Annual report
and accounts
2015
Our strategy is to be a superb provider of public services,
by being the best managed business in our sector. We are a
focused business to government (B2G) business, specialising
across five sectors: Defence, Justice & Immigration, Transport,
Health and Citizen Services. We deliver these services
internationally from our operating units in the UK & Europe,
North America, Asia Pacific and the Middle East.
Serco Group plc Annual Report and Accounts 2015 Introduction
03
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Strategic Report
05 Chairman’s Statement
07 Our Business Model: what we do,
how we do it and where
09 Our Strategy
15 How we Performed in 2015
16 Principal Risks and Uncertainties
30 Viability Statement
31 Key Performance Indicators
34 Chief Executive’s Review
43 Divisional Reviews
51 Finance Review
72 Corporate Responsibility
Directors’ Report
85 Corporate Governance Report
104 Audit Committee Report
114 Nomination Committee Report
116 Corporate Responsibility and
Risk Committee Report
118 Board Oversight Committee
120 Remuneration Report
144 Directors’ Report
151 Directors’ Responsibilities Statement
Financial Statements
153 Independent Auditor’s Report
159 Consolidated Income Statement
160 Consolidated Statement of
Comprehensive Income
161 Consolidated Statement of
Changes in Equity
162 Consolidated Balance Sheet
163 Consolidated Cash Flow Statement
164 Notes to the Consolidated
Financial Statements
236 Company Balance Sheet
237 Notes to the Company
Financial Statements
242 Appendix: List of Subsidiaries
244 Appendix: Supplementary Information
245 Directors, Secretary and Advisors
246 Shareholder Information
Financial StatementsDirectors’ Report
04
Strategic
Report
05 Chairman’s Statement
34 Chief Executive’s Review
07 Our Business Model:
43 Divisional Reviews
What we do, how we do it
and where
09 Our Strategy
09 The historical context
10
New strategic focus
12 Our core sectors
44 UK Central Government
45 UK and Europe Local and
Regional Government
46 Americas
47 AsPac
48 Middle East
13
Implementing the strategy
15 How we Performed in 2015
16 Principal Risks and Uncertainties
49 Corporate Costs
49
Global Services
(discontinued operations)
30 Viability Statement
51 Finance Review
31 Key Performance Indicators
72 Corporate Responsibility
Serco Group plc Annual Report and Accounts 2015
Chairman’s Statement
05
Chairman’s Statement
Sir Roy Gardner
Chairman
Serco is a remarkable company,
supporting governments around
the world in the delivery of
essential public services. As your
new Chairman, I am proud to be
working with the management
team and with every colleague
throughout the Group to
implement Serco’s new strategy
and to create value for our
shareholders and customers.
Since joining Serco in June, I have seen first-hand
the strong commitment of our people to delivering
excellent public services. Much has been done in 2015
to implement Serco’s new strategy and strengthen the
business, and we now have a good foundation upon
which to build a successful future. There is much still to
do to complete our transformation and restore Serco
to appropriate growth and returns, and doing so whilst
ensuring we meet the highest standards of operational
performance, corporate governance, integrity
and business ethics.
I joined Serco’s Board on
1 June 2015 and after a handover
period with Alastair Lyons, your
outgoing Chairman, I took over
his responsibilities with effect
from 1 July 2015. I was extremely
thankful for the thorough handover
I received from Alastair, and
for all his hard work before my
arrival in seeking to stabilise
the business. It was Alastair’s
recruitment of a strong executive
management team, his work to
improve the relationship with the
UK Government, his steering of the
Corporate Renewal Programme
and his support for setting a new
strategic direction and capital
structure for Serco that has been
an essential foundation to
turn the Group around.
In the course of my career I
have been fortunate to serve
in executive, non-executive
and chairman roles of large
and complex companies, often
serving governments around the
world, and I have experienced
a number of the challenges that
Serco is seeking to address. I
have learnt that you must be clear
on the behaviours you expect
from those you work with, and
I am pleased with the refresh
of Serco’s values to Trust, Care,
Innovation and Pride, which will
sit at the very core of how the
business operates. Above all, I
feel very comfortable with Serco’s
strategy of being a world-class
provider of public services. Having
seen the strong commitment of
my new colleagues to delivering
superb public service, and having
seen contracts where we provide
outstanding results for our clients
and service users, I can see why
management believe they can
develop differentiated customer
propositions that are focused on
excelling in public service delivery.
The Group’s new strategy was
presented to shareholders in
March 2015, and since then a
great deal of progress has been
made in implementing that
strategy. We have materially
completed our exit from the
offshore private sector Business
Process Outsourcing business.
Through a combination of raising
new equity from our shareholders
and the proceeds from disposals,
net debt at year-end has been
reduced substantially from a peak
of £745m two years ago to £78m
at 31 December 2015.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 06
Chairman’s Statement continued
With Underlying Trading Profit
of £96m and a free cash outflow
of just £16m, we have over-
delivered against the guidance
we gave at the beginning
of 2015 and in connection
with the Rights Issue. Vast
improvements have been made
to management information
and financial reporting systems.
Costs have been reduced,
and our relationship with key
government customers improved.
The management team has been
strengthened by the addition of
talented new managers. These
achievements are set out in more
detail in Rupert Soames’ Chief
Executive's Review on pages 34
to 42.
In our Corporate Governance
Report on pages 85 to 143, you
will be able to read about the
actions, systems and processes
put in place during 2015 to
deliver stronger, more effective
governance, organisational
change and operational resilience.
This also covers how Serco is
overseeing delivery and alignment
of responsibilities across all areas
of governance, risk management
and corporate responsibility.
As Chair of the Board Oversight
Committee, one of my first
tasks was to receive a detailed
briefing on the Corporate
Renewal Programme. I have
been impressed by the actions
being taken to deliver renewal,
by the independent oversight
we have put in place to ensure
the programme is fully carried
out, and that the responsibilities
of this Committee will include
all material areas related to
ethical standards. Similarly, our
Corporate Responsibility and Risk
Committee has demonstrated
strong governance in action
with Rachel Lomax, Non-
Executive Director and Chair of
this Committee, overseeing the
independent and comprehensive
investigation into the culture
at Yarl’s Wood Immigration
Removal Centre. We will continue
to actively shape the terms
of reference of the various
committees over the course of
2016 and ensure the Board leads
by example.
As part of my induction I have
now visited a number of contracts
and spent considerable time with
divisional management teams and
the executive committee. As well
as being able to see first-hand
the unwavering commitment to
public service, this has helped
me build an understanding of the
operations themselves. In the last
year your Board has also spent
time seeing Serco in action as well
as benefiting from involvement in
dedicated sessions to appraise
budgets, forecasts and strategic
plans. My induction has also
benefited from meeting a number
of Serco’s major shareholders.
The need to recapitalise the
business through the Rights Issue
in early 2015, in order for Serco to
be in a position to rebuild a future,
has meant Serco’s shareholders
have suffered greatly in terms
of lost value. As set out at the
time of the Rights Issue, 2016 will
be a further challenging year in
terms of financial performance,
and we have reiterated our
recent guidance of revenue
and Underlying Trading Profit
reducing to approximately £2.8bn
and £50m respectively. Your
Board is, however, absolutely
focused on long-term, sustainable
shareholder value creation,
and doing so by protecting the
best interests of shareholders
alongside those of our employees,
customers, and the societies
and communities in which we
work. Serco has a highly effective
executive management team,
a deeply committed workforce
that cares passionately about
public service delivery, and a clear
strategy to transform the business
and position it for success in
attractive markets. Once our
transformation is completed over
the course of 2016 and 2017, we
expect to make good progress
on restoring the growth, margins
and returns of the business. I
am confident that the collective
actions being taken will ensure
that Serco is fully restored as a
superb provider of public services
that everyone will be proud to be
associated with.
Sir Roy Gardner
Chairman
Serco Group plc Annual Report and Accounts 2015 Our Business Model
07
Our Business Model
What we do, how we do it and where
Serco serves governments and other bodies who serve the public
or protect their nation’s interests. We focus on five sectors of public
service: Defence, Justice & Immigration, Transport, Health and
Citizen Services, and deliver these internationally from our operating
units in the UK & Europe, North America, Asia Pacific and the Middle
East. We have clear values of Trust, Care, Innovation and Pride which
underpin how we operate.
Since we were founded more
than 50 years ago, we have
delivered services through
people, supported by effective
processes, technology and
skilled management. Our
customers define what outcomes
or services they want to deliver
to their service users, and we
find new and more effective ways
to deliver them. Over the years
we have delivered innovative
solutions to some of the most
complex challenges of the
day, bringing our experience,
innovation and scale to deliver
the financial, service and policy
outcomes our customers want.
In partnership with our
customers, we make a positive
difference to the lives of millions
of people around the world,
and help nations safeguard
their vital interests.
Nearly all governments are under
intense pressure to do more, and
better, with less, as a result of what
we call the ‘Four Forces’. These are:
For less: Citizens are highly
resistant to providing governments
with the means of deficit reduction
by way of tax increases.
The more: The relentless increase,
at rates above GDP growth, of
demand for healthcare and social
welfare, largely as a result of
ageing populations.
The better: The increasing
expectations citizens have of
the quality, accountability and
accessibility of services.
For less: High levels of public
sector debt and debt service
costs, combined with continued
current account deficits, make cost
reductions a necessity. By way
of example, the UK Government
expects to add some £75bn to the
National Debt in 2015/16, and the
current cost of servicing the National
Debt is estimated at £45bn, which
is more than state expenditure on
either defence or education.
In the face of these challenges,
governments have to find ever-
more inventive and sophisticated
ways of providing better public
services at lower cost, and long
experience tells them that people
employed by the state do not
have a monopoly of wisdom or
expertise in terms of innovation
and management of service
delivery. Many companies choose
to focus their intellectual and
management energy on their core
mission, and ask others to provide
the support and execution of
non-core activities. In a similar
vein, a modern army or navy wants
to concentrate its efforts on its
fighting capability, not on running
the facilities or payroll.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 08
Our Business Model continued
Serco constantly looks for ways to
improve the services we deliver.
We can transfer our skills,
insights and ideas from one
sector or region to another, so
we can anticipate and meet new
challenges for customers. In our
markets we are a rarity: a company
that offers services covering
front, middle, and back-office
requirements, across multiple
areas of government service, and
we offer these internationally.
A key part of our value proposition
is that we provide a bridge
between the drive, energy and
innovation of the private sector,
and the very specific requirements
of the public sector. Providing
services to the public and
being predominantly funded by
taxpayers, is different, brings
particular responsibility and in
many ways is more demanding
than only providing services
to the private sector or direct
to consumers. Influences such
as politics, transparency and
accountability to multiple
stakeholders are seen only dimly in
the private sector, but writ large in
the public sector, and need skilful
management. Serco has deep
expertise in providing this bridge;
overlaid on our private sector
techniques, drive and energy, is
a public service ethos that means
we gain the trust of our customers.
As a consequence, we are granted
contracts to provide services of the
utmost sensitivity, from supporting
strategic nuclear weapons to
caring for asylum seekers to being
responsible for healthcare facilities
or transport systems.
Our business model starts
with identifying a pipeline of
opportunities that we anticipate
will be procured by customers.
The Serco Management System
has policies and controls to ensure
that the opportunities pursued are
in line with the Group’s strategy,
with review ‘gates’ to approve the
risk profile and expected financial
returns as a tender progresses
through its various stages. Our
services are ordinarily delivered
through a commitment to a long-
term contract with the customer,
including specified pricing,
service levels and scope of
delivery. Throughout a contract’s
life we would look to continuously
improve our efficiencies and
service outcomes. On contract
expiry, we would either seek
to secure an extension under
existing contractual terms or to
win a competitive rebid process,
or be required to manage a
contract exit process.
Throughout 2015 Serco operated
through six divisions, five of which
(UK Central Government, UK
and Europe Local and Regional
Government, Americas, Asia Pacific
and the Middle East) provide a
broad range of frontline public
service operations to customers
in various geographic regions,
and one (being the Global
Services Division) which provides
private sector Business Process
Outsourcing (BPO) services
globally. On 31 December 2015,
we completed the disposal of the
majority of our Global Services
division, and in 2016 we will
operate exclusively through our
five regional businesses. More
information on our divisions and
their performance in the year
can be found in the Divisional
Reviews on pages 43 to 50. More
background on our markets,
the Serco Management System
and our business operations is
available at www.serco.com.
Serco Group plc Annual Report and Accounts 2015 Our Strategy
09
Our Strategy
In 2014 we carried out a root-and-branch
Strategy Review and in 2015 we have
been implementing it.
Rupert Soames OBE
Group Chief Executive Officer
The objective of the Strategy
Review was to give us a firm
foundation upon which we
could build a company capable
of delivering increasing value
to our stakeholders; to our
customers and service users, by
providing excellent, reliable and
innovative public services; to
our shareholders, by providing
sustainable and growing returns
on the capital they entrust to our
care; to our lenders, by providing
them with a solid and secure
credit; and to our colleagues,
by giving them interesting and
rewarding careers.
The strategy is set out in detail
in this section, but like all good
strategies, it can be simply
expressed. Our strategy is to be a
superb provider of public services,
by being the best managed
business in our sector. We are a
focused business to government
(B2G) business, specialising across
five sectors: Defence, Justice &
Immigration, Transport, Health
and Citizen Services. We deliver
these services internationally
from our operating units in the UK
& Europe, North America, Asia
Pacific and the Middle East.
We live by clear values – Trust,
Care, Innovation and Pride.
The historical context
From 2000 to 2010, Serco grew
rapidly through a combination of
organic growth in existing markets,
expansion into new countries and
acquisitions. Governments were
keen to benefit from involving the
private sector in the provision of
services, and many areas of activity
were contracted out for the first
time. As Serco and others were
able to reduce costs and improve
services, contract margins grew and
the business expanded rapidly.
Towards the end of the decade,
however, the public outsourcing
market matured and conditions
became more difficult. Margins
came under pressure as ‘first
generation’ contracts were
retendered and governments,
having gained experience from
early contracts, became more
sophisticated purchasers. At
the same time, the competitive
landscape became more intense,
as companies from outside the
public service sector were attracted
by the rapid growth and attractive
margins, and existing operators
expanded into new segments.
Overlaid upon this came the
consequences of the financial crisis
in 2008, which led to an intense
focus on public expenditure
deficits. In the UK, the election
in 2010 of a new government
determined to cut spending to
reduce the fiscal deficit, combined
with US budgetary constraints
leading to a series of continuing
resolutions and reductions in
military expenditure, resulted
in a sharp reduction in the rate
of growth of the public sector
outsourcing market.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 10
Our Strategy continued
Faced by these challenges, in
2010 Serco devised a strategy
to reduce its dependence on
frontline services and the public
sector by building, largely through
acquisition, a private sector
Business Process Outsourcing
(BPO) business. The thinking was
that a private sector business could
bring skills and additional services
to the public sector business, and
the core Serco business could add
sales team distribution, brand and
scale to provide enhanced value to
the private sector business. At the
same time Serco sought to combat
a slowing public sector market by
bidding aggressively for new work,
and entered new sectors such
as clinical healthcare in the UK
and providing housing for asylum
seekers. Serco also sought to gain
efficiencies and reduce costs by
investing in an enterprise-wide
SAP enterprise resource planning
(ERP) system and building a shared
services infrastructure covering
information technology, human
resources and finance.
Whilst this strategy was a logical
reaction to challenging conditions,
in practice it proved extremely
difficult to implement because
the synergies between the private
and public sector businesses were
not as expected, and the business
also lost, or saw reductions in,
some of its largest government
contracts. In addition, some of the
contracts we had won between
2010 and 2014 began to lose
money; how many contracts, and
how much money they were losing
and likely to lose in the future
only became truly apparent in
the second half of 2014, following
a comprehensive Contract
and Balance Sheet Review that
resulted in us taking provisions
and write-downs amounting to
£1.3bn in our accounts for 2014.
In addition, in 2013, Serco suffered
reputational damage when it was
alleged by the UK Government
that it had overcharged on a major
contract. A £64m settlement was
paid to the customer, a large and
profitable contract was taken
away, and for a period of time,
Serco was effectively unable to
win material new work from the UK
Government. The consequences
of these factors are most
obviously reflected in the financial
performance and share price of
the Group. Trading Profit fell from
a high of £311m in 2012 to £113m
before the impact of the Contract
and Balance Sheet Review in 2014.
The market capitalisation of the
business over the same period fell
from over £3bn to less than £1bn.
It was in this context that the new
management team commenced
a Strategy Review in May 2014 to
analyse the current market and
competitive situation, develop
a strategy that would offer
the greatest opportunity for
value creation for shareholders,
customers and employees, and
identify how best to implement
the strategy.
New strategic focus
In terms of strategic options,
only two were worthy of detailed
examination. First, we could
continue with the existing strategy
of operating both in the private
and public sector; or we could
focus on one and exit the other.
This was a difficult decision,
because our private sector
operation was a high quality
business, with some excellent
prospects. However, it represented
a very small proportion of our
economic profit, and the hard fact
was that Serco was not making a
good job of owning it; our public
sector customers have proved
extremely resistant to moving
middle or back office functions
outside their jurisdictions, and
we had failed to add value to the
private sector business by using
our public sector distribution
and brand. It became clear
that the disciplines required
for international success in the
private and public sector BPO
markets are different, and to build
a business that could have the
scale to be good at both would
require significant investment.
We therefore decided to focus
investment and effort on our core
market of serving governments,
where we can further develop a
strong and differentiated position.
Attractive public service markets
The 2014 Strategy Review
identified that whilst the public
service market presents a number
of challenges, it also has many
attractions. Most particularly, we
see the market for the provision
of public services by private
companies as being underpinned
by structural growth. There
are only two things we need to
believe for this hypothesis to
be correct; first, that in many
areas of public service provision,
private companies, properly
managed, can deliver services
of higher quality and lower
cost than governments can
themselves. Second, we believe
that governments will continue
to face huge pressures to deliver
more and better public services,
for less, and that these pressures
will lead them to focus relentlessly
on value for money and the quality
of service provision. As described
on page 7, we have named these
pressures the ‘Four Forces’.
Whilst there has been great focus
on ‘austerity’ as a factor affecting
public finances in the short-term,
we believe that these Four Forces
will continue to bear on public
policy for many years to come, and
Serco Group plc Annual Report and Accounts 2015 Our Strategy
11
expertise in staff rostering and
time management is globally
applicable across sectors, as is
project and case management. Yet
higher, building deep capability
in continuous improvement is
globally applicable. Finally, will the
fact that we have deep expertise
in running urban transport in
one territory give us credibility
in another? Will the fact that the
governments in the US and the
UK trust us with some of their
most secret and sensitive projects
help us when bidding for defence
projects in the Middle East? Will
our proven track record in reducing
recidivism amongst offenders in
the UK and Australia be of interest
to authorities in other countries?
We believe the answer to all these
questions is ‘yes’.
will drive growth in private sector
provision of public services in
our sectors at a projected sector
aggregate currently estimated to
be 5–7%. Other factors that make
the public services marketplace
attractive to us are that it is unlikely
to be disrupted by technology or
other exogenous factors; absent
catastrophe, we can be very
confident that the world will still
need prisons, will still need to
manage immigration and provide
healthcare and transport, and
that these services will be highly
people-intensive.
People will ask: how large is the
market? Beyond saying that it is
huge, truthfully, we don’t really
know, as it is fiendishly hard to
define. Does the support of a
mainframe computer supplied by
IBM but operated by government
fall within our definition of the
market? What about services
provided by government-owned
agencies operating on an arm’s-
length basis? Within defence, do
we count supply and support of
missile systems, or just the types of
services we supply (even if we could
get a number for either)? And how
do we disentangle wildly different
definitions of expenditure used
by the various governments with
whom we deal?
If global market share was a
determinant or measure of
success, we might be more
exercised by the question; but
it is not, and with revenues from
government of around £3bn, it
would be so small against the total
global market as to be not worth
measuring. Within some segments
– for example, prisons in the UK –
we can be more precise, but then
we get into issues of commercial
sensitivity. We are not inclined to
share with competitors how much
we are being paid for narrowly
defined sectors, from which they
might be able to extrapolate
contract pricing.
So we ask stakeholders to accept
the fact that while the markets in
which we intend to focus are huge,
our market share is generally small,
although in some geographies
and sectors it is large, and we have
plenty of headroom to grow.
Diversified portfolio
Core to our strategy is the belief
that having a diversified portfolio
of exposures to different sectors
and jurisdictions is an advantage.
In a world where political priorities
of changing governments can
switch resources from defence
to immigration to healthcare,
and back again, being diversified
by segment and jurisdiction is
valuable in reducing risk and
volatility, and enabling us to share
best practice. Many of our closest
competitors are specialists in
either a particular sector, or within
a geography. Although focused
on public services, we feel we
can deliver better risk-adjusted
returns and lower volatility in the
long-term if we have the capability
to operate across more than one
sector within the public services
market, and in more than one
jurisdiction.
But management of risk is only
one reason we like a strategy
of operating across a number
of jurisdictions and sectors. We
believe that governments across
the world face similar challenges
at many levels. At a detailed
operational level, providing
cleaning and catering services
in a hospital is very similar in
Western Australia and Abu Dhabi,
likewise escorting prisoners to
court. At a higher level, having
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 12
Our Strategy continued
Our core sectors
Our business in the public
sector is focused on five sectors:
Defence, Justice & Immigration,
Transport, Health and Citizen
Services. In 2015, our revenues in
each of these sectors were:
Total Revenues 2015
(continuing operations
including joint ventures)
£3,914m
Defence
Justice &
Immigration
Transport
Health
Citizen Services
UK & Europe,
Americas,
Middle East,
Asia Pacific
UK & Europe,
Asia Pacific
Jurisdictions
UK & Europe,
Americas,
Middle East,
Asia Pacific
UK & Europe,
Middle East,
Asia Pacific
UK & Europe,
Americas,
Middle East,
Asia Pacific
Revenues 2015
(continuing operations including joint ventures)
£1,069m
27%
£529m
14%
£837m
21%
£416m
11%
£1,063m
27%
Serco Group plc Annual Report and Accounts 2015 Our Strategy
13
Implementing the strategy
Serco combines people, processes
and technology to deliver superb
services. Since the last two of these
depend entirely on the first one, it
can be simply said that the success
of our strategy will depend upon
how well we manage, organise,
motivate, develop, select and
enable people. So the answer
to ‘how?’ is: ‘by being the best-
managed business in our sector’.
Having such an ambition may
sound trite, but we believe that
it is a worthy and value-creating
objective, and one that we can use
to inspire our management teams.
In any given circumstances, and
whatever the slings and arrows of
fortune, well-managed businesses
do better than poorly managed
businesses, and the best-managed
businesses do best of all.
So, we can define our ambition as
wanting to be the best-managed
business in our sector from a
position where we believe that,
through a process of continuous
improvement and capacity-
building, we can improve service
delivery and efficiency to the
benefit of both our customers
and ourselves. We can use our
ambition to be the ‘best-managed
business in our sector’ to improve
the way we manage contracts
and risk; to equip customers and
colleagues with more accurate
and timely information so that we
can measure performance better;
we can improve the efficiency of
our internal processes; we can
reduce costs; we can strengthen
our business development
capability; and we can invest more
in developing innovative solutions
to public service challenges. None
of this comes easy or quickly, and
we need to steer a tricky course
between the urgent need to reduce
our costs in line with reduced
revenues in the short-term and
investing in systems and processes
that will produce sustainable
benefits in the long-term.
Timeline of strategy implementation
At the time of reporting on the Strategy Review, we set out how we saw our strategy being delivered
successfully over three distinct but dependent phases: ‘Stabilise’, ‘Transform’ and ‘Grow’.
2014 Stabilise
2015–2017 Transform
2018–2020 Grow
• Hire new management
• Strengthen balance sheet
• Harvest benefits of
• Identify issues
• Rebuild confidence and trust
transformation
• Develop strategy and
implementation plan
• Undertake Contract and
Balance Sheet Review
• Stabilise morale
• Improve risk management
• Leverage scale and capability
• Rationalise portfolio
• Mitigate loss-making
contracts
• Strengthen sector
• Build out geographical
footprint
• Move into new sub-segments
• Continuously review portfolio
• Roll out corporate renewal
propositions
• Re-build business
development and pipeline
• Build differentiated capability
• Improve execution and
cost efficiency
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 14
Our Strategy continued
Those elements essential to
stabilise the business were all
delivered in 2014. Also critical
to stabilisation, but the bedrock
from which to properly fund the
transformation stage, was the
strengthening of the balance
sheet, completed in early 2015 with
the Rights Issue and refinancing.
The ongoing exercise to rebuild
confidence and trust was also
cemented by the much improved
financial standing of the business,
as well as all the prior work to
deliver corporate renewal and
the ongoing operational and
relationship improvements that we
are implementing. Our Corporate
Governance Report on pages 85
to 143 also provides details about
the many steps being taken to
improve risk management across
the Group.
In 2015 we rationalised the
portfolio with the conclusion
of our disposal programme,
which was an essential step to
delivering a strategy focused
on public service delivery. We
also made inroads to mitigating
loss-making contracts and other
liabilities, resulting in a net credit
of some £21m being achieved in
2015 as we were able to adjust
some of the Contract and Balance
Sheet Review items, including
an improved view of some of the
onerous contract provisions.
Transformation continues
through 2016 and 2017, and
increasingly this will be focused
on re-building Serco’s business
development functions and bid
pipeline, strengthening our sector
propositions, and consolidating
our differentiated capability in
order to win. We will also continue
to improve operational execution
and drive further cost efficiencies.
Only when these transformational
elements are all in place will we be
able to harvest the financial benefit.
You can read more about executing
the strategy in 2015 and beyond
in the Chief Executive’s Review on
pages 34 to 42 and the Divisional
Reviews on pages 43 to 50. More
information is also included in our
results and other presentations to
investors, available at www.serco.
com/investors.
What strategic success
will look like
The tangible evidence of our
success or otherwise will be a
return to industry rates of growth
and margins. Our current best
estimate is that the market
segments to be focused on are
likely to grow at an aggregate of
5–7% per year and that industry
operating margins across Serco’s
mix of business are likely to be in
the range of 5–6%. If this turns out
to be correct, and markets turn out
as expected, we believe that after
the initial years of restructuring
and transformation, it will be
possible to achieve growth rates
and margins towards the average
of the Group’s peers.
Serco Group plc Annual Report and Accounts 2015 How We Performed
15
How we Performed in 2015
Year ended 31 December
Revenue – including discontinued operations(1)
Reported Revenue(1)
Underlying Trading Profit(2)
Reported Trading Profit / (Loss)(2)
Operating Profit / (Loss) Before Exceptional Items – continuing and discontinued
Operating Loss – continuing and discontinued
Underlying EPS (basic)(3)
EPS Before Exceptional Items (basic) – continuing and discontinued
EPS (basic) – continuing and discontinued
Dividend Per Share
Free Cash Flow
Net Debt (including that for assets and liabilities held for sale)
2015
£3,514.6m
£3,177.0m
£96.0m
£137.6m
£132.7m
2014
£3,955.0m
£3,595.7m
£113.2m
(£632.1m)
(£655.8m)
(£54.8m)
(£1,317.3m)
3.44p
6.55p
(15.47p)
–
(£16.2m)
£77.5m
4.73p
(107.43p)
(205.66p)
3.10p
£62.2m
£682.2m
• Underlying Trading Profit of
£96m, ahead of our guidance
provided at the time of the
Rights Issue of £90m.
• Reported Trading Profit of
£138m, significantly higher
than Underlying Trading Profit,
benefiting from £21m net
release of Onerous Contract
Provisions and Contract and
Balance Sheet Review items,
£9m one-off profit on a contract
termination and £12m beneficial
impact of assets held for sale.
• Exceptional operating charge
of £188m, of which £166m are
non-cash losses on disposals
and impairments.
• Free Cash Outflow of £16m, better
than previously anticipated.
• Net Debt reduced by £605m to
£78m, as a result of the Rights
Issue and offshore BPO disposal
proceeds. Net Debt: EBITDA
around 0.5x.
• £1.8bn total value of signed
contracts, representing more
than 700 individual customer
orders of which 10 are worth
more than £50m each.
• Pipeline of larger new bid
opportunities increases by
approximately £1.5bn to £6.5bn.
• Operating costs reduced by over
£330m, broadly in proportion
with revenue reduction.
• Guidance for 2016 reiterated –
Revenue expected to reduce
to approximately £2.8bn and
Underlying Trading Profit to
around £50m as a result of BPO
disposal and contract attrition.
Rupert Soames, Serco Group Chief Executive, said:
“ The business has delivered a much better
performance than we expected at the start of the
year, which reflects the fact that we are making good
progress in the first year of the implementation of
our strategy.
“ Serco has achieved a great deal in 2015: we have a
significantly stronger balance sheet with materially
less debt, we have successfully disposed of the
majority of our offshore BPO business, reduced costs,
improved our internal reporting processes, recruited
new management, improved the position on several of
our largest loss-making contracts, and strengthened
our pipeline. Our plan has survived first contact
with the enemy.
“Looking ahead, and in line with our plan, we expect
revenues and profits to decline in 2016, as a result
of the disposal of our private sector BPO business
and contract attrition. We have four priorities this
year: further improve the operational and financial
performance of our contracts; build our new business
pipeline; reduce our costs; and improve and embed
our new management information systems.”
Note 1:
Revenue is as defined under IFRS, which excludes Serco’s share of revenue of its joint ventures. Revenue includes that from discontinued operations for consistency with
previous guidance.
Note 2:
Reported Trading Profit is defined as IFRS Operating Profit adjusted for (i) amortisation and impairment of intangibles arising on acquisition and (ii) exceptional items.
Consistent with IFRS, it includes Serco’s share of profit after tax of its joint ventures. Underlying Trading Profit excludes Contract and Balance Sheet Review adjustments
(principally OCP releases or charges), the beneficial treatment of depreciation and amortisation of assets held for sale, and other material one-time items such as the
profit on early termination of a UK local authority contract that occurred in 2015. Trading Profit measures include that from discontinued operations for consistency
with previous guidance.
Note 3:
Underlying EPS reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs (including those for discontinued operations) and related
tax effects.
Reconciliations and further detail of financial performance are included in the Finance Review on pages 51 to 71. The consolidated financial statements and accompanying notes are
on pages 159 to 239.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 16
Principal Risks and Uncertainties
Serco faces many risks and
uncertainties which we mitigate and
manage through risk management
processes (see pages 97 to 102).
The Group Risk Register sets
out the principal risks facing the
Group and is set by the Executive
Committee after taking into
consideration the various divisional
risk registers. The Group Risk
Register is reported to the Board
via the Corporate Responsibility
and Risk Committee.
Following the completion of the
Strategic Review, a robust and
systematic assessment of the
principal risks facing the Group
was carried out. These include
the principal risks that would
threaten the execution of Serco’s
strategy, business model,
future performance, solvency
and liquidity.
Strategic and reputational risks
The resulting principal risks
are each classified as strategic,
reputational, financial, operational,
legal or compliance. They are
described on the following pages,
together with the relevant strategic
business objectives, key risk
drivers; the Group-wide material
controls, which are explained in
more detail on pages 26 to 29,
which have been put in place to
mitigate the principal risks, and the
mitigation actions to improve the
effectiveness of the controls.
The risks are considered within the
timeframe of three years which is
the same time period that has been
used in the Viability Statement (see
page 30). The Viability Statement
takes into account the principal
risks in its assessment.
Risk appetite
In 2016, the Executive Committee
will undertake an exercise to
assess the risk appetite for each
of the principal risks. The risk
appetite represents the nature
and amount of risk that the Group
is willing to accept and facilitates
decision making as to the level of
resource that should be expended
to mitigate the principal risks.
Risk appetite statements are
being developed which will be
reviewed and endorsed by the
Corporate Responsibility and Risk
Committee. These statements will
be used to define the risk tolerance
levels throughout the business,
and along with our values, Code
of Conduct and mandatory ethics
training will provide clarity on the
risk culture of the Group.
Risk
Key risk drivers
Mitigation
Failure to attract and retain
leaders fit for the future
Impact on business objectives:
• Winning good business
• Executing brilliantly
• A place people are proud to work
• Profitable and sustainable
People are at the core of our business
at all levels of the organisation.
Our success depends on the
continued service and performance
of highly qualified and experienced
operational management and business
development teams and their leaders.
If our leaders are not able to meet the
needs of the business, this could impact
our integrity, brand and reputation, and
could have a material adverse impact
on our financial condition and results of
operations affecting the prospects of
the business.
Good leadership underpins our ability
to develop and deliver the services
we provide to customers. The ability
to plan for management succession
and to attract, train and retain good
leaders and other employees is a key
driver for our success.
Material controls:
• Serco Management System
• Serco Leadership Model
• Centres of Excellence
• Appropriately skilled /
trained resources
Failure to maintain a robust framework
of people processes, systems and
controls to enable attraction, selection,
development and retention of the
appropriate calibre of employees and
leaders would compromise our ability
to execute our strategy and achieve
our business objectives. This would
adversely affect employee pride in the
organisation and prevent Serco from
becoming an employer of choice for
talented people.
Employee engagement is also critical
to our success; engaged employees
deliver better service to our customers,
are more productive, and want to stay
with us. Failure to attract, motivate
and engage employees can create a
decline in morale and an increase in
staff turnover, which may adversely
affect our ability to win new and retain
existing contracts owing to a lack of
appropriate skills and a reduction in
customer satisfaction.
