May 2016
18 Mar 2017
26 Feb 2018
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. The (cid:192)nal award to Executive Directors under this plan was made in February 2008.
2. The awards shown in the table are the maximum number of shares that can vest under the performance conditions.
3. 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 Price Index (RPI) over
the three-year performance period.
4. 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 2010 was 555.5p and the range during the year to 31 December
2010 was 493.9p to 651p.
8. No grants were made during the year.
9. For options granted which completed their performance period on 31 December 2010, the Group’s EPS growth was 22.73% per annum over the three-year
performance period which resulted in 100% options vesting. The level at which maximum vesting would occur was 12.69% per annum.
10. Awards held by Kevin Beeston relate to his tenure as an Executive Director prior to September 2007. Kevin Beeston retired from the Board of Serco Group plc at
the conclusion of the Company’s 2010 annual general meeting on 11 May 2010.
11. The aggregate of the total theoretical gains on options exercised by Directors during 2010 amounted to £0.2 million. 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. The 139,322 options exercised, were all sold.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:20)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
101
Section 4
Remuneration Report
Comparison of total shareholder returns
Serco Group plc total shareholder return (TSR) vs FTSE 100 Total Return Index
Value of investment of £100 on 31 December 2005
225
200
175
150
125
100
75
31 Dec 05
31 Dec 06
31 Dec 07
31 Dec 08
31 Dec 09
31 Dec 10
Serco
FTSE 100 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
100 Index, which is a broad equity market index of which it is a constituent.
As detailed earlier, TSR is de(cid:192)ned 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.
102
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:21)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Pensions and life assurance
This section has been audited by Deloitte LLP.
The Directors receive pension and life assurance bene(cid:192)ts consistent with those provided by other leading companies.
The details of the de(cid:192)ned bene(cid:192)t schemes operated by the Group are set out in the note on page 143. In the event of death in service, the Serco
Supplementary Death Bene(cid:192)t Scheme provides for a lump sum payment.
The accrued pension bene(cid:192)ts of all Directors under the Serco Pension and Life Assurance Scheme, which is a de(cid:192)ned bene(cid:192)t scheme, are as
follows:
Transfer
value of
accrued
bene(cid:192)ts at
Transfer
value of
accrued
bene(cid:192)ts at
31 December 31 December
2009
(2)
£
2010
(1)
£
Kevin Beeston
3,659,422
3,564,341
Christopher Hyman
1,744,001
1,702,542
Andrew Jenner
929,133
857,573
Director’s
contributions
for the
year
(3)
£
-
-
-
Increase
in transfer
value during
the year
(4) (cid:32)
(1)-(2)-(3)
£
95,081
41,459
71,560
Gross
increase
in accrued
pension
during
the year
(5)
£ p.a.
8,000
14,536
14,893
Increase
in accrued
pension
during the
year, net
of in(cid:193)ation
(6)
£ p.a.
Value of
increase
in accrual
over the
year
(7)
£
Total
accrued
pension at
year end
(8)
£ p.a.
-
-
287,460
9,626
134,386
121,268
12,141
148,113
74,730
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 for Andrew Jenner,
or to the date of ceasing accrual in the scheme for Kevin Beeston and Christopher Hyman. The increase in accrued pension during the year is shown both as a
gross increase and excluding any increase in respect of in(cid:193)ation.
b The increase in the accrued pension of Andrew Jenner allows for both the increase in his (cid:192)nal pensionable salary 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.
c The increase in accrued pension for Christopher Hyman allows for the increase in his (cid:192)nal pensionable salary and the accrual of an extra three months’
pensionable service until 1 April 2010 when he ceased accruing bene(cid:192)ts in the scheme.
d With effect from 1 April 2010 Christopher Hyman opted to receive a cash alternative equal to 33% of his base pay (excluding bonuses) in lieu of any further
pension provision. Christopher remains entitled to lump sum and widow’s pension bene(cid:192)ts should he die before retirement and whilst employed by Serco.
e The pension of Kevin Beeston increased in line with in(cid:193)ation until his retirement from the Board at the conclusion of the Company’s AGM on 11 May 2010. The
increase net of in(cid:193)ation shown in (6) is therefore zero.
f Transfer values have been calculated in accordance with the current transfer value regulations. The assumptions to be used for calculating transfer values have
been reviewed by the Trustees during the year and updated to re(cid:193)ect changes in long term expectations for in(cid:193)ation and improvements in life expectancy. The net
impact of these changes has resulted in lower transfer values than would have applied with the previous assumptions. However, market movements over the year
have acted to increase transfer values. 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 and changes in the transfer value assumptions, but also the effect of (cid:193)uctuations in the transfer value due to factors beyond
the control of the Company and the Directors, such as stock market movements.
g The value of the net increase in accrual represents the incremental value to the Director of his service during the year or the date the Director left the scheme. In
the case of Andrew Jenner the value of the net increase is calculated on the assumption that his service terminated at the year end. It is based on the increase in
the accrued pension, net of in(cid:193)ation based on the increase in Retail Prices Index.
h 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.
i Both Directors who were active members of the scheme have opted to have their contributions paid by the Company under a salary sacri(cid:192)ce arrangement and
hence no contributions were paid by the Directors during the year.
j Kevin Beeston left Serco employment and ceased being a Director on 11 May 2010. His total accrued pension is his deferred pension at that date.
k Andrew Jenner ceased to be a member of the pension scheme with effect from 31 December 2010, opting to receive a cash alternative equal to 33% of his
base pay (excluding bonuses) in lieu of any further pension provision. Andrew remains entitled to lump sum and widow’s pension bene(cid:192)ts should he die before
retirement and whilst employed by Serco.
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 2010, 5.95% and 4.61% respectively.
The Group has an employee bene(cid:192)t 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 April 2010 a loan of £23 million was made to the Employee Bene(cid:192)t Trust in order to (cid:192)nance
the purchase of shares to satisfy the ongoing liabilities under the Company’s employee share plans.
The Trust held 3,436,547 and 4,710,201 ordinary shares at 1 January 2010 and 31 December 2010 respectively.
Approved by the Board of Directors and signed on its behalf by:
Joanne Roberts
Secretary
1 March 2011
Serco Group plc Annual report and accounts 2010
103
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:22)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Section 5
Independent Auditor’s Report
Independent Auditor’s Report to the members of Serco Group plc
We have audited the Group Financial Statements of Serco Group plc for the year ended 31 December 2010 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 (cid:192)nancial 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
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and Auditor
As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for the preparation of the Group (cid:192)nancial
statements and for being satis(cid:192)ed that they give a true and fair view. Our responsibility is to audit and express an opinion on the Group (cid:192)nancial
statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply
with the Auditing Practices Board’s Ethical Standards for Auditors.
(cid:54)(cid:70)(cid:82)(cid:83)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)
An audit involves obtaining evidence about the amounts and disclosures in the (cid:192)nancial statements suf(cid:192)cient to give reasonable assurance
that the (cid:192)nancial 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 signi(cid:192)cant accounting estimates made by the Directors; and the overall presentation of the (cid:192)nancial statements.
Opinion on the Group Financial Statements
In our opinion the Group Financial Statements:
(cid:79)(cid:3) give a true and fair view of the state of the Group’s affairs as at 31 December 2010 and of its pro(cid:192)t for the year then ended;
(cid:79)(cid:3) have been properly prepared in accordance with IFRSs as adopted by the European Union; and
(cid:79)(cid:3) have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion the information given in the Directors’ Report for the (cid:192)nancial year for which the (cid:192)nancial 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:
(cid:79)(cid:3) certain disclosures of Directors’ remuneration speci(cid:192)ed by law are not made; or
(cid:79)(cid:3) we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
(cid:79)(cid:3) the Directors’ statement contained within the Corporate Governance Report in relation to going concern; and
(cid:79)(cid:3) the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the June 2008 Combined
Code speci(cid:192)ed for our review; and
(cid:79)(cid:3) certain elements of the report to shareholders by the Board on Directors’ remuneration.
Other matter
We have reported separately on the parent Company Financial Statements of Serco Group plc for the year ended 31 December 2010 and on
the information in the Directors’ Remuneration Report that is described as having been audited.
Richard Knights (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
1 March 2011
104
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:23)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Consolidated Income Statement
For the year ended 31 December
Continuing operations
Revenue
Cost of sales
(cid:42)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)
Administrative expenses
(cid:36)(cid:71)(cid:77)(cid:88)(cid:86)(cid:87)(cid:72)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)- before amortisation of intangibles arising on acquisition
Other expenses - amortisation of intangibles arising on acquisition
(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)
Investment revenue
Finance costs
(cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)
Tax
(cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)
Attributable to:
Equity holders of the parent
Non-controlling interest
(cid:40)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:11)(cid:40)(cid:51)(cid:54)(cid:12)
Basic EPS
Diluted EPS
Consolidated Statement of Comprehensive Income
For the year ended 31 December
Note
4,5
14
5,6
8
9
10
2010
£m
2009
£m
4,326.7
(3,682.4)
644.3
(385.6)
3,970.0
(3,383.2)
586.8
(357.1)
258.7
(17.4)
241.3
3.9
(31.3)
213.9
(57.1)
156.8
156.7
0.1
229.7
(17.6)
212.1
2.7
(37.7)
177.1
(46.9)
130.2
130.2
-
12
12
31.88p
31.35p
26.76p
26.45p
(cid:3)
(cid:3)
(cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)
(cid:50)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:72)(cid:75)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:29)
Net actuarial gain/(loss) on de(cid:192)ned bene(cid:192)t pension schemes1
Actuarial (loss)/gain on reimbursable rights1
Net exchange gain/(loss) on translation of foreign operations2
Fair value gain/(loss) on cash (cid:193)ow hedges during the year2
Tax (charge)/credit on items taken directly to equity3
Recycling of cumulative net hedging reserve2
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:85)(cid:72)(cid:75)(cid:72)(cid:81)(cid:86)(cid:76)(cid:89)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)
(cid:3)
Attributable to:
Equity holders of the parent
Non-controlling interest
(cid:3)
(cid:3)
Note
(cid:3)
26
26
10
(cid:3)
(cid:3)
(cid:3)
2010
£m
(cid:20)(cid:24)(cid:25)(cid:17)(cid:27)
49.9
(38.4)
19.0
1.7
(1.7)
0.3
(cid:20)(cid:27)(cid:26)(cid:17)(cid:25)
187.5
0.1
2009
£m
130.2
(259.0)
117.1
(9.9)
(6.3)
45.2
0.2
17.5
17.5
-
1 Recorded in Retirement bene(cid:192)t 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.
3 Of the tax (charge)/credit, a debit of £4.3m (2009: credit of £39.6m) was recorded in the Retirement bene(cid:192)t obligations reserve; a debit of £0.6m (2009: credit of
£1.4m) was recorded in the Hedging and translation reserve; a credit of £3.2m (2009: £4.2m) was recorded in the Share-based payment reserve.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:24)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
105
Section 5
Consolidated Statement of Changes in Equity
For the year ended 31 December
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)
Share-
(cid:69)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)
(cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3) (cid:83)(cid:85)(cid:72)(cid:80)(cid:76)(cid:88)(cid:80)(cid:3) (cid:85)(cid:72)(cid:71)(cid:72)(cid:80)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3) (cid:53)(cid:72)(cid:87)(cid:68)(cid:76)(cid:81)(cid:72)(cid:71)(cid:3) (cid:82)(cid:69)(cid:79)(cid:76)(cid:74)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3) (cid:83)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)
(cid:85)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)
(cid:85)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3) (cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:3)
(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)
£m
£m
£m
Retirement
(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:3)
(cid:3)
(cid:68)(cid:70)(cid:70)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)
£m
(cid:85)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)
£m
(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)
£m
(cid:50)(cid:90)(cid:81)(cid:3)
(cid:86)(cid:75)(cid:68)(cid:85)(cid:72)(cid:86)(cid:3)
(cid:85)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)
£m
Hedging
(cid:68)(cid:81)(cid:71)(cid:3)
(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:79)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)
(cid:85)(cid:72)(cid:86)(cid:72)(cid:85)(cid:89)(cid:72)(cid:3)
£m
(cid:3)
(cid:49)(cid:82)(cid:81)(cid:16)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:82)(cid:79)(cid:79)(cid:76)(cid:81)(cid:74)(cid:3)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)
£m
(cid:72)(cid:84)(cid:88)(cid:76)(cid:87)(cid:92)(cid:3)
£m
At 1 January 2009
9.7
301.1
0.1
339.8
(47.7)
40.0
(19.7)
61.9
685.2
0.1
Total comprehensive income
for the year
-
-
Shares transferred to option
holders on exercise of share options 0.1
3.0
Dividends paid
Expense in relation to share-based
payment
Purchase of own shares for
employee bene(cid:192)t trust (ESOP)
-
-
-
-
-
-
-
-
-
-
-
130.2
(102.3)
4.2
-
(14.6)
17.5
-
(25.9)
-
-
-
-
-
-
(1.8)
9.1
-
7.2
-
-
-
(2.4)
-
-
-
-
10.4
(25.9)
7.2
(2.4)
-
-
-
-
-
(cid:36)(cid:87)(cid:3)(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:21)(cid:19)(cid:20)(cid:19)(cid:3)
(cid:28)(cid:17)(cid:27)(cid:3)
(cid:22)(cid:19)(cid:23)(cid:17)(cid:20)(cid:3)
(cid:19)(cid:17)(cid:20)(cid:3)
(cid:23)(cid:23)(cid:23)(cid:17)(cid:20)(cid:3)
(cid:11)(cid:20)(cid:24)(cid:19)(cid:17)(cid:19)(cid:12)(cid:3)
(cid:23)(cid:28)(cid:17)(cid:25)(cid:3)
(cid:11)(cid:20)(cid:22)(cid:17)(cid:19)(cid:12)(cid:3)
(cid:23)(cid:26)(cid:17)(cid:22)(cid:3) (cid:25)(cid:28)(cid:21)(cid:17)(cid:19)(cid:3)
(cid:19)(cid:17)(cid:20)
Total comprehensive income
for the year
(cid:16)(cid:3)
(cid:16)(cid:3)
Shares transferred to option
holders on exercise of share options (cid:19)(cid:17)(cid:20)(cid:3)
(cid:21)(cid:17)(cid:25)(cid:3)
Dividends paid
Expense in relation to share-based
payment
Purchase of own shares for
employee bene(cid:192)t trust (ESOP)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:20)(cid:24)(cid:25)(cid:17)(cid:26)(cid:3)
(cid:26)(cid:17)(cid:21)(cid:3)
(cid:22)(cid:17)(cid:21)(cid:3)
(cid:16)(cid:3)
(cid:21)(cid:19)(cid:17)(cid:23)(cid:3) (cid:20)(cid:27)(cid:26)(cid:17)(cid:24)(cid:3)
(cid:19)(cid:17)(cid:20)
(cid:16)(cid:3)
(cid:11)(cid:22)(cid:21)(cid:17)(cid:22)(cid:12)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:11)(cid:21)(cid:17)(cid:28)(cid:12)(cid:3)
(cid:27)(cid:17)(cid:24)(cid:3)
(cid:16)(cid:3)
(cid:27)(cid:17)(cid:27)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:27)(cid:17)(cid:27)(cid:3)
(cid:27)(cid:17)(cid:22)(cid:3)
(cid:16)
(cid:11)(cid:22)(cid:21)(cid:17)(cid:22)(cid:12)(cid:3)
(cid:11)(cid:19)(cid:17)(cid:21)(cid:12)
(cid:16)(cid:3)
(cid:11)(cid:21)(cid:22)(cid:17)(cid:19)(cid:12)(cid:3)
(cid:16)(cid:3)
(cid:11)(cid:21)(cid:22)(cid:17)(cid:19)(cid:12)(cid:3)
(cid:16)
(cid:16)
(cid:16)
(cid:36)(cid:87)(cid:3)(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:19)(cid:3)
(cid:28)(cid:17)(cid:28)(cid:3)
(cid:22)(cid:19)(cid:25)(cid:17)(cid:26)(cid:3)
(cid:19)(cid:17)(cid:20)(cid:3)
(cid:24)(cid:25)(cid:27)(cid:17)(cid:24)(cid:3)
(cid:11)(cid:20)(cid:23)(cid:21)(cid:17)(cid:27)(cid:12)(cid:3)
(cid:24)(cid:27)(cid:17)(cid:26)(cid:3)
(cid:11)(cid:21)(cid:26)(cid:17)(cid:24)(cid:12)(cid:3)
(cid:25)(cid:26)(cid:17)(cid:26)(cid:3) (cid:27)(cid:23)(cid:20)(cid:17)(cid:22)(cid:3)
106
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:25)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Consolidated Balance Sheet
At 31 December
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Trade and other receivables
Deferred tax assets
Derivative (cid:192)nancial instruments
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Derivative (cid:192)nancial instruments
Total assets
Current liabilities
Trade and other payables
Current tax liabilities
Obligations under (cid:192)nance leases
Loans
Derivative (cid:192)nancial instruments
Non-current liabilities
Trade and other payables
Obligations under (cid:192)nance leases
Loans
Derivative (cid:192)nancial instruments
Retirement bene(cid:192)t obligations
Provisions
Deferred tax liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings
Retirement bene(cid:192)t obligations reserve
Share-based payment reserve
Own shares reserve
Hedging and translation reserve
Equity attributable to equity holders of the parent
Non-controlling interest
Total equity
Note
13
14
16
19
22
25
18
19
20
25
24
23
21
25
24
23
21
25
26
27
22
28
29
30
30
30
30
2010
£m
899.5
145.0
135.4
156.7
38.1
3.5
2009
£m
898.4
164.4
129.2
181.4
48.0
2.5
1,378.2
1,423.9
65.4
790.2
279.3
3.9
1,138.8
2,517.0
(805.5)
(19.5)
(7.1)
(159.5)
(2.4)
(994.0)
(22.2)
(19.3)
(354.6)
(5.2)
(226.2)
(39.6)
(14.6)
(681.7)
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)
(1,675.7)
(1,839.4)
841.3
692.1
9.9
306.7
0.1
568.5
(142.8)
58.7
(27.5)
67.7
841.3
-
841.3
9.8
304.1
0.1
444.1
(150.0)
49.6
(13.0)
47.3
692.0
0.1
692.1
The Financial Statements were approved by the Board of Directors on 1 March 2011 and signed on its behalf by:
Christopher Hyman
Chief Executive
Andrew Jenner
Finance Director
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:26)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
107
Section 5
Consolidated Cash Flow Statement
For the year ended 31 December
(cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:76)(cid:81)(cid:193)(cid:82)(cid:90)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)
(cid:44)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)
Interest received
Disposal of investments/business undertakings
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of intangible assets
Acquisition of subsidiaries, net of cash acquired
Purchase of other intangible assets
Purchase of property, plant and equipment
(cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:82)(cid:88)(cid:87)(cid:193)(cid:82)(cid:90)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:76)(cid:81)(cid:89)(cid:72)(cid:86)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)
(cid:41)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)
Interest paid
Dividends paid
Non-controlling interest dividends paid
Cash in(cid:193)ow from matured derivative (cid:192)nancial instruments
Repayment of loans
Repayment of non recourse loans
New loan advances
Capital element of (cid:192)nance lease repayments
Purchase of own shares for employee bene(cid:192)t trust (ESOP)
Proceeds from issue of share capital and exercise of share options
(cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:82)(cid:88)(cid:87)(cid:193)(cid:82)(cid:90)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)
(cid:49)(cid:72)(cid:87)(cid:3)(cid:11)(cid:71)(cid:72)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:12)(cid:18)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)
(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:69)(cid:72)(cid:74)(cid:76)(cid:81)(cid:81)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)
Net exchange gain/(loss)
(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:72)(cid:84)(cid:88)(cid:76)(cid:89)(cid:68)(cid:79)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:72)(cid:81)(cid:71)(cid:3)(cid:82)(cid:73)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)
Note
31
15
11
20
2010
£m
241.0
3.3
-
6.1
7.3
(2.1)
(20.9)
(35.4)
(41.7)
(27.9)
(32.3)
(0.2)
1.6
(167.8)
(7.6)
10.1
(8.7)
(23.0)
8.3
(247.5)
(48.2)
319.4
8.1
279.3
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
108
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:27)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
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
of(cid:192)ce 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 105 to 160 have been prepared in accordance with International Financial Reporting Standards (IFRSs)
adopted for use in the European Union and therefore the Group (cid:192)nancial 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 (cid:192)nancial year except as 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.