Current mitigation actions:
• Implementation of Serco
Leadership Model
• Implementation of talent and
succession processes
• Implementation of a robust framework
of people processes and procedures
that supports the acquisition and
retention of the right calibre of staff
Future actions:
• Continued improvements to our
Leadership Model
• Resourcing of the Centres of
Excellence and functions with the
intent to support the delivery of the
Group strategy
• Improvements to our talent
pooling capability
• Improvements to the ‘on boarding’
and induction processes and systems
• Improvements to short- and long-
term incentive arrangements
• Establishment of our Leadership
Academy
Serco Group plc Annual Report and Accounts 2015 Principal Risks and Uncertainties
17
Risk
Key risk drivers
Mitigation
Failure to transform and
deliver the Group strategy
Impact on business objectives:
• Winning good business
• Executing brilliantly
• Profitable and sustainable
We have put in place transformation
programmes to achieve lasting change
in the way Serco operates. Concurrent
programmes are being delivered
in Finance, IT, HR, Procurement,
Contract Management and Business
Development.
Successful delivery of these in an
integrated fashion will drive greater
standardisation, achieve critical
efficiencies and cost reductions,
improve transparency and reinforce
continuous improvement in our
operational delivery.
Delivery of the Group strategy could
be placed at risk because of too
many competing programmes with
complex interdependencies, poor
programme and solution design,
poor integration across activities
(leading to operational inefficiency
or incompatibility), or in the failure to
achieve lasting cultural change (due
to failure of buy-in or the setting of
unrealistic or unclear expectations).
Affordability may place a constraint on
resources, which could jeopardise or
delay the transformation of the Group.
Note: The risk drivers and controls
associated with achieving the
objectives of the Group strategy are
covered under other principal risk,
for example the risk ‘Failure to grow
profitably’ reflects the risk associated
with failing to maintain a healthy
pipeline of new contracts. The risk
of failure to transform and deliver
the Group strategy focuses on the
delivery of the Group transformation
programmes.
Material controls:
• Group strategy
• Transformation programme design
• Governance structure
• Standardised Divisional Performance
Reviews
Current mitigation actions:
• Establishment of a central
Programme Management Office
(PMO) to monitor and coordinate
the programmes
• Implementation of governance for
transformation programmes. PMO
reports delivery constraints to the
Group Chief Operating Officer and
the Executive Committee
Future actions:
• Coordination of a communication
strategy to engage all individuals in
the business so that they buy into
the longer-term goals of the Group
• Ongoing review of Group strategy
and internal delivery structures to
ensure Serco is set to excel in its
chosen markets and sectors
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 18
Principal Risks and Uncertainties continued
Strategic and reputational risks continued
Risk
Key risk drivers
Mitigation
Failure to build our reputation or act
with integrity
Impact on business objectives:
Central to building our reputation
are two key drivers – our operational
performance and our behaviour.
• Winning good business
• Executing brilliantly
• A place people are
proud to work
• Profitable and sustainable
Falling below our expected high
standards with respect to operational
performance and our behaviour will
negatively impact our reputation with
customers and other stakeholders.
Operating effectively but without
integrity will generate mistrust and
scrutiny; conversely, acting with
integrity but operating ineffectively
will raise uncertainty in our ability to
sustain and grow our business.
Both these are key to our reputation,
failing on either one could therefore
significantly impact the economic value
of our business, increase the risk of
regulatory intervention, and impact on
our ability to attract and retain talent.
A number of factors can influence our
ability to mitigate this risk effectively,
including: how we effectively manage
our operational, safety and financial
risks; how we ensure compliance with
contractual, legal and regulatory
requirements; how we ensure that
those who work for us behave with
integrity and in an ethical manner; how
we continually manage our reputation
and stakeholder relationships; and how
we ensure that we respond to incidents
in a transparent and truthful manner.
The critical area of risk for us is where
operational weakness or failure and /
or unethical behaviour intersects with
a highly charged political environment
resulting in a significant negative
impact on the Group’s reputation.
Material controls:
• Our Values and Code of Conduct
• Assurance – three lines of defence
• Serco Management System
• Contract / legal review and
documentation of Service
Delivery Requirements
• Standardised Divisional
Performance Reviews
• Appropriately skilled and
trained resources
• Business continuity, disaster
recovery, crisis management
and communication plans
Current mitigation actions:
• Enhancement of policies on business
standards and ethics, including anti-
bribery and corruption, protection of
human rights, sanctions, adherence
to competition law, avoidance of
money-laundering, conflicts of
interest, and employment of
ex-government officials
• Provision of mandatory ethics
training to make it clear that Serco
does not engage in and will not
tolerate unethical behaviour
• Provision of guidance and tools on
how our people can avoid this risk
• Embedding of ethical and human
rights reviews in our bidding process
• Implementation of processes to
monitor and react to emerging
issues and developed divisional
contingency communication plans
• Implementation of tactical
programmes centred on effective
reactive responses to operational
issues and proactive customer
and stakeholder engagement
programmes
Future actions:
• Continue to strengthen procedures
on due diligence of third parties
and ongoing monitoring of those
relationships
• Our Values have been refreshed and
will be communicated in 2016
Serco Group plc Annual Report and Accounts 2015 Principal Risks and Uncertainties
19
Financial risks
Risk
Failure to grow profitably
Impact on business objectives:
• Winning good business
• Profitable and sustainable
We depend heavily on large contracts
with a relatively limited number of
major government customers and
other public sector bodies and
agencies for a substantial proportion
of our revenue.
If such customers decrease the amount
of business they outsource to us for any
reason, or if the relationship with such
customers were to deteriorate, or we
sustained damage to our reputation, or
we were subject to negative publicity,
then we could lose business across
our customer base and face significant
economic damage. Such damage
could also include losing renewals
and extensions of existing contracts.
Shortly after this report is published,
the UK will hold a referendum on
continued membership of the EU. We
have contracts worth around £130m a
year with European institutions such
as the European Commission and the
European Space Agency, and it is part
of the strategy to build the business
we do with European institutions. We
believe that if Britain left the EU, it
would be more difficult for us to win EU
Government contracts, and we regard
this as a risk to the business.
Key risk drivers
Mitigation
The sustainability of our existing
and future business with governments
is dependent on a favourable policy
of private sector provision of
public services.
Our government customers are
affected by financial, regulatory and
political constraints or policy changes.
A substantial part of our business is,
therefore, linked to changes in the
global economy, fiscal and monetary
policy, political stability, political
leadership, budget priorities, and
the perception and attitude of
governments and the wider public
to outsourcing. These could result in
decisions not to outsource services
or delays in placing work which might
adversely impact our pipeline.
Where a healthy pipeline of new
business exists, Serco needs to
effectively compete for business.
Failure to have the critical skills and
references, a value proposition
that customers will find compelling
and a risk appetite appropriate for
the markets in which we compete
will put Serco at a disadvantage,
and put the sustainable growth
necessary in our business at risk.
In addition, failure to execute our
bids in a professional manner by not
understanding the strategic needs
of a client, or by mispricing bids,
developing unworkable solutions,
misunderstanding risks and other
bidding failures will also prevent us
from achieving our growth ambitions.
Material controls:
• Group strategy market sectors
and geographical regions
• Centres of Excellence
• Serco Management System
• Business Lifecycle Gates Process
• Appropriately skilled /
trained resources
• Standardised Divisional
Performance Reviews
• Contract / legal review and
documentation of service delivery
requirements
Current mitigation actions:
• Set up Centres of Excellence to
critically review the markets and
geographies we operate in globally
and develop compelling value
propositions in each market
• Implemented improved bid
management procedures
• Strengthened the criteria,
processes and level of scrutiny for
management’s review of all bids
and rebids, and ensured stronger
risk management earlier in the bid
process to help identify potential
onerous performance criteria or
contract terms, and transition
and operational risks, in advance
• Continued to invest in appointing
high calibre people for our key bids,
and training our bidding teams to
improve competency
and performance
Future actions:
• Implement regular pipeline and
market reviews
• Embed Centres of Excellence
and review sector drivers, market
propositions and resource allocations
• Review of Business Development
processes, capability and resourcing
• Review governance cycle to ensure
lessons learned are embedded
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 20
Principal Risks and Uncertainties continued
Financial risks continued
Risk
Key risk drivers
Mitigation
Financial control and
finance IT systems failure
Impact on business objectives:
• Executing brilliantly
• Profitable and sustainable
• A place where people are proud
to work
Strong financial systems and controls
are critical to the Group’s success and
underpin many key aspects of our
business, from transaction processing
to both internal and external reporting.
Financial control failure or prolonged
loss of financial IT systems may
result in: an inability to accurately
report timely financial results and
meet contractual financial reporting
obligations; a heightened risk of
error and fraud; poor quality data
leading to poor business decisions
and an inability to forecast accurately;
and an inability to make critical
financial transactions that would
lead to financial instability, potential
business losses and negative
reputational impact.
There are a number of critical
elements driving the risk of financial
control and finance IT systems failure.
These include: a finance governance
structure that sets the right tone
from the top; adequate financial
controls, including access controls to
IT systems, which prevent instances of
sabotage, fraud and error; the design
and subsequent availability of critical
financial IT systems; and the risk of
information security breaches (see
‘major information security breach’
risk below).
Serco must communicate a clear
Group Finance strategy supported by
robust finance policies and standards
that are embedded consistently
throughout the Group.
The risk of financial control and
systems IT failure is largely driven by
inadequate controls and processes.
If these are poorly designed and
complex, they may lead to potential
inaccuracies, fraudulent behaviour
and inefficient use of resources.
The design of financial systems and
access controls should ensure that key
financial processes and systems are
adequately protected from sabotage,
fraud and error, and that instances of
critical financial systems or locations
not being available at critical times for
prolonged periods is minimised.
Material controls:
• Standardised finance systems,
processes and controls, and
reporting
• Group strategy – Finance
Transformation Programme
• Serco Management System
• Business Lifecycle Gates Process
• Appropriately skilled /
trained resources
• Standardised Divisional Performance
Reviews
• Contract / legal review and
documentation of Service Delivery
Requirements
• Business continuity, disaster
recovery, crisis management and
communication plans
• Assurance – three lines of defence
• IT security infrastructure, processes
and controls
Current mitigation actions:
• Embarked upon a major finance
transformation programme to
strengthen the financial control
environment and to transform
finance as a whole, with the goal of
implementing standard processes
and data hierarchies and common
reporting language
• Updated the Group’s finance
strategy and policies
• Roll out of the Serco Finance
Academy to articulate the future
direction of finance and set
expectations
• Updated the delegated authorities
matrix
• Reshaped the design of financial
systems and access controls
• Strengthened the finance team
and developed of a new Finance
Compliance Assurance programme
Future actions:
• Finance transformation programme
will continue to address the
Group’s processes, targeting the
improved effectiveness of its
shared service operation
• Review of contingency plans in place,
including data recovery procedures
and business continuity plans
• Create of a Corporate Shared
Services Crisis Management Team
and Business Continuity Plan
• Ensure regular testing of
back-up systems
Serco Group plc Annual Report and Accounts 2015 Principal Risks and Uncertainties
21
Operational risks
Risk
Key risk drivers
Mitigation
Major information security breach
Impact on business objectives:
• Winning good business
• Executing brilliantly
• Profitable and sustainable
We and our appointed third party
service providers and sub-contractors
are vulnerable to a major information
security breach resulting in the loss or
compromise of sensitive information or
wilful damage resulting in loss of service.
A major information security breach
could have a significant negative impact
on our reputation and on the security of
our customers. This impact could result
in the loss of new or existing business
by disqualification from future work,
contract termination and heavy financial
penalties causing a negative impact on
our strategic objectives.
Such breaches are costly to rectify
and could dilute shareholder returns
and result in criminal or civil action;
contract and business external
accreditations being withdrawn; and
significant media scrutiny, all of which
could materially adversely affect the
business, financial condition, results
of operations and prospects.
This is a heightened risk, particularly with
respect to government contracts, due to
the sensitive and confidential nature of
government data that we handle.
We collect and retain confidential
information in computer systems
regarding our business dealings and
those of our customers, service end-
users and suppliers. We provide high
profile services, which adds to our
attractiveness as a potential target.
The threats facing sensitive information
managed by the Group have increased
with malicious and high profile
attacks against major brands around
the globe by well-known ‘hacktivist’
groups. Alongside this threat is the
more insidious and low profile attack
instigated by certain foreign bodies and
their proxies to obtain information for
defence or economic advantage.
The secure processing, maintenance
and transmission of information, and
compliance with restrictions on the
handling of sensitive information
(including personal and customer
information) is critical to our operations.
Material controls:
• Serco Management System
• Governance structure
• IT security infrastructure, process
and controls
• Business Lifecycle Gates Process
• Business continuity, disaster
recovery, crisis management and
communication plans
• Appropriately skilled /
trained resources
Current mitigation actions:
• Implemented information security
policies and standards
• Implementation of Cyber Defence
Programme
• Attainment of Cyber Essentials Plus
(CES+) certification in the UK
• Mandatory security awareness training
and security awareness campaigns
• Internal and external vulnerability
scanning, risk and security impact
assessments, and third-party
due diligence assessment and
penetration testing
• Implemented Computer Security
Incident Response teams
Future actions:
Continued investment in Cyber Defence
Programme to provide:
• Better visibility, monitoring and
control of our security infrastructure
• A Global Security Operations Centre
equipped with security software
and tools to monitor network and
systems, and to prioritise, remediate
and repel attacks and then report
and manage response on a Group-
wide basis
• Feedback and monitoring of
activities to drive user awareness
and behaviour
• Enhanced awareness training to
key personnel globally
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 22
Principal Risks and Uncertainties continued
Operational risks continued
Risk
Catastrophic event
Impact on business objectives:
• Winning good business
• Executing brilliantly
• A place people are proud to work
Due to the nature of the services
that the Group provides, many of our
operations, if not properly managed,
entail the risk of significant harm to
employees, third parties, members
of the public or the environment.
In the event that such a catastrophic
event is found or perceived to be
caused by the negligence of the
Group, this could result in claims
for personal injury, wrongful death
or property damage by customers,
subcontractors, governments,
employees or members of the public,
which could lead to the payment
of extensive damages and result in
significant adverse publicity
and reputational harm.
Certain events, including those arising
as a result of third party acts such as
acts of terrorism or war, are not within
the Group’s control, but may still result
in losses and significant impact on
customers and the public.
Prolonged disruption to service
delivery due to an ineffective response
to catastrophic events will adversely
impact the Group’s reputation. Such
adverse publicity and reputational
harm could lead to loss of business.
Key risk drivers
Mitigation
Some of our operations are particularly
high-risk; these include nuclear
operations, aviation, rail, marine and
custodial services. Although these
are highly regulated, these carry
inherent significant health, safety and
environmental (HSE) risks, and the
Group is exposed to the risk of material
losses, liabilities and reputational
damage from a catastrophic event, for
example a major incident or accident.
A number of factors may influence
this risk, including: capability and
experience in delivering services in
high-risk sectors; an organisational
culture that prioritises HSE
management; robustness of safety
management to support safety critical
industries; ability to assess, prepare
for and manage safety requirements;
and the impact of external factors
(for example regulatory change, war,
terrorist act); and robustness
of business continuity plans and
crisis management.
Material controls:
• Group strategy
• Safety management systems
• Serco Management System (SMS)
• Business Lifecycle Gates Process
• Governance structure
• Business continuity, disaster
recovery, crisis management
and communication plans
• Appropriately skilled /
trained resources
• Contract / legal review and
documentation of service
delivery requirements
• Assurance – three lines of defence
• Our Values and Code of Conduct
• Insurance
Current mitigation actions:
• Implementation of HSE strategy
with clearly defined objectives and
performance targets and safety
oversight structures and governance
• Policies, systems and procedures
embedded in the SMS
• Implementation of competency
framework and mandatory
training programmes
• External and internal audits to
confirm the effectiveness of
these controls
Future actions:
• Regular review of processes and
assurance of the controls to ensure
continuous improvement
• Review and update of crisis
management plans
Serco Group plc Annual Report and Accounts 2015 Principal Risks and Uncertainties
23
Risk
Key risk drivers
Mitigation
Misreporting of performance
Impact on business objectives:
• Winning good business
• Executing brilliantly
• A place people are proud to work
There may be incidents of employees
not complying with the Group’s
policies, which might result, for
example, in accounting irregularities
or accounting misstatements, and
failures in the accurate monitoring and
reporting of contract performance.
This may result in inaccurate
performance and billing information
being provided to Serco management,
our customers and other stakeholders.
If the misreporting is deliberate, it
may constitute fraud, and the Group
may be subject to litigation, inquiries
or investigations that could divert
management time and resources, and
result in penalties, fines, sanctions,
variation or revocation of permissions
and authorisations, suspension or
debarment from doing business with
government customers.
Accidental or deliberate misreporting
of operational, regulatory and financial
performance, both internally and
externally, would result in reputational
damage, loss of goodwill or contracts.
The reporting of operational
performance and its accuracy is an
inherent risk that is increased due
to the large number of employees,
geographical diversity and the
diversity of the operations that we run.
As a result, we are exposed to
reputational and financial risks
associated with employee errors,
system errors, misunderstanding of
requirements, inadequate quality of
service provision and deliberate acts of
misreporting of performance.
Material controls:
• Serco Management System
• Our Values and Code of Conduct
• Business Lifecycle Gates Process
• Contract / legal review and
documentation of service delivery
requirements
• Assurance – three lines of defence
• Appropriately skilled /
trained resources
Current mitigation actions:
• Following allegations in 2013, in
relation to the Company’s prisoner
escort and electronic monitoring
contracts with the Ministry of
Justice, that the Group had
overcharged the UK Government
as a result of misreporting, the
Group entered into a process
of corporate renewal designed
to mitigate the underlying risks
of misreporting. Through the
Corporate Renewal Programme,
Group-wide controls that mitigate
this risk are being implemented
and are being embedded. These
measures were introduced to
reinforce the importance of data
integrity and factual reporting down
to the individual level, and diminish
the risks in interpretation and
understanding of our obligations.
Future actions:
• Contract management
obligation mapping process to
be implemented and used by all
material contracts
• Compliance assurance programme
to include review of data integrity
compliance
• Review of annual performance
review process to ensure incentives
are aligned with our Values
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report·
24
Principal Risks and Uncertainties continued
Legal and compliance risks
Risk
Key risk drivers
Mitigation
Contract non-compliance and
contract non-performance
Impact on business objectives:
• Winning good business
• Executing brilliantly
• Profitable and sustainable
Our success depends on our ability to
win and successfully deliver contracts
that balance risk and reward. If we
fail to negotiate performance criteria
and contract provisions that can be
delivered at the right price, or we do
not fully understand and mitigate
the risks involved, or we do not put
in place appropriate capabilities
required to deliver against our
contractual obligations, contracts that
we win are more likely to suffer from
poor performance and may result in
compliance challenges.
Not meeting our contractual
obligations through either non-
compliance with contractual
requirements and / or failure to
meet agreed service levels may
result in significant financial or other
penalties being levied, and in extreme
circumstances, the termination of a
contract with related compensation
arrangements, which could extend
to regulatory or other investigations.
Apart from financial detriment, such
failures could adversely affect our
reputation and our ability to win
new business.
There are a number of critical elements
driving the risk of contractual non-
compliance and non-performance,
these include: failing to negotiate
service levels and contract provisions
that are appropriate for the level of
reward; misunderstanding and / or not
complying with contractual obligations,
changes of scope, or incorrectly
evaluating contractual assets; failure
to properly manage contractual and
operational risks; having insufficient
transparency of performance and lack
of capability (systems and people)
to continually deliver against agreed
service levels; and failure of sub-
contractors and other suppliers in the
performance of their obligations.
Contracted services are delivered
through direct delivery of services,
through the use of sub-contractors,
or through joint venture consortium
partners. As a result, these drivers
apply to us as well as our sub-
contractors or consortium partners,
where they do not have the right
expertise, tools and resources to
manage and monitor compliance
with contract obligations and
expectations adequately.
These drivers span the full business
lifecycle, including the bidding,
transformation and operational phase
through to contract close, and can
result from insufficient discipline
with respect to the development,
implementation and adherence to
corporate business processes, and
inadequate programme governance.
Material controls:
• Serco Management System (SMS)
• Our Values and Code of Conduct
• Assurance – three lines of defence
• Business Lifecycle Gates Process
• Contract / legal review and
documentation of Service Delivery
Requirements
• Appropriately skilled /
trained resources
• Standardised Divisional
Performance Reviews (DPR)
Current mitigation actions:
• Revision of Group policies and
governance for bidding, transition,
contract management, risk
management and compliance
• Implementation of a new
Compliance Assurance Programme
to monitor compliance of
contracts with respect to the SMS
requirements
• Roll-out of SMS self-assessment
questionnaires to check compliance
against SMS requirements
• Business lifecycle gates process
updated to include a requirement
for make versus buy decisions
(i.e. hire of staff versus use of
sub-contractors)
• Targeted investment in the
recruitment and training of staff to
improve the capability of bid and
contract management staff. This
training provides contract managers
with awareness of contract
management requirements and
the SMS requirements
• Trained key staff on the new risk
management life cycle processes
• Roll-out of standardised DPRs
Future actions:
• Currently implementing the contract
management obligation mapping
process across the Group. This will
be used to document and track all
material contractual obligations
across all contracts globally
Serco Group plc Annual Report and Accounts 2015 Principal Risks and Uncertainties
25
Risk
Key risk drivers
Material legal and regulatory
compliance failure
Impact on business objectives:
• Winning good business
• Executing brilliantly
• A place people are proud to work
• Profitable and sustainable
Operating across different sectors
and geographies and working with
national and local governments, public
sector bodies and agencies, and
government-regulated customers,
the Group is required to comply with
a complex and ever changing legal
and regulatory environment. Failing to
comply materially with these laws and
regulations may cause significant loss
to the Company.
Legal proceedings (including class
actions) may be costly and if they are
not determined in the Group’s favour,
may divert management’s attention
away from the running of the business.
Losses or financial penalties resulting
from any current or threatened legal
actions may have a material adverse
effect on the Group’s financial
condition, results of operations
and cash flows.
As a government contractor, the Group is subject to a
greater risk of investigation, criminal prosecution, civil fraud,
whistle-blower lawsuits and other legal actions and liabilities
than companies with exclusively commercial customers.
As we have disclosed before, we are under investigation
by the Serious Fraud Office. In November 2013, the UK’s
Serious Fraud Office announced that it had opened an
investigation, which remains ongoing, into our Group’s
Electronic Monitoring Contract. We are cooperating fully
with the Serious Fraud Office’s investigation but it is not
possible to predict the outcome. However, in the event that
the Serious Fraud Office decides to prosecute, the range of
possible adverse outcomes is any one or a combination of
the following:
(i) that the Serious Fraud Office prosecutes the individuals
and / or the Serco Group entities involved - which may
result in the individuals or entities involved defending
the action successfully; or the individuals and the entities
involved being convicted, which may result in significant
financial penalties, an impact on existing contracts with
the UK Government and Serco being subject to a period
of discretionary debarment from future contracts with UK
Government entities; or
(ii) that the Serious Fraud Office and the relevant Serco
Group entities enter into a deferred prosecution
agreement (DPA) – which may result in significant financial
penalties and a period of discretionary debarment from
future contracts with UK Government entities.
Such debarment would be discretionary in the sense that
a contracting authority may consider it not to be relevant
to a given bid or rebid or that Serco has provided sufficient
evidence that it has addressed any issues identified in a DPA,
but would also in any event be limited in time under the terms
of the Public Contract Regulations 2015.
Upon any such conviction or DPA, the amount of additional
work given to the Group by the UK Government may be
reduced, and the Group may be subject to enhanced scrutiny
with respect to its other contracts with the UK Government.
It is possible that further actions beyond those being
implemented under the Corporate Renewal Programme may
need to be taken by us under the terms of any DPA.
If the Group faces any criminal convictions, debarment
consequences or enters into a DPA, any such outcome could
result in significant fines and have a material adverse impact
on the Group’s ability to contract with the UK Government
and its reputation which would, in turn, materially adversely
affect its business, financial condition, results of operations
and prospects.
In addition, a criminal conviction of a Serco entity or of one
or more of the Group’s current or former employees would
in certain circumstances allow the Ministry of Justice to
re-open the £64.3m settlement agreed in respect of certain
issues arising under the Electronic Monitoring Contract. In
those limited circumstances, the UK Government may seek
additional payments from Serco.
We will continue to cooperate with the Serious Fraud
Office’s investigation.
Mitigation
Material controls:
• Serco Management System
• Assurance – three lines of defence
• Business Lifecycle Gates Process
• Contract / legal review and
documentation of Service Delivery
Requirements
• Appropriately skilled /
trained resources
• Standardised DPRs
Current mitigation actions:
• Improvements to the capability of
the organisation to interpret and
implement these requirements
correctly including accessible legal
expertise, subject matter experts
and knowledgeable staff and clear
policies and procedures on how
we manage our legal and
regulatory requirements
• Update to the business lifecycle gate
process to include a requirement to
identify the key material legal and
regulatory requirements, and gain
legal sign-off by contract and legal
and contracts teams augmented by
external legal counsel as appropriate
• Identification of policy owners and
subject matter experts responsible
for the identification and tracking of
new and existing requirements
• Staff training on key material legal
and regulatory requirements
Future actions:
A number of controls are currently being
put in place to increase our ability to
mitigate this risk these include:
• Review of mechanisms for the
identification and management of
key material legal and regulatory
requirements
• Development of policy and
guidelines on management of
key material legal and regulatory
requirements
• Implementation of Contract
Management App (CMA) used to
document and track all material
contractual regulatory requirements
and seek to ensure our requirements
are met at all stages of the contract
lifecycle including contract exit
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 26
Principal Risks and Uncertainties continued
Material Controls – defined as the Group-wide controls implemented across the Group to mitigate the
principal risks.
Appropriately skilled
/ trained resources
We continue to invest in appointing high calibre people for our bids and our
contracts, providing training to improve competency and performance. The
recruitment process uses Success Profiles that provide a global template for
specifying and presenting the requirements of a job role and person specification,
making it easier to record and interpret role requirements during each stage
of the sourcing and selection process.
Where appropriate, training is provided to inform employees and provide the
necessary knowledge and skills to understand and deliver our commitments.
Training needs are analysed and reviewed periodically to ensure training and
skills remain up to date and staff are aware and knowledgeable in best practice
approaches to their work. Training is provided as a series of learning modules
depending on the grade of the employee within the organisation, and specialist
training, provided depending on the role.
Assurance – three
lines of defence
The Serco Management System (SMS) standards specify the controls with clear
definition of those responsible for ensuring compliance. To provide assurance that
these controls are implemented and effective, we have implemented the three lines
of defence, i.e. the business, management assurance and audit.
Business continuity,
disaster recovery and
crisis management
plans
Business Lifecycle
Gates Process
At the business level, an SMS self-assessment tool is provided to enable managers
to assess their compliance with the SMS controls, and plan actions to close gaps.
A programme of management assurance then provides comfort that the divisions
and functions are managing risks effectively and in compliance with the SMS.
Contract reviews are carried out on a periodic basis at contract, business unit and
divisional levels so as to ensure greater visibility of contractual performance issues.
Operational improvement plans are then updated to reflect the results of these
reviews and ensure the capability of staff and systems remains fit for purpose to
ensure all contractual obligations continue to be met.
Internal Audit is the third line of defence and provides an independent review
(sometimes carried out by independent external parties) of the design and
operating effectiveness of controls in place to manage key risks, as well as
feedback on risk management and governance processes.
All Serco divisions are required to have crisis, business continuity and / or disaster
recovery plans that describe the actions to be taken to address crisis situations
and the loss or unavailability of physical, personnel and / or information assets.
Development of the plans is prioritised by risk exposure and other relevant
requirements including high risk or high continuity dependency, contractual,
regulatory or legal requirements.
Application of the Business Lifecycle Gates Process is mandatory for all bids and
contracts. The Gate Sign-off checklists detail the specific sign-off requirements
from Gate 0 to Gate 9. To pass through each Gate, the Business Lifecycle Review
Team (BLRT) confirms that the requirements of each relevant SMS Standards have
been met and every activity has been completed to the necessary standard. In
addition to the BLRT, all bids and contracts are required to carry out independent
reviews (such as Black Hats and Gate Reviews) to provide an appropriate standard
of assurance and governance across the business.
One of the gate requirements is the development of a contract business plan, which
includes the financial budget, defined deliverables, success measures and key
milestones; delivery and progress is monitored and reported against the business
plan, with monthly contract reviews with the Client. In addition, a formal Gate 8
(Service Delivery, Transformation and Benefits Realisation) Review is required to
internally review and agree that the contract is delivering its business plan.
Serco Group plc Annual Report and Accounts 2015 Principal Risks and Uncertainties
27
Centres of Excellence
Contract / legal review
and documentation
of service delivery
requirements
To support the delivery of the Group strategy, Centres of Excellence (CoEs) have
been set up with the objective of critically reviewing the markets and geographies
we operate in globally, our sales propositions and the resources required to be
successful. The CoEs develop a compelling value proposition in each market so
as to develop a sufficiently robust pipeline of new business.
Operational teams are required to understand and document all service delivery
requirements, including customer, contractual, regulatory or internal Serco
requirements. Each operating contract is required to maintain a clear summary of
current contractual requirements, prepared by the contracts / legal team. Changes
to operating contracts are required to be reviewed, approved by the customer,
documented, recorded and stored, managed and maintained by the divisional
contract / legal team.
We are currently implementing the Contract Management Application (CMA) across
the Group; this will be used to document and track all material obligations including
material contractual and regulatory obligations across all material contracts globally.
Governance structure Our governance structure clearly defines roles and responsibilities at Board level and
below to ensure that decisions throughout the organisation are soundly based and
risks are appropriately controlled and monitored. The Board is responsible, among
other matters for, the Group vision and strategy; annual financial and operating plans;
effectiveness of the Group’s system of internal control and risk management. Key
Board responsibilities are referred to by the Board committees.
The Executive Committee reviews risks, internal control and business assurance to
ensure they are effectively managed and reviewed. Our processes of business review
are intended to ensure that we meet customer expectations, regulatory requirements
and performance criteria. The effectiveness of these processes is the focus of the
Corporate Renewal Programme; the implementation of which is overseen by the
Board Oversight Committee, which continues to monitor the embedding of the
policies and procedures.
Divisional Executive Management Teams ensure appropriate governance and
oversight of all aspects of staff, operational, financial, business development,
customer relations, risk management, ethics and strategic performance of the
Division. The Investment Committee provides governance for large or high risk
bids, re-bids, acquisitions, disposals and strategic investments that are outside
the delegated approval authority of the divisions.
A Global Information Assurance Board provides security leadership and oversight
and Enterprise Architecture Boards ensure systems and information security
controls are fit for purpose.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 28
Principal Risks and Uncertainties continued
Group strategy
The Group strategy sets out the specific sectors and geographic markets that Serco
will operate in and the key areas we need to focus on in order to deliver our core
competencies and become the best run business in our sector.
Insurance
IT security
infrastructure,
process and controls
Our Values and
Code of Conduct
Aligned with the Group strategy are divisional strategies and functional strategies
including the health, safety and the environment, People, IT and Finance strategies.
These strategies outline the vision, the performance targets we have set ourselves
and an overview of how we intend to deliver our business objectives. The strategies
provide the basis of our business and operating plans, and also the various
divisional continuous improvement programmes, rationalisation programmes,
and global transformation programmes such as the Finance Transformation and IT
Transformation programmes.
The overall coordination of the programmes is provided by a Group Programme
Management Office (PMO) within the office of the Chief Operating Officer, which
ensures effective prioritisation and tracking of benefits realisation to ensure we
are delivering our overall Group strategy. The PMO seeks to ensure near-term
financial and delivery targets are reviewed; programmes are executable within
set timescales; and milestones, risks and interdependencies are identified and
appropriately managed.
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, and we review the adequacy of our insurance cover at regular
intervals to ensure alignment with our operational risks.
The Chief Information Officer is responsible for ensuring that systems, processes
and controls are in place seek to ensure the confidentiality, integrity and availability
of sensitive information and the associated information systems that support our
business activities. The controls include access control policies to prevent fraud,
errors, sabotage and system design and change control procedures to ensure the
integrity of data.
Serco has been accredited with the UK Government Cyber Essentials Plus
certification; this provides confidence to a number of our stakeholders that we are
appropriately prepared and protected.
We are currently delivering the Cyber Defence Programme which will provide
improvements to the UK IT security infrastructure to provide better visibility,
monitoring and control of UK security infrastructure, and a Global Security
Operations Centre for monitoring and dealing with cyber-attacks across the Group.
Our Values and Code of Conduct define the behaviours we expect from staff to
ensure we operate in a manner that is aligned with these principles and drives
an organisation culture that enforces the Serco brand. The Code of Conduct is
supported by corporate guidelines, mandatory training modules (Serco Essentials
and Serco Essentials Plus training programmes), the ‘Say No’ Tool Kit, and the
Decision Making Guidance.
Our policies are supported by our Code of Conduct (codeofconduct.serco.com),
which applies to all employees from Board Directors to every member of front line
staff, and also to suppliers.
Assurance that the Code of Conduct is deployed and is complied with is provided
by the divisional in-country ethics teams as are the issues highlighted through the
‘Speak Up’ process which enables staff to report illegal, dangerous, dishonest or
unethical activities anonymously.
In addition, we carry out surveys to understand the effectiveness of these controls in
delivering the organisational culture we strive for. The Corporate Responsibility and
Risk Committee has responsibility for the review of ethical issues that may arise from
our current and future activities.
Serco Group plc Annual Report and Accounts 2015 Principal Risks and Uncertainties
29
Safety management
systems
Serco Leadership
Model
Serco Management
System (SMS)
Standardised
Divisional Performance
Reviews (DPRs)
Standardised finance
systems, processes,
and controls and
reporting
Operations are required to work under defined, documented safety management
systems (including procedures and work instructions) which are appropriate
and proportionate to the nature of the operation’s safety risks. Systems and
procedures are reviewed (at least annually) to ensure they reflect material legal
responsibilities associated with applicable material laws, regulations, approvals,
licences and other material legal requirements, industry codes and best practice,
contractual requirements and expectations of regulators and other interested
parties. Operations in safety critical areas including rail, aviation, nuclear, marine
and custodial are subject to regulatory requirements which include specific
requirements around safety management systems. These are subject to review
and audit by the relevant regulator, typically on an annual basis.
The Serco Leadership Model defines the capabilities required at each leadership
tier to align with our strategic priorities and provides a single, global definition
of leadership that applies to all employees. It provides a clear structure for our
leadership development pipeline and helps us to identify, select and develop
leadership talent. The model is embedded in our key people processes,
including: recruitment and selection; induction; performance management;
leadership development; talent reviews and success planning; internal
promotion and appointments.
For our leadership and all our people, successful execution of our business is
enabled by clear definition of what is expected and the provision of guidance to
meet those expectations. Our Leadership Model defines our leadership capability
requirement, aligned to our strategic priorities and applicable to all employees.
For Serco, leadership is less about hierarchy and more about behaviour – building
trust, relationships, networks, communities and working together.
The SMS defines the policies, standards and processes to be applied wherever
we operate. The operating processes reflect the principles of clear delegation of
authority and segregation of duties. We continue to improve the SMS standards
and processes to ensure they provide clarity on the mandatory controls that the
business is required to implement to manage our risks, but are fit for purpose for
the business.
Through our integrated approach to Corporate Renewal, we have introduced a
greater level of transparency with respect to our SMS internal controls. Significant
volumes of training have been delivered both in the UK and globally to raise staff
awareness of the SMS controls and to understand their roles and responsibilities.
We have also continued to roll-out and train key staff in the adoption of a revised
Risk Management operating model.
Divisional and contract performance is reported against a balanced scorecard of
metrics contained in the Divisional Performance Review (DPR). DPR meetings are
held periodically at different levels across the business and ultimately reviewed
by the Group Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer on a monthly basis. These reviews enable leadership to assess the
operational health of the business on a regular basis.
We have implemented a standardised reporting process (including the production
of a core set of Management Accounts) to enable line of sight throughout the
organisation and a standardised planning and forecasting process to ensure
a consistent approach to business and financial planning across the Group. To
support the implementation of these standardised processes we have refreshed
and updated the finance control procedures and are currently delivering a Finance
Transformation Programme which will enhance SAP to provide a unified financial
platform with the aim of providing the ability to gain instant insight into our financial
position and to carry out real-time planning.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 30
Viability Statement
this point, the Group would look
to address the issue by exploring a
range of options including, amongst
others, a temporary or permanent
renegotiation of its debt covenants;
disposals of parts of the Group’s
operations to reduce net debt; and
/ or raising additional capital in the
form of equity, subordinated debt or
other such instruments.
Subject to these qualifications,
and on the basis of the analysis
undertaken, the Directors have a
reasonable expectation that the
Group will be able to continue in
operation and meet its liabilities
as they fall due over the three-year
period of their assessment. In doing
so, it is recognised that such future
assessments are subject to a level
of uncertainty that increases with
time and, therefore, future outcomes
cannot be guaranteed or predicted
with certainty. The Directors have
made the following key assumptions
in connection with this assessment:
– there is no significant unexpected
contract attrition and bid conversion
rates are not significantly lower
than anticipated;
– the Group is able to execute its new
strategy and deliver forecast margin
improvements; and
– the Group is not subject to any
material penalties or direct and
indirect costs and / or losses arising
from the current SFO investigation.
In accordance with provision C2.2
of the UK Corporate Governance
Code, published by the Financial
Reporting Council in September
2014, the Directors have assessed
the prospects of the Group over the
three-year period to 31 December
2018. The Directors believe that the
three-year period is appropriate
for Serco since it reflects the fact
that the Group has limited visibility
of contract bidding opportunities
beyond three years and that
approximately 30% of current year
revenue relates to contracts where
the contract term comes to an end
within three years. Furthermore,
the Group is in the early stages of
implementing a new strategy to turn
its performance around. In addition,
the three-year period also coincides
with the maturity of the Revolving
Credit Facility, which is in April 2019.
Assessing the longer-term viability
of any company at this early stage
of new strategy implementation is
inevitably a challenge, particularly
given the recent history of the Group
as explained in previous shareholder
communications (including the
Prospectus issued by the Company in
relation to the Rights Issue) and the
onerous contracts that exist within
the Group.
During 2015, the Board carried out
a robust assessment of the principal
risks facing the Group, including those
that would threaten the execution of
its strategy, business model, future
performance, solvency and liquidity.
Management and mitigations of
those principal risks have been taken
into consideration when considering
the future viability of the Group. The
Group’s principal risk review, as set
out on pages 16 to 29, considers the
impact of these principal risks and the
mitigating controls that are in place.
In assessing the prospects of the
Group over the three-year period, the
Directors have also considered the
Group’s current financial position as
well as its financial projections in the
context of the Group’s debt facilities
and associated covenants. These
financial projections are based on a
‘bottom up’ Budget exercise for 2016
and 2017, and a more ‘top down’
view for 2018.
The Group is delivering on the
strategic priorities it set out at
the time of the Rights Issue and
continuing to embed these into the
business. Crucially, the combination
of the proceeds of the Rights Issue
and the disposal of our offshore
private sector BPO business has
enabled us to reduce net debt from
£682m to £78m meaning that we
have greatly increased headroom on
our key financial covenants. Going
forward, given the weakness of the
contract pipeline, the Group is likely
to experience net revenue attrition
for a period of time, which will in turn
impact profit and cash generation.
Our base projections indicate that
our debt facilities and projected
headroom are adequate to support
the Group over the next three years.
The Group’s financial plan has been
stress-tested against severe but
plausible scenarios, on their own
and in combination, to evaluate
the future viability of the Group. It
is unlikely, but not impossible, that
the crystallisation of a single risk
would test the future viability of
the Group; however, unsurprisingly,
and as with many companies, it
is possible to construct scenarios
where either multiple occurrences of
the same risk, or single occurrences
of different significant risks, could
put pressure on the Group’s ability
to meet its financial covenants. At
Serco Group plc Annual Report and Accounts 2015
Key Performance Indicators
31
Key Performance Indicators
We use Key Performance Indicators (KPIs) to monitor our performance to ensure
we have a balanced set of metrics that give appropriate emphasis to both financial
and non-financial aspects. Alongside this, in 2015 we have improved significantly
our management information, including the contract performance monitoring
process, monthly management accounts and Division Performance Review process.
Financial Key Performance Indicators
1. Underlying Earnings per Share (EPS)
Definition
Underlying EPS reflect the Underlying Trading Profit
measure after deducting pre-exceptional net finance
costs (including those for discontinued operations)
and related tax effects. It excludes ‘non-controlling
interests’ and divides the amount by the weighted
average number of ordinary shares outstanding
during the period in accordance with IFRS.
Trading Profit is defined as IFRS Operating Profit
adjusted for (i) amortisation and impairment of
intangibles arising on acquisition and (ii) exceptional
items. Consistent with IFRS, it includes Serco’s share of
profit after tax of its joint ventures. Underlying Trading
Profit excludes Contract and Balance Sheet Review
adjustments (principally OCP releases or charges), the
beneficial impact of depreciation and amortisation
of assets held for sale, and other one-time items
such as the profit on early termination of a UK local
authority contract that occurred in 2015. Trading Profit
measures include that from discontinued operations.
Relevance to strategy
Underlying EPS reflects the combined ability to grow
revenue and trading profit margin, together with the
strength of funding and overall financial position.
2. Trading cash flow (£m) and Underlying Trading
cash flow conversion rate
Definition
Trading cash flow is defined as ‘net cash inflow from
operating activities’ excluding exceptional items, as
shown on the face of the Group’s Consolidated Cash
Flow Statement and is stated after capital expenditure
from tangible and intangible purchases less proceeds
of tangible and intangible disposals, adding dividends
we receive from joint ventures and adjusting to
remove tax payments or receipts.
Relevance to strategy
Trading cash flow reflects our ability to generate
funds to invest in our future growth and strategic
development. The Underlying Trading cash flow
conversion rate reflects the efficiency of the business
in converting Underlying Trading Profit into cash.
Performance
Trading Cash Flow (£m)
282.9m
229.0m
Performance
Underlying EPS (pence per share)
119.9m
101.7m
2011
2012
2013
2014
19.9m
2015
35.15p
Underlying Trading Cash Flow Conversion Rate
25.43p
28.64p
101.2%
91.1%
89.8%
4.73p
3.44p
2011
2012
2013
2014
2015
46.6%
20.7%
2011
2012
2013
2014
2015
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 32
Key Performance Indicators continued
3. Return on invested capital (ROIC) %
Definition
ROIC is calculated as Underlying Trading Profit for
the period divided by the invested capital balance.
Invested capital represents the assets and liabilities
considered to be deployed in delivering the trading
performance of the business.
Invested capital assets are: goodwill and other
intangible assets; property, plant and equipment;
interests in joint ventures; trade and other receivables;
inventories; and assets classified as held for sale.
Invested capital liabilities are trade and other
payables (current and non-current) and liabilities
classified as held for sale.
Invested capital is calculated using the closing
balance sheet position for 2014 given the impact
of the Contract and Balance Sheet Review during
that year; for 2015 it is calculated as a two-point
average of the opening and closing balance sheets
for the period.
Relevance to strategy
ROIC measures how efficiently the Group uses its
capital to generate returns from its assets.
Non-financial Key Performance Indicators
4. Major reportable incident rate
(per 100,000 employees)
Definition
Major reportable incidents are classed as fatalities,
fractures, amputations, dislocations, loss of sight,
chemical and hot metal burns, electrical burns,
unconsciousness caused by asphyxia or exposure to
a harmful substance, and acute illness resulting from
substance inhalation or ingestion. The rate measures
our success in providing a safe and secure working
environment (excluding joint ventures).
Relevance to strategy
Delivering excellent service to our customers requires
us to operate in the safest way possible. Safety
also has a direct bearing on the commitment and
engagement of our people.
Performance
The number of major reportable incidents reported in
2015 were 53 compared to 35 reported in 2014 (2014
reported number was 19.9 but as explained on page
79 this has been restated to 37.5), resulting in a rate
of 57.7 per 100,000 employees, which falls short of
our target of a rate set for 2015 of below 30. This can
be broken down with rates for ‘frontline’ (higher risk)
operations at 95.9 and our ‘back office’ operations
at 11.9. The increase relates to an increase in serious
physical assaults within our custodial and immigration
business. This is not just a Serco issue but an industry
issue and is one we take extremely seriously.
Performance
Performance
Underlying Trading ROIC %
Major Reportable Incident Rate (per 100,000 employees)
17.3%
13.9%
12.0%
11.3%
11.1%
67.0
51.5
57.7
37.5
33.4
2011
2012
2013
2014
2015
2011
2012
2013
2014
2015
2014 reported number was 19.9 but as explained on page 79 this has been
restated to 37.5
Serco Group plc Annual Report and Accounts 2015 Key Performance Indicators
33
5. Employee Engagement
Definition
We partner with Aon Hewitt to run our global
employee engagement survey. This covers all
employees, excluding our joint ventures, and focuses
on three key areas: whether people say positive things
about working at Serco (‘say’), people’s intention
to stay with Serco (‘stay’) and their intention to give
discretionary effort (‘strive’). Our engagement score
shows how many employees exhibit strong levels of
all three of these areas when we survey.
Relevance to strategy
We have completed extensive business linkage
analysis across our divisions, including internationally,
to show that high levels of employee engagement
lead to higher customer satisfaction and lower levels
of staff turnover and absenteeism. Therefore, to
achieve our strategic aims, we need highly engaged
employees to deliver outstanding customer service.
Performance
During 2015’s Viewpoint survey, our global
engagement score is 53%, up 2% from 2014.
Several divisions increased their engagement
scores from 2014 whilst two remained stable at
their previous scores. We were pleased that our
four key engagement driver scores increased from
2014 as well. The Viewpoint results were cascaded
to the organisation in Q4 2015 and we have a global
plan of activity in place for 2016 to sustain and drive
employee engagement in Serco, led by our Executive
Committee through all Divisions.
6. Carbon emissions headcount intensity
(tonnes CO2e per FTE)
Definition
We report our greenhouse gas emissions as tonnes
of CO2e per full time equivalent (FTE) employee.
This normalises our emissions to the size of our
business. We adopt ISO 14064-1 2012 to ensure
we meet greenhouse gas reporting requirements
and provide a fair and transparent picture of our
greenhouse gas emissions.
Relevance to strategy
Our carbon dioxide emissions are directly related
to our energy use, and hence to the efficiency of
our operations.
Performance
Our frontline operations have an emissions intensity
of 3.53 tonnes CO2e per FTE whilst our back office
operations reported significantly less at 1.17 tonnes
CO2e per FTE. Combined, our normalised emissions
are 2.45 tonnes CO2e per FTE, which is a 35%
improvement on 2014. This is due to changes in
contributing contracts such as the removal of energy
associated with the operation of Docklands Light
Railway (December 2014) as well as reduced UK gas
consumption as a result of mild weather and the
impact of initiatives taken.
Performance
Serco Employee Engagement
Performance
Tonnes CO2e per FTE
51%
53%
6.86
45%
42%
3.80
2.45
3.53
1.03
1.17
2014
2015
2014
2015
2014
2015
Group
Frontline Operations
Back Office Operations
2012
2013
2014
2015
Historic employee engagement scores have been normalised with the
exclusion of data from the Global Services private sector BPO division
which Serco is exiting.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 34
Chief Executive’s Review
Rupert Soames OBE
Group Chief Executive Officer
The financial results for 2015 were
much better than we expected
both at the start of the year and
at the time of the March 2015
Rights Issue.
“ The business has delivered a much better
performance than we expected at the start of the
year, which reflects the fact that we are making
good progress in the first year of the implementation
of our strategy. Looking ahead to 2016, we have four
priorities: further improve the operational and
financial performance of our contracts; build our new
business pipeline; reduce our costs; and improve and
embed our new management information systems.”
Underlying Trading Profit at
£96m was ahead of the £90m
we had forecast, and Reported
Trading Profit was much higher
still at £138m. Closing net debt
of £78m was significantly lower
than expected, and represented a
year-on-year reduction of £605m.
Revenue including discontinued
operations was around the level
we expected at £3.5bn; the
discontinued operations comprise
the private sector Business Process
Outsourcing (BPO) business, the
majority of which was disposed of
at the end of December 2015. Not
included in Underlying Trading
Profit was a net positive movement
of £21m in provisions for future
losses on onerous contracts and
other liabilities recognised at the
end of 2014; although it has no
impact on Underlying Trading
Profit, it was also pleasing that
Onerous Contract Provision (OCP)
utilisation was £14m lower than
expected at the beginning of the
year. Looking ahead to 2016, and
in line with our plan, we expect a
further reduction in revenues and
profits as we feel the impact of
the disposal of our private sector
BPO business, as well as further
contract attrition.
To give some context to our
performance in 2015, it is worth
reflecting on where we have come
from, and are going to. After a
difficult period during which the
business suffered a series of major
setbacks, I joined the business in
May 2014, and my colleague Angus
Cockburn joined as Group Chief
Financial Officer in October 2014.
A thorough review of contracts
in the business (the Contract
and Balance Sheet Review)
was carried out, resulting in an
announcement in November 2014
that we anticipated a write-down
of around £1.5bn, which included
asset impairments, goodwill write-
offs, and provisions against future
losses on onerous contracts. This
led to the requirement to refinance
the business, which was completed
by way of a Rights Issue and a
renegotiation of our debt facilities
in early 2015. In parallel with the
Contract and Balance Sheet
Review, we carried out a Strategy
Review, which concluded that we
should focus on being a leading
supplier of public services to
governments, and that the private
sector outsourcing activities
should be disposed of. At the
same time as the Strategy Review,
the business also undertook a
Serco Group plc Annual Report and Accounts 2015 Chief Executive’s Review
35
thorough Corporate Renewal
programme, in which new systems
and processes were implemented
to ensure that there would be no
repeat of previous issues.
The Strategy Review, presented
to investors in March 2015,
identified three distinct phases in
the turnaround of our business.
The first phase, ‘Stabilisation’,
involved developing a plan to take
the business forward, refinancing
the business, putting in place
a new management team, and
implementing new reporting
processes. The end of this phase
was marked by the successful
completion of our Rights Issue
and refinancing in April 2015.
Since then we have been working
hard on the second phase:
‘Transformation’. This will take us
through to 2018, when we expect
to see the business starting the
third phase: ‘Growth’.
Within this context, significant
progress has been made in 2015
against our plan. We now have a
firm financial platform; our strategy
– to be a leading international
provider of public services
operating in Defence, Justice &
Immigration, Transport, Health
and Citizen Services – has been
well received by customers; our
risk management and reporting
processes have been hugely
improved; we have made good
progress mitigating the losses
and improving service delivery
on some of the largest onerous
contracts; morale in the business,
and most particularly amongst the
management team, is much better;
relationships with key customers
are healthier; our pipeline of new
business has started to grow again,
and we have established our first
Centres of Excellence; we have
reduced the costs in the business
by over £330m; and we have
disposed of non-core businesses.
In summary, in 2015 we delivered
on our promises, our plan has
survived first contact with the
enemy, and we go into 2016
in much better shape than
we entered 2015. However, to
paraphrase the Duke of Wellington
at Waterloo, we know that much
hard pounding lies ahead.
Summary of financial performance
Revenue and Trading Profit
Reported Revenue was
£3,177m (2014: £3,596m); this
measure excludes revenue from
discontinued operations (our
private sector BPO division) of
£338m as well as Serco’s share
of revenue from joint ventures
of £737m. Revenue including
discontinued operations was
£3,515m (2014: £3,955m). At
constant currency and adjusting for
disposals and acquisitions, revenue
including discontinued operations
declined by 10%, largely as a result
of the ending of contracts such
as the Docklands Light Railway
and National Physical Laboratory,
as well as certain US intelligence
agency support services and visa
processing work; it also reflected
the reduced volumes and rates in
Australian immigration services.
Partially offsetting these declines
were the start of new contracts
such as the Caledonian Sleeper
and the start of full operations at
Fiona Stanley Hospital in Australia.
Reported Trading Profit for the
year was £137.6m (2014: loss of
£632.1m). The difference between
Reported Trading Profit of £137.6m
and Underlying Trading Profit of
£96.0m, is accounted for by three
items. First, we have not included
in Underlying Trading Profit £9.0m
of profit arising from the early
termination of a contract with
Thurrock Council, on the basis that
it is one-off in nature. Second, and
in accordance with the accounting
treatment of assets held for sale,
depreciation and amortisation
charges related to assets held
for sale at 31 December 2014 are
required to be excluded from the
Group accounts; this had the effect
of increasing Reported Trading
Profit by £11.7m, but has been
excluded from Underlying Trading
Profit. Third, we have also excluded
from Underlying Trading Profit a
net benefit of £20.9m arising from
our year-end review of OCPs and
other Contract and Balance Sheet
Review items.
In 2014, it became clear that a
number of contracts would be
unprofitable during their life and
required OCPs, and numerous
future liabilities needed to be
reflected in our Balance Sheet;
together, these led to a charge of
£745.3m to Reported Trading Profit
in 2014. We said at the time we
created these provisions that they
should be viewed as a portfolio
of liabilities and charges, and that
as subsequent events interfered
with the hundreds of judgements
we made at the end of 2014, we
expected that individual items
would vary from our original
estimates; however, we believed
that in aggregate, the charge was a
reasonable and prudent estimation
of the likely total value of future
liabilities. Whilst there have been
numerous charges and releases
against individual contracts and
provisions, the overall net release
of £20.9m against the £745.3m
charged last year indicates that our
overall judgement at the end of
2014 was broadly correct. Within
the net release of £20.9m, OCP
releases totalled £88.8m, additional
OCP charges totalled £91.8m, and
a net total benefit of £23.9m arose
from movements in other balance
sheet provisions and charges
related to contracts taken in 2014.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 36
Chief Executive’s Review continued
The single largest OCP release
was £63m related to the Armidale
Class Patrol Boat (ACPB) contract;
this followed the agreement we
reached in 2015 with the Australian
Government to amend the terms of
the ACPB contract. The largest OCP
charge related to a new provision
of £34m in respect of our contract
with Lincolnshire County Council; in
addition, we judged it necessary to
increase the existing OCP against
our UK Prisoner Escorting Contract
(PECS) by £11m.
Underlying Trading Profit includes
£114m of OCP utilisation, which
reflects the neutralisation of the
losses on contracts identified in
the 2014 Contract and Balance
Sheet Review. A further £11m
of OCP utilisation was applied
to items classified in 2014 as
exceptional. Total OCP utilisation
during 2015 of £125m was £14m
less than the £139m we had
expected at the start of the year.
Currency movements during the
year had no material impact on
Underlying Trading Profit.
Underlying Trading Profit of £113m
in 2014 included losses of £54m
incurred in 2014 on contracts that
were subsequently provided for
and had their equivalent losses
in 2015 neutralised by OCP
utilisation. Therefore Underlying
Trading Profit of £96m for 2015 is
best compared to £167m in 2014.
The significant drop in profits
is driven by contract attrition,
volume and rate reductions on
some contracts and the challenge
of reducing costs in line with
revenues that were £440m lower
in 2015 than in 2014.
Finance, tax and
exceptional costs
Pre-exceptional net finance costs,
including discontinued operations,
were £32.0m (2014: £36.7m). The
reduction in average net debt
over the year reduced the Group’s
net interest payable, but this was
partially offset by the movement
in the discount on provisions
which, although a non-cash item,
is recorded within overall finance
costs. Cash net interest paid in the
year was £32.7m (2014: £39.6m).
Pre-exceptional tax costs,
including discontinued operations,
were £36.6m (2014: £11.1m); on an
underlying basis, tax costs were
£30.5m and the effective rate
was 47.7%; this rate reflects the
combination of the current lack
of a deferred tax credit in the UK
to offset tax charges at locally
prevailing rates in the international
divisions (which tend to be higher
than the UK’s rate). When we are
able to show sufficient profits
in our UK business, we will be
able to reflect the value of a tax
asset in the UK, and we would
therefore expect that at some
point our effective tax rate will
drop substantially. Net cash tax
paid in the year, at £2.7m (2014: net
repayment of £0.6m), was much
lower than the accounting charge.
The Group incurred a £187.5m net
exceptional operating charge for
the year, of which £165.5m relates
to non-cash losses on disposals and
impairments. There was a £77.6m
charge on discontinued operations
reflecting the impairment in the
carrying value of businesses held
for sale prior to disposal. There was
an £87.5m goodwill impairment
related to the updated assessment
for the Americas division.
Exceptional restructuring and other
incremental costs related to the
development and implementation
of the Strategy Review amounted
to £21.9m. In addition to operating
exceptionals, there was £32.8m of
exceptional finance costs relating
to the Rights Issue and debt
refinancing, which included charges
related to the early repayment
of debt.
Earnings per share
Underlying Earnings Per Share,
which reflects the Underlying
Trading Profit measure after
deducting pre-exceptional
finance costs (including those
for discontinued operations) and
related tax effects, was 3.44p (2014:
4.73p); the reduction also reflects the
movement in the weighted average
number of shares in issue which
increased to 986.5m shares (2014:
655.1m shares) as a consequence
of the Rights Issue. Earnings before
exceptional items, including those
for discontinued operations, were
6.55p per share; including the
impact of exceptional items, there
was a loss of 15.47p per share.
Cash flow and net debt
In 2015 our ability to manage
monthly cash flow far outstripped
our ability to forecast it accurately,
as we managed around poor
cash forecasting systems and
the unpredictable impact of our
campaign to normalise working
capital management. In previous
years the focus was on optimising
the net debt position at the
end of reporting periods. The
Serco Group plc Annual Report and Accounts 2015 Chief Executive’s Review
37
consequence of this was significant
volatility in monthly cash flows, with
large net inflows in December and
June, followed by equally large net
outflows in January and July, with
the result that average net debt
over the year was often much higher
than that reported at period ends.
In 2013 this difference between
reported and average net debt
amounted to £149m; in 2014 and
2015, we worked to progressively
reduce this difference; in 2015 it had
dropped to £59m across the year,
and was a mere £34m in the second
half of 2015.
As a consequence, our estimates
of cash flow at the start of the
year were less than perfect, and
the reported result – a Free Cash
outflow of £16m – was significantly
better than we forecast at the
beginning of the year. Admittedly,
there were numerous items which
could not have been foreseen at
the beginning of the year, such
as the inflows from the ending
of the Thurrock and Shop Direct
contracts, lower-than-expected
cash outflow from OCPs, and the
quantum of other working capital
movements as we normalised
debtor and creditor cycles.
As a result of better-than-expected
Free Cash outflow, net debt,
including that for assets and
liabilities held for sale, was also
better than we expected, and
stood at £77.5m at the end of the
year. This represented a reduction
of £605m from the £682.2m at 31
December 2014. The main drivers
of this reduction were the net
proceeds of approximately £530m
from the April 2015 Rights Issue,
together with the approximate
£200m received following the
completion of the BPO disposal
at the end of December 2015.
Offsetting these inflows, there
was an outflow of £88m related to
exceptional items, £33m adverse
currency impact and the £16m Free
Cash outflow related to trading.
The reduction in net debt results
in our leverage for covenant
purposes being 0.4x EBITDA;
on a pro forma basis, removing
the £35m of EBITDA associated
with the BPO disposal, it would
have been 0.5x, which compares
with the requirement in our debt
covenants to be lower than 3.5x.
Dividends
As indicated in March 2015, the
Board is not recommending
the payment of a dividend for
2015. The Board is committed to
resuming dividend payments when
it is prudent to do so. The decision
as to when to declare a dividend
and the amount to be paid will
take into account the Group’s
underlying earnings, cash flows
and financial leverage, together
with the requirement to maintain
an appropriate level of dividend
cover and the market outlook at
the time.
The Revenue and Trading Profit
performance are further described
in the Divisional Reviews. More
detailed analysis of earnings, cash
flow, financing and related matters
are described further in the
Finance Review.
Contract awards, pipeline,
order book and rebids
Contract awards
The Group signed contracts
with an aggregate total value
of £1.8bn during the year; this
excludes £0.3bn signed by the
private sector BPO business that
was sold in December 2015. As
anticipated, the year was relatively
quiet with few major bidding
outcomes announced. The value
of new business won was £0.5bn,
or approximately 30% of the
total value signed, with the bulk
of order intake represented by
securing extensions or successfully
rebidding existing work. Win
rates by volume were around 50%
for new bids and around 90% for
rebids and extensions, but by value
the win rates were around 20% and
75% respectively.
The largest new contracts
signed were those to operate
the North-South line for the
Saudi Railway Company and to
support the US Naval Facilities
Engineering Command; these two
were wins from our £5bn major
opportunities pipeline at the start
of the year. We were however
unsuccessful on two larger new
bids, one for Australian offshore
immigration services and the
other for Wellington metro rail
service. It should be noted that in
early February 2016, the Australian
Government decided to re-tender
the offshore immigration services
contract, and as Reserve Bidder
in the original tender, has invited
Serco and the originally selected
Preferred Bidder to re-tender for
this opportunity, though we have
not included the opportunity
in our pipeline as at the time of
reporting we have not decided
whether to participate in the
process. A third opportunity in
the pipeline, the Icebreaker vessel
to be used by the Australian
Antarctic Division (AAD), saw
Serco selected as Preferred
Tenderer, but, as this contract is
yet to be signed, it has not been
included in the value of signed
contracts and remains in the
Group’s major bids pipeline.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 38
Chief Executive’s Review continued
Smaller new bids won included
facilities management for the new
district general hospital for NHS
Dumfries and Galloway, supply
chain support for the US Navy, and
several contracts for our European
Agencies business, including the
provision of a multi-lingual call
centre based in Brussels offering
support in 24 languages.
Major rebids and extensions
secured during 2015 included:
facilities management services to
Wishaw and Norfolk & Norwich
University Hospitals; IT and contact
centre support for European
Agencies; air traffic control
services for the Federal Aviation
Administration and classification
services for the US Patent and
Trademark Office; cost analysis
support to the US military and
personnel identification support
to the US Navy; traffic camera
services in Victoria, Australia;
defence logistics and base support
services in the Middle East;
Baghdad Air Navigation Services;
and operating the Palm Jumeirah
Monorail System in Dubai. Major
rebids lost during 2015 included
two defence support contracts in
the UK and the National Benefits
Center contract in the US. We will
also experience attrition in 2016
from contracts where we have
either decided not to rebid at the
end of the contract because they
were losing money (examples
being Suffolk Community
Healthcare and National Citizen
Service) or where the customer has
decided to take the work back in
house (for instance MoD Defence
Business Services, Thurrock
Council and Virginia Department
of Transport).
Order book
Pipeline
The Group’s order book,
excluding the discontinued Global
Services division, now stands at
£10.0bn, a reduction of £1.6bn
over the year. The value of signed
contracts in the year increased
the order book, but this was
outweighed by the reductions to
the order book due to revenue
delivered in 2015 and adjustments
for contracts ending early. There is
£2.5bn of revenue already secured
in the order book for 2016,
equivalent to approximately 90%
revenue visibility of our £2.8bn
revenue guidance. The secured
order book is £1.6bn for 2017 and
£1.2bn for 2018.
Rebids
In terms of contracts potentially
ending during 2016, there is an
unusually small number subject
to a rebid or extension decision;
in aggregate these have annual
revenue totalling around £90m,
with an in-year ‘revenue at risk’ of
approximately £60m. In 2017, there
are a larger number of contracts
that will potentially end or need to
be re-bid or extended, with these
having aggregate annual revenue
of around £240m. In 2018, there is
a further £460m. In total over the
next three years therefore, there
are around 40 contracts in our
order book with annual revenue
of over £5m across the Group
where an extension or rebid
will be required, representing
annual revenue of approximately
£790m or around 30% of the
Group’s forecast revenue for
2016 of £2.8bn.
The definition we use for our
reported pipeline is new bid
opportunities with annual revenue
of at least £10m, and which we
expect to bid and to be decided
within the next 24 months. The
definition does not include rebids
and extension opportunities.
It is therefore a relatively small
proportion of the total universe
of opportunities we have in our
prospect list, many of which either
have annual revenues less than
£10m, or are likely to be decided
beyond the next 24 months, or
are rebids and extensions. It
should also be remembered that
in the Americas in particular, we
have numerous contracts which
are classed as ‘IDIQ’ – Indefinite
Delivery / Indefinite Quantity –
which are essentially framework
contracts under which the
customer issues task orders one
at a time; whilst the ultimate value
of such a contract may be very
large and run over many years,
the value of it is only recorded in
our order book as individual task
orders are contracted, and few of
them would appear in the pipeline
as they tend to be contracted on
short lead times.
The reported pipeline has seen
significant decline over recent
years – from around £12bn at the
end of 2013 to around £5bn at the
end of 2014. It is encouraging that
for the first time in several years, it
has shown an increase to around
£6.5bn as at the end of 2015. There
continues to be around 20–30
opportunities, with the annual
contract value averaging around
£30m and a typical length of
contract being 5–10 years.
Serco Group plc Annual Report and Accounts 2015 Chief Executive’s Review
39
Guidance for 2016
and outlook beyond
Serco provided initial guidance
in December 2015 for the 2016
financial year, and that guidance is
unchanged at the date of reporting
the results for the 2015 financial
year. For 2016, we anticipate
Revenue of approximately £2.8bn
and Underlying Trading Profit of
approximately £50m. This view of
Underlying Trading Profit is before
any future adjustments to OCPs
should these arise during the year.
The exit of the private sector BPO
operations is forecast to reduce
Revenue by over £300m and
Underlying Trading Profit by over
£20m, driven by the absence of
the £23m contribution from the
offshore BPO operations which
were disposed of at the very end
of 2015. The Underlying Trading
Loss from the residual UK private
sector BPO operations up to
the point of their assumed exit
is forecast to be approximately
£10m in 2016, which is broadly
unchanged from the loss in 2015,
given the effect of ‘stranded’
costs, which will take some time
to work out of the business.
Revenue attrition across the rest
of the Group is estimated to
be up to £500m. As previously
described, and covered in more
detail in the Divisional Reviews,
the greatest attrition is in the Local
and Regional Government division,
and in the Americas division. In the
Central Government division, the
end of the Northern Rail franchise
in early 2016 will also reduce the
profit contribution, although,
being a joint venture, will have no
impact on revenues. In total, the
impact of the profit contribution
associated with contract attrition
is approximately £40m, in addition
to the £20m impact of the BPO
disposal and wind-down of the
private-sector BPO operations in
the UK described above.
Our forecast for 2016 includes
around £100m of incremental
Revenue from already secured or
potential new business. Limited
progress on new growth in 2016
reflects the weakness in the bid
pipeline during the last two years.
The incremental profit contribution
from this growth, together with
retained cost efficiencies, will
only partially mitigate the profit
reductions from the BPO disposal
and the significant amount of
contract attrition.