IFRS 3 (2008) Business Combinations
IFRS 3 (2008) includes a number of signi(cid:192)cant changes to the accounting for business combinations. All acquisition costs are now required
to be expensed as incurred, rather than capitalised as part of the cost of acquisitions. Any changes to the cost of an acquisition resulting from
an event taking place after the date of acquisition, including those arising from adjustments to contingent consideration, are required to be
recognised in the income statement rather than in goodwill. Any adjustments to contingent consideration in respect of acquisitions made prior
to 1 January 2010 will continue to be accounted for under IFRS 3 (2004).
Amendments to IAS 27 Consolidated and Separate Financial Statements
The amendments to IAS 27 affect the treatment of acquisitions and disposals achieved in stages, and focus on whether or not this results in
a change in control. Acquisitions and disposals that do not result in a change in control are accounted for within reserves, and goodwill is not
re-measured. Where control is lost, all assets, liabilities and non-controlling interests are derecognised, and the resulting gain or loss, after any
proceeds, is recognised in pro(cid:192)t or loss.
The following new and revised Standards and Interpretations have been adopted in the current year. Their adoption has not had any signi(cid:192)cant
impact on the amounts reported in these Financial Statements but may impact the accounting for future transactions and arrangements.
IAS 28 (2008) Investments in Associates
The revisions to IAS 28 require that where there is a loss of signi(cid:192)cant in(cid:193)uence over an associate, the investor measures any investment
retained in the former associate at fair value, with any consequential gain or loss recognised in the income statement.
Amendment to IAS 39 Financial Instruments: Recognition and Measurement: Eligible Hedged Items
This amendment provides clari(cid:192)cation on two aspects of hedge accounting: identifying in(cid:193)ation as a hedged risk or portion, and hedging
with options.
IFRS 1 (revised) First-time Adoption of International Financial Reporting Standards and Amendments to IFRS 1 Additional Exemptions for
First-time Adopters
These amendments provide additional exemptions on (cid:192)rst-time adoption of IFRS, in relation to oil and gas assets and leases.
Amendments to IFRS 2 Group Cash-settled Share-based Payment Transactions
These amendments provide clari(cid:192)cation on the scope of IFRS 2, as well as the accounting for group cash-settled share-based payment
transactions in the separate (cid:192)nancial statements of the entity receiving the goods or services when another group entity of shareholder has
the obligation to settle the award.
IFRIC 17 Distribution of Non-cash Assets to Owners
This Interpretation provides guidance on the appropriate accounting treatment when an entity distributes assets other than cash as dividends
to its shareholders.
IFRIC 18 Transfers of Assets from Customers
This Interpretation addresses the accounting by recipients for transfers of property, plant and equipment from customers and concludes that
when the item of property, plant and equipment transferred meets the de(cid:192)nition of an asset from the perspective of the recipient, the recipient
should recognise the asset at its fair value on the date of the transfer, with the credit being recognised as revenue in accordance with IAS 18.
Improvements to IFRSs (April 2009)
Serco Group plc Annual report and accounts 2010
109
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:28)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Section 5
Notes to the Consolidated Financial Statements
2. Significant accounting policies (continued)
Basis of consolidation
The consolidated (cid:192)nancial statements incorporate the (cid:192)nancial 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 (cid:192)nancial and operating policies of an investee entity so as to obtain bene(cid:192)ts 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 (cid:192)nancial 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.
Non-controlling interests represent the portion of pro(cid:192)t 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.
Changes in segmental information
From the start of 2010 the Group repositioned its business to maximise the focus on growth and opportunities and to ensure that it maintains
a (cid:193)exible and devolved organisation which is responsive to its customers’ needs. From 1 January 2010, the Group reorganised its business into
(cid:192)ve new divisions, focused on the Group’s principal markets: Civil Government; Local Government and Commercial; Defence, Science and
Nuclear; Americas; and AMEAA. The key changes arising from its previous segments are as follows:
Civil Government, the UK and Europe Healthcare, Home Affairs and Welfare to Work business, is included in the new Civil Government division;
the UK and Europe Consulting, Education, Integrated Services, IT and BPO businesses are part of the new Local Government and Commercial
division; and the Civil Government businesses in North America and the rest of the world are allocated to the Americas and AMEAA
divisions respectively.
Defence has transferred to Defence, Science and Nuclear, with the exception of those businesses operating in the geographical regions of
Americas and AMEAA.
Transport has been transferred to Civil Government, with the exception of businesses operating in the geographical regions of Americas
and AMEAA.
Science has transferred to Defence, Science and Nuclear.
As a consequence of these changes, previously published (cid:192)nancial information has been restated.
Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each 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. Acquisition related costs are recognised in pro(cid:192)t or loss as incurred.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement,
measured at its acquisition date fair value. Subsequent changes in fair values are adjusted against the cost of acquisition where they qualify
as measurement period (which is subject to a maximum of one year) adjustments. All other subsequent changes in the fair value of contingent
consideration classi(cid:192)ed as an asset or liability are accounted for in accordance with the relevant accounting standards. Changes in the fair value
of contingent consideration classi(cid:192)ed as equity are not recognised.
The acquiree’s identi(cid:192)able 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, except where a different treatment is mandated by another standard.
Goodwill arising on acquisition is recognised as an asset at the date that control is acquired. Goodwill is measured as the excess of the sum of
the consideration transferred, the amount of any non-controlling interest and the fair value of any previously held equity interest in the acquired
entity, over the net of the acquisition date amounts of the identi(cid:192)able assets and liabilities acquired.
If, after reassessment, the Group’s interest in the net fair value of the acquiree’s identi(cid:192)able net assets exceeds the sum of the consideration
transferred, the amount of any non-controlling interest and the fair value of any previously held equity interest in the acquired entity, the excess
is recognised immediately in the income statement.
Any adjustments to contingent consideration in respect of acquisitions made prior to 1 January 2010 will continue to be re(cid:193)ected in goodwill
in accordance with IFRS 3 (2004).
110
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:19)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
2. Significant accounting policies (continued)
Goodwill
Goodwill arising on consolidation represents the excess of the cost of acquisition over the Group’s interest in the fair value of the identi(cid:192)able
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 pro(cid:192)t or loss and is not subsequently reversed.
For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (CGUs) expected to bene(cid:192)t from the
synergies of the combination. CGUs 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 CGU is less than the carrying amount of the unit, the impairment
loss is allocated (cid:192)rst 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 pro(cid:192)t
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 pro(cid:192)t or loss on disposal.
Investments in joint ventures
The Group’s investments in joint ventures are reported in the (cid:192)nancial 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 (cid:192)nancial statements or reported as separate line items within the Group’s (cid:192)nancial 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 designed to reduce the assets to their residual value over their estimated useful lives.
The principal annual rates used are:
Freehold buildings
2.5%
Short-leasehold building improvements
The higher of 10% or the rate produced by the lease term
Machinery
Motor vehicles
Furniture
Of(cid:192)ce equipment
Leased equipment
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.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:20)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
111
Section 5
Notes to the Consolidated Financial Statements
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:
(cid:79)(cid:3) an asset is created that can be separately identi(cid:192)ed;
(cid:79)(cid:3) it is probable that the asset created will generate future economic bene(cid:192)ts; and
(cid:79)(cid:3) the development cost of the asset can be measured reliably.
Purchased software and development expenditure is amortised over the period in which the Group is expected to bene(cid:192)t. This period is
between three to 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
de(cid:192)ned bene(cid:192)t 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 (cid:193)ows that are independent from other assets, the Group
estimates the recoverable amount of the CGU to which the asset belongs. A CGU is the smallest group of assets that generates cash in(cid:193)ows
from continuing use that are largely independent of the cash (cid:193)ows of other assets or groups of assets. For the purpose of impairment testing,
the goodwill acquired in a business combination is allocated to cash-generating units that are expected to bene(cid:192)t 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 (cid:193)ows are
discounted to their present value using a pre-tax discount rate that re(cid:193)ects current market assessments of the time value of money and the risks
speci(cid:192)c to the asset for which the estimates of future cash (cid:193)ows 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 (cid:192)rst 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 administrative expenses within the consolidated 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 (cid:192)nancial 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.
112
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:21)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
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
of contract costs incurred for work performed to date compared 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 are probable to 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 in order to allocate resources to the segments and to assess their performance.
Items excluded from segments comprise corporate expenses. Speci(cid:192)c corporate expenses are allocated to the corresponding segments.
Segment assets comprise goodwill, other intangible assets, property, plant and equipment, inventories, trade and other receivables (excluding
corporation tax recoverable) and any retirement bene(cid:192)t asset. Liabilities comprise trade and other payables and retirement bene(cid:192)t 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 classi(cid:192)ed as (cid:192)nance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the
lessee. All other leases are classi(cid:192)ed as operating leases.
Assets held under (cid:192)nance 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 (cid:192)nance lease
obligation. Lease payments are apportioned between (cid:192)nance 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 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 rate prevailing on
the date when the fair value was determined. Gains and losses arising on retranslation are included in the net pro(cid:192)t 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
consolidated 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.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:22)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
113
Section 5
Notes to the Consolidated Financial Statements
2. Significant accounting policies (continued)
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.
All other borrowing costs are recognised as an expense in the period in which they are incurred.
(cid:53)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:3)(cid:70)(cid:82)(cid:86)(cid:87)(cid:86)
Payments to de(cid:192)ned contribution pension schemes are charged as an expense as they fall due.
For de(cid:192)ned bene(cid:192)t pension schemes, the cost of providing bene(cid:192)ts is determined using the projected unit credit actuarial cost 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 bene(cid:192)ts are already vested, and is amortised on a straight-line basis over the
average period until the bene(cid:192)t becomes vested. Gains and losses on curtailments or settlements are recognised in the period in which the
curtailment or settlement occurs.
The retirement bene(cid:192)t obligation recognised in the balance sheet represents the present value of the de(cid:192)ned bene(cid:192)t 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 bene(cid:192)t 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 bene(cid:192)t is available as a reduction in contributions and there is a minimum funding requirement, the economic
bene(cid:192)t available as a reduction in contributions is calculated at the present value of:
a) the estimated future service cost in each year; less
b) the estimated minimum funding contributions required in respect of the future accrual and bene(cid:192)ts in that year.
De(cid:192)ned bene(cid:192)t obligations arising from contractual obligations
Where the Group takes on a contract and assumes the obligation to contribute variable amounts to the de(cid:192)ned bene(cid:192)t 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 de(cid:192)ned bene(cid:192)t 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 re(cid:193)ects
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 de(cid:192)cits 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 de(cid:192)ned bene(cid:192)t 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 de(cid:192)ned bene(cid:192)t 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 (cid:192)nancial asset at fair value, being the fair value of the reimbursable rights. In the consolidated
income statement, the expense relating to the de(cid:192)ned bene(cid:192)t 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 classi(cid:192)ed as a de(cid:192)ned contribution pension scheme or a de(cid:192)ned bene(cid:192)t pension scheme under the terms
of the scheme.
When suf(cid:192)cient information is not available to use de(cid:192)ned bene(cid:192)t accounting for a multi-employer de(cid:192)ned bene(cid:192)t pension scheme, the Group
accounts for the scheme as if it were a de(cid:192)ned contribution scheme.
114
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:23)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
2. Significant accounting policies (continued)
Tax
The tax expense represents the sum of current tax expense and deferred tax expense.
Current tax expense is based on taxable pro(cid:192)t for the year. Taxable pro(cid:192)t differs from net pro(cid:192)t 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
pro(cid:192)ts 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 pro(cid:192)t nor the
accounting pro(cid:192)t.
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
suf(cid:192)cient taxable pro(cid:192)ts will be available to allow all or part of the asset to be utilised.
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 legally 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 makes 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 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. Signi(cid:192)cant (cid:192)nancial dif(cid:192)culties of the debtor, probability that the
debtor will enter bankruptcy or (cid:192)nancial 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 an allowance for doubtful debts 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 allowance for doubtful debts.
Subsequent recoveries of amounts previously written off are credited against administrative expenses.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:24)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
115
Section 5
Notes to the Consolidated Financial Statements
2. Significant accounting policies (continued)
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 insigni(cid:192)cant changes in value and have a maturity of three months or less. This de(cid:192)nition is also
used for the consolidated cash (cid:193)ow statement.
Dividends
Dividends are recorded in the Group’s consolidated (cid:192)nancial statements in the period in which they are declared, appropriately authorised and
no longer at the discretion of the Company.
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 (cid:192)nance cost in respect of the accounting period and reduced by payments made in the period. Loans which are unhedged
are stated at amortised cost using the effective interest-rate method. Accrued interest is recorded separately from the associated borrowings
within current liabilities.
Loans are described as non recourse loans and classi(cid:192)ed 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.
(cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:75)(cid:72)(cid:71)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)
The Group enters into a variety of derivative (cid:192)nancial 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 (cid:192)nancial 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 (cid:192)nancial asset whereas a derivative with a negative
fair value is recognised as a (cid:192)nancial liability. The resulting gain or loss is recognised in pro(cid:192)t or loss immediately unless the derivative is
designated and effective as a hedging instrument, in which event the timing of the recognition in pro(cid:192)t 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 (cid:192)rm
commitments (fair value hedges), hedges of highly probable forecast transactions or hedges of foreign currency risk of (cid:192)rm commitments
(cash (cid:193)ow 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 (cid:192)nancial 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 pro(cid:192)t or loss.
Hedge accounting
The Group designates certain hedging instruments, which include derivatives, embedded derivatives and non-derivatives in respect of foreign
exchange risk, as either fair value hedges, cash (cid:193)ow hedges, or hedges of net investments in foreign operations. Hedges of foreign exchange
risk on (cid:192)rm commitments are accounted for as cash (cid:193)ow 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 (cid:193)ows 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 pro(cid:192)t 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 quali(cid:192)es for hedge accounting. The adjustment to the carrying amount of the hedged item arising from the hedged risk
is amortised to pro(cid:192)t or loss from that date.
116
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:25)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
2. Significant accounting policies (continued)
Cash (cid:193)ow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash (cid:193)ow hedges are deferred in equity.
The gain or loss relating to the ineffective portion is recognised immediately in pro(cid:192)t or loss.