In terms of cash flow and net
debt movement, we anticipate
an increased level of Free
Cash outflow, as Underlying
Trading Profit is expected to be
significantly lower than in 2015,
and we do not expect any one-
off benefits such as the cash
in-flows resulting from the end
of the Shop Direct and Thurrock
contracts. We also expect to see
continued outflow related to the
utilisation of OCPs and previously
booked exceptional items. We
therefore estimate that closing
net debt at the end of 2016 could
be around £200m, equivalent to
leverage for covenant purposes
of approximately 2x EBITDA.
For 2017, conditions remain
uncertain and we do not expect
anything more than limited
financial progress. Rebuilding and
ultimately converting our pipeline
of new contract opportunities will
take some time, as will delivering
incremental net benefits of cost
efficiency programmes. Our view
of 2017 will clearly come more into
focus as we progress through 2016.
Strategy implementation
progress
In March 2015, we set out our new
strategy, which is to focus on the
public sector market and be a
leading provider of public services
to governments. Specifically, we
intend to focus on five market
sectors: Defence, Justice &
Immigration, Transport, Health
and Citizen Services; and to do
so across four geographies: UK
& Europe, North America, Asia
Pacific and the Middle East. The
strategy builds upon Serco’s long
track record and expertise in the
transformation and management
of complex public services, and in
supporting critical and sensitive
activities central to the work of
governments. We believe our
chosen markets have long-term
structural growth drivers and that
Serco can play a central role in
helping governments respond to
the challenge of improving the
quality and reducing the cost of
public services, whilst earning for
our shareholders sustainable and
attractive risk-adjusted returns.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 40
Chief Executive’s Review continued
In our strategy presentation in
March 2015, we identified three
distinct phases in the turnaround
of our business. The first
phase – Stabilisation – involved
identifying all the issues which
had impacted the company,
changing management, setting a
new strategy, reducing net debt,
disposing of non-core businesses,
and repairing relations with our
customers, most particularly the
UK Government. This phase is
now complete. The next phase
– Transformation – is now in full
swing as we navigate a path
towards our ambition of becoming
one of the best managed
businesses in our sector. Whilst
achieving this ambition will take
many years, we expect it to enter
the final phase – Growth – in
2018 - 2020; the precise moment
the business starts to grow again
in a meaningful way is hard to
predict, and will depend on both
our performance and external
events. Some, such as the speed
with which we can reduce costs
without prejudicing service
quality, and building compelling
service propositions are in our
control; others, such as the timing
of contract awards, the behaviour
of competitors and the macro-
economic environment, are
not. But with any plan, it is very
helpful if it can deliver on early
promises, and we feel that, with
our performance in 2015, in which
we have outperformed on almost
every metric we set ourselves, we
have done that.
Strengthening our balance sheet
Our strategy has to be properly
funded, and a firm foundation is
required to allow the Group to
grow and flourish in the future as
well as being an absolute necessity
to retain customers’ confidence.
To achieve a sustainable balance
sheet with a prudent level of
financial gearing, we therefore
launched a Rights Issue during
the year, which was successfully
completed raising net proceeds of
£530m. We subsequently reached
agreement with our lending
banks and US private placement
noteholders to refinance our
debt facilities; we have therefore
achieved the necessary reduction
in our borrowing, extended the
time period of our Revolving Credit
Facility and put in place more
flexible financial covenants.
Disposing of non-core
businesses
As a major part of reshaping our
portfolio, we have concluded our
programme of targeted disposals.
In the first half of 2015, we sold
the Great Southern Rail luxury
tourist travel operation in Australia,
which was losing money and
could neither gain, nor deliver,
synergies to the rest of the Group.
Likewise, in September 2015, we
reached agreement on the sale of
our offshore private sector BPO
operations for a gross consideration
of approximately £250m. This
business was acquired by Serco
in 2011 on the premise that there
were synergies between private
and public outsourcing businesses;
whilst in some parts of public sector
operations such as IT and back
office systems this may be true,
however, for the majority of our
business, which is heavily biased
towards frontline services, often of
a highly sensitive nature, using low-
cost labour in emerging markets
is not a palatable or practical
option for our customers, and we
determined that these synergies
could not in reality be achieved.
We had previously stated our
intention to dispose of our
Environmental and Leisure
businesses; this was prompted
by our urgent need to reduce
our debt burden rather than
any strategic necessity. These
businesses provide frontline
services to UK Local Authorities,
are profitable, and align with
our strategy of providing public
services; they also give added
breadth and depth to our offering
to Local Authorities, which is an
important business for us in the
UK. Once we had certainty around
the disposal of our Private Sector
BPO business and the proceeds
of the Rights Issue, we were able
to review the decision to dispose
of these businesses, and we
concluded that for both strategic
and financial reasons these
businesses should be retained
within Serco’s portfolio.
Mitigating loss-making contracts
We are working hard to mitigate
our loss-making contracts
throughout the Group in order
to improve profitability and cash
Serco Group plc Annual Report and Accounts 2015 Chief Executive’s Review
41
performance whilst meeting our
contractual service obligations.
The adjustments required to
the Contract and Balance Sheet
Review charges taken last year
were a net positive in 2015, and we
will maintain an intense focus on
each and every onerous contract
to make further progress. During
the year, the major improvement
was the agreement reached on
the ACPB contract to improve the
scope of work, the service regime
and, very importantly, to bring an
earlier end (2017 rather than 2022)
to this highly onerous contract.
Other operational or negotiated
improvements included the Future
Provision of Marine Services (FPMS)
and HMP Ashfield contracts; we
have also successfully exited
onerous contracts such as Suffolk
Community Healthcare and the
National Citizen Service, in both
these cases at significantly lower
cost than we initially expected.
A small number of other contracts
have had new provisions or
increases to reflect the latest
operational performance and
trading conditions, but overall,
and with the total OCP balance
reducing to £300m from £447m
a year earlier, we have made
pleasing progress on one of our
biggest challenges.
Reducing our costs
We have also made good progress
reducing costs. In 2015, our
operating costs were reduced by
over £330m, broadly in proportion
with the revenue reduction. Much
of this was direct cost reduction
resulting from contracts which we
exited, or where volumes reduced
or businesses were sold; but we
are also driving out cost to offset
the effect of negative operating
leverage as the Group becomes
smaller. Our previously announced
plans to extract £20m of overhead
and procurement savings in 2015
from specific initiatives were
soundly beaten.
Improving management
information
Management information has
improved noticeably, increasing
our visibility of performance and
strengthening our controls and
governance. Additionally, the
strengthening of our bid risk
management through tightened
procedures and more thorough
commercial reviews is becoming
more deeply embedded in the
business. We now have high-quality
monthly management accounts,
which have become fundamental
to the way in which monthly
Divisional Performance Reviews
now function, and the structure
of these management accounts
has been flowed down through
the business units and to contract
level. Our core SAP accounting
platform has been both upgraded
and better integrated with related
systems. Further improvements will
come in 2016 as we begin the year
with new finance data structures
and chart of accounts which have
been reviewed, rationalised and
standardised, and as we begin
to fully utilise the power of new
reporting tools. In addition, we
have made significant investment in
new Procurement and HR systems,
which will go live during 2016, and
we plan to continue
our investment in new systems
to improve the efficiency of
the business.
Rebuilding our pipeline and
leveraging Centres of Excellence
The Strategy Review led us to
conclude that we needed to
focus on sectors of government
expenditure which had applicability
across a number of our regional
operations, so we could leverage
our international scale to provide
customers innovation and
operational excellence. Historically,
Serco has not been great at sharing
skills, best practice and intellectual
property across our businesses.
To tackle this, in 2015 we started
to build Centres of Excellence
in Health, Justice & Immigration
and Transport. These Centres of
Excellence comprise small teams of
world-class people seconded from
our businesses whose job it is to
take a global view of opportunities,
recommend resource allocation
and bid prioritisation, build
compelling propositions and
support our regional operations in
their bids. In time, as these Centres
of Excellence become increasingly
effective, we see us expanding
the number of them to encompass
a number of core operational, as
well as market-centric, capabilities
such as Workforce Management
and Continuous Improvement.
In all their activities, the principle
behind the Centres of Excellence
is to use a small number of high
quality people, along with building
a culture of sharing best practice
around the world to enable us to
excel at proposition development,
bidding and operations.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 42
sector, as we are about repaying
our investors, customers and
colleagues for the confidence and
support they have shown us over
the recent difficult times. It will
take years to achieve all we aspire
to, and as we have consistently
said there will bumps and mis-
steps along the way. We are
rightly cautious on the prospects
for 2016 given further revenue
attrition and profit pressure, but
I am confident we are taking the
necessary actions, and have the
strategic plan, management team
and stabilised financial position
in place to succeed.
Rupert Soames OBE
Group Chief Executive Officer
Serco – and proud of it.
Chief Executive’s Review continued
Delivering greater
cost efficiency
Serco over-achieved against our
target of £20m in overhead and
procurement savings in 2015. Whilst
these will annualise to a higher
figure in 2016, they will be offset in
part by inflationary pressure on our
labour costs, including the impact
of the new National Living Wage,
as well as further pressure from
negative operating cost leverage
as revenues decline. Across
the business we are reducing
the number of management
layers, rolling out Continuous
Improvement initiatives in our
contract base, and making better
use of our scale in procurement and
the operation of shared services.
The total net Revenue reduction
in 2016 is however expected to
be approximately 20%, resulting
from the exit of private sector BPO
operations and the substantial
amount of contract attrition. In the
light of the associated reduction
in profit contribution, we are
targeting more significant cost
reductions in both central support
functions and other overheads. In
our budgets we have set ourselves
an increased target of achieving
over £50m in further savings in
2016; this is to be delivered from
a combined overhead and shared
service centre cost base that in
2015 was approaching £500m.
This cost base includes elements
that are fixed or semi-fixed in the
short-term, or are areas of cost,
such as business development
and bidding, where we want to
protect or even increase our spend
in order to deliver a strategy for
future growth.
Achieving over £50m in further
cost savings is the level required
to achieve our forecast of
approximately £50m of Underlying
Trading Profit. Even at this level,
our cost base would not have
reduced fully in line with the
greater rate of revenue reduction,
resulting in a further year of
margin pressure. However, at the
same time, we will be focused
on developing a more efficient
cost model for the longer-term;
with an overarching plan to
stabilise revenues and move back
to growth, our aim is to ensure
positive operating cost leverage
which contributes strongly to
our planned outcome of Serco
achieving margins at least in line
with our industry by the end of our
2020 Strategy Review time horizon.
Concluding thoughts
Having completed the
Stabilisation phase of our plan
in good order, and delivered on
our promises for 2015, we are
now focused on the hard work
of Transformation. We are as
serious about turning Serco into
the best managed business in our
Serco Group plc Annual Report and Accounts 2015 Divisional Reviews
43
Divisional Reviews
Consistent with the
reporting of the year ended
31 December 2014, this section
is presented according to the
management structure and
internal reporting that Serco
put in place for 2015 as a result
of actions from the Corporate
Renewal Programme and the
Strategy Review.
The UK Central Government
division (‘CG’) brings together
Serco’s work for the UK Central
Government, which is principally in
the Defence, Justice & Immigration
and Transport sectors, with the
latter including that for devolved
authorities. The UK and Europe
Local and Regional Government
(‘LRG’) division comprises our
Health business and our Citizen
Services operations, the latter
including welfare, business
support and BPO services for the
public sector, our various support
operations to European Agencies,
and other direct services such
as our environmental and leisure
services for local authorities.
Serco’s operations in the three
other geographic regions are
reported as separate divisions,
being Americas (consisting
principally of our operations in
the USA, together with those in
Canada), ‘AsPac’ (the Asia Pacific
region, consisting our operations
in Australia, together with those
in New Zealand and Hong
Kong) and the Middle East. The
Global Services division consists
of Serco’s private sector BPO
operations, which for statutory
reporting purposes are classified as
discontinued operations following
Serco’s previously announced
strategic exit from this market.
Serco’s underlying measures
include the Revenue and Trading
Profit of these discontinued
operations for the sake of
consistency with previous guidance.
Aligned to statutory reporting and
consistent with the reporting of
the Year ended 31 December 2014,
Serco’s share of revenue from its
joint ventures is not included in
divisional revenue, while Serco’s
share of joint ventures’ profit
after interest and tax costs is
included in divisional Trading
Profit. As previously disclosed and
for consistency with guidance,
Serco’s Underlying Trading Profit
measure excludes Contract and
Balance Sheet Review adjustments
(principally OCP releases or
charges), the beneficial treatment
of depreciation and amortisation
of assets held for sale, and any
other one-time items such as the
profit on early termination of a
UK local authority contract that
occurred in 2015.
Year ended 31 December 2015
£m
CG
LRG
Americas
AsPac
Middle
East
Corporate
costs
Sub-total
continuing
Global
Services
Total
Revenue including discontinued operations
742.1
905.8
693.0
544.7
291.4
Change
Constant currency change
Organic change
(23%)
(23%)
(22%)
(6%)
(4%)
(4%)
(2%)
(8%)
(8%)
(23%)
(15%)
(9%)
+12%
+6%
+4%
Discontinued operations adjustment*
–
–
–
–
–
Revenue
742.1
905.8
693.0
544.7
291.4
–
–
–
–
–
–
3,177.0
337.6
3,514.6
(12%)
(11%)
(10%)
(6%)
(8%)
N/a
(11%)
(11%)
N/a
–
(337.6)
(337.6)
3,177.0
–
3,177.0
Underlying Trading Profit / (Loss)
Change
Change at constant currency
Margin
53.1
4.7
(8%)
(8%)
+38%
+73%
7.2%
0.5%
44.3
+3%
(3%)
6.4%
11.9
(66%)
(62%)
2.2%
(1%)
0%
6.5%
Contract and Balance Sheet Review adjustments
7.1
(28.2)
(17.3)
46.9
8.5
Benefit from not depreciating and
amortising assets held for sale**
Other one-time items***
–
–
–
9.0
–
–
–
–
–
–
18.9
(51.2)
81.7
14.3
(23%)
+111%
(23%)
+100%
2.6%
4.2%
96.0
(15%)
(15%)
2.7%
20.3
0.6
20.9
–
9.0
11.7
–
11.7
9.0
(3%)
(3%)
N/a
3.3
–
–
Reported Trading Profit / (Loss)
60.2
(14.5)
27.0
58.8
27.4
(47.9)
111.0
26.6
137.6
Amortisation of intangibles arising on acquisition
Discontinued operations adjustment*
–
–
(1.1)
–
(2.5)
(1.2)
–
–
–
–
–
–
(4.8)
–
(0.1)
(4.9)
(26.5)
(26.5)
Operating profit / (loss) before exceptionals
60.2
(15.6)
24.5
57.6
27.4
(47.9)
106.2
–
106.2
*
Statutory reporting only includes the post-tax result of discontinued operations as a single line in the Consolidated Income Statement.
** The total benefit from not depreciating and amortising assets held for sale is £11.8m including £0.1m of amortisation of intangibles arising on acquisition within Global Services.
*** Other one-time items in the year reflect the profit on early termination of a UK local authority contract.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 44
Divisional Reviews continued
Year ended 31 December 2014
£m
CG
LRG
Americas
AsPac
Middle
East
Corporate
costs
Sub-total
continuing
Global
Services
Total
Revenue including discontinued operations
961.4
959.8
708.1
706.0
260.4
Discontinued operations adjustment*
–
–
–
–
–
Revenue
961.4
959.8
708.1
706.0
260.4
–
–
–
3,595.7
359.3
3,955.0
–
(359.3)
(359.3)
3,595.7
–
3,595.7
Underlying Trading Profit / (Loss)
Margin
58.0
6.0%
3.4
0.4%
43.2
6.1%
35.5
5.0%
19.1
7.3%
(52.8)
106.4
6.8
113.2
N/a
3.0%
1.9%
2.9%
Contract and Balance Sheet Review adjustments
(300.8)
(93.8)
(26.7)
(237.1)
(19.3)
(37.3)
(715.0)
(30.3)
(745.3)
Reported Trading Profit / (Loss)
(242.8)
(90.4)
16.5
(201.6)
(0.2)
(90.1)
(608.6)
(23.5)
(632.1)
Amortisation of intangibles arising on acquisition
(0.1)
Impairment of intangibles arising on acquisition
Discontinued operations adjustment*
–
–
(1.7)
(5.5)
–
(2.3)
–
–
(2.2)
(6.4)
–
–
–
–
–
–
–
(6.3)
(11.9)
–
(5.1)
(0.4)
29.0
(11.4)
(12.3)
29.0
Operating profit / (loss) before exceptionals
(242.9)
(97.6)
14.2
(210.2)
(0.2)
(90.1)
(626.8)
–
(626.8)
*
Statutory reporting only includes the post-tax result of discontinued operations as a single line in the Consolidated Income Statement.
UK Central Government
The UK Central Government
division includes our frontline
services in Defence, Justice
& Immigration and Transport
(including contracts for the
Department for Transport as well
as those for devolved authorities).
Revenue for the year was £742.1m
(2014: £961.4m), a decline of
23%. At constant currency and
excluding the impact of disposals
(the Collectica debt collection
business disposed in June 2014),
the organic decline was 22%. The
principal drivers of the significant
revenue reduction were the end
of the contracts for the Docklands
Light Railway (DLR), National
Physical Laboratory (NPL) and the
Colnbrook immigration removal
centre; together, these three
contracts accounted for around
90% of the organic revenue
decline. Other reductions included
lower project or volume-related
revenue, for example managing
the Thameside prison expansion
in 2014. There was limited growth
elsewhere to offset these contract
ends or reductions, with the largest
being the start of the Caledonian
Sleeper contract which Serco
began operating on 31 March 2015.
Underlying Trading Profit
was £53.1m (2014: £58.0m),
representing an implied margin
of 7.2% (2014: 6.0%). Trading Profit
includes the profit contribution
from joint ventures (the vast
majority of which for the Group
are in this division), and if the
£697m share of revenue was also
included the overall divisional
margin is 3.7% (2014: 3.5%); the
joint venture profit contribution
of £33.8m was £4.2m ahead of
the prior year. Within Underlying
Trading Profit there was £57m
of Onerous Contract Provision
(OCP) utilisation, which was
broadly in line with our original
expectations. This includes those
for COMPASS, PECS and FPMS,
which as previously disclosed were
amongst the largest provisions
taken as part of the Contract and
Balance Sheet Review. While there
was around an aggregate £28m
of loss from these three contracts
in 2014 which was neutralised
by OCP utilisation in 2015, this
benefit was more than offset
by the significant reduction in
profit contribution from contract
attrition and lower project-related
profitability, as well as the disposal
of the Collectica business.
The Contract and Balance Sheet
Review charge taken in 2014 in
Central Government was £300.8m.
The net impact of adjustments to
key assumptions and other related
changes was a £7.1m net release
in 2015. The key movements were
OCP releases due to operational
improvements on the FPMS and
HMP Ashfield contracts, which
contributed to more than offset
additional charges that were
required to be taken such as on the
PECS contract where reassessment
indicates higher costs to deliver
our contractual commitments;
reassessment of the OCP required
for COMPASS did not result in
a charge or release. After the
Contract and Balance Sheet
Review adjustments of £7.1m,
Reported Trading Profit for the
year increased to £60.2m.
Serco Group plc Annual Report and Accounts 2015 Divisional Reviews
45
UK Central Government
represented around £100m of the
Group’s aggregate total value of
signed contracts during the year;
there were a limited number of
bids due for decision in 2015, with
the majority of the value signed
reflecting rebids or extensions such
as our RAF Northolt and helicopter
fleet support operations.
Looking ahead, the impact of
known contract losses or other
revenue reductions is currently
anticipated to have a gross impact
of around £100m or approximately
15% in 2016. The key drivers of
this attrition are the transfer
back of services that Serco had
previously been providing to the
Defence Science and Technology
Laboratory (Dstl) and the end
of the current Defence Business
Services arrangement, together
with a number of smaller contracts
ending or reducing in scope. The
end of the Northern Rail franchise
in early 2016 will also result in a
substantially lower joint venture
profit contribution than the £8.2m
received in 2015.
Additionally, of existing work
where an extension or rebid
will be required at some point
during the next three years due
to a scheduled contract end date
before the end of 2018, there are
12 contracts with annual revenue
of over £5m within the UK Central
Government division; in aggregate,
these represent approximately
40% of the current level of annual
revenue for the division.
In terms of areas for future growth,
there are two major bids currently
under consideration, being the
Defence Fire & Risk Management
Organisation and the operation
of the Clyde and Hebrides Ferries
Services. Following the significant
disruption to our customer
relationships with UK Central
Government in 2013 and the
subsequent Corporate Renewal
process that was put in place
over the course of 2014, we now
believe that our relationships with
our UK customers are on a firmer
footing. We believe that a number
of major opportunities will emerge
over the next two years as the UK
Government continues its efforts
to save cost and improve services.
In particular, as one of the leading
suppliers of custodial services
in the UK, we are obviously
heartened by the declared
intention of the UK Government to
focus on reform and improvement
of the prison system, and are
hopeful that this policy may in time
produce opportunities for us.
UK and Europe Local and
Regional Government
The UK and Europe Local and
Regional Government division
includes our frontline services
in the devolved public service
delivery markets of Health,
primarily hospital facilities
management services, and
Citizen Services, which includes
welfare and business support
operations, BPO services for the
public sector, various support
operations for European Agencies,
and other direct services such our
environmental and leisure services
for local authorities.
Revenue for the year was £905.8m
(2014: £959.8m), a decline of 6%. At
constant currency and excluding
the impact of disposals (the
Braintree Community Hospital
clinical healthcare services
business disposed in March 2014),
the organic decline was 4%. There
was modest revenue growth from
the start of new contracts such
as Lincolnshire County Council
BPO services and Havering
environmental services, together
with additional volume-related
revenues in health procurement
services and a small number of
other Citizen Services contracts.
These areas of growth were offset
by the end of contracts such as
Westminster City Council BPO
support, Suffolk Community
Healthcare and private sector
facilities management for an
aviation industry customer,
together with a number of other
reductions in volume-related
revenue predominantly in other
Citizen Services operations.
Underlying Trading Profit was
£4.7m (2014: £3.4m), representing
a margin of 0.5% (2014: 0.4%).
Within Underlying Trading
Profit there was £11m of non-
exceptional OCP utilisation, which
was modestly better than our
original expectations. The main
movements in Underlying Trading
Profit were the removal of loss
on the National Citizen Service
contract, together with some initial
progress on reducing overhead
costs, which were broadly offset by
the reduction in profit contribution
from the effect of contracts ending
or reducing in scope and the
in-year loss on the Lincolnshire
County Council contract.
The Contract and Balance Sheet
Review charge taken in LRG in
2014 was £93.8m. The net impact
of adjustments to key assumptions
and other related changes was a
£28.2m net charge in 2015. The
principal driver of this was the
establishment of a new OCP,
together with related impairments
and charges, for our business
process and contact centre
services contract with Lincolnshire
County Council; there has been
significant operational challenge
in the first year, predominantly
related to our responsibility
to implement a new ERP
system, which is now expected
to result in losses for the
remaining contractual period.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 46
Divisional Reviews continued
Separately, there was a one-time
profit of £9.0m relating to the
Thurrock BPO services contract
where settlement on early
termination had been mutually
agreed with the customer; the one-
time profit represents a payment
to Serco in lieu of anticipated
profit in future years, net of direct
costs, impairments and other
charges. After these Contract and
Balance Sheet Review adjustments
and the one-time profit on early
termination, the Reported Trading
Loss for the year was £14.5m.
LRG represented approximately
£400m of the Group’s aggregate
total value of signed contracts
during the year; the largest items
were the successful rebids of
Serco’s support services to Wishaw
General Hospital and Norfolk
& Norwich University Hospital,
various IT support services for
European agencies, the new win
for facilities management services
to the new district general hospital
for NHS Dumfries and Galloway,
an extension until the end of 2017
for the Child Maintenance Group
(CMG) case management contract
and a one-year extension to our
operation of the Work Programme.
Looking ahead, the impact of
known contract losses or other
revenue reductions is currently
anticipated to have a gross impact
of around £200m or approximately
25% in 2016. The key drivers of
this significant rate of attrition are
the end of the Suffolk Community
Healthcare and National Citizen
Services contracts which were
heavily loss-making and were not
rebid, the early termination of the
Thurrock BPO services contract,
the ending of certain infrastructure
services support to private
sector customers, lower revenues
on healthcare procurement
operations, the reducing scale of
CMG operations and a number of
other smaller contracts ending or
reducing in scope.
Additionally, of existing work
where an extension or rebid will be
required at some point during the
next three years due to a scheduled
contract end date before the end
of 2018, there are 10 contracts with
annual revenue of over £5m within
the LRG division; in aggregate,
these represent approximately
20% of the current level of annual
revenue for the division.
In terms of areas for future growth,
we are focused on building our
pipeline of opportunities in the
UK in Citizen Services (which
includes Environmental and
Leisure) and Health. Sharply
reduced Local Authority spending
is having some unpredictable
results: some Local Authorities
are taking services back in-house,
others are outsourcing them.
Similar pressures apply in the
Healthcare sector, where we have
a strong position in non-clinical
services. There are currently a
number of environmental and
hospital facilities management
opportunities in the pipeline.
We are working hard across all
sectors of this market to develop
compelling propositions, and are
confident that they will appeal
to customers. In our European
business we continue to bid
for major IT and operational
support projects for government
agencies, and are also looking
for opportunities to offer other
parts of our portfolio, such as
immigration services.
Americas
Our Americas division provides
professional, technology and
management services focused on
Defence, Transport, and Citizen
Services (principally process
outsourcing for government
agencies). The US federal
government, including the military,
civilian agencies and the national
intelligence community, are
our largest customers. We also
provide services to the Canadian
Government and to some US state
and municipal governments.
Revenue for the year was £693.0m
(2014: £708.1m), a decline of
2%. In US dollars, the main
currency for operations of the
division, revenue for the year was
equivalent to US$1,061m. The
strengthening particularly of the
US dollar provided growth of
£40m or 6%, with the decline at
constant currency being 8%. This
decline was driven by contract
attrition from the end of various
areas of operations on behalf of
the US Federal Retirement Thrift
Investment Board (FRTIB), certain
US intelligence agency support
services and visa processing work.
There was partial offset from
expansion in existing services such
as the US Affordable Care Act
(ACA) eligibility support services
contract and naval installation
task order work under the Sea
Enterprise IDIQ framework.
Underlying Trading Profit
was £44.3m (2014: £43.2m),
representing a margin of 6.4%
(2014: 6.1%). Within Underlying
Trading Profit there was £10m of
OCP utilisation, which was more
than our original expectations.
The main movements in
Underlying Trading Profit were
the benefits of cost reduction
initiatives and the £2m favourable
currency movement, which were
largely offset by the reduction
in profit contribution from
contract attrition.
Serco Group plc Annual Report and Accounts 2015 Divisional Reviews
47
The Contract and Balance
Sheet Review charge taken in
the Americas division in 2014
was £26.7m. The net impact of
adjustments to key assumptions
and other related changes was
a £17.3m net charge in 2015. The
principal drivers of this were the
required provision, together with
related impairments and charges,
for the Virginia Department of
Transport (VDOT) operations
following operational challenges
on the sub-contract related to
implementing a new IT system, and
an increase in the existing provision
for the Ontario Driver Examination
Services contract. After these
Contract and Balance Sheet Review
adjustments, Trading Profit for the
year reduced to £27.0m.
Americas represented
approximately £750m of the
Group’s aggregate total value
of signed contracts and order
book progress during the year.
The largest were: the successful
re-compete of air traffic control
services for the Federal Aviation
Administration and rebid of
classification services for the US
Patent and Trademark Office;
securing a third year of the
expanded services providing
eligibility support to the US
Affordable Care Act (ACA);
and winning a new contract to
support the US Naval Facilities
Engineering Command (NAVFAC).
Amongst a large number of other
smaller contract awards were a
one-year extension to the 5 Wing
Canadian Forces Base in Goose
Bay contract, and rebids of cost
analysis support to the US military
and personnel identification
support to the US Navy.
Looking ahead, the impact of
known contract losses or other
revenue reductions is currently
anticipated to have a gross impact
of around £100m or approximately
15% in 2016. The key drivers of this
significant rate of attrition are the
early end of the VDOT contract,
and the loss of the rebid for record
processing at the National Benefits
Center. Additionally, of existing
work where an extension or rebid
will be required at some point
during the next three years due
to a scheduled contract end date
before the end of 2018, there are
five contracts with annual revenue
of over £5m within the Americas
division; in aggregate, these
represent approximately 40% of
the current level of annual revenue
for the division.
In terms of areas for future growth,
our pipeline for the Americas
division has remained more
buoyant than the UK divisions.
Major new bid opportunities due
for decision over the next two
years include passport processing
for the Department of State
and Department of Homeland
Security and several opportunities
to provide various support
functions to the US Navy. Looking
beyond, the market for defence
services remains attractive in
size and growth potential and
other potential bids in transport
operational support and Citizen
Services are expected to progress
through our longer-term prospects
list. Options to develop Serco’s
involvement in non-clinical health
support and parts of the Justice
& Immigration market will also be
evaluated over the longer-term.
AsPac
Operations in the Asia Pacific
division include Justice,
Immigration, Defence, Health,
Transport and Citizen Services.
With Serco’s operations in
Australia being by far the largest
element of the division, the
country represents 16% of total
Revenue for the Group.
Revenue for the year was £544.7m
(2014: £706.0m), a decline of
23% in reported currency and
15% at constant currency. In
Australian dollars, the main
currency for operations of the
division, revenue for the year was
equivalent to A$1,106m. Local
currency weakness, particularly
the Australian dollar, contributed a
decline of £57m or 8%. Excluding
the impact of disposals (the Great
Southern Rail business disposed in
May 2015), the organic decline was
9%. This decline was driven almost
entirely by a further reduction in
the volume of work in Australian
immigration services, which more
than offset growth from the Fiona
Stanley Hospital in Perth and
the Auckland South Corrections
Facility which both became fully
operational in 2015, as well as
some growth from other areas
of scope expansion to existing
services such as Acacia prison.
Underlying Trading Profit was
£11.9m (2014: £35.5m), representing
a margin of 2.2% (2014: 5.0%).
Within Underlying Trading Profit,
there was £20m of OCP utilisation,
relating principally to the Armidale
Class Patrol Boat (ACPB) contract
and which was lower than our
original expectations; in 2014, the
losses on ACPB were not included
within Underlying Trading Profit
as they were included as part of
the Contract and Balance Sheet
Review charge. The main drivers
of the reduction in Underlying
Trading Profit reflect the impact of
the significant scale reduction in
Australian immigration services, the
in-year loss incurred at Mount Eden
Correctional Facility, together with
a £2m adverse currency impact.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report·
48
Divisional Reviews continued
The Contract and Balance Sheet
Review charge taken in 2014
was £237.1m. The net impact of
adjustments to key assumptions
and other related changes was
a £46.9m net release in 2015.
The agreement reached with
the Australian Government to
amend the terms of the ACPB
contract, which was the Group’s
single-largest OCP, resulted in a
release of £63m, principally due
to the contract now ending in
June 2017 rather than running
through to 2022. There was
partial offset to this release from
OCP charges being required on
Serco’s operations in Hong Kong
and in relation to the operational
challenges faced on the Mount
Eden Correctional Facility
contract. After these Contract and
Balance Sheet Review adjustments,
Reported Trading Profit for the
year increased to £58.8m.
AsPac represented approximately
£300m of the Group’s aggregate
total value of signed contracts and
order book progress during the
year; the single largest element
of this reflects the order book
increase to account for a rolling
one-year estimate of volumes for
Australian immigration services;
additionally, a three-year extension
for our traffic camera services
contract in Victoria was awarded,
while most of the other progress
represented contracts for various
Citizen Services processing
support work.
Looking ahead, the impact of
known contract losses or other
revenue reductions is currently
anticipated to have a gross impact
of up to £50m or 10% in 2016; this
includes the annualisation effect
of the GSR disposal and a number
of other small losses or reductions,
though the result for 2016 will still
be susceptible to the prevailing
volume of work in Australian
immigration services as this single
contract represents more than
a quarter of the total revenue
for the division. Additionally, of
existing work where an extension
or rebid will be required at some
point during the next three years,
due to a scheduled contract end
date before the end of 2018, there
are seven contracts with annual
revenue of over £5m within the
AsPac division; in aggregate, these
represent approximately 15% of
the current level of annual revenue
for the division.
During the year, Serco was
unsuccessful in the major new bid
opportunities for Wellington’s
metro rail service and Australian
offshore immigration detention
services. It should be noted that in
early February 2016, the Australian
Government decided to re-tender
the offshore immigration services
contract, and as Reserve Bidder
in the original tender, has invited
Serco and the originally selected
Preferred Bidder to re-tender
for this opportunity, though as
yet we have not included the
opportunity in our pipeline
as at the time of reporting we
have not decided whether to
participate in this tender. A third
opportunity in the pipeline, the
Icebreaker vessel to be used by
the Australian Antarctic Division
(AAD), saw Serco selected as
Preferred Tenderer, but, as this
contract is yet to be signed, it
has not been included in the
value of signed contracts and
remains in the Group’s major bids
pipeline. In the short-term, there
are few bids due for decision,
however over the course of 2016
we expect more to enter the
pipeline particularly in the areas of
Justice and Immigration services.
Looking beyond, other potential
opportunities are expected
to be developed in Transport,
Citizen Services and non-clinical
health services.
Middle East
Operations in the Middle East
division include Transport, Defence,
Health and other Direct Services
such as facilities management.
Revenue for the year was £291.4m
(2014: £260.4m), an increase of
12%. Stronger local currency
provided growth of 6% and a
small health support services
acquisition added 2%; organic
growth at constant currency was
therefore 4%. This revenue growth
was driven by the start of the new
contract for the Saudi Railway
Company as well as growth from
the annualisation of contracts won
during 2014 or increases in scope
of existing operations, which was
partially offset by a small number
of operations reducing in scope
and the end of air traffic control
operations in Erbil.
Underlying Trading Profit was
£18.9m (2014: £19.1m), representing
a margin of 6.5% (2014: 7.3%).
Within Underlying Trading Profit,
OCP utilisation was immaterial.
While Underlying Trading Profit
was held level with the prior year,
there was margin pressure as
a result of attrition and scope
reductions being concentrated in
areas that were higher margin.
The Contract and Balance Sheet
Review charge taken in 2014
was £19.3m. The net impact of
adjustments to key assumptions
and other related changes was
an £8.5m net release in 2015. This
related to allowances for doubtful
debts that had been charged in
2014 but subsequently collected
Serco Group plc Annual Report and Accounts 2015 Divisional Reviews
49
in 2015. After these Contract and
Balance Sheet Review adjustments,
Reported Trading Profit for the
year increased to £27.4m.
The Middle East represented
approximately £200m of the
Group’s aggregate total value of
signed contracts during the year;
the largest of these was the new
win to support the Saudi Railway
Company in the operation of the
North-South Railway. Other wins
included successfully securing
existing work for logistics and base
support services provided to the
Australian Defence Force (ADF) in
the region, facilities management
at Abu Dhabi Global Market
Square (formerly Sowwah Square),
for Baghdad Air Navigation
Services (ANS) and to operate
and maintain the Palm Jumeirah
Monorail System in Dubai.
Looking ahead, known contract
losses or other revenue reductions
are currently not anticipated to
have a material impact in 2016.
There is though some pressure
resulting from the planned
transition of certain ANS roles
to customers in the region.
Additionally, of existing work
where an extension or rebid will
be required at some point during
the next three years due to a
scheduled contract end before
the end of 2018, there are seven
contracts with annual revenue
of over £5m within the Middle
East division; in aggregate, these
represent approximately 30% of
the current level of annual revenue
for the division.
In terms of areas for future
growth, there remains a vibrant
public service outsourcing market
in the region and Serco has strong
references to continue expanding;
whilst the recent reductions in
the oil price may lead to some
projects being delayed, we, as
operators, tend to get involved
only when the infrastructure build
is at or near completion. Major
pipeline opportunities due for
award in 2016 or 2017 now include
three major light rail and tram
operations in the region, as well as
further developments in defence
training services and in non-
clinical health and other facilities
management support.
Corporate Costs
Corporate costs relate to typical
central function costs of running
the Group, including executive,
governance and support functions
such as HR, finance and IT. Where
appropriate, these costs are stated
after allocation of recharges to
operating divisions. The costs of
Group-wide programmes and
initiatives are also incurred centrally,
and these include the costs of the
Corporate Renewal Programme.
Corporate costs in 2015, before
Contract and Balance Sheet
Review adjustments, were £51.2m
(2014: £52.8m). While there was
some one-time Corporate Renewal
implementation work that occurred
in 2014, and the benefit of actions
taken during 2015 to reduce
costs at the centre, these were
partially offset by some increased
costs in 2015 associated with
implementing the Strategy Review
and investment in improved
management information, systems
and processes.
The Balance Sheet Review charge
taken in 2014 was £37.3m. The
net impact of adjustments to key
assumptions and other related
changes was a £3.3m net release
in 2015, reducing Corporate Costs
within Reported Trading Profit
to £47.9m.
Global Services
(discontinued operations)
The Global Services division
consists of Serco’s private sector
BPO business, predominantly
for customers in the UK, India
and North America, following
the transfer of public sector
BPO operations to our other
divisions. The operations consist
of middle and back office skills
and capabilities across customer
contact, transaction and financial
processing, and related consulting
and technology services.
As part of Serco’s previously
announced strategy to exit non-
core markets and to focus on
the provision of public services,
Serco is seeking to exit its private
sector BPO operations. On
31 December 2015, the transaction
to dispose of the majority of
the offshore private sector BPO
operations was completed. Two
smaller but separate transactions
relating to some operations in
the Middle East are expected to
complete in 2016. The remaining
private sector operations, which
are predominantly UK onshore
operations, will be exited either
by further disposals, transfers,
early termination or running-off
the contracts over their remaining
contractual period.
For statutory reporting purposes,
the Global Services division
is classified as discontinued
operations, therefore only the
post-tax result of these operations
is included as a single line in
the reporting of the Group’s
Income Statement. However,
for consistency with previous
guidance, Serco’s underlying
measures include the Revenue
and Trading Profit of these
discontinued operations.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 50
Divisional Reviews continued
Revenue was £337.6m (2014:
£359.3m), a decline of 6%. Stronger
local currency provided growth of
2%, with the decline at constant
currency being 8%. The start of the
new contract won in 2014 for multi-
channel contact services for a
major UK retailer provided revenue
growth, as did expansion in
domestic Indian BPO operations;
however, this was more than offset
by contract attrition, largely as a
result of our managed exit of a
number of smaller loss-making
contracts in the UK.
Underlying Trading Profit was
£14.3m (2014: £6.8m), representing
a margin of 4.2% (2014: 1.9%).
Within Underlying Trading Profit,
there was £15m of onerous
contract provision utilisation.
Drivers of the improvement in
Underlying Trading Profit include
the benefit of provision utilisation
and other actions taken to
reduce the impact of loss-
making operations.
The Contract and Balance Sheet
Review charge taken in 2014
was £30.3m. The net impact of
adjustments to key assumptions
and other related changes was
a £0.6m net release in 2015. As
the division included assets
designated as held for sale,
there is a benefit of not charging
depreciation and amortisation of
£11.7m. After these Contract and
Balance Sheet Review adjustments
and held for sale benefits,
Reported Trading Profit for the
year increased to £26.6m.
Given the disposal of the majority of
the offshore operations completed
on 31 December 2015, and because
there was also good progress
during 2015 in managing the exit
from the loss-making contracts
in the remaining UK onshore
operations, the Revenue of £337.6m
in 2015 reduces very substantially;
Serco’s budget for 2016 includes
approximately £20m of residual
revenue contribution, which will
vary depending on the timing of
exiting remaining contracts. The
residual operations are expected to
contribute an Underlying Trading
Loss of around £10m in 2016,
reflecting contract losses up to
the point of exit together with the
effect of ‘stranded’ shared service
centre costs and other overheads
previously absorbed by the Global
Services division. Serco is targeting
to make progress reducing these
stranded costs through additional
cost savings over the course of 2016
and beyond.
Serco Group plc Annual Report and Accounts 2015 Finance Review
51
Finance Review
Angus Cockburn
Group Chief Financial Officer
Underlying Trading Profit at £96m was ahead of the
£90m we had forecast, and Reported Trading Profit
was much higher still at £138m. Closing net debt
of £78m was significantly lower than expected and
represented a year-on-year reduction of £605m.
Revenue including discontinued operations was
around the level we expected at £3.5bn.
Revenue
Revenue declined by 11.6%
in the year to £3,177.0m (2014:
£3,595.7m), an 11.2% reduction
in constant currency.
Revenue including that arising
from operations classified as
discontinued declined by 11.1%
in the year to £3,514.6m (2014:
£3,955.0m), an 11.1% reduction
in constant currency.
Commentary on the revenue
performance of the Group is
provided in the Chief Executive’s
Review and the Divisional Reviews
sections above.
Trading Profit
Trading Profit is defined as
operating profit as shown on the
face of the Consolidated Income
Statement before i) amortisation
and impairment costs of
intangibles arising on acquisitions
and ii) exceptional items, adjusted
to include the Trading Profit arising
on discontinued operations.
Trading Profit increased in the year
to £137.6m (2014: Trading Loss
£632.1m). The improvement from
2014 is primarily attributable to the
2014 impact of the Contract and
Balance Sheet Review that resulted
in significant asset impairments,
onerous contract provisions (OCPs)
and other charges of £745.3m
being recorded in that year.
Trading Profit for the Group
includes that arising on
discontinued operations of £26.6m.
Underlying Trading Profit
Underlying Trading Profit is
defined as Trading Profit adjusted
to exclude charges and releases
made to OCPs, charges and
releases made in respect of other
items identified during the 2014
Contract and Balance Sheet
Review, the beneficial treatment of
depreciation and amortisation on
assets held for sale and any other
one-time items.
Underlying Trading Profit was
£96.0m, a decline of 15.2%
from 2014. At constant currency
Underlying Trading Profit was
£95.9m. Commentary on the
trading performance of the
Group is provided in the Chief
Executive’s Review and the
Divisional Reviews sections above.
Excluded from Underlying Trading
Profit were net charges to OCPs
of £3.0m following the annual
reassessment undertaken as part
of the budgeting process, which
would have been a net release of
£5.4m at constant currency. Also
excluded from Underlying Trading
Profit were net releases of £23.9m
relating to other provisions and
accruals for items identified during
the 2014 Contract and Balance
Sheet Review.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 52
Finance Review continued
Overview of Financial Performance
For the year ended 31 December
Revenue – including discontinued operations
Less: Revenue from discontinued operations
Revenue
Underlying Trading Profit
Onerous contract and Balance Sheet Review adjustments
Benefit from non-depreciation and non-amortisation of assets held for sale
Other one-time items
Trading Profit / (Loss)
Other expenses – amortisation and impairment of intangibles arising on acquisition
Operating profit / (loss) before exceptional items on continuing and discontinued operations
Less: Operating (loss) / profit before exceptional items arising on discontinued operations
Operating profit / (loss) before exceptional items
Exceptional loss on disposal of subsidiaries and operations
Other exceptional operating items
Exceptional operating items
Operating loss
Investment income
Other finance costs
Exceptional finance costs
Total net finance costs
Loss before tax
Tax on profit / (loss) before exceptional items
Tax on exceptional items
Tax
Loss for the year from continuing operations
Discontinued operations
Profit / (loss) for the year from discontinued operations
Loss for the year
Underlying earnings / (loss) per share (restated)* from continuing and discontinued operations
Underlying trading margin from continuing and discontinued operations
Earnings / (loss) per share before exceptional items (restated)* from continuing
and discontinued operations
Earnings / (loss) per share (restated)* from continuing and discontinued operations
Dividend per share
*
Restatement of earnings per share reflects adjustment to the weighted average number of shares associated with the Rights Issue
2015
£m
3,514.6
(337.6)
3,177.0
96.0
20.9
11.7
9.0
137.6
(4.9)
132.7
(26.5)
106.2
(2.6)
(107.3)
(109.9)
(3.7)
6.1
(39.0)
(32.8)
(65.7)
(69.4)
(17.9)
0.4
(17.5)
(86.9)
(66.2)
(153.1)
3.44p
2.7%
2014
£m
3,955.0
(359.3)
3,595.7
113.2
(745.3)
–
–
(632.1)
(23.7)
(655.8)
29.0
(626.8)
(2.3)
(323.4)
(325.7)
(952.5)
4.6
(42.6)
–
(38.0)
(990.5)
(7.2)
8.2
1.0
(989.5)
(357.6)
(1,347.1)
4.73p
2.9%
6.55p
(107.43p)
(15.47p)
(205.66p)
–
3.10p
Serco Group plc Annual Report and Accounts 2015
Finance Review
53
Underlying Trading Profit excludes the benefit arising from the non-depreciation of assets classified as held
for sale. In 2015 depreciation and amortisation of £10.0m and £1.7m respectively was not charged to operating
profit on assets classified as held for sale relating to those businesses classified as discontinued operations.
Other one-time items relate to the early termination of a UK Local Authority contract where settlement
has been mutually agreed with the customer. The one-time profit represents a payment to Serco in lieu of
anticipated profits in future years, net of direct costs, impairments and other charges.
In 2014, Underlying Trading Profit of £113.2m excludes non-exceptional charges made in respect of OCPs,
asset impairments and other provisions arising from the 2014 Contract and Balance Sheet Review of £745.3m.
Discontinued operations
Completion of the sale of the majority of the offshore private sector BPO business, which accounted for the
bulk of the Global Services division, occurred on 31 December 2015. The disposal of operations based in the
Middle East to the same purchaser is expected to complete in two tranches during 2016 following receipt of
the necessary approvals; the balance sheet items associated with these operations remain within assets and
liabilities held for sale at 31 December 2015.
During the course of 2015 the other predominantly UK onshore private sector BPO operations have either
been sold or exited early, or will be in the near future. As a result, in 2015 the Global Services division is
deemed to be a discontinued operation in accordance with IFRS. Those onshore BPO businesses which have
not yet been exited are treated as assets held for sale and segregated from the other assets and liabilities on
the balance sheet.
The results of discontinued operations were as follows:
For the year ended 31 December
Revenue
Underlying Trading Profit
Onerous contract and balance sheet review adjustments
Benefit from non-depreciation and non-amortisation of assets held for sale
Trading Profit / (Loss)
Other expenses – amortisation and impairment of intangibles
arising on acquisition
Operating profit / (loss) before exceptional items
Exceptional gain / (loss) on disposal of subsidiaries and operations
Other exceptional operating items
Operating loss
Investment revenue
Finance costs
Loss before tax
Tax on profit / (loss) before exceptional items
Tax on exceptional items
2015
£m
337.6
14.3
0.6
11.7
26.6
(0.1)
26.5
5.4
(83.0)
(51.1)
2.1
(1.2)
(50.2)
(18.8)
2.8
2014
£m
359.3
6.8
(30.3)
–
(23.5)
(5.5)
(29.0)
(3.1)
(332.7)
(364.8)
1.6
(0.3)
(363.5)
(3.9)
9.8
Net loss of discontinued operations (attributable to equity
owners of the Company) as presented in the income statement
(66.2)
(357.6)
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 54
Finance Review continued
Joint ventures – share of results
The most significant joint ventures are the Atomic Weapons Establishment (AWE) and Northern Rail. Serco
manages AWE in a consortium with Lockheed Martin and Jacobs Engineering Group in a 25-year contract that
runs to 2025. In 2015 Serco’s share of revenue was £326.1m (2014: £329.8m) and profit after tax was £18.6m (2014:
£16.9m). Northern Rail is a 50% joint venture with Abellio to operate a rail franchise that runs until 31 March 2016.
In 2015 Serco’s share of revenue was £292.7m (2014: £288.7m) and profit after tax was £8.2m (2014: £6.5m). While
the revenues and individual line items are not consolidated in the Group Income Statement, summary financial
performance measures of the aggregate of all joint ventures are set out below for information purposes.
For the year ended 31 December
Revenue
Operating profit
Net finance cost
Tax expense
Profit after tax
Dividends received from joint ventures
Exceptional items
2015
£m
737.2
42.6
(0.4)
(5.2)
37.0
32.5
2014
£m
798.3
37.9
(0.3)
(7.6)
30.0
34.8
Exceptional items are non-recurring items of financial performance that are outside normal operations and are
material to the results of the Group either by virtue of size or nature. As such, the items set out below require
separate disclosure on the face of the income statement to assist in the understanding of the underlying
performance of the Group.
Exceptional items have arisen on both the continuing and discontinuing operations of the Group. Exceptional
items arising on discontinued operations are disclosed on the face of the Consolidated Income Statement
within the profit or loss attributable to discontinued operations. Those arising on continuing operations are
disclosed on the face of the Consolidated Income Statement within exceptional operating items.
Serco Group plc Annual Report and Accounts 2015 Finance Review
55
For the year ended 31 December
Exceptional items arising on continuing operations
Exceptional loss on disposal of subsidiaries and operations
Other exceptional operating items
Impairment of goodwill
Restructuring costs
Aborted transaction costs
Costs associated with UK Government review
UK frontline clinical health contract provisions
Provision for settlement relating to DLR pension deficit funding dispute
Other provision for legal claims
Impairment and related charges of Australian rail business
Other exceptional operating items
Exceptional operating items arising on continuing operations
Exceptional items arising on discontinued operations
Loss on disposal of discontinued operations prior to reserve recycling
Recycling of gains in hedging and translation reserves
Exceptional gain / (loss) on disposal
Other exceptional operating items
Restructuring costs
Impairment of goodwill
Impairment of other assets transferred to held for sale
Other exceptional operating items
Exceptional operating items arising on discontinued operations
2015
£m
(2.6)
(87.5)
(19.7)
(1.7)
(1.2)
2.8
–
–
–
(107.3)
(109.9)
(45.6)
51.0
5.4
(2.2)
(65.9)
(14.9)
(83.0)
(77.6)
2014
£m
(2.3)
(181.2)
(24.0)
–
(9.2)
(16.1)
(35.6)
(20.1)
(37.2)
(323.4)
(325.7)
(3.1)
–
(3.1)
(8.7)
(284.8)
(39.2)
(332.7)
(335.8)
Exceptional items arising on continuing and discontinued operations
(187.5)
(661.5)
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 56
Finance Review continued
Exceptional loss on disposal of businesses arising on continuing operations
The total exceptional loss on disposal of businesses in 2015, excluding profits or losses arising on the disposal of
business classified as discontinued operations, was £2.6m (2014: £2.3m). In May 2015 the Group completed the
sale of its Great Southern Rail (GSR) business in Australia for a cash consideration of £2.9m, resulting in a loss
on disposal of £2.8m. The transaction was part of the disposal programme of businesses identified as not being
core to Serco’s future strategy, as announced initially in November 2014. In addition, in January 2015, the Group
disposed of its National Physical Laboratory (NPL) business for a consideration of £12.1m, with no gain or loss
on disposal. AgPlus was a subsidiary of NPL which was retained and sold separately with a gain of £0.5m being
recognised. In June 2015, the Group also disposed of its Serco India Private Limited business, representing the
Group’s frontline public services operations in the Indian transport sector, for a consideration of £1.0m, resulting
in a loss on disposal of £0.8m. All of these businesses were classified as held for sale as at 31 December 2014. In
2015 there was also an exceptional gain of £0.5m recognised relating to transactions completed in prior periods.
Other exceptional operating items arising on continuing operations
Goodwill is tested for impairment annually or more frequently if there are indications that there is a risk that
it could be impaired. The recoverable amount of each Cash Generating Unit (CGU) is based on value in use
calculations derived from forecast cash flows based on past experience, adjusted to reflect market trends,
economic conditions, the Group’s strategy and key risks. These forecasts include an estimated level of new
business wins and contract attrition and an assumption that the final year forecast continues into perpetuity at
a CGU-specific terminal growth rate. The terminal growth rates are provided by external sources and are based
on long-term inflation rates of the geographic market in which the CGUs operate and therefore do not exceed
the average long-term growth rates forecast for the individual markets.
In 2015, we conducted impairment testing of our CGUs that has identified a non-cash exceptional impairment to
continuing operations of £87.5m (2014: £181.2m), primarily due to a higher level of contract attrition than previously
forecast and the associated impact on future cash flows. The impairments arose in the following CGUs.
For the year ended 31 December
Local & Regional Government: Direct Services and Europe
Local & Regional Government: UK Health
Americas
Total exceptional goodwill impairment charge
2015
£m
–
–
(87.5)
(87.5)
2014
£m
(57.6)
(22.9)
(100.7)
(181.2)
In 2015, a charge of £19.7m (2014: £24.0m) arose in relation to the restructuring programme resulting from
the Strategy Review. This included redundancy payments, provisions, external advisory fees and other
incremental costs.
The disposal of the Environmental and Leisure businesses was aborted in the year and as a result the one-off
costs of £1.7m associated with the aborted sale have been treated as exceptional.
In 2015, there were exceptional costs totalling £1.2m associated with the UK Government reviews, this reflected
external costs incurred and included external adviser costs related to these reviews. In 2014 costs totalling £9.2m
were incurred associated with both the UK Government reviews and the programme of corporate renewal.
In 2015, the exit of the UK Frontline Clinical Health contracts was completed with the Cornwall Out of
Hours contract being exited in May and the Suffolk Community Healthcare contract ended in September.
On completion of the contract exits, existing OCPs of £2.8m that are no longer required were released
and recorded as a credit in exceptional items.
Serco Group plc Annual Report and Accounts 2015 Finance Review
57
In November 2014 the Group agreed to settle a dispute with the Trustees of the Docklands Light Railway (DLR)
Pension Scheme over the extent of its liability to fund the deficit on the scheme. The settlement resulted in
a total exceptional charge inclusive of costs of £35.6m, consisting of the full and final settlement amount of
£33.0m and costs of £2.6m. The settlement is to be paid over four equal annual instalments from January 2015
to January 2018 covering all past and any future DLR associated pension liabilities.
In 2014 an exceptional provision of £20.1m was recognised for legal claims made against Serco for commercial
disputes. This provision was based on legal advice received by the Company. There have been no further
charges in 2015 in relation to these disputes.
In 2014 an impairment review was performed on the Australian rail business, Great Southern Rail (GSR), resulting
in a charge totalling £37.2m. This consisted of an impairment of £23.1m to reduce the carrying value of its net
assets to the estimated recoverable amount and a charge of £14.1m in relation to the break costs of leases
relating to the business. The GSR business was exited in May 2015, with the loss on disposal of £2.8m, included
within loss on disposal of businesses.
Exceptional profit or loss on disposal of discontinued operations
Completion of the sale of the majority of the offshore private sector BPO business occurred on 31 December
2015. During the year the Group also disposed of businesses in relation to the predominantly UK onshore
private sector BPO business. The net assets at the date of disposal of discontinued operations were:
Goodwill
Other intangible assets
Property, plant and equipment
Trade and other receivables
Deferred tax assets
Cash and cash equivalents
Trade and other payables
Obligations under finance leases
Provisions
Corporation tax liabilities
Deferred tax liabilities
Minority interest disposed
Net assets / (liabilities) disposed
Offshore
£m
156.7
30.4
35.1
82.8
3.1
31.0
(51.5)
(1.1)
(16.8)
(26.0)
(5.1)
0.4
239.0
UK onshore
£m
–
–
0.8
0.5
–
0.8
(0.5)
(0.1)
(4.9)
(0.3)
–
–
Total
£m
156.7
30.4
35.9
83.3
3.1
31.8
(52.0)
(1.2)
(21.7)
(26.3)
(5.1)
0.4
(3.7)
235.3
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 58
Finance Review continued
The loss on disposal is calculated as follows:
Cash consideration
Face value of loan note received
Gross consideration
Loan note fair value adjustment
Indemnities provided
Net consideration
Less:
Net (assets) / liabilities disposed
Disposal related costs
Loss on disposal of discontinued operations
prior to reserve recycling
Recycling of gains on translation of foreign operations
Recycling of gains on hedged derivative financial instruments
from reserves
Exceptional gain / (loss) on disposal
Offshore
£m
UK onshore
£m
212.8
30.0
242.8
(10.5)
(30.7)
201.6
(239.0)
(7.5)
(44.9)
43.0
8.0
6.1
(1.6)
–
(1.6)
–
(2.3)
(3.9)
3.7
(0.5)
(0.7)
–
–
(0.7)
Total
£m
211.2
30.0
241.2
(10.5)
(33.0)
197.7
(235.3)
(8.0)
(45.6)
43.0
8.0
5.4
The offshore disposal reflects the majority of the offshore BPO operations, which excludes the consideration
and net assets related to the smaller but separate disposal transactions of operations in the Middle East that
are subject to separate completion in 2016. As at 31 December 2015 the net assets relating to the Middle East
were £15.0m and expected consideration in respect of the disposal was £15.0m.
The UK onshore business is being sold or transferred as components to various different purchasers.
One element was sold in the year and the elements remaining at the year-end are expected to be sold
or transferred during 2016.
Other exceptional operating items arising on discontinued operations
In 2015 a charge of £2.2m (2014: £8.7m) has arisen in discontinued operations in relation to the restructuring
programme resulting from the Strategy Review.
During 2015, an impairment test of the Global Services business was conducted as a result of the offers received
in the year together with movements of the assets held for sale since the end of 2014. The impairment testing
identified a non cash exceptional impairment of goodwill relating to discontinued operations of £65.9m (2014:
£284.8m) as a result of a reduction in the carrying value of net assets due to a decrease in the estimated
recoverable amount of the CGU; this was recorded at the half year. Assets other than goodwill have also been
impaired by a total of £14.9m (2014: £39.2m). The impairment of goodwill relates primarily to the offshore
Global Services business, the majority of which was disposed of on 31 December 2015, and the other asset
impairments to the UK onshore business.
Serco Group plc Annual Report and Accounts 2015
Finance Review
59
Exceptional finance costs
In December 2014, agreement was reached for the Group to defer its December 2014 covenant test until
31 May 2015. As a result, costs were incurred in 2015 to preserve the existing finance facilities. In addition,
payments were made to the US Private Placement (USPP) Noteholders as a result of early settlement following
the Group refinancing. Total charges of £32.8m have been treated as exceptional items as they are outside
of the normal financing arrangements of the Group and are significant in size.
Other finance costs and investment income on continuing and discontinuing operations
Investment income of £8.2m (2014: £6.2m) principally relates to interest earned on deposits during the period
of £3.2m and interest accruing on net retirement benefit assets of £4.9m.
Other finance costs of £40.2m (2014: £42.9m) principally relate to interest incurred on the USPP loans and the
Revolving Credit Facility (£24.7m), facility fees and other charges (£7.2m) and the movement in discount on
provisions (£5.6m).
In total, pre-exceptional net finance costs were £32.0m (2014: £36.7m).
Taxation on continuing and discontinuing operations
Our tax strategy is to manage all taxes to ensure that we pay the appropriate amount in the countries in
which we operate, while both respecting applicable tax legislation and utilising appropriate legislative reliefs.
Our strategy is aligned with the Group’s business strategy and endorsed by the Board. Responsibility for
tax strategy and risk management sits with the Chief Financial Officer. Day to day delivery of the strategy is
executed by a global team of tax professionals who are aligned with our businesses and who work closely
with local tax authorities and local advisers.
Tax charge
In 2015, we recognised a tax charge of £36.7m on a pre-tax and pre-exceptional profit of £100.7m representing an
effective tax rate of 36.4%. The tax charge on an underlying basis, reflecting Underlying Trading Profit of £96.0m
less pre-exceptional net finance costs of £32.0m, was £30.5m, representing an effective tax rate of 47.7%.
A £3.1m tax credit was also recognised on exceptional losses of £220.3m. The principal reasons for the absence
of a tax credit on these exceptional costs is that no UK deferred tax asset is being recognised in respect of
UK costs and no tax deduction is available for the impairment of goodwill in any territory. The credit of £3.1m
represents tax relief on restructuring costs in overseas territories and the benefit of a tax credit from losses sold
to joint venture partners.
The principal reasons why the effective tax rates are higher than the UK standard corporation tax rate of 20.25%
are due to higher rates of tax on profits arising on our international operations, together with the absence of
any deferred tax credit for losses incurred in the UK (which includes the result of UK divisions, the majority of
corporate costs and certain interest costs). The increase in the effective tax rate has been partially offset by a
tax credit on the recognition of additional deferred tax assets that were not previously recognised on provisions
in Australia.
Our tax charge in future years will continue to be materially impacted by our accounting for UK deferred taxes.
To the extent that future UK tax losses are not recognised, our effective tax rate will be higher than prevailing
standard corporation tax rates as we will not be able to recognise the associated tax benefits arising. To
the extent that our existing UK tax losses are subsequently recognised or utilised, our effective rate will be
impacted by the associated tax benefit and will reduce accordingly.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 60
Finance Review continued
Contingent tax assets
At 31 December 2015, the Group has gross estimated unrecognised deferred tax assets of £1.05bn (£195m
net), which are potentially available to offset against future taxable profits. These principally relate to tax
losses of £890m. Of these tax losses, £761m arise in the UK business (net £137m) – £584m arising in Serco
Limited, the Group’s principal UK trading entity; the remaining £177m of tax losses arise in other UK group
companies. Of the net £137m of UK tax assets in respect of losses, only £10.5m is recognised on the balance
sheet on the basis of forecast utilisation against future taxable profits, with the remaining £126.5m being a
contingent asset not recognised.
Taxes paid
Net corporate income tax of £9.4m was paid during the year, relating primarily to our operations in Americas
(£2.2m), India (£6.7m), Middle East (£1.3m), Europe (£3.6m) and offset by tax refunds arising in AsPac (£4.4m)
in respect of prior years. The Group’s UK operations have been loss making overall and accordingly no tax
payments have been due. During the year the Group has transferred tax losses to its profitable joint ventures
in return for cash payments from the joint ventures of £6.7m, resulting in an overall tax paid figure in our cash
flow of £2.7m.
Dividend
As indicated in March, the Board is not recommending the payment of a dividend in respect of the 2015
financial year. The Board is committed to resuming dividend payments when it is prudent to do so. The
Directors’ decision as to when to declare a dividend and the amount to be paid will take into account the
Group’s underlying earnings, cash flows and financial leverage, together with the requirement to maintain
an appropriate level of dividend cover and the market outlook at the time.
Share count and earnings per share
The equity placing conducted in May 2014 and Rights Issue in April 2015 increased the weighted average
number of shares for earnings per share (‘EPS’) purposes to 986.5m (2014: 655.1m). The annualising effect of the
Rights Issue will further increase the weighted average number of shares to approximately 1,099m for 2016.
EPS before exceptional items from both continuing and discontinuing operations was 6.55p per share; including
the impact of exceptional items there was a loss of 15.47p per share.
Underlying EPS was 3.44p per share. This measure reflects the Underlying Trading Profit £96.0m and deducts
pre-exceptional net finance costs (including those for discontinued operations) and related tax effects.
Cash flow and reconciliation to net debt
The table below shows the operating loss and Free Cash Flow reconciled to movements in net debt. Free
Cash Flow is the cash flow from subsidiaries and dividends received from joint ventures and is stated before
exceptional items which are considered non-recurring in nature. Free Cash Flow for 2015 was an outflow of
£16.2m compared to an inflow of £62.2m in 2014.
Operating cash flow (before movements in working capital, exceptional items and tax) was £82.5m, a reduction
of £3.9m from the prior year; included within this are movements in provisions that in the year predominantly
reflect the cash outflows in relation to onerous contracts whilst in the prior year the movement reflects the
establishing of provisions for onerous contracts identified following the 2014 Contract and Balance Sheet
Review. The year-on-year decrease in other non-cash movements is principally due to the 2014 impairment of
working capital items that arose following the Contract and Balance Sheet Review.
2015 free cash flow reflects a £22.6m outflow in working capital from the continued normalisation of balances
at the end of the statutory period compared to the average for the period, tax returning to a paid position
compared with a small net refund received in 2014 and higher net purchases of tangible and intangibles assets
of £36.0m.
The impact of the Contract and Balance Sheet Review was mostly non-cash in nature in 2014, relating principally
to provision movements and other impairments.
Serco Group plc Annual Report and Accounts 2015 Finance Review
61
Cash Flow: Year ended 31 December
Operating loss on continuing operations
Operating loss on discontinued operations
Less: exceptional items
Operating profit / (loss) before exceptional items on
continuing and discontinued operations
Less: profit from joint ventures
Movement in provisions
Other non-cash movements
Operating cash inflow before movements in
working capital, exceptional items and tax
Working capital movements
Tax (paid) / received
Non-cash R&D expenditure
Cash flow from operating activities before exceptional items
Dividends from joint ventures
Interest received
Interest paid
Purchase of intangible and tangible assets net of proceeds from disposals
Free Cash Flow
Net disposal / (acquisition) of subsidiaries
Costs of equity Rights Issue
Proceeds from Rights Issue and share placement
Purchase of own shares net of share option proceeds
Other movements on investment balances
Capitalisation and amortisation of loan costs
Impairment of loan receivable
Non-recourse loan disposals, repayments and advances
New, acquired and disposed finance leases
Exceptional items
Dividends paid
Foreign exchange loss on net debt
Movement in net debt including assets and liabilities held for sale
Asset held for sale movement in net debt
Net debt at 1 January
Net debt at 31 December
Net debt at 1 January including assets and liabilities held for sale
Net debt at 31 December including assets and liabilities held for sale
2015
£m
(3.7)
(51.1)
187.5
132.7
(37.0)
(116.0)
102.8
82.5
(22.6)
(2.7)
(0.7)
56.5
32.5
3.4
(36.1)
(72.5)
(16.2)
184.9
–
530.3
4.4
(1.3)
(0.6)
–
24.0
0.5
(88.4)
–
(32.9)
604.7
(44.2)
(642.7)
(82.2)
(682.2)
(77.5)
2014
£m
(952.5)
(364.8)
661.5
(655.8)
(30.0)
472.6
299.6
86.4
17.0
0.6
(0.5)
103.5
34.8
2.7
(42.3)
(36.5)
62.2
(4.6)
(4.1)
156.3
2.3
(3.5)
3.6
(4.6)
(6.8)
(13.7)
(40.4)
(53.1)
(30.4)
63.2
39.5
(745.4)
(642.7)
(745.4)
(682.2)
Average net debt for the year ended 31 December 2015, calculated on a daily basis, was £454.8m a reduction of
(£323.8m) from the 2014 average net debt of £778.6m. The reduction in net debt was predominantly due to the
Rights Issue and proceeds from the disposal of the offshore private sector BPO business.
The table below provides an analysis of trading cash flow and provides the pre-interest and pre-tax cash flows
equivalent to Underlying Trading Profit. This is derived from the cash flow from operating activities excluding
tax items and is shown after net capital expenditure and after dividends received from joint ventures.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 62
Finance Review continued
The percentage conversion of Underlying Trading Profit into trading cash flow is also provided in this table and
this is a measure of the efficiency of the business in terms of converting profit into cash before taking account
of the impact of interest, tax and exceptional items. This measure is impacted by provisions related to onerous
contracts, and we would expect it to be impacted in future periods by the expected utilisation of OCPs.