Amounts deferred in equity are recycled to pro(cid:192)t or loss in the periods when the hedged item affects pro(cid:192)t 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-
(cid:192)nancial asset or a non-(cid:192)nancial 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-(cid:192)nancial asset or non-(cid:192)nancial liability.
Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedging instrument expires or is sold, terminated,
exercised, or no longer quali(cid:192)es 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 pro(cid:192)t 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 pro(cid:192)t or loss.
Hedges of net investments in foreign operations
Hedges of net investments in foreign operations are accounted for similarly to cash (cid:193)ow hedges. Any gain or loss on the hedging
instrument relating to the effective portion of the hedge is recognised in equity and accumulated in the hedging and translation reserve.
The gain or loss relating to the ineffective portion is recognised immediately in pro(cid:192)t or loss and is included in the ‘net exchange gain/loss
on translation of foreign operations’ line item.
Gains and losses on the hedging instrument relating to the effective portion of the hedge accumulated in the foreign currency translation reserve
are reclassi(cid:192)ed to pro(cid:192)t or loss in the same way as exchange differences relating to the foreign operations.
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.
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):
(cid:79)(cid:3) IAS 24 (revised) Related Party Disclosures
(cid:79)(cid:3) Amendment to IAS 32 Financial Instruments: Presentation: Classi(cid:192)cation of Rights Issues
(cid:79)(cid:3) Amendments to IFRS 1 Limited Exemption from Comparative IFRS 7 Disclosures for First-time Adopters
(cid:79)(cid:3) Amendments to IFRS 7 Financial Instruments Disclosures
(cid:79)(cid:3) IFRS 9 Financial Instruments
(cid:79)(cid:3) Amendment to IFRIC 14 Prepayment of a Minimum Funding Requirement
(cid:79)(cid:3) IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments
(cid:79)(cid:3) Improvements to IFRSs (May 2010)
The Directors do not anticipate that the adoption of these standards and interpretations will have a material impact on the Group’s (cid:192)nancial
statements in the period of initial application, with the exception of amounts reported and disclosures in respect of the Group’s (cid:192)nancial assets
and (cid:192)nancial liabilities on adoption of IFRS 9. However, it is not practicable at this stage to provide a reasonable estimate of the effect.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:26)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
117
Section 5
Notes to the Consolidated Financial Statements
3. Critical accounting judgements and key sources 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 above, management has made the following
judgements that have the most signi(cid:192)cant effect on the amounts recognised in the (cid:192)nancial statements (apart from those involving estimations
which are dealt with below).
Revenue and pro(cid:192)t recognition of long-term project-based contracts
Revenue and pro(cid:192)t 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 signi(cid:192)cant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next (cid:192)nancial year, are discussed below.
Impairment of goodwill
Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been
allocated. The value in use calculation involves an estimation of the future cash (cid:193)ows of cash-generating units and also the selection of
appropriate discount rates, which involves judgement, to calculate present values (see note 13). The carrying value of goodwill is £899.5m
(2009: £898.4m) at the balance sheet date.
Retirement bene(cid:192)t obligations
The calculation of retirement bene(cid:192)t obligations is dependent on material key assumptions including discount rates, future returns on assets and
future contribution rates (see note 26). The value of retirement bene(cid:192)t obligations at the balance sheet date is £226.2m (2009: £294.2m). Details
of the impact of changes in assumptions relating to retirement bene(cid:192)t obligations are disclosed in the Finance Review (page 52).
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 de(cid:192)ned in IAS 18
5. Segmental information
2010
£m
4,103.5
223.2
4,326.7
3.9
4,330.6
2009
£m
3,824.0
146.0
3,970.0
2.7
3,972.7
Information reported to the Chief Operating Decision Maker for the purposes of resource allocation and assessment of segment performance
focuses on the categories of customer identi(cid:192)ed using their respective markets. Details of the different products and services provided by
each operating segment are included in the Our business and Our performance sections of this report. From 1 January 2010, the Group has
reapportioned its business into (cid:192)ve new divisions. The Group’s reportable operating segments under IFRS 8 Operating Segments are:
Reportable Segments
Civil Government
Operating Segments
UK and Europe civil government and transport;
Defence, Science and Nuclear
UK and Europe defence and science-based businesses;
Local Government and Commercial
UK and Europe IT and BPO, integrated services, education and commercial businesses;
Americas
AMEAA
US defence, intelligence and federal civil government agencies operations,
and Canadian operations; and
Africa, Middle East, Asia (including Hong Kong and India) and Australasia.
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 2.
118
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:27)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
5. Segmental information (continued)
The following is an analysis of the Group’s revenue and results by operating segment in the year ended 31 December 2010.
Reportable segments
Year ended 31 December 2010
Revenue
Result
Segment result
Corporate expenses
(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:3)
Investment revenue
Finance costs
(cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)(cid:3)
Tax
(cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)(cid:3)
(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:87)(cid:88)(cid:85)(cid:72)(cid:13)
Goodwill
Property, plant and equipment: segments
Property, plant and equipment: corporate
Intangible assets: segments
Intangible assets: corporate
Depreciation and amortisation
Depreciation: segments
Depreciation: corporate
Civil
Government
£m
Defence,
Science
and Nuclear
£m
Local
Government
and
Commercial
£m
Americas
£m
AMEAA
£m
Total
£m
1,126.9
910.8
853.9
953.9
481.2
4,326.7
66.4
77.3
53.1
64.0
32.0
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
-
3.7
-
8.4
1.9
11.3
-
1.4
1.2
10.4
0.2
1.3
1.8
4.9
3.5
7.2
2.6
15.1
4.8
9.1
Amortisation of intangibles arising on acquisition:
segments
Amortisation – other: segments
Amortisation – other: corporate
0.2
3.6
-
1.7
2.7
5.3
13.9
1.3
0.6
1.2
Segment assets
Reportable segment assets
Corporate assets
Segment liabilities
Reportable segment liabilities
Corporate liabilities
292.2
408.0
533.5
694.5
251.0
(243.0)
(313.3)
(176.0)
(133.5)
(85.8)
* stated on a cash basis: including acquisitions but excluding (cid:192)nance leases
292.8
(51.5)
(cid:21)(cid:23)(cid:20)(cid:17)(cid:22)
3.9
(31.3)
(cid:21)(cid:20)(cid:22)(cid:17)(cid:28)
(57.1)
(cid:20)(cid:24)(cid:25)(cid:17)(cid:27)
3.1
35.2
0.2
35.4
11.7
9.2
20.9
38.8
0.6
39.4
17.4
13.1
13.1
43.6
2,179.2
9.0
2,188.2
(951.6)
(102.3)
(1,053.9)
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:20)(cid:28)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
119
Section 5
Notes to the Consolidated Financial Statements
5. Segmental information (continued)
Reportable segments
Restated
Year ended 31 December 2009
Civil
Government
£m
Defence,
Science
Local
Government
and Nuclear and Commercial
£m
£m
Americas
£m
1,026.3
921.2
809.2
872.6
AMEAA
£m
340.7
Total
£m
3,970.0
Revenue
Result
Segment result
Corporate expenses
(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)
Investment revenue
Finance costs
(cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)
Tax
(cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)
(cid:38)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)(cid:72)(cid:91)(cid:83)(cid:72)(cid:81)(cid:71)(cid:76)(cid:87)(cid:88)(cid:85)(cid:72)(cid:13)
Goodwill
Property, plant and equipment: segments
Property, plant and equipment: corporate
Intangible assets: segments
Intangible assets: corporate
(cid:39)(cid:72)(cid:83)(cid:85)(cid:72)(cid:70)(cid:76)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:80)(cid:82)(cid:85)(cid:87)(cid:76)(cid:86)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)
Depreciation: segments
Depreciation: corporate
45.0
77.9
47.0
61.8
24.1
5.1
9.4
-
2.2
1.1
13.2
-
3.9
-
8.9
2.0
0.9
2.5
4.1
1.1
8.3
2.7
12.7
7.1
2.8
Amortisation of intangibles arising on acquisition:
segments
Amortisation – other: segments
Amortisation – other: corporate
0.3
3.7
-
1.7
2.6
5.3
14.2
1.3
0.5
1.2
Segment assets
Reportable segment assets
Corporate assets
Segment liabilities
Reportable segment liabilities
Corporate liabilities
284.4
447.4
538.7
661.2
197.2
(242.2)
(340.6)
(207.8)
(105.7)
(54.0)
* stated on a cash basis: including acquisitions but excluding (cid:192)nance leases
255.8
(43.7)
212.1
2.7
(37.7)
177.1
(46.9)
130.2
6.2
37.6
2.4
40.0
10.6
6.9
17.5
33.6
0.8
34.4
17.6
13.2
9.7
40.5
2,128.9
30.0
2,158.9
(950.3)
(138.6)
(1,088.9)
120
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:19)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
5. Segmental information (continued)
Segment assets comprise:
Goodwill
Other intangible assets
Property, plant and equipment
Trade and other receivables – non-current
Inventories
Trade and other receivables – current excluding Corporation tax recoverable (note 19)
Segment liabilities comprise:
Trade and other payables – current
Trade and other payables – non-current
Retirement bene(cid:192)t obligations
Geographic information
United Kingdom
United States
Other countries
Total
2010
£m
899.5
145.0
135.4
156.7
65.4
786.2
2009
£m
898.4
164.4
129.2
181.4
65.9
719.6
2,188.2
2,158.9
2010
£m
(805.5)
(22.2)
(226.2)
2009
£m
(771.6)
(23.1)
(294.2)
(1,053.9)
(1,088.9)
Revenue
2010
£m
2,586.4
880.3
860.0
4,326.7
Non-current
assets*
2010
£m
707.9
463.2
165.5
1,336.6
Revenue
2009
£m
2,541.9
819.2
608.9
3,970.0
Non-current
assets*
2009
£m
734.9
404.8
233.7
1,373.4
* Non-current assets exclude (cid:192)nancial instruments and deferred tax 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 10% of Group revenues. The customers’ revenues were
respectively £2,418.3m (2009: £2,351.6m) across all reported segments other than Americas and AMEAA and £850.5m (2009: £796.1m) within
the Americas segment.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:20)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
121
Section 5
Notes to the Consolidated Financial Statements
6. Operating profit
Operating pro(cid:192)t is stated after charging/(crediting):
Net foreign exchange losses/(gains)
Research and development costs
Loss 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)
Impairment of goodwill (note 13)
Staff costs (note 7)
Allowance for doubtful debts charged to income statement (note 19)
Fair value adjustment on (cid:192)nancial instruments
- recycling of amounts on discontinued cash (cid:193)ow hedges (note 25(d))
- forward foreign exchange contracts: non-designated hedges (note 25(a))
Operating lease payments
Operating lease income
2010
£m
1.8
62.3
0.8
39.4
17.4
26.2
4.2
1,837.3
2.2
0.3
(1.4)
128.6
-
2009
£m
(3.4)
47.1
2.0
34.4
17.6
22.9
-
1,694.0
1.4
0.2
3.0
104.5
(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 Auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s Auditor 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
Other services relate to consulting services provided to the Group.
2010
£m
0.9
0.7
1.6
0.1
0.2
0.3
0.6
2009
£m
0.9
0.7
1.6
0.1
0.2
0.3
0.6
122
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:21)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
7. Staff costs
The average monthly number of employees (including Executive Directors) was:
Civil Government
Defence, Science and Nuclear
Local Government and Commercial
Americas
AMEAA
Unallocated
Total
2010
Number
11,313
8,516
11,477
10,192
17,014
287
58,799
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
8. Investment revenue
Interest receivable on other loans and deposits
9. Finance costs
Interest payable on non recourse loans
Interest payable on obligations under (cid:192)nance leases
Interest payable on other loans
Movement in discount on provisions and deferred consideration
Net interest payable on retirement bene(cid:192)t obligations (note 26)
2010
£m
1,582.9
139.1
106.5
1,828.5
8.8
1,837.3
2010
£m
3.9
3.9
2010
£m
1.4
2.2
23.7
1.2
2.8
31.3
2009
Number
11,540
9,182
11,400
10,286
15,036
266
57,710
2009
£m
1,467.7
126.7
92.4
1,686.8
7.2
1,694.0
2009
£m
2.7
2.7
2009
£m
1.6
1.8
26.8
1.2
6.3
37.7
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:22)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
123
Section 5
Notes to the Consolidated Financial Statements
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 pro(cid:192)t in the Consolidated Income Statement as follows:
(cid:51)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:68)(cid:91)
Tax calculated at a rate of 28% (2009: 28%)
Expenses not deductible for tax purposes
Unrelieved tax losses
Effect of the use of unrecognised tax losses
Impact of changes in statutory tax rates
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 (cid:193)ow hedges
Taken to Retirement bene(cid:192)t obligations reserve
Taken to Share-based payment reserve
Deferred tax
Relating to cash (cid:193)ow hedges
Taken to Retirement bene(cid:192)t obligations reserve
Taken to Share-based payment reserve
2010
£m
63.3
(8.1)
2.5
(0.6)
57.1
2010
£m
213.9
59.9
3.6
2.5
-
0.8
-
3.2
(4.2)
(8.7)
57.1
2010
£m
-
(9.7)
(2.7)
0.6
14.0
(0.5)
1.7
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)
The income tax expense for the year is based on the UK statutory rate of corporation tax for the period of 28% (2009: 28%). The impact of
changes in statutory tax rates relates principally to the reduction of the UK corporation tax rate from 28% to 27% from 1 April 2011, which was
enacted on 27 July 2010. This change has resulted in a deferred tax charge arising from the reduction in the balance sheet carrying value of
deferred tax assets to re(cid:193)ect the anticipated rate of tax at which those assets are expected to reverse. The UK Government has also indicated
that it intends to enact future reductions in the main tax rate of 1% each year down to 24% by 1 April 2014. We estimate that the future rate
changes would further reduce the UK deferred tax assets and liabilities recognised but the actual impact will be dependent on the deferred
tax position at that time.
124
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:23)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
11. Dividends
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2009 of 4.40p per share on 490.5 million ordinary shares
(2009: Final dividend for the year ended 31 December 2008 of 3.52p per share on 481.1million ordinary shares)
Interim dividend for the year ended 31 December 2010 of 2.20p per share on 488.2 million ordinary shares
(2009: Interim dividend for the year ended 31 December 2009 of 1.85p per share on 489.0 million ordinary shares)
Proposed (cid:192)nal dividend for the year ended 31 December 2010 of 5.15p per share on 488.5 million
ordinary shares (2009: 4.40p on 490.5 million ordinary shares)
2010
£m
2009
£m
21.6
16.9
10.7
32.3
25.2
9.0
25.9
21.6
The proposed (cid:192)nal dividend for 2010 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).
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 per share
2010
Millions
491.5
8.4
499.9
Earnings
2009
£m
2009
Millions
486.6
5.6
492.2
Per share
amount
2009
Pence
Earnings
2010
£m
Per share
amount
2010
Pence
Earnings for the purpose of basic EPS being net pro(cid:192)t attributable to the
equity holders of the parent
Add back:
Amortisation of intangible assets arising on acquisition, net of tax
of £3.6m (2009: £4.1m)
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
156.7
31.88
130.2
26.76
13.8
2.81
13.5
2.77
170.5
156.7
-
156.7
34.69
31.88
(0.53)
31.35
143.7
130.2
-
130.2
29.53
26.76
(0.31)
26.45
At 31 December 2010 options over nil (2009: 894,000) shares were excluded from the weighted average number of shares used for calculating
diluted earnings per share because their exercise price was above the average share price for the year and they were, therefore, anti-dilutive.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:24)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
125
Section 5
Notes to the Consolidated Financial Statements
13. Goodwill
At 1 January 2009
Additions
Reduction in deferred consideration payable on Infovision
Exchange differences
At 1 January 2010
Additions
Impairment
Reduction in deferred consideration payable on Infovision
Reduction in deferred consideration payable on Sandrunner
Exchange differences
At 31 December 2010
£m
963.2
6.2
(16.5)
(54.5)
898.4
3.1
(4.2)
(12.7)
(1.0)
15.9
899.5
Goodwill is attributable to the excess of consideration over the fair value of net assets acquired and includes expected synergies, existing
contracts, future growth prospects, staff knowledge, expertise and customer contacts.
Additions during the year include goodwill in respect of the acquisitions of RB Solutions Limited and the trade and liabilities of HyIT Knowledge
Systems Private Limited (note 15).
During the year, the Group exited its remaining business in the non-core South African market, a joint venture providing aviation ground handling
services, following the non-renewal of its license. Accordingly, an impairment charge of £4.2m has been recognised in the Consolidated Income
Statement as an administrative expense. The recoverable amount is based on fair value less costs to sell. The impairment expense attributable
to the joint venture’s goodwill is allocated to Corporate Expenses in the Group’s segmental information (note 5).
The goodwill acquired in business combinations is allocated, at acquisition, to the cash-generating units (CGUs) that are expected to bene(cid:192)t
from that business combination. At the start of the (cid:192)nancial year a group restructuring took place, including a combination of certain business
units, triggering a re-assessment of the level at which cash in(cid:193)ows are largely independent of each other. Therefore, in accordance with IAS 36,
the Group’s CGUs were rationalised and this process incorporated the reallocation of some immaterial goodwill balances to the revised CGUs.