Trading cash flow: Year ended 31 December
Free cash flow from operating activities before exceptional items
Add back:
Tax paid / (received)
Interest received
Interest paid
Trading Cash Flow
Underlying Trading Profit
Underlying Trading Profit cash conversion
2015
£m
(16.2)
3.4
(3.4)
36.1
19.9
96.0
20.7%
2014
£m
62.2
(0.1)
(2.7)
42.3
101.7
113.2
89.8%
The Underlying Trading Profit conversion into trading cash flow was 20.7%. This was due primarily to the cash
outflows on provisions movement, including assets held for sale £116.0m, the outflow of working capital of
£22.6m in the year from the continued normalisation of balances at the end of the statutory period compared
to the average for the period, and from the net purchase of tangible and intangible assets £72.5m. These
reductions to cash were largely offset by the impact of depreciation, amortisation and impairments during the
year, including the Underlying Trading Profit benefit relating to assets held for sale, £83.2m, the cash inflows
arising from one-time items and the collection of bad debts provided for under the Contract and Balance Sheet
review £18.4m and other non-cash items £31.3m.
Analysis of net debt
Net debt, including assets held for sale, reduced to £77.5m (2014: £682.8m), predominately due to the proceeds
received from the Rights Issue and from the disposal of the offshore private sector BPO business.
As at 31 December
Cash and cash equivalents
Loans receivable
Other loans
Obligations under finance leases
Recourse net debt
Non-recourse debt
Net debt
As at 31 December
Cash and cash equivalents
Loans receivable
Other loans
Obligations under finance leases
Recourse net debt
Non-recourse debt
Net debt
2015
As reported
£m
Assets and liabilities held
for sale adjustment
£m
Including assets and
liabilities held for sale
£m
323.6
19.9
(381.9)
(43.8)
(82.2)
–
(82.2)
5.2
–
–
(0.5)
4.7
–
4.7
328.8
19.9
(381.9)
(44.3)
(77.5)
–
(77.5)
2014
As reported
£m
Assets and liabilities held
for sale adjustment
£m
Including assets and
liabilities held for sale
£m
180.1
1.0
(797.3)
(26.5)
(642.7)
–
(642.7)
22.4
–
(0.8)
(37.1)
(15.5)
(24.0)
(39.5)
202.5
1.0
(798.1)
(63.6)
(658.2)
(24.0)
(682.2)
Serco Group plc Annual Report and Accounts 2015 Finance Review
63
Treasury operations and risk management
The Group’s operations expose it to a variety of financial risks that include liquidity, the effects of changes in
foreign currency exchange rates, interest rates and credit risk. The Group has a centralised treasury function
whose principal role is to ensure that adequate liquidity is available to meet the Group’s funding requirements
as they arise and that the financial risk arising from the Group’s underlying operations is effectively identified
and managed.
Treasury operations are conducted in accordance with policies and procedures approved by the Board and are
reviewed annually. Financial instruments are only executed for hedging purposes - speculation is not permitted.
A monthly report is provided to senior management outlining performance against the treasury policy and the
treasury function is subject to periodic internal review.
Liquidity and funding
As at 31 December 2015, the Group had committed funding of £855m, comprising a £480m revolving credit
facility with a syndicate of banks and £375m of private placement notes. In addition the Group had a receivables
financing facility of £30m. The principal financial covenants attaching to these facilities are that the ratio of net
debt to EBITDA should not exceed 3.5x and the ratio of EBITDA to interest expense should be greater than 3.0x.
In April 2015 the Group raised gross proceeds of £555m from the Rights Issue, of which £450m was used to
reduce gross indebtedness (see Rights Issue, debt refinancing and covenants overleaf).
Following the disposal of the majority of the offshore private sector BPO operations, the Group was required
to offer the net disposal proceeds to the debt holders in prepayment. Two thirds of the proceeds were offered
to private placement note holders at par and one third to repay any outstanding drawdowns on the revolving
credit facility (nil outstanding at 31 December 2015). As a result of this process, £113m of private placement
notes were repaid on 16 February 2016, leaving £262m of private placement notes in issue at that date.
Interest rate risk
Given the nature of the Group’s business, we have a preference for fixed rate debt to reduce the volatility of
net finance costs. Our treasury policies require us to maintain a minimum proportion of fixed rate debt as a
proportion of overall net debt and for this proportion to increase as the ratio of EBITDA to interest expense
falls. As at 31 December 2015, more than 100% of the Group’s net debt was at fixed rates. Interest on the
revolving credit facility is at floating rate, however it was undrawn.
Foreign exchange risk
The Group is subject to currency exposure on the translation to GBP of its net investments in overseas
subsidiaries. The Group manages this risk where appropriate by borrowing in the same currency as those
investments. Group borrowings are predominantly denominated in GBP and USD.
The Group manages its currency flows to minimise foreign exchange risk arising on transactions denominated
in foreign currencies and uses forward contracts where appropriate to hedge net currency flows.
Credit risk
Cash deposits and in-the-money financial instruments give rise to credit risk on the amounts due from
counterparties. The Group manages this risk by adhering to counterparty exposure limits based on external
credit ratings of the relevant counterparty.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 64
Finance Review continued
Rights Issue, debt refinancing and covenants
The Group announced in November 2014 plans for new equity to be raised through a Rights Issue and for the
proceeds to be used primarily to reduce the Group’s indebtedness. This was launched on 12 March 2015 and
received shareholder approval on 30 March 2015. The equity Rights Issue successfully completed in April 2015
raising approximately £555m of gross proceeds (£530m net after expenses), with trading in new shares
commencing on 17 April 2015 and 549,265,547 new shares being issued.
On 30 April 2015, the Group concluded a refinancing with its lending banks and private placement noteholders.
This included the reduction of gross indebtedness by £450m. The Group’s committed revolving credit facility
was reduced in size from £730m to £480m and the maturity date extended by two years to April 2019. Financial
covenants across the Group’s funding arrangements are unchanged, reflecting the strengthening of the Group’s
balance sheet by the Rights Issue. Fees and expenses relating to the repayment of the Group’s borrowings and
amendments to the existing finance agreements were £33m, and these included a premium of £25m on the
early settlement of private placement notes. These expenses have been treated as exceptional finance costs.
In accordance with the amended terms of Serco Group plc’s borrowing facilities, compliance certificates for the
year to 31 December 2014 and 12 months to 30 June 2015 were submitted to its lenders in May and September
2015 respectively, and these showed the Group complied with the financial covenants.
For covenant purposes the definition of Consolidated Total Net Borrowings (CTNB) represents Group recourse
net debt at the balance sheet date adjusted to exclude encumbered cash, loan receivable amounts, and also
adjusted to reflect the impact of currency hedges associated with recourse loans. The covenant definition of
EBITDA is the twelve month operating profit of the business before exceptional items, deducting profits from
joint ventures and after adding back depreciation, intangible amortisation, share based payment charges and
dividends received from joint ventures. The covenant test for 31 December 2014 was deferred until 31 May 2015.
The covenant definition of EBITDA for 31 December 2014 and the 12 months to 30 June 2015 was amended to
exclude the impact of charges arising from the Contract and Balance Sheet Review whilst CTNB was calculated
after the proceeds less underwriting charges from the equity Rights Issue. The covenant test for the years
ended 31 December 2014 and 2015 are shown below:
As at 31 December
Operating (loss) / profit before exceptional items
Less: Joint venture post-tax profits
Add: Dividends from joint ventures
Amortisation of other intangible assets
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Share based payment expense
Balance sheet and contract write-downs in 2014
EBITDA per covenant
Net finance costs
Other adjustments
Net finance costs per covenant
Recourse net debt (including assets and liabilities held for sale)
Encumbered cash and other items
Proceeds from rights issue less underwriting charge
Consolidated Total Net Borrowings (CTNB)
Covenant CTNB / EBITDA (not to exceed 3.5x)
Covenant EBITDA / Net finance costs (at least 3.0x)
2015
£m
132.7
(37.0)
32.5
40.5
28.9
2.1
9.8
–
209.5
32.0
(0.6)
31.4
77.5
14.2
–
91.7
0.44x
6.67x
2014
£m
(655.8)
(30.0)
34.8
38.7
41.8
–
5.4
757.6
192.5
36.7
0.2
36.9
658.2
–
(543.7)
114.5
0.59x
5.22x
Serco Group plc Annual Report and Accounts 2015 Finance Review
65
Balance sheet summary
The balance sheet at 31 December 2015 is summarised below showing the impact of the assets and liabilities
held for sale for each line item. At the year end the balance sheet had net assets of £282.1m, a movement of
£348.3m from the 2014 closing net liabilities position of £66.2m. The movement is mainly due to the funds raised
through the Rights Issue and a reduction in provisions due predominantly to utilisation, partially offset by the
impairment to goodwill. The balance sheet is summarised below:
As at 31 December
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Other non-current assets
Deferred tax assets
Retirement benefit assets
Current assets
Inventories
Trade and other current assets
Current tax
Cash and cash equivalents
Assets classified as held for sale
Total current assets
Total assets
Current liabilities
Trade and other current liabilities
Current tax liabilities
Provisions
Obligations under finance leases
Loans
Amounts classified as held for sale
Total current liabilities
Non-current liabilities
Other non-current liabilities
Deferred tax liabilities
Provisions
Obligations under finance leases
Loans
Retirement benefit obligations
Total liabilities
Net assets / (liabilities)
2015
Including
assets held
for sale
£m
Adjustment
for assets
held for sale
£m
As
reported
£m
Including
assets held
for sale
£m
2014
Adjustment
for assets
held for sale
£m
As
reported
£m
517.7
90.2
74.1
72.0
42.2
127.1
923.3
26.4
549.7
11.3
328.8
916.2
–
916.2
1,839.5
(558.6)
(14.3)
(191.2)
(16.3)
(132.2)
(912.6)
–
(7.8)
(0.4)
(0.9)
(0.2)
–
–
(9.3)
509.9
89.8
73.2
71.8
42.2
127.1
914.0
–
26.4
(20.6)
529.1
(4.7)
(5.2)
(30.5)
39.8
9.3
6.6
323.6
885.7
39.8
925.5
–
1,839.5
7.4
0.1
22.6
0.5
–
30.6
(32.5)
(551.2)
(14.2)
(168.6)
(15.8)
(132.2)
(882.0)
(32.5)
820.6
123.8
132.9
73.5
48.4
143.9
1,343.1
33.9
623.7
20.7
202.5
880.8
–
880.8
2,223.9
(695.7)
(34.4)
(223.8)
(18.5)
(48.4)
(1,020.8)
–
(279.1)
(5.0)
(94.5)
(26.8)
(11.0)
–
(416.4)
(2.7)
(119.0)
(4.2)
(22.4)
(148.3)
564.7
416.4
–
96.1
21.8
18.1
8.9
4.5
149.4
(219.9)
541.5
118.8
38.4
46.7
37.4
143.9
926.7
31.2
504.7
16.5
180.1
732.5
564.7
1,297.2
2,223.9
(599.6)
(12.6)
(205.7)
(9.6)
(43.9)
(871.4)
(219.9)
(912.6)
(1.9)
(914.5)
(1,020.8)
(70.5)
(1,091.3)
(18.3)
(22.3)
(315.0)
(28.0)
(249.7)
(11.5)
(644.8)
(1,557.4)
282.1
–
–
(18.3)
(22.3)
1.9
(313.1)
–
–
–
(28.0)
(249.7)
(11.5)
(37.3)
(11.7)
(384.1)
(45.1)
(773.7)
(17.4)
7.6
2.5
11.9
28.2
20.3
–
(29.7)
(9.2)
(372.2)
(16.9)
(753.4)
(17.4)
1.9
(642.9)
(1,269.3)
70.5
(1,198.8)
–
–
(1,557.4)
(2,290.1)
282.1
(66.2)
–
–
(2,290.1)
(66.2)
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report·
66
Finance Review continued
Provisions
The total of current and non-current provisions, excluding provisions related to businesses held for sale, has
decreased by £96.2m since 31 December 2014, the majority of which relates to a reduction in contract provisions
as a result of the utilisation and release of provisions against losses on onerous contracts, offset by new or
additional onerous contract provision charges made in the year. Movements in contract provisions, including
those related to businesses held for sale since the 31 December 2014 balance sheet date, are as follows:
Onerous
Contract
Provisions
£m
Other
Contract
Provisions
£m
Total contract
provisions
including assets
held for sale
£m
Held for sale
adjustment
£m
Total contract
provisions as
reported
£m
At 31 December 2014
Charged to income statement
Released to income statement
Released to income statement
(exceptional)
Utilised during the year
Utilised during the year (exceptional)
Unwinding of discount
Disposals
FX
Transfer to trade payables
Assets held for sale
Reclassifications
At 31 December 2015
(447.1)
(91.8)
88.8
2.8
114.1
10.8
(5.5)
6.5
8.2
–
–
13.3
(299.9)
(4.9)
(10.1)
2.7
–
16.6
–
–
0.4
0.3
(4.5)
–
(13.6)
(13.1)
(452.0)
(101.9)
91.5
2.8
130.7
10.8
(5.5)
6.9
8.5
(4.5)
–
(0.3)
21.6
12.8
(1.3)
–
(24.7)
–
–
(6.9)
–
4.5
4.9
–
(313.0)
10.9
(430.4)
(89.1)
90.2
2.8
106.0
10.8
(5.5)
–
8.5
–
4.9
(0.3)
(302.1)
Onerous Contract Provisions (OCPs) arising from the Contract and Balance Sheet Review in 2014 accounted for
£447.1m of the 31 December 2014 contract provisions balance shown above. A full assessment of the forecasts
that form the basis of the OCPs is conducted annually as part of the budgeting process.
In 2015, additional charges have been made in respect of future forecast losses on onerous contracts of £91.8m.
This increase related to revisions to existing contracts of £53.1m and new provisions raised on contracts of
£38.7m. New contract provisions include charges of £34.0m in respect of the Lincolnshire contract, details
of which are provided below. In 2015, releases to the income statement from OCPs were £91.6m, including a
release of £62.7m resulting from the renegotiation completed in November 2015 of our contract to operate and
maintain a fleet of patrol boats for the Royal Australian Navy. This contract was the single largest OCP charged
in 2014.
Utilisation of OCPs in 2015 was £124.9m; of this £10.8m was utilised against OCPs recorded as exceptional items.
The OCPs arising as exceptional items relate solely to contracts within the UK Frontline Clinical Health sector
following the decision in 2013 to exit this sector; this exit was completed in September 2015 when the Suffolk
Community Healthcare contract ended.
Below is an update for the largest OCP contracts following the reassessment conducted as part of the annual
budget process:
Serco Group plc Annual Report and Accounts 2015 Finance Review
67
Armidale Class Patrol Boats (ACPB)
The ACPB contract relates to the operations and maintenance of a fleet of patrol boats for the Royal Australian
Navy. This contract was entered into in December 2003 with an initial design and build phase, after which the
fleet became operational in 2007. Serco’s key obligation is to have the fleet available for operations for a fixed
number of days a year.
In November 2015, agreement was reached with the Australian Government customer to amend the terms of
the ACPB contract. The main changes agreed within the amendment are for an improved service regime under
an enhanced maintenance and remediation scope of works and schedule, for Serco to provide maintenance and
remediation work on an agreed cost recovery basis subject to strict expenditure caps and audit processes, and
that the contract will end in June 2017 rather than running through to 2022. Furthermore, under the terms of the
Settlement and Amendment Deed, both parties agreed to a mutual release of claims they may have had against
each other prior to the point of contract amendment. As a result of the agreement the OCP forecast has been
reassessed resulting in a release of £62.7m.
Commercial and Operational Managers Procuring Asylum Support Services (COMPASS)
The COMPASS contract with the UK Home Office is for the provision of accommodation, transportation and
subsistence payments for asylum seekers whilst their claims are being processed. Claim processing can take
from a few months to several years. This contract commenced in 2012 and provides services in two of the six
administrative regions of the contract in the UK; the North West, comprising fourteen Local Authority areas;
and Scotland and Northern Ireland. The contract runs to December 2017, with a further extension of up to two
years at the option of the customer.
In 2015, the numbers of service users continued to be volatile, however for the year as a whole utilisation of the
onerous contract provision was in line with the forecast expectation. The forecasts for the contract have been
reassessed with the result being that the remaining balance of the provisions as at 31 December 2015 of £89.1m,
is considered sufficient to cover the anticipated losses over the remaining contract term. The final outcome over
the contract life will be heavily dependent on the future number of asylum seekers, the volatility of numbers and
our ability to find suitable accommodation.
Future Provision of Marine Services (FPMS)
The FPMS contract that commenced in 2007, which has a 15-year duration, provides marine support services to
the UK Ministry of Defence (MOD) dockyard ports of Portsmouth, Plymouth and Faslane as well as support to
military exercises and training to the Raasay Ranges.
In 2015 the contract has performed better than expected due largely to lower costs in respect of backfill
vessel bookings and dockings, and the revenues from additional taskings from the customer. The forecasts
for the contract have been reassessed with the result being a net release of £2.1m due to both the favourable
performance in the year and savings expected in future years from a voluntary redundancy programme run
in 2015; partially offset by lower RPI inflation on the contract than previously forecast and costs relating to the
purchase of a new vessel.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 68
Finance Review continued
Prisoner Escort and Custody Services (PECS)
The contract provides prisoner transportation between courts and prisons and for the management of prisoner
welfare when at court for the Ministry of Justice (MOJ). It was awarded in 2011 and runs for seven years.
In 2015, utilisation of the OCP was slightly higher than originally expected. The contract is operated with a very
challenging KPI regime and in order to meet these KPIs we require a larger workforce than previous envisaged,
along with the associated recruitment, training and contract management costs; the forecast for the contact has
been reassessed with the result being an increase to the OCP of £11.3m. In the case of this contract, we have
judged that it is unlikely that the customer will wish to extend this contract beyond its minimum term in 2018
on the current basis. If this judgement proves to be incorrect, further OCP charges may be required.
HMP Ashfield
The HMP Ashfield PFI contract commenced in 1999 and runs through to 2024. In 2013 the operational role
of Ashfield changed from a Young Offender Institution to an adult male sex offenders’ prison, resulting in a
changed cost base. Since the change of operational role of the prison the MoJ has imposed a level of pricing
that we dispute, and which would result in substantial losses over the remaining life of the contract. Discussions
with the MoJ around re-pricing proposals are expected to conclude in 2016.
In 2015 performance has been slightly better than expected due to the benefit of in year cost savings. The
forecast for the contract has been reassessed with the result being a release of £8.7m due to the expected
future ongoing benefits of the cost reductions and efficiencies delivered in 2015.
Lincolnshire County Council
The Lincolnshire contract commenced in April 2014 with a transition phase expected to complete in
March 2015 before full operational services were due to commence in April 2015. The contract is for an
initial five year term, commencing April 2015, with a further two extension periods of two years each
exercisable at the customer’s option.
The contract scope is to provide the following outsourced services: information management and technology
services and support; back office services including finance, HR and payroll services; and customer services
acting as the internal and external point of contact for Lincolnshire County Council and all Council services.
In 2015 the contract had difficulties implementing a new Enterprise Resource Planning (ERP) system and
resolving these issues has been more complex and protracted than originally anticipated. While we are making
good progress, the full implementation of the new system is not expected until later this year. The delay has
impacted our ability to make the wider service transformation changes needed to make the contract more
efficient and also led to operational service difficulties, triggering service credits. The issues have also resulted
in the requirement to increase and maintain additional management and support resources on the contract to
remediate the problems faced.
As a result of these factors a charge totalling £34.0m was taken in 2015, comprising a provision for future losses
over the remaining term of the contract. In 2015 £5.3m of the provision was utilised against the impairment of
assets. The in-year losses incurred on the contract, of £5.2m, were recorded within Underlying Trading Profit.
The OCPs referred to above account for 76% of the total OCP balance as at 31 December 2015. Other OCP
movements in the year occurred across multiple sectors and geographies in which Serco operates and at
31 December 2015 there were no other OCPs that have expected cumulative future losses in excess of £15m.
The other movements include additional charges made in the Americas in respect of revised expectations and
contract exits, additional charges relating to our Hong Kong operations, a further provision on a UK Transport
contract and new charges made in respect of a Justice and Immigration contract in AsPac.
Serco Group plc Annual Report and Accounts 2015 Finance Review
69
Other Contract and Balance Sheet Review items
In addition to the net charge of £3.0m impacting non-exceptional OCPs, there were other adjustments arising
in the period on items identified during the Contract and Balance Sheet Review. These adjustments relate to a
number of items including:
• The releases of other provisions and accruals of £26.5m where liabilities have either been settled for less than
the amount provided or accrued or have lapsed due to the passage of time.
• The release of allowances for bad debts of £8.5m following the receipt of payments in respect of old
outstanding balances.
• Additional charges made in the year of £11.1m to increase provisions or settle further liabilities arising on
items identified during the Contract and Balance Sheet Review.
The overall net improvement to Trading Profit from OCPs and other Contract and Balance Sheet Review
adjustments was therefore £20.9m in the year.
Pensions
At 31 December 2015, the net retirement benefit asset included in the balance sheet arising from our defined
benefit pension scheme obligations was £94.8m (2014: £101.1m). The pension scheme asset base is £1.3bn
(2014: £1.5bn).
Defined Benefit Pension Schemes
As at 31 December
Group schemes – non contract specific
Contract specific schemes (including franchise adjustment)
Net retirement benefit asset
Retirement benefit assets
Retirement benefit obligations
Deferred tax liabilities
Net retirement benefit asset (after tax)
Key assumptions:
Discount rate
Inflation rate of increase in pensions in payment
Life expectancy (years)
Current pensioners at 65 – male
Current pensioners at 65 – female
Future pensioners at 65 – male
Future pensioners at 65 – female
2015
£m
115.6
–
115.6
127.1
(11.5)
(20.8)
94.8
2014
£m
130.5
(4.0)
126.5
143.9
(17.4)
(25.4)
101.1
3.80%
3.60%
2.0% CPI
and 3.0%
RPI
2.0% CPI
and 3.0%
RPI
87.6
90.1
89.4
92.1
87.5
90.0
89.3
92.0
The Group provides a number of occupational defined benefit and defined contribution schemes for its
employees. The Group’s principal defined benefit pension scheme is the Serco Pension and Life Assurance
Scheme (SPLAS) and this had a surplus of £127.1m (2014: £143.9m) calculated under IAS19 rules and is shown in
the non-contract specific section of the above table.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 70
Finance Review continued
The decrease in the surplus was driven principally by a decrease in the value of Liability Driven Investment (LDI)
assets in the year. Certain LDI assets were transferred to a separate gilt portfolio in late December to back
the longevity swap and those gilts (£50m) still contribute to the Scheme’s overall interest rate and inflation
protection but do not fall under the classification of LDI. Assets have also been disinvested to meet cashflow
requirements (particularly member benefits) over the year.
Of the total net retirement benefit asset of £115.6m (2014: £130.5m), of that related to non-contract specific
schemes there was a surplus of £127.1m (2014: £143.9m) in SPLAS, a deficit of £11.1m (2014: £13.1m) in the Serco
Section of the Railways Pension Scheme and a deficit of £0.4m (2014: £0.3m) in a small German pension scheme.
The last formal actuarial valuation of SPLAS was undertaken as at 5 April 2012 and showed a deficit of £24m.
The estimated actuarial deficit at 31 December 2015 was approximately £28m (2014: deficit £5m). The principal
difference between the actuarial valuation and the IAS19 valuation relates to the use of a lower discount rate
applied to measure the scheme liabilities for the actuarial basis. The main investments of this scheme are LDI
assets that seek to reduce volatility by matching the liabilities of the scheme for changes in interest and inflation
rates through a combination of gilts and corporate bonds with inflation and interest swap overlays.
In the period, Serco Caledonian Sleepers Ltd began to trade and the Serco Caledonian Sleeper Shared Cost
Section of the Railways Scheme became part of the Group. As at 31 December 2015 there was a nil deficit on the
Serco Caledonian Sleeper Shared Cost Section of the Railways Scheme contract after the franchise adjustment.
Pre-tax ROIC
Pre-tax ROIC is calculated as Trading Profit divided by the Invested Capital balance. Invested Capital represents
the assets and liabilities considered to be deployed in delivering the trading performance of the business.
Of the total assets on the balance sheet, Invested Capital assets are: goodwill and other intangible assets;
property, plant and equipment; interests in joint ventures; trade and other receivables; inventories; and assets
classified as held for sale. All other assets are excluded from Invested Capital, being: retirement benefit assets;
tax assets; derivative financial instruments; and cash and cash equivalents. Of the total liabilities on the balance
sheet, Invested Capital liabilities are trade and other payables and liabilities classified as held for sale. All other
liabilities are excluded from Invested Capital being: retirement benefit obligations; tax liabilities; provisions;
obligations under finance leases; derivative financial instruments; and loans.
In 2015 Invested Capital is calculated using the two-point average of the opening and closing balance sheets for
the year. For 2014 a single point was utilised due to the significant reduction in net assets during the year.
For 2015 the return from Underlying Trading Profit was 11.1%. The composition of Invested Capital and
calculation of ROIC is summarised in the table below.
Serco Group plc Annual Report and Accounts 2015 Finance Review
71
Invested Capital and Pre-tax ROIC %
As at 31 December
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interest in joint ventures
Trade and other receivables
Current assets
Inventory
Trade and other receivables
Assets classified as held for sale
Total invested capital assets
Current liabilities
Trade and other payables
Assets classified as held for sale
Non-current liabilities
Trade and other payables
Total invested capital liabilities
Invested capital
Trading profit / (loss)
ROIC %
Underlying Trading Profit
ROIC %
Profit Forecast
2015
£m
509.9
89.8
73.2
13.8
50.2
736.9
26.4
519.7
39.8
585.9
1,322.8
(548.8)
(32.5)
(18.3)
(599.6)
723.2
137.6
16.0%
96.0
11.1%
2014
£m
541.5
118.8
38.4
1.6
38.1
738.4
31.2
498.8
564.7
1,094.7
1,833.1
(581.9)
(219.9)
(29.7)
(831.5)
1,001.6
(632.1)
N/a
113.2
11.3%
On 11 March 2015, we issued profit forecast guidance based on a number of forecasting assumptions that
were published in the Group’s Rights Issue Prospectus. Our Trading Profit results for the year, prepared on
a comparable basis to the profit forecast assumptions, are consistent with our reported Underlying Trading
Profit of £96m. Hence, our results for the year are broadly in line with the published Trading Profit forecast of
around £90m.
Angus Cockburn
Group Chief Financial Officer
25 February 2016
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report·
72
Corporate Responsibility
First and foremost Serco
will live by its values – Trust,
Care, Innovation, Pride. They
form the foundation for how
we operate and how we
recognise our responsibilities
to our customers, the public,
our employees, partners,
suppliers, communities and
the environment.
Being a responsible business
means ensuring that we:
• comply with the law as well as
meet the standards we have
set for ourselves;
• deliver on our commitments
and are open and transparent;
• engage and motivate our
people, act safely and with
respect for the environment and
the communities we work in; and
• understand and minimise
business risk and achieve
appropriate financial returns.
By being responsible, we will
support the communities we
serve, strengthen our reputation
and brand, enhance our financial
performance and create sustainable
value for our shareholders.
Corporate responsibility (CR) is built
into the way we operate through
the Serco Management System
(SMS). The SMS defines the rules
that govern the way we behave,
operate and deliver our strategy. It
encompasses a set of Group-wide
policies and standards, covering
subjects ranging from business
conduct and ethics including
human rights, health, safety and
the environment, and people to
procurement and supply chain.
Every employee completes training
on understanding the principles
of the SMS when they join Serco.
This is supported by our Code
of Conduct (codeofoconduct.
serco.com), which applies to all
employees from Board Directors
to every member of frontline staff.
Our Code defines what we are
committed to do and the standards
we expect.
Our Governing Principles define the
behaviours we expect throughout
Serco. Alongside the review of
our strategy we have worked with
employees to review them. The
view was that they needed to be
refreshed and simplified to ensure
consistent understanding. The
result is a set of values – Trust, Care,
Innovation and Pride. While our
Code of Conduct defines ‘what’
we expect, our values define the
‘how’, and with this the behaviours
we expect from those who work for
us. These will be rolled out in 2016
with supporting communications
and tools to enable managers to
have conversations with their teams
on what they mean, where they
work. They will be embedded in
key people processes such as our
leadership model and performance
development reviews. We will
monitor this through our annual
‘Viewpoint’ employee engagement
survey. They sit at the core of
how we operate and how we
manage CR, details of which and
our performance in the year are
summarised below.
Managing corporate
responsibility
Our CR framework encompasses:
our people; health and safety;
communities; the environment;
our marketplace, which covers our
relationships with our customers,
suppliers and other parties; and
our commitment to ethics, human
rights and business conduct.
The Board has ultimate
responsibility for the Group’s
business strategy, which
encompasses our approach to
CR. Rachel Lomax is the Board
sponsor for CR and chairs the
Corporate Responsibility and
Risk Committee (CRRC). More
information on the CRRC can be
found on pages 116 and 117.
This Board Committee has
oversight of our approach to CR
and its governance, ethics, risk
management, security, and health,
safety and environment matters.
This Committee met four times
during 2015, receiving at each
meeting formal progress reports
on the elements making up our
CR framework. The CRRC Chair
reports after each meeting to
the Board on the Committee’s
activities, raising any specific issues
for Board consideration and action.
Serco Group plc Annual Report and Accounts 2015 Corporate Responsibility
73
The Group Chief Executive Officer
is a member of the CRRC, and is
responsible for promoting the
Group’s approach to CR and its
effective implementation across
the Group. This is agreed with
the Executive Committee, which
oversees its implementation.
Each CR element has a designated
Group Lead responsible for
engaging with divisional leads to
develop an appropriate strategy,
objectives and performance
indicators, and monitor and report
on performance to the Executive
Committee and CRRC. Each
divisional Executive Management
Team, under the direction of
the divisional Chief Executive,
then develops specific plans to
address the elements within the
CR framework relevant to their
business operations and strategy.
Delivery of these and performance
against agreed indicators
are reported to the division’s
Executive Management Team and
provided to the designated Group
Lead for review, consolidation and
Group reporting.
Ensuring ethical standards
At the heart of being a responsible
business is a commitment to
doing the right thing. We have
continued to develop ethical
governance through the divisional
Ethics Leads, who report to the
relevant divisional Executive
Management Teams. They are
responsible for the development
and implementation of the
division’s ethics and compliance
programme, managing our
whistleblowing ‘Speak Up’ process
and investigating and resolving
issues raised.
The divisional Ethics Leads
also form the core of the Ethics
Oversight Group, which meets at
least quarterly to review initiatives,
issues and share best practice. This
has included the implementation
of an online gifts and hospitality
register; completion of an ethics
and compliance risk assessment
to better identify risks across
the divisions; completion of an
independent review to assess how
current compliance requirements
are managed; development
of improved processes for the
effective due diligence of third
parties; and development of a new
question set for our ‘Viewpoint’
employee engagement survey
to create a sub-index on culture
within the main index, which was
included in the 2015 survey.
Following an initial culture
assessment in 2013, Navex Global
were asked to complete a full
follow up assessment in 2015 of
our UK operations. Their findings
were positive with many factors
identified in their 2013 report
having been addressed. This is
best reflected by the fact that they
found that 91% of line managers
and supervisors, and 85% of all
staff, either agreed or strongly
agreed that Serco is committed
to ethical business conduct.
There remain areas where further
improvement would be beneficial,
and plans are being developed to
address these.
We have continued our focus
on training with ethical and
compliance topics included within
our ‘Serco essentials’ (mandated
for all staff) and ‘Serco essentials
plus’ (mandated for all managers
and leaders) training. This has
included training for all staff
on our Code of Conduct, data
protection, equal opportunity
and diversity, and in addition
for managers and leaders topics
including competition law, anti-
bribery and corruption, anti-
money laundering and export
controls and trade compliance.
We continue to operate our
‘Speak-Up’ process which
is supported by an online
whistleblowing case management
system provided by an
independent third party provider.
Awareness of Speak Up continues
to increase with the results of our
employee engagement survey
‘Viewpoint’ showing that 83% felt
they had received the information
they needed to understand Serco’s
Code of Conduct (79% in 2014),
and with 71% (70% in 2014) feeling
they can report unethical conduct
without fear (above the Aon
benchmark average of 67%).
Of the Speak Up cases closed in
2015, 96% had been investigated.
63% of cases resulted in some
corrective action being taken,
typically relating to process
improvements, 24% resulted in
disciplinary action being taken
against some / all of those
involved, and a further 6% resulted
in one or more employees being
dismissed. 48% of the cases were
closed within three months of the
issue being raised.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 74
Corporate Responsibility continued
An example of how we have
sought to manage corporate
responsibility is given on page
117 in the CRRC Report in relation
to the independent investigation
that was launched following
a report by Channel 4 News
in March 2015. This included
undercover recording of staff
at the Yarl’s Wood Immigration
Removal Centre, which is
operated by Serco on behalf
of the UK Government, making
seemingly unacceptable and
derogatory comments. A full copy
of the independent investigation
report, its recommendations and
Serco’s response is available on
www.serco.com.
People
We are trusted to deliver essential
and life-enhancing services that
our communities depend on.
Delivering great service starts
with our colleagues. We depend
on their skills and commitment to
deliver the services our customers
expect. They contribute directly to
our reputation and ability to grow.
We recognise the privileged role
we are given, and that we must
enable our people to deliver
great service. We must also make
it easy to manage our workforce
with standard, simple and intuitive
systems and processes:
• We want our leaders to be fit for
the future, agile and adaptable,
and clear on the behaviours and
results expected of them.
• We want our colleagues to be
highly engaged and passionate
about service. We want them
to share our values and a sense
of personal responsibility for
delivering great customer
outcomes, and to achieve
them time after time.
• We want our workforce and
people management practices
to have an unrivalled reputation
for effectiveness and efficiency.
Leadership
We are seeking to continually
raise the bar for the quality and
capability of our leadership cadre.
In part this has been done through
the selection of new leaders and
helping to clarify – for new leaders
and those who have remained with
Serco – what the requirements
are for leaders in Serco. This will
be driven through a Leadership
Academy and specifically a
programme designed as a gateway
into a broader, ongoing curriculum
for leadership development
in partnership with a leading
business school. The first cohorts
will commence in 2016.
We recognise the importance to
the business of attracting and
retaining leaders, and the potential
risk if we don’t. We have therefore
driven greater accountability
and responsibility for ensuring
the calibre of our leadership
through our Talent and Succession
processes in 2015.
In 2015, our Annual Talent
and Succession Review was
supplemented by quarterly reviews
held between the Group Chief
Operating Officer, Group Human
Resources Director and Divisional
Chief Executive Officers and
Human Resources Directors, to
ensure that actions committed to in
the annual review are delivered and
issues dealt with along the way.
In addition, there has been a
greater focus on deeper dives into
specific groups. Regular Talent
and Succession Planning Boards
were introduced in the UK Region
across a number of Functional /
Business areas. The Boards serve
to identify potential emerging
talent; identify succession
challenges, opportunities and
critical role and people risks;
calibrate performance and
potential ratings; generate draft
succession plans; and agree
actions and monitor progress.
Employee Engagement
We measure engagement through
our ‘Viewpoint’ employee survey
and drive improvement through
our annual engagement roadmap.
Our engagement roadmap for
2015 was structured around
quarterly focus areas targeting
the key drivers of engagement,
Group-wide, as per the 2014
results (connection to Serco,
recognition, acting on employee
feedback and use of employee
knowledge, skills and abilities).
Divisional activity to address
these was additionally supported
by the coordination of global best
practice sharing and the provision
of resources and communications.
In 2015, the survey was updated
to integrate a series of questions
regarding our working culture
enabling greater focus on ethics,
integrity, diversity and inclusion.
As referred to earlier, a ‘culture’
index was added to the reporting
configuration for the survey results,
enabling automated reporting of
employee engagement specifically
regarding Serco ‘culture’.
Serco Group plc Annual Report and Accounts 2015 Corporate Responsibility
75
The 2015 Viewpoint Survey
was successfully launched and
completed in Q3 2015 with a
strong participation rate (76%
across the Group, 92% for
leaders). The results showed a
2% improvement in employee
engagement and 5% improvement
in leadership engagement. We will
continue to focus on our priority
engagement drivers: connection to
Serco, learning and development,
acting on employee feedback and
recognition, in seeking to improve
engagement further.
Developing systems
and processes
During 2015 we continued
work to identify and analyse
opportunities for enhancement
of our HR system’s (MyHR)
functionality and enhancements
with additional services.
Our Learning Management
System (LMS), fundamental to
delivering essential compliance
and behavioural training, and
successfully implemented in the
UK, went live across our businesses
in the Middle East and AsPac.
Use of the LMS has been strong.
From September 2014 to
December 2015, the total number
of users globally has increased
from 250 (original pilot population)
to 38,743. The total number of
courses hosted on the system
has increased from 12 to 495,
and the total number of course
completions to date is 219,361
(UK – 124,754; Middle East – 6,829;
AsPac – 87,778).
Adoption of the LMS for
business-specific training has
been driven in AsPac, where
capability to manage and report
all training has been built for Serco
Immigration Services (contributing
approximately 100 courses to
the catalogue), while the same
capability has been established
in the UK for Serco Marine
(contributing approximately 250
courses to the catalogue).
Following the successful pilot for a
new global recruitment solution at
Fiona Stanley Hospital in Australia,
the project to implement the
system across our businesses
in the UK, Middle East and
Australia launched in Q3 2015.
The implementation will be
completed during 2016, including
robust candidate tracking, talent
pooling to create a searchable
database of prospective
candidates, and an extensive
reporting and analytical capability.
These two implementation
programmes continue our journey
to globally consistent learning
and recruitment solutions that will
greatly improve our capabilities
in those areas. Both integrate
with our existing HR systems,
driving further value. Although
not initially in scope, both our
North American and European
businesses have been engaged
with the intent to bring them into
scope in future phasing.
Meanwhile, other new technology
is being rolled out in our North
American business and in the UK.
In the US, we have successfully
completed the implementation
of a new employee performance
management system, enabling our
8,500 US employees and managers
to align individual goals with
company business objectives and
improving delivery of our annual
performance review process.
In the UK, we have begun to
implement a new absence
management solution to drive
improvements in managing
planned and unplanned absence.
The system went live to 4,500
employees in December and
deployment of the system across
our UK organisation will continue
through 2016.
Diversity
Serco is a diverse business. We
seek to value difference and work
to create an inclusive and fair
environment for all. We seek to treat
people fairly and equally, accept and
embrace diversity and, as far as is
reasonably possible, reflect the local
communities in which we work.
Serco seeks to ensure equality,
diversity, inclusion, and anti-
discriminatory practice in the
workplace and community, offers
fair treatment in every aspect of
working life, and fosters a positive
climate of employee relations with
the intention that all employees
are treated with respect and
dignity. We adopt equality-
proofed policies and processes to
promote equality in the workforce
and monitor its diversity (where
allowed to do so by law).
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 76
Corporate Responsibility continued
According to our 2015
engagement survey, 76% of
employees believe that Serco
values diversity. This is up 1%
from 2014. By comparison, the
Aon global average external
benchmark is 71%.
The ‘Inspiring Women in Serco’
network launched in 2015,
sponsored by divisional Chief
Executive, Liz Benison. Principal
objectives for the network have
been proposed and a ‘Chapter-led’
governance framework is being
established. This complements an
existing affinity group for women
in management in our North
American business. Currently
there are three chapters at three
different locations across the US
meeting monthly. These groups
will represent a network for our
female talent across the business,
focusing on communication,
development and support
while encouraging mentoring,
relationship-building and the
establishment of career role
models. The learning from these
groups is being shared with our
other regions.
The gender breakdown of
our workforce is shown in the
table below.
Human Rights
and Ethics policy and Group
standard require us to respect
the United Nations Declaration
of Human Rights and the United
Nations Guiding Principles on
Business and Human Rights, and
to comply with the national laws
of the jurisdictions in which we
operate. This includes recognising
our obligations under the recently
enacted UK Modern Slavery
Act 2015.
We recognise that we can be a
force for good and will consider
operating in countries where there
are known risks of potential human
rights issues, provided we have an
approach which we believe can be
used to improve others respect for
human rights.
We will not knowingly be
connected to any direct breach
of human rights and will seek to
take corrective action if there are
any breaches. We are committed
to avoiding complicity in adverse
human rights impacts or otherwise
contributing to them, and where
it is discovered that there is such
complicity or a contribution we
will take necessary steps to cease
or prevent such contribution or
use our leverage to mitigate any
remaining impact to the greatest
extent possible.
We clearly state in our Code of
Conduct Serco’s commitment to
the protection of human rights.
Specifically, our Business Conduct
We use a Human Rights Decision
Making Tree as a tool for
evaluating the human rights
impacts of the contracts we
bid for and stimulating thinking
around how any adverse impacts
can be avoided or mitigated. If a
human rights issue is uncovered,
the issue will be reviewed by the
divisional Executive Management
Team for appropriate action and if
significant and has an implication
across the Group, or represents a
significant reputational risk to the
Group or clarification is needed on
the Company’s position, the issue
may be raised to the Executive
Committee for final decision.
The Investment Committee
provides governance for large or
high risk bids, rebids, acquisitions,
disposals and strategic
investments that are outside the
delegated approval authority of
the divisions. Included within this
is determining Serco’s position
in relation to new geographic
markets, opportunities or
activities. Where those activities
have been identified as presenting
an ethical dilemma which presents
a significant reputational risk
across the Group, such activities
will be considered by the
Corporate Responsibility and
Risk Committee on behalf of the
Board and any material outcome
reported or raised to the Board.
Human rights considerations
are included as part of risk
management. In addition to
this, during 2015 each division
completed an ethics, compliance
and human rights risk assessment
At 31 December 2015, the numbers of men and women employed by Serco were as follows:
Directors
Senior Managers
Employees
Number
Percentage
Male
Female
7
73
3
13
64,084
39,047
Male
70%
85%
62%
Female
30%
15%
38%
At 31 December 2015, we had 105,999 employees, of which we had gender information on 103,131.
(Source: Serco global HR systems, figures provided on a total headcount basis; includes BPO).
Serco Group plc Annual Report and Accounts 2015 Corporate Responsibility
77
which included for example,
the risk of slavery and human
trafficking taking place in our
business and in our supply chain.
During 2016, we will continue to
monitor the outcomes of our third
party due diligence and review
business practices in identified
risk areas.
In 2016 we will be reviewing
training in regards to the
protection of human rights and
prevention of slavery and human
trafficking in particular. We will
also review how we engage with
our suppliers and joint venture and
strategic partners on these issues.
Marketplace
Customers
Our principal customers are
national and local governments.
We have more than 50 years’
experience of helping them to
achieve their goals. By focusing
on the needs of the people they
serve, we enable our customers
to deliver better outcomes. Our
front line delivery involves us in
vital areas of public life, including
providing safe transport, finding
sustainable jobs for the long-
term unemployed, helping
patients recover more quickly,
improving the local environment,
rehabilitating offenders, protecting
borders and supporting the
armed forces.
Our reputation with our existing
customers is vital to our success
and to our prospects of future
growth. Many factors influence our
reputation, including the quality of
the services we provide, how we
deliver our commitments and how
we engage with our customers
and other stakeholders, such as
the local communities. Developing
and improving the relationships we
have with our customers is central
to us sustaining and growing our
business. This is about living the
values we stand by – Trust, Care,
Innovation, Pride.
We continue to 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.
These relationships lie with our
divisional and Group leaders.
We have strengthened how we
capture contractual obligations
to ensure we are delivering
on our commitments; we have
improved operational performance
reporting and review, both with
our customers and internally;
and looked at how we can
strengthen and better manage
customer relationships. These
help us to ensure we can better
identify and respond promptly
to their concerns and confirm we
are meeting commitments and
expectations. We continue to
place customer satisfaction at the
core of our management reporting
and incentive structures so we
are fully focused on ensuring our
customers receive the high quality
services they deserve from us.
Suppliers
Our approach to procurement
has four main strands: to make
the most of the benefits of
competitive supplier selection;
to optimise the efficiency and
effectiveness of our processes and
resources; to drive sustainability
throughout our supply chain; and
to develop positive relationships
with our suppliers. Our approach
takes regulatory, statutory,
ethical and sustainable factors
into consideration when making
decisions on the purchase of
goods and the commissioning of
services. We aim to be professional
in all our dealings with suppliers
and those we work with.
We have a Procurement and
Supply Chain function to ensure
consistent procurement processes
are applied in selecting and
using suppliers; to manage
the risk through appropriate
procurement strategies and
supplier selection criteria, ensuring
that sourcing initiatives are fair
and ethical to both Serco and the
participating suppliers; and to
ensure compliance with laws and
regulations, our ethical standards,
code of conduct and human rights
throughout our supply chain.
The relationship between Serco
and its suppliers is an important
component to achieving high
performance in our business. In
selecting suppliers, Serco works
hard to choose reputable business
partners who are committed to
ethical standards and business
practices compatible with those of
Serco. We continue to enhance our
systems and processes for choosing
and managing our suppliers.
Our approach to sustainable
ethical procurement is included
in our Procurement and Supply
Chain Group Standard. It sets out
the detailed requirements and
minimum expectations of our
policy of sustainable and ethical
procurement. Specifically, it
addresses the expectation that our
staff and suppliers have a natural
respect for our ethical standards in
the context of their own particular
culture and that relationships
with our suppliers are based on
the principle of fair and honest
dealings at all times.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 78
Corporate Responsibility continued
Our Serco Supplier Code of
Conduct, which supplements our
Serco Code of Conduct, applies
to all suppliers of Serco, including
all of the Serco suppliers’ facilities.
It formalises Serco’s practices
and makes clear that, recognising
differences in cultures and legal
requirements, we expect that
wherever our suppliers are located,
producing products for us or
delivering services for us, that they
are produced and / or provided in
a manner compatible with the high
standards that contribute to the
reputation of Serco.
Joint venture partners
Serco is involved in a number of
joint ventures with commercial
partners and customers. 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
Executive Committee and Board as
appropriate. This includes holding
regular strategy and review
meetings with our partners.
As with our suppliers, we continue
to enhance the systems and
processes to seek to ensure that
our joint venture partners meet the
standards we have set ourselves in
our policies and through our values.
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. This includes working with
voluntary sector organisations,
which often lack the scale and
experience to access major
government programmes.
Responsibility for relationships
with our strategic partners lies
with the relevant contract and
divisional management.
Community
Our communities are primarily the
people who live and work around
our contracts, but our definition
extends to include the third-sector
organisations we partner with to
deliver a number of our contracts.
We encourage our employees
to volunteer their time to local
projects. This not only benefits
the community and builds the
reputation of both Serco and
our customers, but it also has a
positive impact on the personal
development of the volunteers.
Working with communities
contributes directly to our business
success. It helps to enhance our
reputation and build trust with
our customers and the public,
by demonstrating that Serco
is a values-led organisation. It
also helps us better understand
community needs and to operate
existing contracts successfully,
particularly where we are
delivering services directly
to the public.
Our community activities are as
diverse as our business, and we
manage them at a local level. In
2015 they included support for: the
Nepal earthquake disaster relief;
heart research; cancer care; Royal
Flying Doctor Services; schools
and universities; rural communities;
the elderly; and sport and
community groups.
We believe it is important
to recognise and celebrate
exceptional achievements by our
employees, including those made
to the communities in which we
live and work. The Serco Pulse
Awards (which has categories in
relation to community, operational
excellence, heart and people)
recognise people at every level
and from every part of the
company whose behaviours are
making a difference, and providing
role models that help shape our
businesses in the future. In 2015,
14 divisional pulse community
awards have been recognised of
which six received a Global Pulse
Community Award.
Serco Foundation
During 2015, the Serco Foundation
Trustees developed a three-year
strategy with a vision of being
a pioneer in applying service
business know-how to help charities
deliver better outcomes for society.
This will be delivered by supporting
charities seeking improved
performance, by giving access to
Serco people, methodology and
experience. In line with this, in
February 2015 Serco and a global
charity signed a collaborative
agreement which enabled us to
provide direct support to a project
looking at the implementation of
their routine immunisation supply
chain strategy in India. The overall
objective of this is to reduce the
mortality rate in children under five.
We deployed two experienced
members of our staff who, over
a six-month period, worked
with the supply chain strategy
implementation partners in
cold chain and vaccine logistics
management to:
Serco Group plc Annual Report and Accounts 2015 Corporate Responsibility
79
1.
2.
3.
Develop a procurement
manual for use by buying
agencies across the supply
chain and introducing
a stronger governance,
forecasting and performance
management framework
Redesign the National Cold
Chain Vaccine Logistics
Action Plan, to prioritise
and maximise its efficiency
and effectiveness.
Introduce international
best practice to cold chain
equipment maintenance
practices and provide a
performance measurement
framework with a focus on
achieving service outcomes
Overall, when the outcomes
of their work have been
implemented, it is estimated that
it will enable an additional 500,000
children to be fully immunised
every year.
Health and safety
Our aspiration is zero harm.
Nothing is so urgent or important
that we cannot do it safely.
A strong health and safety
performance seeks to ensure the
safety of our people and protects
our reputation. Wherever they
work and whatever their role, our
people must adhere to stringent
health and safety procedures.
These procedures are embedded
in the SMS and are the minimum
standards that apply. A core
element of this is understanding
the safety risks we face as a
business. During 2015 a review of
the potential risks that could lead
to a significant safety event were
re-assessed along with associated
controls. We operate in a number
of heavily regulated, safety-critical
areas, which place stringent
requirements upon us. We seek to
have the systems in place to deliver
these requirements, as reflected
in the regulatory approvals and
licences we operate under. This
also means that we have regular
regulatory oversight. Together,
these factors give us a strong
controls framework for managing
our HSE responsibilities.
We have also reviewed and
revised our health, safety and
environment strategy for the
next three years. We recognise
that until we meet our aspiration
of zero harm there will always
be more we can do to improve
our processes and management
systems, reinforce leadership
and commitment and train and
develop the health and safety
capabilities of our people. We
have developed some strategic
objectives and set ourselves
targets to track our progress.
These cover:
• a drive to improve and focus on
safety culture to increase leader
and employee engagement,
which we will measure through
the ‘Viewpoint’ employee
engagement survey
• to raise visibility and apply a
consistent approach to the
management and reporting of
third party incidents, particularly
in regard to contractors;
• to review and improve
consistency in approach to how
incidents are managed and
reported with specific emphasis
on lessons learnt and the sharing
of these across the organisation
• to drive improvement and
focus on environmental issues
and management to support
delivery of the Group’s
environmental target.
We monitor and have objectives
around a number of performance
indicators including lost time
incidents, physical assaults and
major reportable incidents. In
2015 we reviewed and restated
our safety performance indicator
definitions which are recorded on
our safety management system
‘Assure’. As a result of this and
other system enhancements, we
noted a number of anomalies in
2014 data which led to a full review
of historical data. This identified
a number of incidents which had
been reported late and a number
reclassified when the revised
definitions were applied. We have
therefore adjusted our 2014 data
to reflect this along with resetting
2015 targets based on the revised
2014 baseline.
Reflecting the various safety risk
profiles, we track our performance
data for frontline operations
separately from our BPO business
which, whilst having a significant
number of staff, is a low safety
risk. This brings our safety KPI
rates down. Given the offshore
private sector BPO sale we will
be basing our targets on the 2015
frontline baseline rather than the
Group baseline, as this better
reflects the risk profile of the
Group moving forward.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 80
Corporate Responsibility continued
Overall performance across our
main KPIs has seen a deterioration
in performance against 2014. This
has been driven by an increase
(24%) in numbers of physical
assaults which typically results in
lost time and the more serious
assaults in major reportable
incidents. This predominantly
relates to our custodial / immigration
operations in the UK and AsPac.
This is not just a Serco issue but an
industry issue and is one we take
extremely seriously. For example,
in the UK the National Offender
Management Service (NOMS)
reports that over the last two years
there has been just under a 50%
increase in serious physical assaults.
During 2015 we completed a
detailed review of the risks,
controls and initiatives being
undertaken in the UK and AsPac
to better understand and manage
the risks driving physical assaults.
There is significant work being
undertaken and a range of
initiatives being implemented,
however the environment
continues to evolve and this
will remain a significant area
of management attention and
continue to impact our broader
safety KPIs.
We tragically had two employee
fatalities in 2015. One was a
call centre operative who was
killed in a road traffic accident in
India and the second in the UK
when a Prison Custody Officer
received fatal injuries during a
physical assault. Such incidents
are fully investigated and where
appropriate actions taken
and learnings shared across
the Company.
Lost time incidents
Lost time incidents (LTIs) relate
to any work related occurrences
incurring one full lost working day
or more and provide a general
overview of safety performance.
The number of LTIs are normalised
per 100,000 FTE to give the Lost
Time Incident Rate (LTIR). In 2015 we
saw a 10% increase in the number
of LTIs compared to 2014. This has
impacted our LTIR by 11%. This
increase has mainly been driven
by increases in physical assaults.
At 630 our LTIR is above our target
for 2015 of 548. For just frontline
staff, the last four quarter rate
of 1,139 is also above our target
of 981. The majority of physical
assaults relate to our custodial /
immigration operations. When
these are removed slips / trips /
falls and manual handling continue
to be the highest contributors to
LTIs with the underlying LTIR for
the last four quarters for the Group
at 346 and frontline operations
at 673. This shows an underlying
good safety performance across
the business. Our target for 2016
is for a 5% reduction in our LTIR
based on 2015 frontline baseline
at 1,139 (2016 target 1,082).
Physical assaults
Physical assaults continue to be
an area of significant management
attention as we have seen across
our custodial and immigration
operations in both the UK and
AsPac an increase in the numbers
of physical assaults reported. To
better understand this, in 2015 we
completed a reassessment of the
risk factors that are impacting our
operations and the industry as a
whole. These include: increasing
issues around new psychoactive
substances, often referred to as
‘legal highs’; increasing gang-
related violence; ethnicity, cultural
mix and changing populations;
consequence management;
and the processing pathway for
immigrants. Recognising this
evolving risk profile we continue to
drive a number of initiatives. These
include five minute interventions to
better manage initial contact; body
worn cameras, placement strategy
and heat map assessments. We
work closely with our customers
on this issue, for example in the UK
we are active participants in the
National Offender Management
Service Violence Reduction Project.
As part of this review we have
evolved our reporting to cover all
physical assaults, as in previous
years, but also now monitor
those defined as serious physical
assaults, i.e. those that result in
physical injuries requiring medical
treatment involving overnight
hospitalisation in a medical facility
or ongoing medical treatment.
For 2015 our physical assault
rate at 689 (per 100,000 FTE) has
increased by 25% against 2014, with
93% of all physical assaults coming
from within our custodial and
immigration operations. This falls
short of our target (533) by 29%.
Serco Group plc Annual Report and Accounts 2015 Corporate Responsibility
81
When just frontline performance
is considered we still see a
deterioration against 2014 of 26%
in our rate and fall short by 30%
against target (979). This reflects an
erratic performance over the last
five years which is reflective of the
changing risk profile.
Within this the more ‘serious’
assaults make up 17% of all
assaults. Our serious physical
assault rate at 118 for 2015 is a
36% increase against 2014 (87).
For 2016 our objective is for a
5% reduction in the 2015 serious
physical assault rate at 218 based
on 2015 frontline operations
baseline (2016 target 207).
Major reportable incidents
Of the 581 LTIs reported in 2015,
53 (9%) were classified as ‘major’
incidents. This compares to 35
reported in 2014. The increase
reflects the increase in serious
physical assaults. Major Reportable
Incidents (MRI) are classed as
fatalities, fractures, amputations,
dislocations, loss of sight, chemical
and hot metal burns, electrical
burns, unconsciousness caused by
asphyxia or exposure to a harmful
substance and acute illness
resulting from substance inhalation
or ingestion.
We normalise MRIs using the
same base (100,000 FTE) as LTIs
to produce a Major Reportable
Incident Rate (MRIR). The MRIR
for 2015 at 57.7 is a 54% increase
against 2014 (37.5) and is above
the target we set ourselves at
the beginning of the year (30).
In regard to our frontline
operations our MRIR is 95.9.
As with the LTIs the principal
contributors are those business
units providing custodial or
immigration services and
specifically relating to either
physical assaults on staff or
injuries incurred during control
and restraints, often intervening
in violent incidents between
prisoners. When these operations
are removed the MRIR comes
down to 31.2 which is just above
our target of 30. Frontline
operations excluding custodial /
immigration operations MRIR is 51
which brings us closer to but still
falls short of our target of 40. All
MRIs are investigated and where
identified corrective actions taken
and lessons learned shared across
the Company. Our target for 2016
is to achieve a MRIR for frontline
operations of 91.
Environment
Serco’s aspiration for zero harm
applies as much to the environment
as it does to health and safety. It
makes good business sense to
protect our reputation and reduce
our energy consumption and
environmental impact.
Across more than two thirds of
our business, we are working on
our customers’ premises and are
therefore not in direct control
of the environment in which we
operate. That is why collaborative
working with our customers on
environmental issues is important.
Serco recognises its responsibility
to ensure that any adverse impact
on the environment is reduced,
or where possible, eliminated by
applying the most appropriate
management systems at contract
level – whether designed by our
customers or by us.
Serco’s activities are typically
managed at a local level which
means there are a wide range of
initiatives in operation around the
world. For example, in Americas
in Arkansas we upgraded external
lighting at our CMS contract and
also completed environmental
assessments at our fleet business
unit facilities; in the Middle East our
Dubai Metro operation received a
Waste Management Award for a
mobile phone recycling campaign;
in our custodial estate in the UK we
upgraded boiler and zone controls
at Kilmarnock and upgraded
building management systems at
Dovegate, Lowdham Grange
and Ashfield.
Where we are not in control of the
working environment, we support
our customers in applying their
own environmental management
systems and objectives.
Where environmental initiatives
have been identified, specific
indicators relevant to the project
are agreed so that delivery and
where possible impact can be
assessed. This is monitored within
the relevant division and managed
locally to ensure appropriate
ownership and sustainability
of projects.
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 82
Corporate Responsibility continued
In 2015 the introduction in the UK
of the Energy Saving Opportunity
Scheme (ESOS) regulations
required Serco to present to the
Executive Committee costed
energy reduction initiatives for
a representative section of the
business. Examples are rainwater
harvesting systems; variable speed
pumps to boiler rooms; and early
upgrades to dated heating plants.
In 2015 Serco again responded
to the Carbon Disclosure Project
FTSE 350 (CDP) request for
information, achieving an improved
score of 99% compared to 97% in
2014, retaining us in the Carbon
Disclosure Leadership Index.
Greenhouse gas emissions
Our reporting year for greenhouse
gas emissions is one quarter
behind our financial year, namely
1 October 2014 to 30 September
2015. We report our emissions
data using an operational
control approach to defining
our organisational boundary.
This follows the greenhouse gas
protocol and defines how we meet
the Regulations’ requirements in
respect of the emissions we are
responsible for.
Serco quantifies and reports to
ISO 14064-1 2012. We have used
the Department for Environment,
Food and Rural Affairs (DEFRA)
2015 conversion factors within our
reporting methodology. We have
also opted to use operational
control as the consolidation
approach, due to the nature of
our business, with employees who
are often on customer sites where
no operational control is possible.
As this approach is inconsistent
with the financial statements, we
have described the classification
of reporting boundaries in detail
in our Basis of Reporting 2015
document, which is available on
our website, www.serco.com.
We report all material emission
sources for which we consider
ourselves responsible and have
set our materiality threshold at 5%.
These sources align with where
we consider we have operational
control. The emissions that
have not been included in this
year’s report relate to refrigerant
gases from air conditioning and
refrigeration outside the UK.
After analysis, we believe these
emissions are immaterial.
We do not have responsibility
for any emission sources that are
beyond our operational control,
for example, business travel other
than by our own transport, and
therefore do not report them here.
Scope 3 emissions can be found
in our annual Carbon Disclosure
Project FTSE 350 submission.
In 2015 we achieved an overall
materiality level of less than
5%, although not all divisions
achieved it. Our objective for
2016 is for all divisions to
achieve a materiality threshold
of at least 5% for greenhouse
gas emissions reporting.
In some cases, we have estimated
emissions based on similar
Serco facilities. This is done, for
example, where our staff work
in leased premises but have no
access to actual consumption
figures. In other cases, we have
extrapolated total emissions by
using available information from
part of the reporting period and
extending it to apply to the full
reporting year. This occurs for the
rare occasions where gaps are
identified in our data.
The sum of all estimated emissions
is below 5% of our global
emissions, so we consider the
potential for error to be immaterial.
In 2015 the total carbon dioxide
equivalent (CO2e) was 226,008
tonnes. This compares favourably
to last year’s emissions which were
368,012 of CO2e and represents a
38% reduction over last year. This
is due to changes in contributing
contracts such as the removal
of energy associated with the
operation of Docklands Light
Railway (December 2014) as well
as reduced UK gas consumption
as a result of mild weather and
the impact of initiatives taken.
Figure 1 provides a breakdown
of 2015 emissions by type.
Figure 2 provides a comparison
of 2015 and 2014 Global Scope 1
and 2 emissions.
Serco Group plc Annual Report and Accounts 2015 Corporate Responsibility
83
To express our annual reported
emissions in relation to the scale
of our activities, we have used
full time equivalents (FTE) as our
intensity ratio. This is the most
relevant indication of the constantly
changing nature of our business
and provides the best comparative
measure over time. Emissions
reported have been normalised to
2.45 tonnes CO2e per FTE (3.80 in
2014). Our emission intensity for
frontline business was 3.53 tonnes
per FTE (6.86 in 2014) and for BPO
FTEs it was 1.17 (1.03 in 2014). For
2016 we propose to reduce our
carbon emissions intensity (tonnes
of CO2e per FTE) by 3% for the
frontline operations against our
2015 performance.
Figure 1 – % Breakdown 2015 by emission type
Electricity 46.2%
Natural Gas 6.6%
Petrol 0.3%
Diesel 12.8%
Fuel Oil 2.2%
Specialist Marine Fuel 31.6%
Fugitive emissions 0.2%
Propane 0.2%
Figure 2 – Global scope 1 and 2 emissions in Tonnes CO2e
2015 v 2014
Combustion of fuel and
operation of facilities (Scope 1)
Grid electricity purchase
for our own use (Scope 2)
168,381
121,621
199,631
104,387
2015
2014
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Secretary
25 February 2016
Financial StatementsDirectors’ ReportStrategic ReportStrategic Report· 84
Directors'
Report
85 Corporate Governance Report
104 Audit Committee Report
85 Chairman's governance overview
114 Nomination Committee Report
87 Our governance framework
116 Corporate Responsibility
and Risk Committee Report
118
Board Oversight
Committee Report
120 Remuneration Report
144 Directors' Report
151 Directors' Responsibilities
Statement
88 Leadership
88 Meet the Board
92 How the Board operates
94 Effectiveness
94 The work of the Board
94 Board effectiveness
97 Accountability
97 Managing business risks
and internal control
101 Financial reporting process
101 Business conduct
102 Going concern
102 Engaging with shareholders
Serco Group plc Annual Report and Accounts 2015
Corporate Governance Report
85
Corporate Governance Report
Sir Roy Gardner
Chairman
I strongly believe that high standards of corporate
governance, integrity and business ethics are key
to underpinning the success of all businesses and
they protect the best interests of our customers,
employees, shareholders and the societies and
communities in which we work.
Chairman’s governance overview
Dear Shareholder
This is my first Corporate Governance
Report to you since I joined as Chairman.
I strongly believe that high standards
of corporate governance, integrity and
business ethics are key to underpinning
the success of all businesses and
they protect the best interests of our
customers, employees, shareholders, and
the societies and communities in which we
work. Other than my own appointment as
Chairman, there were no other changes to
the Board in 2015. The strength and depth
of experience of the current Board and
their commitment to the highest standards
of governance mean that we believe we
are well placed to further improve Serco's
performance in the coming years.
Since joining the business, I have visited
a number of operations in the UK and
overseas and I have met a large number
of people that want to do the right thing
in the right way. That demonstrates to me
that at its core, Serco wants to operate as
a well governed organisation. I also see
what good actions have been taken and
what progress is being made. Alastair
Lyons reported last year that 2014 saw
the implementation of a comprehensive
programme of corporate renewal to deliver
stronger, more effective governance,
organisational change and operational
resilience across the Group. Recognising
the importance of the successful
implementation of the Corporate Renewal
Programme, in 2015 the Group continued
to drive the embedding across the Group
of the actions, systems and processes
which form the Programme. Whilst I
recognise that it will take time to fully
embed all of the changes, significant
inroads have been, and continue to
be, made. In order to ensure that there
remains strong oversight and focus on
embedding these actions, the Board
Oversight Committee will continue to
closely monitor this. In my report as
Chairman of that Committee on pages
118 and 119, I go into more detail on the
activities of embedding corporate renewal,
which I encourage you to read.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 86
Corporate Governance Report continued
Chairman’s governance overview continued
The Board has reviewed the terms
of reference of the different Board
committees in order to ensure that
the division of responsibilities and the
terms of reference for each committee
are properly aligned. As a result of that
review, the Corporate Responsibility
and Risk Committee (CRRC) will be
renamed the Risk Committee following
the AGM in May. The membership of
the Risk Committee will be amended
to ensure that all aspects of risk can be
given full and proper consideration.
The Heads of Risk and Internal Audit
will also be invited to attend all Risk
Committee meetings to ensure that
there is full awareness of discussions
across both functions. During the year
under review, the Group has put a lot of
emphasis on risk management and it felt
appropriate that the Risk Committee be
given additional time to ensure that risk
management receives an appropriate
level of attention at Board level. The
Board recognises the importance of
corporate responsibility matters and
the relevant areas of responsibility have
been picked up by either the Board, for
example in relation to Health and Safety,
or the Board Oversight Committee in
relation to ethical and other corporate
responsibility matters in addition to its
existing responsibilities. As a result I feel
it is appropriate to reflect this broadening
of responsibilities and change its name
from the Board Oversight Committee to
the Corporate Responsibility Committee
and increase its membership. Further
information can be found in the individual
Committee reports.
An independent external evaluation of
the Board, its Committees and individual
Directors was carried out in early 2015 in
respect of the year ended 31 December
2014. The results were discussed by the
Board and the outcomes were made
available to me on appointment. This
provided useful information following the
significant changes to the Board during
2014. With my becoming Chairman in
July, half way through the year, I felt that
there would be limited value in carrying
out another evaluation during 2015.
However, I recognise the importance of
continual and constructive evaluation
of the Board's performance, and an
internally facilitated evaluation of Board
effectiveness will be conducted in the
summer of 2016.
This report sets out the Company’s
governance policies and practices and
includes details of how the Company
applies the principles of the UK
Corporate Governance Code (the Code).