Goodwill has been allocated to CGUs in the following operating segments:
Civil Government
Defence, Science and Nuclear
Local Government and Commercial
Americas
AMEAA
At 31 December
2010
£m
62.1
105.5
295.5
408.2
28.2
899.5
Restated
2009
£m
61.2
106.9
295.3
395.7
39.3
898.4
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 risk-adjusted cash (cid:193)ow projections based on (cid:192)nancial plans approved by senior management covering
a (cid:192)ve-year period, and include a terminal value based on the projections for the (cid:192)nal year of that plan, with an in(cid:193)ationary growth rate
assumption applied. The key assumptions affecting the CGUs are discussed below.
Short-term growth rates
Short-term revenue growth rates used in each CGU (cid:192)ve-year plan are based on internal data regarding the current pipeline of opportunities
and published industry forecasts for the relevant market. Further discussion of the Group’s order book and pipeline is provided in the
Our business and Our performance sections.
126
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:25)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
13. Goodwill (continued)
Terminal growth rates
The cash (cid:193)ows subsequent to the (cid:192)ve-year period are based upon management’s estimate of the growth rates of the sectors in which the CGUs
operate. Where possible these have been derived with reference to external sources. The range of terminal growth rates applied to the CGUs
within each operating segment are set out below:
Civil Government
Defence, Science and Nuclear
Local Government and Commercial
Americas
AMEAA
%
2.5
2.5
2.5
3.0
2.5 - 7.0
These rates do not exceed the average long-term growth rates forecast for the individual market sectors.
Discount rate
Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital have been used in discounting the projected
risk-adjusted cash (cid:193)ows. These rates are adjusted for risks speci(cid:192)c to the market in which the CGU operates, including but not limited to:
geographic and economic risks, contract length and customer type.
The range of pre-tax discount rates applied to the CGUs within each operating segment are disclosed below:
Civil Government
Defence, Science and Nuclear
Local Government and Commercial
Americas
AMEAA
%
9.2
9.1 - 9.2
9.1
9.9
9.6 - 12.9
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption and the Directors have not identi(cid:192)ed any reasonably possible material
changes in the key assumptions that would cause the carrying value of goodwill to exceed the recoverable amount.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:26)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
127
Section 5
Notes to the Consolidated Financial Statements
14. Other intangible assets
o
Cost
At 1 January 2010
Additions
Disposals
Exchange differences
At 31 December 2010
Amortisation and impairment
At 1 January 2010
Charge for the year
Disposals
Exchange differences
At 31 December 2010
Net book value
At 31 December 2010
o
Cost
At 1 January 2009
Arising on acquisition of a company
Additions
Disposals
Reclassi(cid:192)cations to tangible assets
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
Customer
relationships
£m
Licences and
franchises
£m
Software and
development
expenditure
£m
Pension
related
intangibles
£m
71.7
-
-
1.7
73.4
22.5
9.9
-
0.3
32.7
69.5
2.9
-
5.9
78.3
44.1
7.5
-
3.9
55.5
133.9
22.8
(23.2)
1.0
134.5
55.5
23.7
(17.4)
0.1
61.9
26.6
-
-
-
26.6
15.2
2.5
-
-
17.7
Total
£m
301.7
25.7
(23.2)
8.6
312.8
137.3
43.6
(17.4)
4.3
167.8
40.7
22.8
72.6
8.9
145.0
Acquisition related
Other
Customer
relationships
£m
Licences and
franchises
£m
Software and
development
expenditure
£m
Pension
related
intangibles
£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
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
Customer relationships 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 £17.4m (2009: £17.6m).
The Group is carrying £72.6m (2009: £78.4m) in relation to Software and development expenditure which includes assets relating to the Group’s
SAP (cid:192)nance-related systems, of £42.7m (2009: £32.8m). The average amortisation period of these assets has six years (2009: (cid:192)ve years)
remaining. The Group is carrying £40.7m (2009: £49.2m) in relation to customer relationships of which the principal component is £34.0m (2009:
£39.2m) relating to SI International, Inc. The remaining average life of these customer relationship intangible assets is approximately (cid:192)ve years
(2009: six years).
128
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:27)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
15. Acquisitions
During the year, the Group completed the following acquisitions which have been accounted for in accordance with IFRS 3 Business
Combinations (2008).
15 (a) RB Solutions Limited:
On 17 February 2010, the Group acquired 100% of the share capital in RB Solutions Limited. Net assets acquired total £0.1m purchased for
consideration of £1.5m of cash and £0.5m in deferred consideration paid on 17 August 2010.
The acquisition gives rise to £1.9m of goodwill relating to future opportunities in Local Government business process outsourcing. None of the
goodwill recognised is expected to be deductible for corporate income tax purposes.
RB Solutions Limited is based in the UK and provides remote processing services to Local Government.
Costs of £0.3m have been expensed in relation to the acquisition and integration of RB Solutions Limited.
15 (b) HyIT Knowledge Systems Private Limited:
On 28 August 2010, the Group acquired the trade and liabilities of HyIT Knowledge Systems Private Limited. Net liabilities acquired were
INR3,000 (£0.0m) for a purchase consideration of INR15.0m (£0.2m) of cash and INR77.2m (£1.0m) in deferred consideration to be paid
contingent on future performance of the acquired trade and liabilities.
The acquisition gives rise to £1.2m of goodwill relating to future opportunities in the local Geo-Informatics market. None of the goodwill
recognised is expected to be deductible for corporate income tax purposes.
HyIT Knowledge Systems Private Limited is based in Hyderabad, India providing client-site Geo-Informatics and technical support
staf(cid:192)ng services.
Due to the small size of the acquisitions, full IFRS 3 disclosures have not been presented.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:21)(cid:28)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
129
Section 5
Notes to the Consolidated Financial Statements
16. Property, plant and equipment
Cost
At 1 January 2010
Additions
Disposals
Exchange differences
At 31 December 2010
Accumulated depreciation and impairment
At 1 January 2010
Charge for the year
Disposals
Exchange differences
At 31 December 2010
Net book value
At 31 December 2010
Cost
At 1 January 2009
Additions
Reclassi(cid:192)cation from intangible assets
Disposals
Arising on acquisition of subsidiaries
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
Freehold
land and
buildings
£m
7.4
-
-
(0.2)
7.2
3.3
0.2
-
-
3.5
3.7
Freehold
land and
buildings
£m
7.6
0.1
-
-
-
(0.3)
7.4
3.3
0.2
-
(0.2)
3.3
Short-
Machinery,
leasehold motor vehicles,
furniture
improvements and equipment
£m
building
£m
47.1
2.4
(0.1)
1.4
50.8
20.2
5.6
-
0.5
26.3
265.2
44.5
(22.2)
10.2
297.7
167.0
33.6
(15.4)
5.3
190.5
Total
£m
319.7
46.9
(22.3)
11.4
355.7
190.5
39.4
(15.4)
5.8
220.3
24.5
107.2
135.4
Short-
Machinery,
leasehold motor vehicles,
furniture
and equipment
£m
building
improvements
£m
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
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
4.1
26.9
98.2
129.2
The carrying amount of the Group’s Machinery, motor vehicles, furniture and equipment includes an amount of £23.9m (2009: £22.1m) in
respect of assets held under (cid:192)nance leases.
The carrying amount of the Group’s Short-leasehold building improvements includes an amount of £2.3m (2009: £3.0m) in respect of assets
held under (cid:192)nance leases.
130
Serco Group plc Annual report and accounts 2010
17. Joint ventures
The Group’s interests in joint ventures are reported in the consolidated (cid:192)nancial 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 pro(cid:192)t
Investment revenue
Finance costs
Pro(cid:192)t before tax
Tax
Share of post-tax results of joint ventures
Operating pro(cid:192)t is after allocating £0.7m (2009: £2.8m) 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
2010
£m
794.1
(729.5)
64.6
2.2
(0.5)
66.3
(17.2)
49.1
2010
£m
156.7
173.4
(146.0)
(141.1)
43.0
2010
£m
29.8
7.4
28.2
65.4
2009
£m
786.0
(724.5)
61.5
1.0
(0.5)
62.0
(14.9)
47.1
2009
£m
186.4
145.4
(129.8)
(162.5)
39.5
2009
£m
22.6
18.0
25.3
65.9
As at 31 December 2010, £nil (2009: £nil) of advances received from customers were included within Long-term project-based contract
balances. As at 31 December 2010, the Group had £nil (2009: £nil) of contract retentions held by customers.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:22)(cid:20)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
131
Section 5
Notes to the Consolidated Financial Statements
19. Trade and other receivables
Trade and other receivables: non-current
Amounts owed by joint ventures
Amounts recoverable on retirement bene(cid:192)t 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
2010
£m
4.7
123.4
28.6
156.7
2010
£m
579.4
64.9
96.7
45.2
786.2
4.0
790.2
2009
£m
2.7
144.3
34.4
181.4
2009
£m
514.7
65.2
81.4
58.3
719.6
1.3
720.9
As of 31 December 2010, trade receivables of £4.2m (2009: £4.6m) were considered to be impaired. Impairments to trade receivables
are based on speci(cid:192)c estimated irrecoverable amounts and provisions on outstanding balances greater than a year old unless there is (cid:192)rm
evidence that the balance is recoverable. The amount of the provision was £4.2m as of 31 December 2010 (2009: £3.4m) 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 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
Allowance for doubtful debts
Movements on the Group allowance for doubtful debts are as follows:
At 1 January
Charged to income statement
Utilised
Exchange differences
At 31 December
2010
£m
488.0
56.9
14.0
20.5
4.2
(4.2)
579.4
2010
£m
3.4
2.2
(1.4)
-
4.2
2009
£m
438.5
40.9
11.8
22.3
4.6
(3.4)
514.7
2009
£m
2.7
1.4
(0.6)
(0.1)
3.4
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.
132
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:22)(cid:21)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
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
2010
£m
-
-
108.5
108.5
Other
currencies
2010
£m
7.3
3.6
159.9
170.8
Total
2010
£m
7.3
3.6
268.4
279.3
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
* Cash of project companies and customer advance payments totalling £10.9m (2009: £11.2m) 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 (cid:192)ve years
After (cid:192)ve years
Less: amount due for settlement within one year
(shown within current liabilities)
Amount due for settlement after one year
Non
recourse
loans
2010
£m
8.0
7.9
7.8
-
23.7
(8.0)
15.7
Other
loans
2010
£m
151.5
114.3
224.2
0.4
490.4
Total
2010
£m
159.5
122.2
232.0
0.4
514.1
(151.5)
(159.5)
338.9
354.6
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
The carrying amounts and fair values of the loans are as follows:
Non recourse loans
Other loans
Carrying
amount
2010
£m
23.7
490.4
514.1
Fair value
2010
£m
25.3
506.8
532.1
Carrying
amount
2009
£m
29.0
624.9
653.9
Fair value
2009
£m
31.3
638.8
670.1
The fair values are based on cash (cid:193)ows discounted using a rate based on the borrowing rate associated with the loan. All loans are held at
amortised cost.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:22)(cid:22)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
133
Section 5
Notes to the Consolidated Financial Statements
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 – (asset)/liability
Income statement charge/(credit) (note 10)
Items recognised in equity and in other comprehensive income (note 10)
Exchange differences
At 31 December – asset
2010
£m
(39.0)
1.9
14.1
(0.5)
(23.5)
The movement in deferred tax assets and liabilities during the year was as follows:
(cid:3)
(cid:3)
Temporary
differences
(cid:82)(cid:81)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:18)(cid:3)
(cid:76)(cid:81)(cid:87)(cid:68)(cid:81)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:86)(cid:3)
£m
Share-based
payment and
(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:3)
(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)(cid:3)
£m
(cid:3)
(cid:3)
Retirement
(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:3)
(cid:86)(cid:70)(cid:75)(cid:72)(cid:80)(cid:72)(cid:86)(cid:3)
£m
Derivative
(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)
(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)
£m
Other
(cid:87)(cid:72)(cid:80)(cid:83)(cid:82)(cid:85)(cid:68)(cid:85)(cid:92)(cid:3)
(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)
£m
At 1 January 2010
(Credited)/charged to income statement
Items recognised in equity and in other
comprehensive income
Exchange differences
At 31 December 2010
22.6
(5.6)
-
0.3
17.3
(17.8)
(8.7)
(0.5)
(0.1)
(27.1)
(25.4)
(2.1)
14.0
-
(13.5)
(1.0)
0.1
0.6
-
(0.3)
(17.4)
18.2
-
(0.7)
0.1
The movement in deferred tax assets and liabilities during the previous year was as follows:
At 1 January 2009
(Credited)/charged to income statement
Items recognised in equity and in other
comprehensive income
Exchange differences
At 31 December 2009
Temporary
differences
on assets/
intangibles
£m
Share-based
payment and
employee
bene(cid:192)ts
£m
26.5
(0.5)
-
(3.4)
22.6
(18.7)
1.5
(1.0)
0.4
(17.8)
Retirement
bene(cid:192)t
schemes
£m
Derivative
(cid:192)nancial
instruments
£m
Other
temporary
differences
£m
7.5
6.2
(39.1)
-
(25.4)
0.6
0.1
(1.7)
-
(1.0)
(10.0)
(7.5)
-
0.1
(17.4)
2009
£m
5.9
(0.2)
(41.8)
(2.9)
(39.0)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)
£m
(39.0)
1.9
14.1
(0.5)
(23.5)
Total
£m
5.9
(0.2)
(41.8)
(2.9)
(39.0)
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 (cid:192)scal authority. The following is the analysis of the deferred tax balances
(after offset) for (cid:192)nancial reporting purposes:
Deferred tax liabilities
Deferred tax assets
2010
£m
14.6
(38.1)
(23.5)
2009
£m
9.0
(48.0)
(39.0)
At the balance sheet date, the Group did not recognise deferred tax assets of £9.7m (2009: £5.6m) which principally relate to unused tax losses
of £31.8m (2009: £26.1m). Losses of £1.3m (2009: £1.3m) expire within (cid:192)ve years, losses of £11.0m (2009: £2.1m) expire within 6-10 years,
losses of £12.6m (2009: £11.6m) expire within 15-20 years and losses of £6.9m (2009: £11.1m) may be carried forward inde(cid:192)nitely.
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 £0.1m (2009: £0.4m). 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.
134
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:22)(cid:23)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
23. Obligations under finance leases
Minimum
lease
payments
2010
£m
Present value
of minimum
lease
payments
2010
£m
Minimum
lease
payments
2009
£m
Present value
of minimum
lease
payments
2009
£m
Amounts payable under (cid:192)nance leases:
Within one year
Between one and (cid:192)ve years
After (cid:192)ve years
Less: future (cid:192)nance 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
Finance lease obligations are secured by the lessors’ title to the leased assets.
8.8
20.5
1.3
30.6
(4.2)
26.4
(8.8)
17.6
7.1
18.2
1.1
26.4
-
26.4
(7.1)
19.3
The Directors estimate that the fair value of the Group’s lease obligations approximates their carrying amount.
24. Trade and other payables
Trade and other payables: current
Trade creditors
Other creditors
Accruals and deferred income
Amounts owed to joint ventures
The average credit period taken for trade purchases is 31 days (2009: 32 days).
Trade and other payables: non-current
Other creditors
7.5
17.6
3.0
28.1
(4.1)
24.0
(7.5)
16.5
2010
£m
203.8
152.4
449.2
0.1
805.5
2010
£m
22.2
22.2
6.0
15.3
2.7
24.0
-
24.0
(6.0)
18.0
2009
£m
197.7
126.4
447.0
0.5
771.6
2009
£m
23.1
23.1
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:22)(cid:24)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
135
Section 5
Notes to the Consolidated Financial Statements
25. Financial risk management
25 (a) Fair value of (cid:192)nancial instruments
(i) Hierarchy of fair value
The Group held the following (cid:192)nancial instruments which fall within the scope of IAS 39 Financial Instruments: Recognition and Measurement
at 31 December:
Carrying amount
(measurement basis)
Comparison
fair value
Carrying amount
(measurement basis)
Comparison
fair value
Loans and receivables:
Trade receivables (note 19)
Other (cid:192)nancial assets (note 25(e))
(cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:68)(cid:86)(cid:86)(cid:72)(cid:87)(cid:86)(cid:29)
Derivative (cid:192)nancial instruments: current
Derivative (cid:192)nancial instruments: non-current
Financial liabilities at amortised cost:
Trade payables (note 24)
Loans (note 21)
(cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:79)(cid:76)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:29)
Derivative (cid:192)nancial instruments: current
Derivative (cid:192)nancial instruments: non-current
Amortised
Cost
2010
£m
579.4
0.8
(203.8)
(514.1)
Fair value
hierarchy
- Level 2
2010
£m
3.9
3.5
(2.4)
(5.2)
Amortised
Cost
2009
£m
514.7
0.8
2010
£m
579.4
0.8
(203.8)
(532.1)
(197.7)
(653.9)
Fair value
hierarchy
- Level 2
2009
£m
1.4
2.5
(5.5)
(1.7)
2009
£m
514.7
0.8
(197.7)
(670.1)
The Directors estimate that the carrying amounts of trade receivables and trade payables approximate to their fair value.
The fair values of loans are based on cash (cid:193)ows discounted using a rate based on the borrowing rate associated with the loan. All loans are
held at amortised cost.
The fair values of derivative (cid:192)nancial instruments are calculated based on a discounted cash (cid:193)ow analysis using appropriate quoted interest
rates for the duration of the instruments as noted below:
(cid:79)(cid:3) Currency swaps and interest rate swaps are measured at the present value of estimated future cash (cid:193)ows. The present value of foreign
currency balances are converted at the year end exchange rate.
(cid:79)(cid:3) Forward foreign exchange contracts are measured using quoted forward exchange rates matching the maturities of the contracts.
(cid:79)(cid:3) Commodity contracts are measured at the present value of estimated cash (cid:193)ows with reference to quoted forward prices for Gas Oil.
The classi(cid:192)cation 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 (cid:192)nancial instruments held by the Group at 31 December 2010, are considered to fall into Level 2. There were
no transfers between Level 1 and 2 during the year.
136
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:22)(cid:25)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
25. Financial risk management (continued)
25 (a) Fair value of (cid:192)nancial instruments (continued)
(ii) Fair value of derivative (cid:192)nancial instruments
The fair valuation of derivative (cid:192)nancial instruments results in a net liability of £0.2m (2009: £3.3m), comprising non-current assets of £3.5m
(2009: £2.5m), current assets of £3.9m (2009: £1.4m), current liabilities of £2.4m (2009: £5.5m) and non-current liabilities of £5.2m
(2009: £1.7m).
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)
(cid:21)(cid:19)(cid:20)(cid:19)(cid:3)
£m
Movement
in fair value
(cid:82)(cid:73)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:3)
(cid:75)(cid:72)(cid:71)(cid:74)(cid:72)(cid:86)(cid:3)
£m
Movement
in fair value
of non-
(cid:71)(cid:72)(cid:86)(cid:76)(cid:74)(cid:81)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:3)
(cid:75)(cid:72)(cid:71)(cid:74)(cid:72)(cid:86)(cid:3)
£m
(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)
(cid:21)(cid:19)(cid:20)(cid:19)
£m
Currency swaps
Forward foreign exchange contracts
Interest rate swaps
Commodity futures contracts
Currency swaps
Forward foreign exchange contracts
Interest rate swaps
Commodity futures contracts
25 (b) Financial risk
(0.5)
(cid:11)(cid:21)(cid:17)(cid:22)(cid:12)(cid:3)
(cid:11)(cid:21)(cid:17)(cid:20)(cid:12)(cid:3)
(cid:20)(cid:17)(cid:25)(cid:3)
(cid:11)(cid:22)(cid:17)(cid:22)(cid:12)(cid:3)
1.5
(cid:19)(cid:17)(cid:26)(cid:3)
(cid:11)(cid:20)(cid:17)(cid:24)(cid:12)(cid:3)
(cid:20)(cid:17)(cid:19)(cid:3)
(cid:20)(cid:17)(cid:26)(cid:3)
-
(cid:20)(cid:17)(cid:23)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:20)(cid:17)(cid:23)(cid:3)
1.0
(cid:11)(cid:19)(cid:17)(cid:21)(cid:12)
(cid:11)(cid:22)(cid:17)(cid:25)(cid:12)
(cid:21)(cid:17)(cid:25)
(cid:11)(cid:19)(cid:17)(cid:21)(cid:12)
Movement
in fair value
of cash (cid:193)ow
hedges
£m
Movement
in fair value
of non-
designated
hedges
£m
31 December
2009
£m
(4.7)
(1.5)
(2.1)
2.0
(6.3)
-
(3.0)
-
-
(3.0)
(0.5)
(2.3)
(2.1)
1.6
(3.3)
1 January
2009
£m
4.2
2.2
-
(0.4)
6.0
The Board is ultimately responsible for ensuring that (cid:192)nancial and non-(cid:192)nancial risks are monitored and managed within acceptable and
known parameters. The Board delegates authority to the executive team to manage (cid:192)nancial risks. The Group’s treasury function acts as a
service centre and operates within clearly de(cid:192)ned guidelines and policies that are approved by the Board. The guidelines and policies de(cid:192)ne
the (cid:192)nancial 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.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:22)(cid:26)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
137
Section 5
Notes to the Consolidated Financial Statements
25. Financial risk management (continued)
25 (c) Liquidity risk
(i) Credit facilities
The Group maintains committed credit facilities to ensure that it has suf(cid:192)cient liquidity to maintain its ongoing operations. As at 31 December,
the Group’s committed credit facilities and corresponding borrowings were as follows:
Syndicated revolving credit facility
Syndicated term loan facility
Bilateral revolving credit facility
Bilateral revolving credit facility
Syndicated revolving credit facility
Syndicated term loan facility
Bilateral revolving credit facility
Bilateral revolving credit facility
Currency
GBP
USD
GBP
EUR
Currency
GBP
USD
GBP
EUR
Amount
2010
Millions
400.0
396.4
35.0
12.5
Amount
2009
Millions
400.0
488.0
35.0
12.5
Drawn
2010
£m
76.6
253.2
-
-
329.8
Drawn
2009
£m
120.5
302.2
35.0
-
457.7
Undrawn
2010
£m
Total facility
2010
£m
323.4
-
35.0
10.7
369.1
400.0
253.2
35.0
10.7
698.9
Undrawn
2009
£m
Total facility
2009
£m
279.5
-
-
10.7
290.2
400.0
302.2
35.0
10.7
747.9
The Group’s bank credit facilities comprise a £400.0m syndicated revolving credit facility, a syndicated amortising term loan for
US Dollar 396.4m and bilateral revolving credit facilities for £35.0m and Euro 12.5m. The syndicated revolving facility matures in
September 2013 whilst the syndicated term loan is repayable between September 2011 and September 2013. The bilateral facilities
mature in December 2011 and April 2012 respectively.
The banking facilities are unsecured and have (cid:192)nancial and non-(cid:192)nancial covenants and obligations typical of these arrangements.
The Group has outstanding private placements of £117.7m which amortise in equal annual instalments from 2011 to 2015. The private
placements comprise a tranche of £83.0m and a tranche of US Dollar 55.0m, which is hedged by two cross currency swaps (note 25(d)).
138
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:22)(cid:27)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
25. Financial risk management (continued)
25 (c) Liquidity risk (continued)
(ii) Maturity of (cid:192)nancial liabilities
The Group’s (cid:192)nancial liabilities will be settled on a net basis based on the remaining period at the balance sheet to the contractual maturity date.
The amounts disclosed below are the contractual undiscounted cash (cid:193)ows based on the earliest date on which the Group can be required to pay.
(cid:3)
(cid:3)
(cid:3)
Trade creditors
Obligations under (cid:192)nance leases
Loans
Future loan interest
Derivative (cid:192)nancial liabilities
At 31 December 2010
Trade creditors
Obligations under (cid:192)nance leases
Loans
Future loan interest
Derivative (cid:192)nancial liabilities
At 31 December 2009
On demand
or within
(cid:82)(cid:81)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)
£m
Between
one and
(cid:87)(cid:90)(cid:82)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)
£m
Between
two and
(cid:192)(cid:89)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)
£m
After
(cid:192)(cid:89)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:3)
£m
203.8
8.8
159.5
16.0
5.4
393.5
-
6.1
122.2
11.4
0.9
140.6
On demand
or within
one year
£m
Between
one and
two years
£m
197.7
7.5
110.7
26.0
5.7
347.6
-
7.8
153.1
20.5
1.2
182.6
-
14.4
232.0
11.2
0.1
257.7
Between
two and
(cid:192)ve years
£m
-
9.8
365.9
28.3
0.4
404.4
-
1.3
0.4
0.3
-
2.0
After
(cid:192)ve years
£m
-
3.0
24.2
1.2
-
28.4
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)
£m
203.8
30.6
514.1
38.9
6.4
793.8
Total
£m
197.7
28.1
653.9
76.0
7.3
963.0
The Group’s derivative (cid:192)nancial liabilities are settled on both a net and gross basis depending upon the terms of each derivative (cid:192)nancial
instrument. The maturity of the Group’s undiscounted derivative (cid:192)nancial liabilities is as follows:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
On demand or within one year
Between one and two years
Between two and (cid:192)ve years
At 31 December 2010
On demand or within one year
Between one and two years
Between two and (cid:192)ve years
At 31 December 2009
Currency
(cid:86)(cid:90)(cid:68)(cid:83)(cid:86)(cid:3)
£m
Forward foreign
exchange
(cid:70)(cid:82)(cid:81)(cid:87)(cid:85)(cid:68)(cid:70)(cid:87)(cid:86)(cid:3)
£m
Interest
(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)(cid:86)(cid:90)(cid:68)(cid:83)(cid:86)(cid:3)
£m
-
-
-
-
(2.4)
(0.4)
(0.1)
(2.9)
(3.0)
(0.5)
-
(3.5)
Currency
swaps
£m
Forward foreign
exchange
contracts
£m
Interest
rate swaps
£m
(0.1)
-
(0.1)
(0.2)
(1.9)
(0.6)
(0.6)
(3.1)
(3.7)
(0.6)
0.3
(4.0)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)
£m
(5.4)
(0.9)
(0.1)
(6.4)
Total
£m
(5.7)
(1.2)
(0.4)
(7.3)
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:22)(cid:28)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
139
Section 5
Notes to the Consolidated Financial Statements
25. Financial risk management (continued)
25 (d) Foreign exchange risk
(i) Transactional
The Group’s business does not involve a signi(cid:192)cant 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 Group treasury 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 signi(cid:192)cant future transactions and cash (cid:193)ows. 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.
At 31 December 2010, the net total notional amount of outstanding forward foreign exchange and currency swap contracts to which the Group
is committed is negative £59.6m (2009: positive £74.8m). These arrangements are mainly designed to address signi(cid:192)cant exchange exposures
for the next (cid:192)ve years (2009: six years).
(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:3)(cid:75)(cid:72)(cid:71)(cid:74)(cid:72)(cid:86)
At 31 December 2010, the Group held a number of currency swaps designated as cash (cid:193)ow hedges against US Dollar private placements.
Fixed interest cash (cid:193)ows denominated in US Dollars are exchanged for (cid:192)xed interest cash (cid:193)ows denominated in Sterling. The pro(cid:192)le of these
currency swaps held by the Group is as follows:
(cid:48)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)
August 2015
August 2015
(cid:3)
(cid:49)(cid:82)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)
(cid:68)(cid:80)(cid:82)(cid:88)(cid:81)(cid:87)(cid:3)
2010
(cid:56)(cid:54)(cid:39)(cid:3)(cid:80)(cid:3)
35.0
20.0
(cid:53)(cid:72)(cid:70)(cid:72)(cid:76)(cid:89)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)
(cid:56)(cid:54)(cid:39)(cid:3)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)
2010
(cid:8)(cid:3)
(cid:51)(cid:68)(cid:92)(cid:68)(cid:69)(cid:79)(cid:72)
(cid:42)(cid:37)(cid:51)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)
2010
(cid:8)(cid:3)
5.7
5.7
5.7
5.7
(cid:3)
Notional
amount
2009
USD m
35.0
20.0
Receivable
USD
interest rate
2009
%
5.7
5.7
Payable
GBP
interest rate
2009
%
5.7
5.7
The Group also held a number of forward foreign exchange contracts designated as cash (cid:193)ow hedges with a notional amount of £29.5m
(2009: £21.3m).
All currency derivatives designated as cash (cid:193)ow hedges are highly effective and the fair value gain of £2.2m (2009: £6.2m loss) has been
deferred in equity. No balances in relation to ineffectiveness have been recognised in the Consolidated Income Statement. Amounts in the
hedging reserve are recycled to the income statement as the hedged transactions affect the income statement. A loss of £0.3m (2009: £0.2m)
has been included in the Consolidated Income Statement, and the remaining loss of £0.1m (2009: £0.4m) 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 £338.5m (2009: £386.2m). The foreign exchange
loss of £12.1m (2008: £47.0m gain) 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 Consolidated 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 (cid:192)nancial instruments. At 31 December 2010, if the US Dollar had weakened by 10% against Sterling, with all other variables
held constant, post-tax pro(cid:192)t for the year would have been £0.1m lower (2009: £0.1m) mainly as a result of movements on working capital. Equity
would have been £30.6m higher (2009: £31.2m) 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 2010,
if the US Dollar had weakened by 10% against the Canadian Dollar, with all other variables held constant, post-tax pro(cid:192)t for the year would have
been unaffected (2009: unaffected). Equity would have been £0.6m higher (2009: £0.6m) due to Canadian Dollar denominated non-current
intercompany borrowings.
140
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:19)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
25. Financial risk management (continued)
25 (e) 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 (cid:192)nancial assets and liabilities exposed to interest rate risk is set out below:
Financial assets
Cash and cash equivalents
Other (cid:192)nancial assets
Financial liabilities
Non recourse Canadian Dollar loans
Sterling loans
US Dollar loans
Other loans
(cid:41)(cid:79)(cid:82)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
rate
2010
£m
279.3
0.2
279.5
(cid:41)(cid:79)(cid:82)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)
rate
2010
£m
-
19.2
106.3
22.8
148.3
Weighted
(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:192)(cid:91)(cid:72)(cid:71)(cid:3)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)
received
2010
%
6.00
Weighted
(cid:68)(cid:89)(cid:72)(cid:85)(cid:68)(cid:74)(cid:72)(cid:3)(cid:192)(cid:91)(cid:72)(cid:71)(cid:3)
(cid:76)(cid:81)(cid:87)(cid:72)(cid:85)(cid:72)(cid:86)(cid:87)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)(cid:3)
paid
2010
%
5.27
5.83
2.53
9.1
(cid:3)
(cid:41)(cid:76)(cid:91)(cid:72)(cid:71)(cid:3)
rate
2010
£m
-
0.6
0.6
(cid:3)
(cid:41)(cid:76)(cid:91)(cid:72)(cid:71)(cid:3)
rate
2010
£m
23.7
118.6
223.5
-
365.8
Floating
rate
2009
£m
319.4
0.2
319.6
Floating
rate
2009
£m
-
71.1
144.2
12.2
227.5
Weighted
average (cid:192)xed
interest rate
received
2009
%
6.00
Weighted
average (cid:192)xed
interest rate
paid
2009
%
5.27
5.83
3.20
12.00
Fixed
rate
2009
£m
-
0.6
0.6
Fixed
rate
2009
£m
29.0
118.6
278.7
0.1
426.4
Exposure to interest rate (cid:193)uctuations is mitigated through the use of interest rate derivatives. Excluded from the above analysis is £26.4m of
amounts payable under (cid:192)nance leases, which are subject to (cid:192)xed rates of interest (2009: £24.0m).
(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 debt by swapping
(cid:193)oating for (cid:192)xed interest rates. The pro(cid:192)le of the interest rate swaps is as follows:
Maturity
March 2011
March 2012
Maturity
March 2011
March 2012
Payable USD
weighted
average
interest rate
2010
%
Receivable
USD
interest rate
2010
%
1.60
1.83
3 month USD LIBOR
3 month USD LIBOR
Payable USD
weighted
average
interest rate
2009
%
Receivable
USD
interest rate
2009
%
1.60
1.83
3 month USD LIBOR
3 month USD LIBOR
Notional
value
2010
USD m
150
300
Notional
value
2009
USD m
150
300
The swaps were designated as cash (cid:193)ow hedges and are highly effective. The fair value loss of £1.5m has therefore been deferred within equity
(2009: £2.1m loss).
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:20)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
141
Section 5
Notes to the Consolidated Financial Statements
25. Financial risk management (continued)
25 (e) Interest rate risk (continued)
(iii) Interest rate sensitivity
The sensitivity analysis below shows the exposure to interest rates for both derivative and non-derivative (cid:192)nancial liabilities at the balance sheet
date and on average balances held throughout the past year. A 100 basis point increase in interest rates with all other variables held constant
would have resulted in a gain on post-tax pro(cid:192)t for the year to 31 December 2010 of £0.7m (2009: £0.3m). The gain on equity due to a 100 basis
point movement would have been £2.1m (2009: £4.3m) due to movements in the fair value of derivative (cid:192)nancial instruments held as
cash (cid:193)ow hedges.
25 (f) 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 maturity pro(cid:192)le of the three (2009: two) commodity derivatives used by the joint ventures to reduce this risk is as follows:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)(cid:3)
(cid:48)(cid:68)(cid:87)(cid:88)(cid:85)(cid:76)(cid:87)(cid:92)(cid:3)
January 2011 - September 2011
January 2011 - September 2011
January 2011 - September 2013
Maturity
January 2010 - September 2010
January 2010 - September 2011
Notional
(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)
2010
(cid:48)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:79)(cid:76)(cid:87)(cid:85)(cid:72)(cid:86)(cid:3)
(cid:3)
(cid:3)
18.5
10.8
74.2
Notional
value
2009
Million litres
9.4
44.9
Payable
(cid:192)(cid:91)(cid:72)(cid:71)(cid:3)(cid:85)(cid:68)(cid:87)(cid:72)
2010
(cid:83)(cid:3)(cid:83)(cid:72)(cid:85)(cid:3)(cid:79)(cid:76)(cid:87)(cid:85)(cid:72)
28.95
39.70
42.96
Payable
(cid:192)xed rate
2009
p per litre
33.80
28.95
All commodity derivatives were designated as cash (cid:193)ow hedges and were highly effective. During the year a gain of £1.0m (2009: £2.0m) has
therefore been deferred within equity.
(i) 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 gain of £7.1m in equity (2009: £3.5m). The
sensitivity to changes in fuel prices resulting from changes in exchange rates is included within the currency sensitivity analysis (see note 25(d)).
25 (g) Credit risk
The Group’s principal (cid:192)nancial 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, a long-term public rating from two recognised credit
rating agencies of ‘Single A’. It also ensures that no exposure to any one institution at any given time exceeds a pre-approved exposure limit.
25 (h) Capital risk
The Group’s key objectives when managing capital are to ensure the Group has suf(cid:192)cient funds to meet current and future business
requirements, to provide returns for shareholders and bene(cid:192)ts 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 2010, the Group
maintained suf(cid:192)cient debt facilities that ensured its objectives were met.
142
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:21)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
26. Retirement benefit schemes
The Group has accounted for pensions in accordance with IAS 19 Employee Bene(cid:192)ts. The Group operates a number of de(cid:192)ned bene(cid:192)t
schemes and de(cid:192)ned contribution schemes. The pension charge for the year ended 31 December 2010, including the proportionate share
of joint ventures, was £106.5m (2009: £92.4m).
26 (a) De(cid:192)ned bene(cid:192)t schemes
The Group operates de(cid:192)ned bene(cid:192)t schemes for qualifying employees of its subsidiaries in the UK and Europe. In addition, the Group has
interests in joint ventures, which operate de(cid:192)ned bene(cid:192)t schemes for qualifying employees.
The assets of the funded schemes are held independently of the Group’s assets in separate trustee administered funds. The Group’s major
schemes are valued by independent actuaries annually using the projected unit credit actuarial cost method. This re(cid:193)ects service rendered by
employees to the dates of valuation and incorporates actuarial assumptions primarily regarding discount rates used in determining the present
value of bene(cid:192)ts, projected rates of salary growth, and long-term expected rates of return for scheme 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 scheme assets are based
on published brokers’ forecasts for each category of scheme assets. Pension assets and liabilities in different de(cid:192)ned bene(cid:192)t schemes are not
offset unless the Group has a legally enforceable right to use the surplus in one scheme to settle obligations in the other scheme and intends
to exercise this right.
(i) Balance sheet values
The amounts recognised in the balance sheet are grouped together as follows:
Contract speci(cid:192)c (cid:178) (cid:57)irtually certain costs reimbursed
The Group has an obligation to contribute to the pension scheme over the term of the contract. At rebid any de(cid:192)cit 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 de(cid:192)ned
bene(cid:192)t obligation. The Group’s share of the de(cid:192)ned bene(cid:192)t 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 de(cid:192)ned bene(cid:192)t plan has been presented net of the amount recognised for the
reimbursement, resulting in a nil charge to the income statement.
Contract speci(cid:192)c (cid:178) Not certain costs reimbursed
These are pre-funded de(cid:192)ned bene(cid:192)t schemes. The Group has obligations to contribute variable amounts to the pension schemes over the
terms of the related contracts. At rebid any de(cid:192)cit or surplus would transfer to the next contractor. The Group has recognised as a liability the
de(cid:192)ned bene(cid:192)t 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 speci(cid:192)c
These consist of a pre-funded de(cid:192)ned bene(cid:192)t scheme which does not relate to any speci(cid:192)c contract (the funding policy 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 de(cid:192)ned bene(cid:192)t
scheme, both of which do not relate to any speci(cid:192)c contract. Any liabilities arising are recognised in full.
(ii) Triennial funding valuation
Among our non contract speci(cid:192)c schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The most recent full actuarial
valuation of this scheme was undertaken as at 6 April 2009 and resulted in an actuarially assessed de(cid:192)cit of £141m. Following this review, the
Group agreed with the Trustees to make cash contributions of 30% of members’ pensionable salaries until 2019, plus lump sum payments
of £20m, which was paid in December 2010 and £40m, which was paid in January 2011. We continue to review the level of bene(cid:192)ts and
contributions under the scheme in light of our business needs and changes to pension legislation.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:22)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
143
Section 5
Notes to the Consolidated Financial Statements
26. Retirement benefit schemes (continued)
26 (a) De(cid:192)ned bene(cid:192)t schemes (continued)
The assets and liabilities of the schemes at 31 December are:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Virtually
certain costs
(cid:85)(cid:72)(cid:76)(cid:80)(cid:69)(cid:88)(cid:85)(cid:86)(cid:72)(cid:71)(cid:3)
2010
£m
Not certain
costs
(cid:85)(cid:72)(cid:76)(cid:80)(cid:69)(cid:88)(cid:85)(cid:86)(cid:72)(cid:71)(cid:3)
2010
£m
Non contract
(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:192)(cid:70)(cid:3)
2010
£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 de(cid:192)cit
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 de(cid:192)cit
Franchise adjustment
Effect of IFRIC 14
Net pension liability
Related assets
Intangible assets (note 14)
Trade and other receivables (note 19)
875.1
(951.5)
1,533.2
(1,840.1)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)
2010
£m
424.0
117.8
660.6
34.9
53.8
216.0
26.1
(306.9)
28.2
53.7
(1.2)
(226.2)
8.9
123.4
132.3
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)
36.6
16.6
651.3
1.1
9.5
134.9
25.1
(76.4)
1.5
-
(1.2)
(76.1)
-
-
-
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
132.2
56.1
-
-
17.8
48.7
-
254.8
(378.2)
(123.4)
-
-
-
(123.4)
-
123.4
123.4
255.2
45.1
9.3
33.8
26.5
32.4
1.0
403.3
(510.4)
(107.1)
26.7
53.7
-
(26.7)
8.9
-
8.9
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
certain costs
reimbursed
2009
£m
Not certain
costs
reimbursed
2009
£m
Non contract
speci(cid:192)c
2009
£m
Liabilities in relation to unfunded schemes included above amount to £48.7m (2009: £48.7m).
Certain of the Group’s non contract speci(cid:192)c 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 in(cid:193)ation and
interest swap overlays. The assumed expected rate of return is taken to be gilts +0.7% (2009: gilts +0.7%).
144
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:23)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
26. Retirement benefit schemes (continued)
26 (a) De(cid:192)ned bene(cid:192)t schemes (continued)
In some schemes, employee contributions vary over time to meet a speci(cid:192)ed proportion of the overall costs, including a proportion of any
de(cid:192)cit. 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:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Recognised in the income statement
Current service cost – employer
Past service cost
Reimbursed to employer
(cid:53)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:85)(cid:85)(cid:76)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:87)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)
Expected return on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Reimbursed to employer
Finance (income)/cost
Included within the SOCI
Actual return on scheme assets
Less: expected return on scheme assets
Other actuarial gains/(losses)
Actuarial gains recognised in the SOCI
Change in IFRIC 14
Change in franchise adjustment
Change in members’ share
Reimbursed to employer
Actuarial losses on reimbursable rights
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:83)(cid:72)(cid:81)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:11)(cid:70)(cid:82)(cid:86)(cid:87)(cid:12)(cid:18)(cid:76)(cid:81)(cid:70)(cid:82)(cid:80)(cid:72)(cid:3)(cid:85)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:54)(cid:50)(cid:38)(cid:44)(cid:3)
(cid:3)
(cid:3)
Virtually
certain costs
(cid:85)(cid:72)(cid:76)(cid:80)(cid:69)(cid:88)(cid:85)(cid:86)(cid:72)(cid:71)(cid:3)
2010
£m
Not certain
costs
(cid:85)(cid:72)(cid:76)(cid:80)(cid:69)(cid:88)(cid:85)(cid:86)(cid:72)(cid:71)(cid:3)
2010
£m
Non contract
(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:192)(cid:70)(cid:3)
2010
£m
9.7
-
(9.7)
(cid:16)(cid:3)
(16.6)
-
21.5
(4.9)
-
24.1
(16.6)
7.5
13.8
21.3
-
-
-
(21.3)
(21.3)
(cid:16)(cid:3)
15.5
-
-
(cid:20)(cid:24)(cid:17)(cid:24)(cid:3)
(18.4)
(3.4)
20.4
-
(1.4)
35.7
(25.3)
10.4
3.7
14.1
-
(7.7)
(8.0)
-
(15.7)
(cid:11)(cid:20)(cid:17)(cid:25)(cid:12)(cid:3)
14.7
0.3
-
(cid:20)(cid:24)(cid:17)(cid:19)(cid:3)
(46.0)
-
50.2
-
4.2
81.7
(47.4)
34.3
(19.8)
14.5
0.3
-
(1.7)
-
(1.4)
(cid:20)(cid:22)(cid:17)(cid:20)(cid:3)
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)
2010
£m
39.9
0.3
(9.7)
(cid:22)(cid:19)(cid:17)(cid:24)
(81.0)
(3.4)
92.1
(4.9)
2.8
141.5
(89.3)
52.2
(2.3)
49.9
0.3
(7.7)
(9.7)
(21.3)
(38.4)
(cid:20)(cid:20)(cid:17)(cid:24)
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:24)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
145
Section 5
Notes to the Consolidated Financial Statements
26. Retirement benefit schemes (continued)
26 (a) De(cid:192)ned bene(cid:192)t schemes (continued)
Recognised in the income statement
Current service cost – employer
Past service cost
Reimbursed to employer
(cid:53)(cid:72)(cid:70)(cid:82)(cid:74)(cid:81)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:68)(cid:85)(cid:85)(cid:76)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:87)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)
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
Virtually
certain costs
reimbursed
2009
£m
Not certain
costs
reimbursed
2009
£m
Non contract
speci(cid:192)c
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
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
(10.8)
(131.1)
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)
146
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:25)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
26. Retirement benefit schemes (continued)
26 (a) De(cid:192)ned bene(cid:192)t schemes (continued)
Cumulative actuarial losses recognised since 1 January 2004 are £42.0m (2009: losses of £53.5m).
Changes in the fair value of scheme liabilities are analysed as follows:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
At 1 January 2009
Current service cost – employer
Current service cost – employee
Past service costs
Scheme participants’ contributions
Interest cost – employer
Interest cost – employee
Bene(cid:192)ts paid
Actuarial gains and losses
Exchange differences
At 1 January 2010
Current service cost – employer
Current service cost – employee
Past service costs
Scheme participants’ contributions
Interest cost – employer
Interest cost – employee
Bene(cid:192)ts paid
Actuarial gains and losses
Exchange differences
At 31 December 2010
Changes in the fair value of plan assets are analysed as follows:
(cid:3)
(cid:3)
(cid:3)
(cid:3)
At 1 January 2009
Expected return on scheme assets – employer
Expected return on scheme assets – employee
Employer contributions
Contributions by employees
Bene(cid:192)ts paid
Actuarial gains and losses
Exchange differences
At 1 January 2010
Expected return on scheme assets – employer
Expected return on scheme assets – employee
Employer contributions
Contributions by employees
Bene(cid:192)ts paid
Actuarial gains and losses
Exchange differences
At 31 December 2010
Virtually
certain costs
(cid:85)(cid:72)(cid:76)(cid:80)(cid:69)(cid:88)(cid:85)(cid:86)(cid:72)(cid:71)(cid:3)
£m
Not certain
costs
(cid:85)(cid:72)(cid:76)(cid:80)(cid:69)(cid:88)(cid:85)(cid:86)(cid:72)(cid:71)(cid:3)
£m
Non contract
(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:192)(cid:70)(cid:3)
£m
267.2
7.0
-
-
2.5
16.1
-
(9.2)
85.2
-
368.8
9.7
-
-
3.1
21.5
-
(11.1)
(13.8)
-
378.2
356.4
12.2
4.8
-
0.7
15.6
6.0
(8.8)
89.4
-
476.3
15.5
6.2
-
0.6
20.4
7.6
(12.5)
(3.7)
-
510.4
719.8
14.7
0.6
0.7
1.1
41.4
1.1
(33.4)
157.6
(4.3)
899.3
14.7
0.5
0.3
0.9
50.2
1.3
(33.7)
19.8
(1.8)
951.5
Virtually
certain costs
(cid:85)(cid:72)(cid:76)(cid:80)(cid:69)(cid:88)(cid:85)(cid:86)(cid:72)(cid:71)(cid:3)
£m
Not certain
costs
(cid:85)(cid:72)(cid:76)(cid:80)(cid:69)(cid:88)(cid:85)(cid:86)(cid:72)(cid:71)(cid:3)
£m
Non contract
(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:192)(cid:70)(cid:3)
£m
177.6
12.2
-
15.4
2.5
(9.2)
26.0
-
224.5
16.6
-
14.1
3.2
(11.1)
7.5
-
254.8
297.3
14.3
5.6
17.9
6.0
(8.8)
22.6
-
354.9
18.4
6.9
18.9
6.3
(12.5)
10.4
-
403.3
719.2
35.3
1.0
29.1
1.6
(33.4)
24.6
0.1
777.5
46.0
1.4
48.3
1.3
(33.7)
34.3
-
875.1
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)
£m
1,343.4
33.9
5.4
0.7
4.3
73.1
7.1
(51.4)
332.2
(4.3)
1,744.4
39.9
6.7
0.3
4.6
92.1
8.9
(57.3)
2.3
(1.8)
1,840.1
(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)
£m
1,194.1
61.8
6.6
62.4
10.1
(51.4)
73.2
0.1
1,356.9
81.0
8.3
81.3
10.8
(57.3)
52.2
-
1,533.2
Employer contributions for non contract speci(cid:192)c schemes in 2010 include a £20m special contribution paid in December 2010.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:26)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:27)
Serco Group plc Annual report and accounts 2010
147
Section 5
Notes to the Consolidated Financial Statements
26. Retirement benefit schemes (continued)
26 (a) De(cid:192)ned bene(cid:192)t schemes (continued)
History of experience gains and losses
Experience adjustments arising on scheme assets:
Amount (£m)
Percentage of the fair value of scheme assets
Experience adjustments arising on scheme liabilities:
Amount (£m)
Percentage of the present value of scheme liabilities
2010
2009
2008
2007
52.2
3%
4.2
0%
73.2
5%
(58.2)
(3)%
(263.7)
(22)%
0.1
0%
1.4
0%
(5.1)
0%
Fair value of scheme assets (£m)
Present value of scheme liabilities (£m)
1,533.2
(1,840.1)
1,356.9
(1,744.4)
1,194.1
(1,343.4)
1,342.8
(1,500.9)
2006
45.8
4%
(13.1)
(1)%
1,186.8
(1,465.1)
De(cid:192)cit (£m)
(306.9)
(387.5)
(149.3)
(158.1)
(278.3)
The normal contributions expected to be paid during the (cid:192)nancial year ending 31 December 2011 are £59.6m ((cid:192)nancial year ended 31 December
2010 £60.7m).
Assumptions in respect of the expected return on scheme 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 2010 in respect to in(cid:193)ation, interest, bond yields
and equity performance when selecting the expected return on assets assumptions.
The expected yield on bond investments with (cid:192)xed 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 concluded that an appropriate equity risk premium is 4.1% (2009: 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
In(cid:193)ation 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
Future pensioners at 65
– male
– female
2010
%
3.50
2.60 (CPI) and 3.10 (RPI)
2.60 (CPI) and 3.10 (RPI)
2.60 (CPI) and 3.10 (RPI)
5.40
8.30
5.40
4.90
4.20
5.45
0.50
5.40
2010
Years
20.8
23.3
22.4
24.5
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
148
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:27)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
26. Retirement benefit schemes (continued)
26 (a) De(cid:192)ned bene(cid:192)t schemes (continued)
(cid:55)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:83)(cid:79)(cid:68)(cid:70)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:87)(cid:68)(cid:76)(cid:79)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:91)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:82)(cid:81)(cid:86)(cid:88)(cid:80)(cid:72)(cid:85)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:76)(cid:81)(cid:71)(cid:72)(cid:91)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:85)(cid:72)(cid:87)(cid:76)(cid:85)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:69)(cid:72)(cid:81)(cid:72)(cid:192)(cid:87)(cid:86)
The UK Government announced in its June 2010 budget that when they publish the statutory increase (cid:192)gure in the future they will use the CPI
measure of in(cid:193)ation rather than RPI. This was con(cid:192)rmed on 8 December 2010.
Certain of the Group’s pension schemes re(cid:193)ect the lower liability where bene(cid:192)ts are explicitly based on statutory increases in the Rules in
31 December 2010 pension liability (cid:192)gures. If this change had not occurred, the net liability of the pension schemes on the Group balance sheet
would have been £59.2m greater. There is no impact on the operating pro(cid:192)t of the current year due to applying
the change.
26 (b) De(cid:192)ned contribution schemes
The Group paid employer contributions of £61.9m (2009: £49.4m) into UK and other de(cid:192)ned contribution schemes, foreign state pension
schemes and multi-employer schemes, including those of joint ventures.
Pre-funded de(cid:192)ned bene(cid:192)t schemes treated as de(cid:192)ned contribution
Serco accounts for certain pre-funded de(cid:192)ned bene(cid:192)t schemes relating to contracts as de(cid:192)ned contribution schemes because the contributions
are (cid:192)xed until the end of the current concession and at rebid any surplus or de(cid:192)cit 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 2009
Charged to income statement
Released to income statement
Utilised during the year
Unwinding of discount
Exchange differences
At 1 January 2010
Charged to income statement
Released to income statement
Utilised during the year
Unwinding of discount
Exchange differences
At 31 December 2010
Employee
related
£m
Property
£m
Contract
£m
Other
£m
5.9
2.4
-
(0.6)
-
-
7.7
3.5
-
(0.6)
-
0.4
11.0
9.8
-
-
(1.2)
0.4
(1.0)
8.0
0.1
(0.9)
(1.2)
0.3
0.3
6.6
11.2
0.9
(0.5)
(0.7)
0.3
(0.8)
10.4
0.2
(0.9)
(2.2)
0.3
0.2
8.0
19.0
1.9
-
(2.8)
-
(1.9)
16.2
2.3
(2.7)
(2.7)
-
0.9
14.0
Total
£m
45.9
5.2
(0.5)
(5.3)
0.7
(3.7)
42.3
6.1
(4.5)
(6.7)
0.6
1.8
39.6
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 bene(cid:192)ts expected to be required. Management has calculated the provision based on the discounted cash out(cid:193)ows
required to settle the lease obligations.
Contract provisions primarily relate to SI International, Inc. 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 out(cid:193)ows 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.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:23)(cid:28)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
149
Section 5
Notes to the Consolidated Financial Statements
28. Share capital
Issued and fully paid:
490,912,075 (2009: 486,764,440) ordinary shares of 2p each at 1 January
Issued on the exercise of share options
493,220,805 (2009: 490,912,075) ordinary shares of 2p each at 31 December
The Company has one class of ordinary shares which carry no right to (cid:192)xed income.
2010
£m
9.8
0.1
9.9
Number
2010
Millions
490.9
2.3
493.2
2009
£m
9.7
0.1
9.8
Number
2009
Millions
486.8
4.1
490.9
During the year 2,308,730 (2009: 4,147,635) ordinary shares of 2p each were allotted to the holders of share-based awards or their personal
representatives using newly listed shares.
29. Share premium account
At 1 January
Premium on shares issued
At 31 December
30. Reserves
2010
£m
304.1
2.6
306.7
2009
£m
301.1
3.0
304.1
30 (a) Retirement bene(cid:192)t obligations reserve
The retirement bene(cid:192)t obligations reserve represents the actuarial gains and losses recognised in respect of annual actuarial valuations for
de(cid:192)ned bene(cid:192)t 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 satis(cid:192)ed 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 options schemes. At 31 December 2010, the ESOP held 4,710,201
(2009: 3,436,547) shares equal to 1.0% of the current allotted share capital (2009: 0.7%). The market value of shares held by the ESOP as at
31 December 2010 was £26.2m (2009: £18.2m).
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 (cid:193)ow hedges.
150
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:24)(cid:19)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
31. Notes to the consolidated cash flow statement
(cid:53)(cid:72)(cid:70)(cid:82)(cid:81)(cid:70)(cid:76)(cid:79)(cid:76)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:76)(cid:81)(cid:193)(cid:82)(cid:90)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)
(cid:3)
(cid:3)
(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:83)(cid:85)(cid:82)(cid:192)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:3)
Adjustments for:
Share-based payment expense
Depreciation of property, plant and equipment
Amortisation and impairment of intangible assets
Loss on disposal of property, plant and equipment
Pro(cid:192)t on disposal of intangible assets
Impairment of goodwill
Movement in provisions
(cid:50)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:76)(cid:81)(cid:193)(cid:82)(cid:90)(cid:3)(cid:69)(cid:72)(cid:73)(cid:82)(cid:85)(cid:72)(cid:3)(cid:80)(cid:82)(cid:89)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:3)
Decrease/(increase) in inventories
Increase in receivables
Increase in payables
Special contribution to de(cid:192)ned bene(cid:192)t pension scheme (note 26)
(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:74)(cid:72)(cid:81)(cid:72)(cid:85)(cid:68)(cid:87)(cid:72)(cid:71)(cid:3)(cid:69)(cid:92)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:3)
Tax paid
(cid:3)
(cid:49)(cid:72)(cid:87)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)(cid:76)(cid:81)(cid:193)(cid:82)(cid:90)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2010
(cid:133)(cid:80)
(cid:21)(cid:23)(cid:20)(cid:17)(cid:22)
(cid:27)(cid:17)(cid:27)
(cid:22)(cid:28)(cid:17)(cid:23)
(cid:23)(cid:22)(cid:17)(cid:25)
(cid:19)(cid:17)(cid:27)
(cid:11)(cid:20)(cid:17)(cid:24)(cid:12)
(cid:23)(cid:17)(cid:21)
(cid:11)(cid:24)(cid:17)(cid:20)(cid:12)
(cid:22)(cid:22)(cid:20)(cid:17)(cid:24)
(cid:22)(cid:17)(cid:24)
(cid:11)(cid:23)(cid:22)(cid:17)(cid:23)(cid:12)
(cid:20)(cid:19)(cid:17)(cid:19)
(cid:11)(cid:21)(cid:19)(cid:17)(cid:19)(cid:12)
(cid:21)(cid:27)(cid:20)(cid:17)(cid:25)
(cid:11)(cid:23)(cid:19)(cid:17)(cid:25)(cid:12)
(cid:21)(cid:23)(cid:20)(cid:17)(cid:19)
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
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Additions to (cid:192)xtures and equipment during the year amounting to £10.0m (2009: £11.9m) were (cid:192)nanced by new (cid:192)nance leases.
(cid:36)(cid:81)(cid:68)(cid:79)(cid:92)(cid:86)(cid:76)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:81)(cid:72)(cid:87)(cid:3)(cid:71)(cid:72)(cid:69)(cid:87)
(cid:3)
(cid:3)
(cid:3)
Cash and cash equivalents
Non recourse loans
Other loans
Obligations under (cid:192)nance leases
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Cash and cash equivalents
Non recourse loans
Other loans
Obligations under (cid:192)nance leases
At
(cid:20)(cid:3)(cid:45)(cid:68)(cid:81)(cid:88)(cid:68)(cid:85)(cid:92)(cid:3)(cid:3)
(cid:21)(cid:19)(cid:20)(cid:19)(cid:3)
(cid:133)(cid:80)(cid:3)
(cid:22)(cid:20)(cid:28)(cid:17)(cid:23)(cid:3)
(cid:11)(cid:21)(cid:28)(cid:17)(cid:19)(cid:12)(cid:3)
(cid:11)(cid:25)(cid:21)(cid:23)(cid:17)(cid:28)(cid:12)(cid:3)
(cid:11)(cid:21)(cid:23)(cid:17)(cid:19)(cid:12)(cid:3)
(cid:11)(cid:22)(cid:24)(cid:27)(cid:17)(cid:24)(cid:12)(cid:3)
At
1 January
2009
£m
250.8
(34.1)
(713.6)
(17.2)
(514.1)
(cid:3)
(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:193)(cid:82)(cid:90)(cid:3)
(cid:133)(cid:80)(cid:3)
(cid:3)
(cid:36)(cid:70)(cid:84)(cid:88)(cid:76)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:13)(cid:3)
(cid:133)(cid:80)(cid:3)
(cid:40)(cid:91)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)
(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:86)(cid:3)
(cid:133)(cid:80)(cid:3)
(cid:49)(cid:82)(cid:81)(cid:3)(cid:70)(cid:68)(cid:86)(cid:75)(cid:3)
(cid:80)(cid:82)(cid:89)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)
(cid:133)(cid:80)(cid:3)
At
(cid:22)(cid:20)(cid:3)(cid:39)(cid:72)(cid:70)(cid:72)(cid:80)(cid:69)(cid:72)(cid:85)
(cid:3)(cid:21)(cid:19)(cid:20)(cid:19)
(cid:133)(cid:80)
(cid:11)(cid:23)(cid:27)(cid:17)(cid:22)(cid:12)(cid:3)
(cid:26)(cid:17)(cid:25)(cid:3)
(cid:20)(cid:24)(cid:26)(cid:17)(cid:26)(cid:3)
(cid:27)(cid:17)(cid:26)(cid:3)
(cid:20)(cid:21)(cid:24)(cid:17)(cid:26)(cid:3)
(cid:19)(cid:17)(cid:20)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:19)(cid:17)(cid:20)(cid:3)
(cid:27)(cid:17)(cid:20)(cid:3)
(cid:11)(cid:21)(cid:17)(cid:22)(cid:12)(cid:3)
(cid:11)(cid:21)(cid:20)(cid:17)(cid:27)(cid:12)(cid:3)
(cid:11)(cid:20)(cid:17)(cid:20)(cid:12)(cid:3)
(cid:11)(cid:20)(cid:26)(cid:17)(cid:20)(cid:12)(cid:3)
(cid:16)(cid:3)
(cid:16)(cid:3)
(cid:11)(cid:20)(cid:17)(cid:23)(cid:12)(cid:3)
(cid:11)(cid:20)(cid:19)(cid:17)(cid:19)(cid:12)(cid:3)
(cid:11)(cid:20)(cid:20)(cid:17)(cid:23)(cid:12)(cid:3)
(cid:21)(cid:26)(cid:28)(cid:17)(cid:22)
(cid:11)(cid:21)(cid:22)(cid:17)(cid:26)(cid:12)
(cid:11)(cid:23)(cid:28)(cid:19)(cid:17)(cid:23)(cid:12)
(cid:11)(cid:21)(cid:25)(cid:17)(cid:23)(cid:12)
(cid:11)(cid:21)(cid:25)(cid:20)(cid:17)(cid:21)(cid:12)
Cash (cid:193)ow
£m
Acquisitions*
£m
Exchange
differences
£m
Non cash
movements
£m
73.0
6.5
33.0
5.7
118.2
0.9
-
(2.5)
-
(1.6)
(5.3)
(1.4)
58.2
(0.6)
50.9
-
-
-
(11.9)
(11.9)
At
31 December
2009
£m
319.4
(29.0)
(624.9)
(24.0)
(358.5)
* Acquisitions represent the net cash/(debt) acquired on acquisition.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:24)(cid:20)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
151
Section 5
Notes to the Consolidated Financial Statements
32. Capital and other commitments
Capital expenditure contracted but not provided:
- Property, plant and equipment
2010
£m
1.7
2009
£m
5.5
Included within the balances above is joint venture capital expenditure contracted but not provided in relation to property, plant and equipment
of £nil (2009: £1.2m).
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 (cid:192)ve years
After (cid:192)ve years
2010
£m
112.0
240.6
129.3
481.9
2009
£m
106.7
207.3
123.5
437.5
Principal lease commitments are within the Civil Government segment, with future minimum lease payments totalling £231.1m (2009: £181.0m).
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 (cid:192)xed during this period.
152
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:24)(cid:21)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
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
2010
£m
0.2
2.5
1.0
0.2
4.4
0.5
8.8
2009
£m
0.5
4.5
1.8
0.1
0.2
0.1
7.2
Executive Option Plan (EOP)
Options granted under the EOP may be exercised after the third anniversary of grant, dependent upon the achievement of a (cid:192)nancial
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
2010
Thousands
6,857
-
(2,620)
(280)
3,957
Weighted
average
exercise
price
2010
£
2.72
-
2.79
3.47
2.63
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
Of these options 3,534,982 (2009: 5,992,295) were exercisable at the end of the year, with a weighted average exercise price of £2.42
(2009: £2.48).
The options outstanding at 31 December 2010 had a weighted average contractual life of 3.2 years (2009: 3.7 years).
The exercise prices for options outstanding at 31 December 2010 ranged from £1.39 to £4.55 (2009: £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 £5.81
(2009: £4.41).
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 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.
There were no new options granted under Executive Option Plans during the year.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:24)(cid:22)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
153
Section 5
Notes to the Consolidated Financial Statements
33. Share-based payment expense (continued)
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 (cid:192)nancial 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
2010
Thousands
5,623
-
(1,786)
(146)
3,691
Weighted
average
exercise
price
2010
£
Nil
Nil
Nil
Nil
Nil
Number of
options
2009
Thousands
8,214
351
(2,383)
(559)
5,623
Weighted
average
exercise
price
2009
£
Nil
Nil
Nil
Nil
Nil
Of these options, 1,544,054 (2009: 896,487) were exercisable at the end of the year.
The options outstanding at 31 December 2010 had a weighted average contractual life of 6.8 years (2009: 7.6 years).
There were no grants of LTIP options during the year. During the prior 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.
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 paid over the vesting period.
154
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:24)(cid:23)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
33. Share-based payment expense (continued)
Transformational Share Scheme
Awards made to eligible employees under the Transformational Share Scheme are structured as options with a £nil 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
2010
Thousands
86
33
-
-
119
Weighted
average
exercise
price
2010
£
Nil
Nil
Nil
Nil
Nil
Number of
options
2009
Thousands
39
53
-
(6)
86
Weighted
average
exercise
price
2009
£
Nil
Nil
Nil
Nil
Nil
None of these options were exercisable at the end of the year (2009: none).
The options outstanding at 31 December 2010 had a weighted average contractual life of 0.8 years (2009: 1.3 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 over the vesting period. This model is considered to be 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
2010
590p
Nil
N/A
3 years
N/A
1.0%
2009
366p
Nil
N/A
2 years
N/A
1.4%
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:24)(cid:24)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
155
Section 5
Notes to the Consolidated Financial Statements
33. Share-based payment expense (continued)
Performance Share Plan (PSP)
Under the PSP, eligible employees have been granted options with an exercise price of two pence. 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 second
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
2010
Thousands
479
3,523
-
(58)
3,944
Weighted
average
exercise
price
2010
£
Nil
0.02
Nil
Nil
0.02
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 (2009: none).
The options outstanding at 31 December 2010 had a weighted average contractual life of 9.2 years (2009: 9.5 years).
In the year, four 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
2010
615p
2p
28.9%
3 years
1.9%
-
2009
406p
Nil
28.8%
3 years
2.2%
1.2%
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.
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
2010
615p
2p
N/A
3 years
N/A
-
2009
406p
Nil
N/A
3 years
N/A
1.2%
156
Serco Group plc Annual report and accounts 2010
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(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
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 2010 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
2010
Thousands
207
219
-
-
426
Weighted
average
exercise
price
2010
£
Nil
Nil
Nil
Nil
Nil
Number of
options
2009
Thousands
28
207
(28)
-
207
Weighted
average
exercise
price
2009
£
Nil
Nil
Nil
Nil
Nil
None of these options were exercisable at the end of the year (2009: none).
The options outstanding at 31 December 2010 had a weighted average contractual life of 1.9 years (2009: 2.5 years).
In the year, one grant was 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
2010
2009
602p
Nil
28.9%
3 years
1.8%
-
404p
Nil
28.9%
3 years
1.8% to 2.4%
1.2%
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.
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
2010
602p
Nil
N/A
3 years
N/A
-
2009
404p
Nil
N/A
3 years
N/A
1.2%
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:24)(cid:26)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
157
Section 5
Notes to the Consolidated Financial Statements
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 10%. 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
2010
Thousands
6,106
-
(248)
(379)
5,479
Weighted
average
exercise
price
2010
£
4.0
Nil
4.0
4.0
4.0
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
Of these options, 16,278 (2009: none) were exercisable at the end of the year.
The options outstanding at 31 December 2010 had a weighted average contractual life of 1.2 years (2009: 2.1 years). Given that options granted
under the Sharesave plan 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.
158
Serco Group plc Annual report and accounts 2010
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(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
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.
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
2010
£m
2.0
51.5
53.5
2010
£m
0.1
2010
£m
3.5
2009
£m
1.6
46.3
47.9
2009
£m
0.6
2009
£m
2.2
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 guarantee
has been given or received. 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 speci(cid:192)ed in
IAS 24 Related Party Disclosures:
Short-term employee bene(cid:192)ts
Post-employment bene(cid:192)ts
Share-based payment expense
2010
£m
7.5
0.8
2.8
11.1
2009
£m
3.2
0.4
1.5
5.1
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee
(2010: 19 individuals, 2009: 9 individuals).
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:24)(cid:28)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
159
Section 5
Notes to the Consolidated Financial Statements
35. List of principal undertakings
The Company has taken advantage of the exemption under Section 410(2) of the Companies Act 2006 by providing information only in relation
to undertakings whose results or (cid:192)nancial position, in the opinion of the Directors, principally affected the (cid:192)nancial statements.
A complete list of subsidiary and associated undertakings will be attached to the next Serco Group plc annual return to Companies House.
The percentage of equity capital held directly or indirectly 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
Rest of Europe
Germany
AMEAA
Australia
North America
USA
Joint venture undertakings
United Kingdom
AMEAA
Australia
Serco Limited
NPL Management Limited
2010
100%
100%
2009
100%
100%
Serco GmbH
100%
100%
Serco Australia Pty Limited
Great Southern Rail Limited
100%
100%
100%
100%
Serco Services Inc.
100%
100%
AWE Management Limited
Merseyrail Services Holding Company Limited
Northern Rail Holdings Limited
2010
33%
50%
50%
2009
33%
50%
50%
Serco Sodexo Defence Services Pty Limited
50%
50%
All joint ventures are accounted for using the proportionate consolidation method. All the subsidiaries of the Group have been consolidated.
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, (cid:192)nance leases, and bonding facilities of its joint ventures up to a maximum value of £8.2m
(2009: £7.0m). The actual commitment outstanding at 31 December 2010 was £5.6m (2009: £4.3m).
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
(cid:192)nancial loss.
The Group is aware of claims and potential claims which involve or may involve legal proceedings against the Group. The Directors are of the
opinion, having regard to legal advice received and the Group’s insurance arrangements, that it is unlikely that these matters will, in aggregate,
have a material effect on the Group’s (cid:192)nancial position.
160
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:25)(cid:19)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
UK GAAP Audit Report – Parent Company
Independent Auditor’s report to the members of Serco Group plc
We have audited the parent Company Financial Statements of Serco Group plc for the year ended 31 December 2010 which comprise the
Company Balance Sheet and the related notes 1 to 16. The (cid:192)nancial 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
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than
the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and Auditor
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 satis(cid:192)ed that they give a true and fair view. Our responsibility is to audit and express an opinion on 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 Ethical Standards for Auditors.
(cid:54)(cid:70)(cid:82)(cid:83)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:68)(cid:88)(cid:71)(cid:76)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:86)(cid:87)(cid:68)(cid:87)(cid:72)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)
An audit involves obtaining evidence about the amounts and disclosures in the (cid:192)nancial statements suf(cid:192)cient to give reasonable assurance that
the (cid:192)nancial 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 signi(cid:192)cant accounting estimates made by the Directors; and the overall presentation of the (cid:192)nancial statements.
Opinion on the parent Company Financial Statements
In our opinion the parent Company Financial Statements:
(cid:79)(cid:3) give a true and fair view of the state of the parent Company’s affairs as at 31 December 2010;
(cid:79)(cid:3) have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice; and
(cid:79)(cid:3) have been prepared in accordance with the requirements of the Companies Act 2006.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
(cid:79)(cid:3) the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and
(cid:79)(cid:3) the information given in the Directors’ Report for the (cid:192)nancial year for which the (cid:192)nancial 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:
(cid:79)(cid:3) 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
(cid:79)(cid:3) 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
(cid:79)(cid:3) certain disclosures of Directors’ remuneration speci(cid:192)ed by law are not made; or
(cid:79)(cid:3) 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 2010.
Richard Knights (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
1 March 2011
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:25)(cid:20)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
161
Section 5
Company Balance Sheet
At 31 December
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 (cid:192)nancial instruments due within one year
Derivative (cid:192)nancial 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 (cid:192)nancial 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
Provisions
Derivative (cid:192)nancial instruments
Net assets
Capital and reserves
Called up share capital
Share premium account
Capital redemption reserve
Own shares
Share-based payment reserve
Hedging and translation reserve
Pro(cid:192)t and loss account
Shareholders’ funds
* Note 1
Note
3
4
4
7
7
6
6
5
7
6
7
9
10
11
12
13
14
2010
£m
812.1
812.1
585.3
5.6
15.6
2.2
1.8
-
610.5
(200.6)
(23.6)
(45.7)
(0.7)
(1.6)
(2.1)
(10.1)
(284.4)
326.1
1,138.2
(335.8)
(243.0)
(1.0)
(4.8)
553.6
9.9
306.7
0.1
(27.5)
38.7
(0.4)
226.1
553.6
2009
Restated*
£m
805.5
805.5
758.8
6.1
14.6
0.5
1.4
-
781.4
(65.7)
(10.0)
(223.1)
(0.3)
(1.1)
(5.2)
(4.7)
(310.1)
471.3
1,276.8
(518.5)
(251.1)
-
(1.7)
505.5
9.8
304.1
0.1
(13.0)
32.8
(1.5)
173.2
505.5
The Financial Statements of the Company (registered number 2048608) were approved by the Board of Directors on 1 March 2011 and signed
on its behalf by:
Christopher Hyman
Chief Executive
Andrew Jenner
Finance Director
162
Serco Group plc Annual report and accounts 2010
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(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
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 (cid:192)nancial statements have been prepared in accordance with UK GAAP and applicable UK law.
Accounting convention
These accounts have been prepared under the historical cost convention and on the going concern basis.
Restatement
The prior year (cid:192)gures have been restated to reclassify the assets and liabilities of the Serco Group plc Employee Share Ownership Trust (ESOP)
from amounts owed by subsidiary companies due within one year to an Own Share reserve. This has resulted in a decrease in both current
debtors and reserves of £15.4m.
Fixed asset investments
Investments held as (cid:192)xed 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 Inland Revenue 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 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 approved by the Board of Directors, and recorded in the Company’s (cid:192)nancial statements in the period in which they are declared,
appropriately authorised and no longer at the discretion of the Company.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:25)(cid:22)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
163
Section 5
Notes to the Company Financial Statements
1. Accounting policies (continued)
(cid:39)(cid:72)(cid:85)(cid:76)(cid:89)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:192)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:76)(cid:81)(cid:86)(cid:87)(cid:85)(cid:88)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:75)(cid:72)(cid:71)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:70)(cid:87)(cid:76)(cid:89)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)
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 re-measurement is taken to the pro(cid:192)t and loss account except where the derivative is a designated cash (cid:193)ow
hedging instrument. The accounting treatment of derivatives classi(cid:192)ed as hedges depends on their designation, which occurs on the date that
the derivative contract is committed to. The Company designates derivatives as:
(cid:79)(cid:3) a hedge of the fair value of an asset or liability (fair value hedge);
(cid:79)(cid:3) a hedge of the income/cost of a highly probable forecast transaction or commitment (cash (cid:193)ow hedge); and
(cid:79)(cid:3) a hedge of a net investment in a foreign entity.
Gains and losses on fair value are recorded in the pro(cid:192)t and loss account with the gain or loss on the hedged item attributable to the
hedged risk.
Gains or losses on cash (cid:193)ow hedges that are regarded as highly effective are recognised in equity. Where the forecast transaction results in a
(cid:192)nancial asset or liability, only gains or losses previously recognised in equity are reclassi(cid:192)ed to pro(cid:192)t or loss in the same period as the asset
or liability affects pro(cid:192)t or loss. Where the forecast transaction or commitment results in a non-(cid:192)nancial 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 pro(cid:192)t 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
pro(cid:192)t and loss account.
For the ineffective portion of hedges or transactions that are not designated for hedge accounting under FRS 26, any change in assets or
liabilities is recognised immediately in the pro(cid:192)t and loss account. Where a hedge no longer meets the effectiveness criteria, any gains or
losses deferred in equity are only transferred to the pro(cid:192)t and loss account when the committed or forecast transaction is recognised in the
pro(cid:192)t and loss account. However, where cash (cid:193)ow 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 has been recorded in equity at that time remains in equity and is recognised when the
forecast transaction is ultimately recognised in the pro(cid:192)t and loss account.
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 pro(cid:192)t and loss account when the foreign
operation is disposed of.
(cid:38)(cid:88)(cid:85)(cid:85)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:68)(cid:91)
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.
(cid:39)(cid:72)(cid:73)(cid:72)(cid:85)(cid:85)(cid:72)(cid:71)(cid:3)(cid:87)(cid:68)(cid:91)
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.
164
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:25)(cid:23)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
2. Auditor’s remuneration
Fees payable to the Company’s Auditor for the audit of the Company’s annual accounts of £10,000 (2009: £10,000) have been borne by another
group company.
3. Investments held as fixed assets
Shares in subsidiary companies at cost
At 1 January 2010
Options over parent’s shares awarded to employees of subsidiaries
At 31 December 2010
Shares in subsidiary companies at cost
At 1 January 2009
Options over parent’s shares awarded to employees of subsidiaries
At 31 December 2009
£m
805.5
6.6
812.1
£m
799.6
5.9
805.5
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)
* Note 1
5. Other creditors including taxation and social security
Other creditors
% ownership
100%
50%
2010
£m
-
3.0
2.6
5.6
3.4
9.4
2.8
15.6
21.2
2010
£m
1.6
Restated*
2009
£m
0.2
3.4
2.5
6.1
0.9
10.6
3.1
14.6
20.7
2009
£m
1.1
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:25)(cid:24)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
165
Section 5
Notes to the Company Financial Statements
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 are repayable as follows:
Within one year or on demand
Between one and two years
Between two and (cid:192)ve years
After (cid:192)ve years
7. Derivative financial instruments
Currency swaps
Interest rate swaps
Forward foreign exchange contracts
Analysed as:
Non-current
Current
2010
£m
560.0
(23.6)
(200.6)
335.8
224.2
111.8
224.0
-
560.0
2009
£m
594.2
(10.0)
(65.7)
518.5
75.7
143.8
351.1
23.6
594.2
Assets
2010
£m
Liabilities
2010
£m
Assets
2009
£m
Liabilities
2009
£m
0.9
-
3.1
4.0
1.8
2.2
4.0
-
(3.5)
(3.4)
(6.9)
(4.8)
(2.1)
(6.9)
-
1.1
0.8
1.9
1.4
0.5
1.9
(0.5)
(3.1)
(3.3)
(6.9)
(1.7)
(5.2)
(6.9)
The Company holds derivative (cid:192)nancial instruments in accordance with the Group’s policy in relation to its (cid:192)nancial risk management. Details of
the disclosures are set out in note 25 of the Group’s Consolidated Financial Statements.
8. Deferred tax asset
Capital allowances in excess of depreciation
Short term timing differences
The movement in the deferred tax asset during the year was as follows:
At 1 January
Charged to pro(cid:192)t and loss account
Items taken directly to equity
At 31 December
2010
£m
0.2
2.6
2.8
2010
£m
3.1
(0.1)
(0.2)
2.8
2009
£m
-
3.1
3.1
2009
£m
0.9
(0.1)
2.3
3.1
166
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:25)(cid:25)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
9. Called up share capital
Issued and fully paid
490,912,075 (2009: 486,764,440) ordinary shares of 2p each at 1 January
Issued on the exercise of share options
493,220,805 (2009: 490,912,075) ordinary shares of 2p each at 31 December
The Company has one class of ordinary shares which carry no right to (cid:192)xed income.
2010
£m
9.8
0.1
9.9
Number
2010
Millions
490.9
2.3
493.2
2009
£m
9.7
0.1
9.8
Number
2009
Millions
486.8
4.1
490.9
During the year 2,308,730 (2009: 4,147,635) 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. Own shares
2010
£m
304.1
2.6
306.7
2009
£m
301.1
3.0
304.1
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 2010, the ESOP held 4,710,201
(2009: 3,436,547) shares equal to 1.0% of the current allotted share capital (2009: 0.7%). The market value of shares held by the ESOP as at
31 December 2010 was £26.2m (2009: £18.2m).
12. Share-based payment reserve
At 1 January
Options over parent’s shares awarded to employees of subsidiaries
Share-based payment expense
Share options to holders on exercise
At 31 December
* Note 1
Details of the share-based payment disclosures are set out in note 33 of the Group’s Consolidated Financial Statements
13. Hedging and translation reserve
At 1 January
Fair value gain/(loss) on cash (cid:193)ow hedges during the period
Tax (charge)/credit on items taken directly to equity
Net exchange gain on translation of foreign operations
At 31 December
2010
£m
32.8
6.6
2.2
(2.9)
38.7
2010
£m
(1.5)
0.5
(0.2)
0.8
(0.4)
Restated*
2009
£m
27.4
5.9
1.3
(1.8)
32.8
2009
£m
3.9
(8.1)
2.3
0.4
(1.5)
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:25)(cid:26)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
167
Section 5
Notes to the company financial statements
14. Profit and loss account
At 1 January
Pro(cid:192)t for the year
Equity dividends
At 31 December
* Note 1
2010
£m
173.2
85.2
(32.3)
226.1
Restated*
2009
£m
141.7
57.4
(25.9)
173.2
As permitted by Section 408 of the Companies Act 2006, the pro(cid:192)t and loss account of the Company is not presented as part of these accounts.
15. Contingent liabilities
The Company has provided certain (cid:192)nancial guarantees and indemnities in respect of the loans, overdraft and bonding facilities, and other
(cid:192)nancial commitments of its subsidiaries. The total commitment outstanding as at 31 December 2010 was £126.0m (2009: £36.5m).
The Company has also guaranteed overdrafts, (cid:192)nance leases, and bonding facilities of its joint ventures up to a maximum value of £8.2m
(2009: £7.0m). The actual commitment outstanding at 31 December 2010 was £5.6m (2009: £4.3m).
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 (cid:192)nancial loss.
16. 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 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.
168
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:25)(cid:27)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Supplementary information
Five-year record
Revenue
Adjusted operating pro(cid:192)t
Adjusted operating margin
Pro(cid:192)t before tax
Group free cash (cid:193)ow
Group recourse net debt
Total net debt
Adjusted earnings per share
Dividend per share
£m
£m
%
£m
£m
£m
£m
pence
pence
2010
4,327
258.7
5.98%
213.9
185.8
(303.6)
(261.2)
34.69p
7.35p
2009
3,970
229.7
5.79%
177.1
137.3
(387.7)
(358.5)
29.53p
6.25p
2008
3,124
165.2
5.29%
136.1
94.2
(524.5)
(514.1)
22.20p
5.00p
2007
2,811
142.0
5.05%
114.6
97.6
(137.9)
(162.3)
18.57p
4.25p
2006
2,548
122.8
4.82%
107.4
85.4
(171.9)
(205.9)
15.92p
3.60p
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:25)(cid:28)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
169
Section 5
Directors, Secretary and Advisors
Chairman
Alastair Lyons CBE*
Directors
Leonard V. Broese van Groenou*
Paul Brooks*
Christopher Hyman CBE
Andrew Jenner
David Richardson*^
*Non-Executive
^Senior Independent Director
Secretary
Joanne Roberts
(cid:53)(cid:72)(cid:74)(cid:76)(cid:86)(cid:87)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3)(cid:50)(cid:73)(cid:192)(cid:70)(cid:72)
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY
Serco Group plc is registered in
England and Wales, No. 2048608
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
125 London Wall
London
EC2Y 5AJ
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
Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
170
Serco Group plc Annual report and accounts 2010
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:26)(cid:19)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Shareholder information
Group website
Go to www.serco.com to catch up on the current share price, latest news in the investors section and read the Annual report 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:
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 dif(cid:192)culties.
(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 7047.
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 Re-investment Plan heading within the Product Centre section.
Dividends paid direct to your bank account
(cid:79)(cid:3) Avoid the risk of cheques being lost in the post
(cid:79)(cid:3) No need to present cheques for payment
(cid:79)(cid:3) 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.
Global payment services
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 7047 if calling from outside the UK). Alternatively
you can download an application form and terms and conditions from the website www.shareview.co.uk.
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 2010 the Trust planted more than half a million native trees
in the UK.
(cid:54)(cid:72)(cid:85)(cid:70)(cid:82)(cid:3)(cid:36)(cid:53)(cid:36)(cid:3)(cid:83)(cid:27)(cid:19)(cid:3)(cid:16)(cid:17)(cid:76)(cid:81)(cid:71)(cid:71)(cid:3)(cid:3)(cid:3)(cid:20)(cid:26)(cid:20)
(cid:20)(cid:23)(cid:18)(cid:19)(cid:22)(cid:18)(cid:21)(cid:19)(cid:20)(cid:20)(cid:3)(cid:3)(cid:3)(cid:20)(cid:19)(cid:29)(cid:22)(cid:28)
Serco Group plc Annual report and accounts 2010
171
Section 5
Shareholder information
Share dealing
Serco does not endorse any one service for the buying and selling of its shares. However, arrangements have been made with the following
independent share dealing providers to offer all shareholders competitive charges.
Alternatively, if shareholders hold a share certi(cid:192)cate 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 (cid:192)nancial advice.
Shareview
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
certi(cid:192)cate or recent dividend tax voucher.
Stocktrade
We have arranged a telephone sharedealing service with Stocktrade for purchases/sales of Serco shares. You should call 0845 601 0995
between 8.00am and 4.30pm, Monday to Friday and quote Low Co 330 (callers from outside the UK should call +44 (0)131 240 0508).
Commission is charged at 0.5% on amounts to £10,000 and 0.2% on the excess thereafter, subject to a minimum charge of £17.50. Further
details and other dealing options can be found at www.stocktrade.co.uk/serco.
Please note that UK share purchases will be subject to 0.5% stamp duty. The above services are not available to US residents.
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The range and size of ordinary shareholding as at 31 December 2010 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
3,998
2,680
464
536
201
45
67
11
8,002
%
49.96
33.49
5.80
6.70
2.51
0.56
0.84
0.14
100
Number of
shares
1,714,237
6,024,751
3,296,423
16,392,113
48,989,397
32,053,535
183,878,496
200,871,853
493,220,805
%
0.35
1.22
0.67
3.32
9.93
6.50
37.28
40.73
100
172
Serco Group plc Annual report and accounts 2010
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Financial calendar
Preliminary results announcement
Ex-dividend date
Record date
2011
2 March
9 March
11 March
Last date for receipt/revocation of DRIP dividend mandates 20 April
Interim Management Statement
Annual General Meeting
Final dividend pay date
9 May
9 May
17 May*
Half-year results announcement
24 August**
Financial year-end
31 December
* Subject to shareholder approval
** Provisional
Printed on Cocoon Silk 50 which is certi(cid:192)ed
as an FSC product manufactured with 50%
recycled (cid:192)bres and 50% virgin (cid:192)bres.
Designed by 85FOUR.
www.85FOUR.com
Printed by The Midas Press Ltd.
www.midaspress.co.uk
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Serco Group plc
Registered Of(cid:192)ce:
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire RG27 9U(cid:60)
T: (cid:14)44 (0)1256 745 900
E: generalenquiries(cid:35)serco.com
www.serco.com
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