In the following pages, we illustrate
how our governance arrangements
work in practice, focusing on the key
elements of the Board’s role: leadership,
effectiveness, accountability and
engaging with shareholders.
Sir Roy Gardner
Chairman
25 February 2016
Compliance with the UK Corporate Governance Code
Throughout the financial year ended 31 December 2015, Serco Group plc complied fully with all relevant provisions of the UK
Corporate Governance Code with the exception of B.6 which states that the Board should undertake a formal annual evaluation of
Board performance. As explained in the Chairman’s governance review above, an externally-facilitated evaluation was conducted
in early 2015 in respect of the year ended 31 December 2014 and an internal evaluation of Board effectiveness will take place
during the summer of 2016 when the Chairman has been in post for a full year. A performance evaluation of the Chairman, led by
the Non-Executive Directors, will also be included in the summer 2016 Board evaluation exercise. The Code can be found on the
Financial Reporting Council’s website at frc.org.uk.
Serco Group plc Annual Report and Accounts 2015 Corporate Governance Report
87
Governance in action
The raising of capital via a Rights Issue
and the refinancing of our debt facilities
was a significant event in 2015, requiring
robust governance and oversight by the
Board. A significant time commitment
was required to collectively evaluate
the potential options presented by
management and a number of Board
and Committee meetings were held
over a short period of time. In reaching
its decision on the best course of
action and satisfying itself to the best
of its knowledge and belief as to the
adequacy of disclosures, the Board
sought the views and detailed guidance
of professional advisers and carefully
considered the impact on the business
model and strategy, customers and
shareholders. In addition to the formal
Board meetings, the Chairman worked
closely with the management team
responsible for execution of the project
and ensured that other Board members
were kept informed of progress.
Our governance framework
The Serco business is complex and our
governance framework continuously
evolves to ensure that business decisions
and activities and any associated risks are
carefully controlled and monitored. The
Serco Management System (SMS) is a
comprehensive system including policies
and processes that gives clarity of roles
and responsibilities, governance and
reporting across the business.
The role of the Board
The Board is responsible to shareholders
for creating and delivering sustainable
shareholder value through the
management of the Group’s businesses.
The Board determines the strategic
objectives and policies of the Group to
deliver long-term value, providing overall
strategic direction within a framework of
risk appetite and controls. The Board’s
aim is to ensure that management
strikes an appropriate balance between
promoting long-term growth and
delivering short-term objectives.
The Board is responsible for
demonstrating ethical leadership and
promoting the Company’s values,
culture and behaviours, and for acting
in a way that promotes the success of
the Company for the benefit of the
shareholders as a whole.
The Board is also responsible for ensuring
that management maintains systems of
internal control that provide assurance
of effective and efficient operations,
internal financial controls and compliance
with law and regulations. In addition,
the Board is responsible for ensuring
that management maintains an effective
risk management and oversight process
at the highest level across the Group.
In carrying out these responsibilities,
the Board must have regard to what is
appropriate for the Group’s business and
reputation, the materiality of the financial
and other risks inherent in the business
and the relative costs and benefits of
implementing specific controls. The
Board is also responsible for deciding
other matters of significance to the Group
as a whole because of their strategic,
financial or reputational implications
or consequences.
Specific key decisions and matters have
been reserved for approval by the Board.
These include decisions on the Group’s
strategy, approval of risk appetite,
capital and liquidity matters, major
bids, acquisitions, mergers or disposals,
Board membership, financial results
and governance issues including the
corporate governance framework.
Leadership
Board gender diversity
• Male
• Female
7
3
Board tenure
• < One year
1
• Between one
and three years 7
• > Three years
2
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report·
88
Corporate Governance Report continued
Leadership – Meet the Board
Sir Roy Gardner (70)
Chairman
Rupert Soames OBE (56)
Group Chief Executive Officer
Angus Cockburn (52)
Group Chief Financial Officer
Edward J Casey, Jr (57)
Group Chief Operating Officer
Mike Clasper CBE (62)
Non-Executive Director
Appointment
Sir Roy was appointed a Non-
Executive Director of Serco
Group plc on 1 June 2015,
becoming Chairman on
1 July 2015.
Responsibilities:
Sir Roy is responsible for the
effective operation of the Board
and oversight of corporate
governance. He is Chair of
the Nomination and Board
Oversight Committees and a
member of the Remuneration
and Corporate Responsibility
and Risk Committees.
Experience:
Previously, Sir Roy was the
Chairman of Compass Group
PLC, Chief Executive of Centrica
plc, Managing Director of GEC-
Marconi Limited and a Director
of GEC plc.
He has also been the
Non-Executive Chairman
of Manchester United plc,
Plymouth Argyle Football
Club and Connaught plc and
a Non-Executive Director of
Laporte plc.
Sir Roy is the Chairman of the
Advisory Board of the Energy
Futures Lab at Imperial College
London and is the former
Chairman of the Apprenticeship
Ambassadors Network.
Sir Roy is a Fellow of the
Chartered Association of
Certified Accountants, the
Royal Aeronautical Society,
the Royal Society of Arts, the
City & Guilds Institute and the
Energy Institute.
External appointments:
Sir Roy is the Senior Independent
Director at William Hill plc,
and Chairman of Mainstream
Renewable Power Ltd. He is also
a Senior Adviser to Credit Suisse.
Until January 2016, Sir Roy was a
Non-Executive Director of Willis
Group Holdings Limited.
Appointment
Rupert joined Serco as Group
Chief Executive Officer in
May 2014.
Appointment:
Angus joined Serco in
October 2014 as Group
Chief Financial Officer.
Appointment:
Ed was appointed Group Chief
Operating Officer in May 2014
after serving as Acting Group
Chief Executive Officer following
his appointment to the Board in
October 2013.
Appointment:
Mike joined Serco as a
Non-Executive Director in
March 2014 and is Senior
Independent Director.
Responsibilities:
Rupert 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 relationships
with investors and other key
stakeholders. He provides
leadership to the Group and
represents Serco to major
customers, shareholders
and industry organisations.
Rupert is a member of the
Nomination Committee, the
Corporate Responsibility and
Risk Committee, the Executive
Committee and the Approvals
and Allotment Committee.
Experience:
Prior to joining Serco, Rupert
served for 11 years as the
Chief Executive of Aggreko
plc, the FTSE 100 temporary
power business. During his
tenure at Aggreko, the market
capitalisation of the business
increased from £450m to over
£5bn. Prior to Aggreko, he was
with the software company Misys
plc for five years, latterly as Chief
Executive of its Banking and
Securities Division. He spent
the first 16 years of his career at
GEC plc; in the last four years
of his service at GEC he was
responsible for the UK, African
and Asian operations of Avery-
Berkel. He studied Politics,
Philosophy and Economics
at Oxford University and was
President of the Oxford Union.
Responsibilities:
Angus is responsible for the
Group’s financial strategy
and management, including
reporting, forecasting, treasury
and tax. He shares responsibility
with the Group Chief Executive
Officer for our relationship with
shareholders and the City. Angus
is a member of the Executive
Committee and the Approvals
and Allotment Committee.
Responsibilities:
Ed is responsible for the day-
to-day operations of the Group,
ensuring that the business is
efficient and effective and that
proper service to customers
is conducted. He is a member
of the Board Oversight
Committee, the Executive
Committee and the Approvals
and Allotment Committee.
Responsibilities:
Mike is Senior Independent
Director and a member of the
Corporate Responsibility and
Risk, Audit and Nomination
Committees.
Experience:
Mike was previously the Group
Chief Executive of BAA plc from
2003 to 2006 and Chairman
of HMRC from 2008 to 2012.
Mike was previously the Senior
Independent Director at ITV
PLC from which he stepped
down on 31 December 2013
after eight years on the ITV
Board. Mike has an MA in
Engineering from St John’s
College, Cambridge. In 1995 he
was granted the title CBE, and
received an Honorary Doctorate
from Sunderland University.
Experience:
Angus joined Serco from
Aggreko plc, the FTSE 100
temporary power business,
where he served 14 years as
Chief Financial Officer and
latterly, Interim Chief Executive.
Angus brings corporate finance
and accounting experience,
gained across a variety of
sectors whilst working for highly
competitive global companies.
During his tenure at Aggreko he
drove through a programme of
continuous improvement within
the finance function.
Prior to Aggreko, Angus spent
three years as Managing Director
of Pringle of Scotland, a Division
of Dawson International Plc; five
years at PepsiCo Inc. in a number
of senior finance positions,
including Regional Finance
Director for Central Europe; and
several years at KPMG working
in the UK and USA. Angus is
an Honorary Professor at the
University of Edinburgh.
Experience:
Ed has been with the company
since 2005. Previous to his role as
Group Chief Operating Officer,
Ed was Chief Executive Officer
of Serco’s Americas Division.
Under Ed’s leadership, the
Americas business tripled in size
and successfully integrated two
acquisitions: RCI in 2006 and SI
International in 2008.
Prior to Serco, Ed worked
for nine years in the energy
business, including President
and Chief Executive Officer
of NP Energy Inc., an energy
marketing business he founded
and later sold; President and
Chief Operating Officer of
Tenneco Energy until it was sold
for $4bn; and as Group President
and Chief Financial Officer for
LG&E Energy Corp. Previously,
Ed worked over ten years in
investment banking and private
equity, including with The
Blackstone Group and Fremont
Group LLC.
External appointments:
Rupert is Senior Independent
Director of Electrocomponents
plc and a member of its
Remuneration, Nomination
and Audit Committees.
External appointments:
Angus is an experienced
Non-Executive Director and is
currently serving on the Board of
GKN plc where he is a member
of the Audit, Remuneration and
Nomination Committees.
External appointments:
Ed is a Director of Talen Energy
Corporation where he is a
member of the Audit Committee
and the Compensation,
Governance and Nominating
Committee.
External appointments:
Mike is currently Chairman of
Coats Group plc and Which?
Limited and President of
the Chartered Management
Institute (CMI).
Serco Group plc Annual Report and Accounts 2015 Corporate Governance Report
89
Ralph D Crosby Jr (68)
Non-Executive Director
Tamara Ingram (55)
Non-Executive Director
Rachel Lomax (70)
Non-Executive Director
Angie Risley (57)
Non-Executive Director
Malcolm Wyman (69)
Non-Executive Director
Appointment:
Ralph joined Serco as a
Non-Executive Director in
June 2011.
Appointment:
Tamara joined Serco as a
Non-Executive Director in
March 2014.
Appointment:
Rachel joined Serco as a
Non-Executive Director in
March 2014.
Appointment:
Angie joined Serco as a
Non-Executive Director in
April 2011.
Appointment:
Malcolm joined Serco as a
Non-Executive Director in
January 2013.
Responsibilities:
Ralph is a member of the
Board Oversight Committee.
Responsibilities:
Tamara is a member of the
Corporate Responsibility
and Risk and Remuneration
Committees.
Responsibilities:
Rachel is the Chair of the
Corporate Responsibility and
Risk Committee and a member
of the Audit Committee.
Responsibilities:
Angie is Chair of the
Remuneration Committee
and a member of the
Nomination Committee.
Responsibilities:
Malcolm is Chair of the Audit
Committee and he is also a
member of the Remuneration,
Nomination and Board
Oversight Committees.
Experience:
Ralph was Chairman of EADS
North America until his
retirement from that position at
the end of December 2011. He
joined EADS in 2002 as Chairman
and Chief Executive Officer of
EADS North America and also
served as a member of the EADS
global Executive Committee
until 2010. Previously, Ralph
held numerous positions
with Northrop Grumman
Corporation, concluding over 20
years of service as President of
their Integrated Systems Sector.
Prior to his industry career,
Ralph served as an Officer in
the US Army. Ralph has an MA
in Public Administration from
Harvard, an MA in International
Relations from the Graduate
Institute of International Studies,
Switzerland, and a BSc from the
United States Military Academy
at West Point, New York.
External appointments:
Ralph is a Non-Executive
Director of American Electric
Power Co Inc. in the United
States and Airbus Group, S.E.
in the Netherlands.
Experience:
Tamara is Executive Vice
President at WPP, where she
is Managing Director at Grey
Group and CEO, Team P&G.
In 2013 Tamara stepped down
after completing nine years as
a Non-Executive Director of
The Sage Group plc. Previously,
Tamara chaired the Board of Visit
London (formerly the London
Tourist Board) from 2001 – 2011.
Experience:
From 2003 to 2008 Rachel was
Deputy Governor (Monetary
Policy) of the Bank of England
and was previously Permanent
Secretary at the Department for
Transport, the Department for
Work and Pensions (formerly the
Department of Social Security)
and the Welsh Office.
Experience:
Previously, Angie was Group
HR Director at Lloyds Banking
Group and prior to that she was
Executive Director of Whitbread
plc until May 2007, having joined
the Whitbread Group in 1989.
She has also been a member of
the Low Pay Commission, and a
Non-Executive Director of Biffa
plc and Arriva plc.
Experience:
Malcolm, a chartered
accountant, was previously an
Executive Director and the Chief
Financial Officer of SABMiller
plc, until his retirement in July
2011. Malcolm joined SABMiller
in 1986 in South Africa and
joined the Board as Group
Corporate Finance Director
in 1990. He was appointed to
the Board of SABMiller upon
its listing on the London Stock
Exchange in 1999. He was Chief
Financial Officer from 2001 until
his retirement in July 2011.
External appointments:
Tamara is currently a Trustee
of Save the Children (UK).
External appointments:
Rachel is Senior Independent
Director and Chair of the
Conduct & Values Committee
of HSBC Holdings plc. She is
a Non-Executive Director of
Heathrow Airport Holdings
Limited, and a member of the
supervisory board of Arcus
European Infrastructure Fund.
Rachel is a Trustee / Board
member of Imperial College
London, the Institute of Fiscal
Studies (of which she is also
President), Ditchley Park,
Breugel and City UK.
External appointments:
Angie is currently the Group
Human Resources Director of J
Sainsbury plc, and a member of
the Sainsbury’s Operating Board.
External appointments:
Malcolm is a Non-Executive
Director and Audit Committee
Chairman of Imperial Tobacco
Group plc and Senior
Independent Director and
Audit Committee Chairman
of Nedbank Group Limited in
South Africa.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 90
Corporate Governance Report continued
Leadership
Roles on the Board
The roles and responsibilities of the Directors and the Company Secretary are described in more detail below:
Chairman
Group Chief Executive Officer
• Leads the Board and ensures that it is effective in all aspects of
• Leads the business to develop and deliver the Group’s strategy
its role.
• Takes a leading role in determining the structure and
composition of the Board, and its capabilities.
• Manages the business of the Board, ensuring that it facilitates the
Board to fulfil its role and function and, in doing so, ensuring that:
• the Directors receive timely, accurate, concise and clear
information.
• the Board invests sufficient time on each matter for effective
consideration and decision-making, in keeping with the
relative importance of each matter and especially for complex
or strategically important issues.
• Provides appropriate counsel and support to the Group
Chief Executive whilst respecting executive responsibility.
• Takes a leading role in the development and succession needs
of the Board, and the effective performance of each Director,
including:
• promoting the effective contribution of the Non-Executive
Directors; and
• ensuring that new Directors receive an effective induction.
and business plans as agreed with the Board.
• Provides inspirational leadership across the Group, setting the
tone from the top to promote the Company’s values and the
highest ethical behaviour by all employees.
• Develops, motivates and retains a strong, professional and
internationally-minded senior management team capable of
meeting the challenges associated with the Company’s long-
term growth strategy.
• Identifies strategic opportunities to enable the Group to grow
and differentiate itself, and agrees with the Board a roadmap to
realising those opportunities.
• Accountable for the Group’s performance and operational
management, including its:
• operational governance;
• ethical compass;
• profitability;
• competitive market position; and
• risk management and internal control systems.
• Maintains a close relationship of trust with the Chairman, seeking
appropriate counsel and support whilst preserving executive
responsibility.
• Leads the executive team, setting a personal example, building
team spirit, ensuring clear lines of communication, developing
individual and team capabilities, and ensuring that robust
succession planning processes are in place.
• Acts as an effective ambassador for the Group, developing
and maintaining strong relationships with current and potential
customers, and key stakeholders.
• Proactively promotes the Group’s investment case to investors
and listens to the views of major shareholders on key issues
affecting the Group.
• Communicates both internally and externally the Group’s culture
and values, key strategic imperatives and performance of the
business, ensuring that a clear sense of purpose is conveyed.
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91
Roles on the Board
Group Chief Financial Officer
Group Chief Operating Officer
• Provides leadership in the continuous evaluation of short and long-
• Leads the day-to-day implementation of the Group’s strategic and
term strategic financial objectives.
operational plans.
• Provides accurate and timely financial information and analysis to
ensure performance trends are clear and decision-making is based
on rigorous financial analysis.
• Directs and oversees all aspects of the Finance and Accounting
functions of the Group including the recruitment and development
of the team; responsible for Tax, Treasury and Investor Relations.
• Provides administrative oversight of the Internal Audit function.
• Evaluates and advises the Board on the impact of long range
planning, introduction of new programmes / strategies and
accounting standards.
• Provides the Executive Committee with advice on the financial
implications of business activities.
• Manages processes for financial forecasting, budgets and
consolidation reporting.
• Ensures that effective internal controls are in place and ensures
compliance with appropriate accounting regulations for financial
and tax reporting.
• Directs the following Group functions: Business Development and
the Centres of Excellence, Information Technology, Corporate
Shared Services, Mergers and Acquisitions, Compliance and Risk
Management and Business Transformation.
• Provides oversight of the day-to-day operations of the business.
• Alongside the Group Chief Financial Officer leads the monthly
Divisional Performance Reviews.
• Supports the Group Chief Executive Officer in strategic planning
and developing and executing implementation plans, including
plans to drive growth through the development of global
capabilities and to achieve operational improvements and
cost savings by better utilising corporate shared services
and lean principles.
• Chairs the Group Investment Committee review and approval of
investment decisions, including acquisitions and disposals, bid
approvals and parent company support mechanisms.
• Accountable for delivery of the Corporate Renewal Programme,
including responsibility for the Serco Management System, the
accurate reporting of operational performance indicators and the
adoption of robust compliance and risk management processes.
• Working with the Group Chief Information Officer, ensures that the
information systems are appropriate to support the operational
performance of the Group and the delivery of the strategic plan,
and are robust in terms of data and information security.
• Has oversight over health and safety, insurance and pensions matters.
Senior Independent Director
Non-Executive Directors
• Acts as a sounding board for the Chairman and assists him in the
• Constructively challenge and contribute to the development of
delivery of his objectives as requested.
the Group’s strategy and business plans.
• Provides an alternative point of contact for principal shareholders
if they have any concerns that are unresolved through normal
channels of communication.
• Seeks to maintain a balanced understanding of the views and
concerns of principal shareholders.
• Takes a leading role in the performance evaluation of the Chairman.
• Should it become necessary, leads an orderly succession process
for the Chairman.
• In the unlikely event that there is a serious failure in Board
governance, or where normal Board functioning is seriously
impaired or the Chairman is unable to act:
• will act as an intermediary where necessary; and
• will intervene to resolve the issues and restore the Board to
effective functioning.
• Ensure that the Group upholds high standards of integrity and
probity with appropriate oversight over the effective embedding
of the agreed culture, values, and ethical compass.
• Maintain effective oversight and review of the Group’s
performance against agreed goals and objectives, and of the
performance of the executive management.
• Maintain an effective understanding and oversight of the Group’s
principal risks and the assurance in place around those risks
including the results of the internal audit programme.
• Satisfy themselves as to:
• the integrity of the financial statements and all other formal
announcements;
• whether, taken as a whole, the Annual Report and Accounts is
fair, balanced and understandable;
• whether the Group’s risk management and internal control
processes, including those relating to the financial reporting
process, are robust and defensible; and
• whether the Board has robustly assessed the solvency and
liquidity risks faced by the Group.
• Taking primary roles in:
• appointing and, if necessary, removing Executive Directors, and
in Board succession planning.
• the Board’s determination of remuneration policy for the
Chairman, the Executive Directors, the Executive Committee
members and the Company Secretary.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 92
Corporate Governance Report continued
Leadership continued
Roles on the Board
Company Secretary
• Responsible for advising the Board on all corporate governance matters.
• Assists the Chairman in ensuring that all Board procedures are
followed and that there are good information flows, together with
facilitating induction programmes for newly appointed Directors.
Conflicts of interest
The Company’s Articles of Association include provisions reflecting recommended best practice concerning any Directors’
conflicts of interest. The Board has in place procedures for Directors to report any potential or actual conflicts to the other
members of the Board for their authorisation where appropriate. In deciding whether to authorise a conflict or potential conflict of
interest, only those Directors that have no interest in the matter under consideration are able to take the relevant decision acting
in a way they consider, in good faith, is most likely to promote the Company’s success. The Directors may impose conditions or
limitations when giving any authorisation, if they think this is appropriate.
The process of reviewing conflicts disclosed, and authorisations given, is repeated at least annually. Any conflicts or potential
conflicts considered by the Board and any authorisations given are recorded in the Board minutes and in a register of Directors’
conflicts, which is maintained by the Company Secretary.
How the Board operates
The Board and its committees
Currently the Board has ten members comprising the Chairman, three Executive Directors and six Non-Executive Directors.
The Board organises itself with clear divisions of responsibility so that no individual or group of individuals has unfettered powers
of decision-making. Whilst each constituent of the Board carries out distinct but complementary roles and responsibilities,
collectively all Directors work for the long-term success of the Company.
Many key Board responsibilities are referred to four standing Board Committees: the Audit, Nomination, Remuneration and
Corporate Responsibility and Risk Committees. This structure allows particularly detailed or complex matters to be given special
scrutiny and oversight. The Board has a fifth committee, the Approvals and Allotments Committee. This Committee comprises the
Executive Directors and the Company Secretary and meets on an ad hoc basis to approve proposals that have more operational
significance but do not merit full Board consideration.
The Board Oversight Committee is an additional committee formed in 2013 to oversee the Corporate Renewal Programme. The
Board Oversight Committee will remain in place to provide oversight and assurance, monitoring the further embedding of the
initiatives, policies and procedures that have been put in place as part of the Corporate Renewal Programme. As a result of the
changes to the Corporate Responsibility and Risk Committee outlined in the Chairman's governance overview above, including
renaming it to be the Risk Committee, the Board Oversight Committee will also take on responsibility for some corporate
responsibility related items and will be renamed the Corporate Responsibility Committee. More information can be found in the
Board Oversight Committee report on pages 118 and 119.
Except where decisions are specifically delegated, each Committee reports and submits recommendations back to the Board for
its review and, where necessary, decision. Each Committee operates within clearly defined terms of reference, which are reviewed
annually by the respective Committees and, if necessary, approved by the Board to ensure they remain appropriate and reflect any
changes in good practice and governance. The Terms of Reference of each Committee are all available online at www.serco.com.
The Board has approved a procedure for Directors to take independent professional advice at the Company’s expense and
Committees are authorised to obtain outside legal or other independent professional advice if they consider it necessary.
The Board and the Committees meet with sufficient frequency to fulfil their respective responsibilities, using structured but
flexible agendas to ensure that regular matters are addressed properly, while allowing time to discuss significant new issues.
More information on the work and performance of the Board can be found in the following pages. Separate reports describing
the activities of the Audit, Board Oversight, Corporate Responsibility and Risk, Nomination, and Remuneration Committees are
presented on pages 104 to 143.
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93
Conduct of meetings
Board meetings are scheduled eight times a year. The Company uses an electronic portal to ensure that papers are provided in
a timely and secure manner. Board meetings are held over one, two or three days and are structured to allow open discussion of
the strategy and trading and financial performance of the Group. To facilitate a proper understanding of the Group’s businesses at
Board and Committee meetings the opportunity is used to combine the formal business of the Board with Divisional presentations
and discussions. During 2015 the Board held a meeting in Dubai and received a presentation from the members of the Middle East
Division management team and undertook a number of local contract site visits and reviews. Additional Board meetings are held
as required.
Board decisions are usually taken by consensus. Exceptionally, if a decision is to be taken by vote, the Chairman has a second or
casting vote.
Reserved matters
There is a formal schedule of matters reserved to the Board. This schedule, which is reviewed annually, includes approval of:
• the Group strategy;
• annual financial and operating plans;
• major contract bid decisions, capital expenditure, acquisitions or divestments;
• annual and half-year financial results and satisfying itself as to the integrity of financial information;
• the Company’s dividend policy;
• ensuring there are adequate succession plans for the Board and senior management;
• appointing and removing Directors, the Company Secretary and committee members;
• setting and reviewing risk management and treasury policies;
• setting levels of operational delegated authorities;
• agreeing the Group’s culture, values, and ethical compass;
• reviewing the Group’s overall governance arrangements; and
• reviewing the effectiveness of the Group’s system of internal control and risk management processes.
Other specific responsibilities are delegated to Board Committees. Details of the responsibilities delegated to the Committees
are given on pages 104 and 143. The membership of each Committee is reviewed regularly to ensure the appropriate balance
of skills, experience, independence and knowledge of the Group.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 94
Corporate Governance Report continued
Effectiveness
The work of the Board
At each Board meeting, the Group Chief Executive Officer presents a comprehensive update on strategic and business issues
across the Group together with an update on transformation and portfolio management activity; the Chief Operating Officer
reports on contract performance, business development, strategy implementation and health and safety; and the Group Chief
Financial Officer presents an analysis of the financial performance, both at Group and divisional levels. Other senior executives
attend relevant parts of Board meetings in order to inform the Board of developments and activities in their areas of responsibility.
This provides the Board with access to a broader group of executives and helps Directors make assessments of the Group’s
emerging talent as potential succession to senior management roles. During the year, the Board conducted in-depth reviews of
operations and strategy. A number of the Non-Executive Directors and the Chairman have spent time at contract site visits with
local management in Hong Kong, USA, Australia and the UK. The Executive Directors regularly visit sites around the world.
Further site and contract visits are planned for 2016.
At its meetings during the year, the Board discharged its responsibilities and, in particular, reviewed the areas detailed in the
table below:
Strategy and transformation
Group and divisional corporate strategies, including Centres of Excellence, exit of the
private sector BPO business and portfolio management.
Funding and capital
Approval and completion of the Rights Issue, debt refinancing; tax and treasury policy.
Investor relations
Investor and analyst feedback following release of full year 2014 and half year 2015 results.
Business performance
The operational performance of each of the divisional businesses and periodic updates
presented by divisional management teams; health and safety reviews.
Governance
Recruitment of a new Chairman and consideration of legal governance and
compliance developments.
Financial and risk management The Group's business plans, presentations on the Group risk register and significant
areas of risk.
Diversity, talent and succession Presentations from the Group Human Resources and Talent Directors on diversity and
inclusion, succession and talent management and development across the Group.
Board effectiveness
Balance
To be effective, the Board must understand the dynamics of Serco’s mix of complex businesses across many diverse markets,
including the issues and factors upon which sustained success depends. A balance of experience, skills and viewpoints within the
Board promotes overall Board effectiveness and enhances Company performance in the long-term. The Directors are drawn from
different backgrounds and industries, and each has extensive experience of other international businesses in sectors that help
inform and augment Board debate.
Induction, training and ongoing development
On joining the Board, each Director receives a personalised induction programme including:
• an overview of the Group’s businesses, risks, governance arrangements and relations with investors;
• structured meetings with a range of relevant senior managers from across the Group;
• meetings with key advisers and shareholders as appropriate to the Director’s role; and
• site and contract visits to gain first-hand insight into operational contracts with major customers.
Legal and regulatory updates are essential for good governance, to ensure that Directors understand the operational environment
of the business. The Board and committee meetings incorporate briefings periodically on changes to the business, legislative and
regulatory environment, and on other relevant topics, such as changes to the corporate and remuneration reporting landscape.
External speakers are invited to present to the Board on current relevant issues.
Serco Group plc Annual Report and Accounts 2015 Corporate Governance Report
95
As part of its annual evaluation process, the Board considers the training needs of the Directors and the Company Secretary.
Development needs fall within the remit of the Chairman, who reviews and agrees these with each individual. All Board members
are encouraged to attend relevant external training courses at the Company’s expense. More information on Board evaluation
can be found on page 96. An induction programme for the Chairman including site visits and meetings with stakeholders, senior
executives of, and advisers to, the Group progressed throughout 2015. All Directors continue to undertake programmes
of contract visits and meetings with senior executives as highlighted above.
Board independence
The Board considers all of the Non-Executive Directors to be independent. In coming to this conclusion, it has determined that
each Non-Executive Director is independent in character and judgement and there are no relationships or circumstances that are
likely to affect, or could appear to affect, the Directors’ judgements. In particular, they are independent of management and have
no cross-directorships or significant links that could materially interfere with the exercise of their independent judgement.
The 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.
The Board considered the Chairman to be independent on his appointment in July 2015. The Nomination Committee keeps the
Board’s diversity, balance and independence under review.
The terms and conditions of the appointment of the Directors are summarised in the Directors’ Remuneration Report on pages
130 and 131 and are available on request from the Company Secretary.
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 (AGM) 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 AGM must stand for re-election at the next AGM. Any Non-
Executive Directors, excluding the Chairman, who have served for more than nine years will be subject to annual re-election.
Notwithstanding the above, in accordance with provisions contained within the UK Corporate Governance Code, all Directors
retired and stood for re-election at the 2015 AGM and will do so, on an annual basis, at each AGM. Their names will be set out in
the Notice of Annual General Meeting.
Time commitment and external directorships
As part of the Board evaluation process, the available time commitment of each Director is considered. The Board considers
that the 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 present any material conflicts of interest to Serco, or compromise the effective management of the Group,
and 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 Directors’ Remuneration Report on page 140.
Sir Roy Gardner was appointed as Chairman with effect from 1 July 2015. Sir Roy is the Senior Independent Director at William Hill
plc and Chairman of Mainstream Renewable Power Ltd. He is also a Senior Adviser to Credit Suisse. Prior to Sir Roy’s appointment
the Board carefully considered these commitments and concluded that they would not have any material impact on his role as
Chairman of Serco Group plc.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 96
Corporate Governance Report continued
Board attendance
The frequency and content of Board meetings are reviewed by the Board annually. During the year there were eight scheduled
Board meetings and one additional meeting; five scheduled Remuneration Committee meetings and one additional meeting;
four scheduled Audit Committee meetings and four additional meetings; and four scheduled Nomination Committee meetings
and two additional meetings.
The attendance of the individual Directors at Board and Committee meetings of which they were members during 2015 was as follows:
Number held
Edward J. Casey, Jnr
Mike Clasper
Angus Cockburn
Ralph D. Crosby Jr.
Sir Roy Gardner (a)
Tamara Ingram
Rachel Lomax
Alastair Lyons (b)
Angie Risley
Rupert Soames
Malcolm Wyman
Board
9
9
9
9
8
5 (5)
7
8
4 (4)
9
9
8
Audit
Remuneration
Nomination
Corporate
Responsibility
and Risk
Board
Oversight
8
N/a
8
N/a
N/a
N/a
N/a
7
N/a
N/a
N/a
8
6
N/a
N/a
N/a
N/a
1 (2)
6
N/a
4 (4)
6
N/a
5
6
N/a
5
N/a
N/a
1 (1)
N/a
N/a
2 (5)
6
6
6
4
N/a
4
N/a
N/a
2 (2)
3
4
2 (2)
N/a
4
N/a
3
3
N/a
N/a
3
2 (2)
N/a
N/a
1 (1)
N/a
N/a
2
(a) Sir Roy Gardner joined the Board on 1 June 2015.
(b) Alastair Lyons retired from the Board on 1 July 2015. All the meetings of the Nomination Committee that he did not attend dealt with the appointment of his replacement and
were chaired by Mike Clasper, the Senior Independent Director.
Notes:
1. The number of meetings held includes scheduled and additional meetings.
2. The table excludes the attendance of Directors who attended meetings by invitation only.
3. Where a number is given in brackets against a Director’s attendance, this is the number of meetings which took place during their tenure.
Performance evaluation
A formal independent effectiveness review of the Board, its Committees and individual Directors was carried out in early 2015 in
respect of the year ended 31 December 2014 and was facilitated externally by CTMC&A Limited, an independent company with no
connections to the Board. CTMC&A Limited has previously facilitated an effectiveness review of the Board. The results have been
discussed by the Board and shared with the Chairman following his appointment. An internal review of Board effectiveness will take
place in summer 2016.
No review of the Chairman has been carried out since February 2014 as at the time of the last Board effectiveness review in 2015,
Alastair Lyons had indicated his intention to step down and a review of Sir Roy Gardner is due to take place at the same time as the
wider Board evaluation process that is scheduled for the summer of 2016.
Serco Group plc Annual Report and Accounts 2015 Corporate Governance Report
97
Accountability
Managing business risks and internal control
Serco has a system of internal controls, including financial, operational and compliance controls and risk management controls,
designed to manage and minimise risks that would adversely affect service levels to our customers, and safeguard shareholders’
investments, our assets, our people and our reputation (collectively ‘business risks’).
For each system of internal control, we have defined within the SMS Group Standards the processes and associated controls that
must be in place together with clear definitions of those individuals responsible for ensuring compliance. To provide assurance that
these controls are implemented and effective, we have implemented a three lines of defence model, i.e. the business, compliance
assurance (via the Group Compliance Assurance Programme) and the internal audit programme.
First line of defence – We seek to minimise the probability and impact of business risks through the consistent implementation
of the SMS, ensuring that appropriate process infrastructure and controls are in place and that appropriately trained staff are in
place to monitor mitigation plans. While SMS controls are designed to mitigate and minimise business risks, these risks cannot
be completely eliminated. Consequently, while SMS controls can provide reasonable assurance against misstatement or loss,
this cannot be absolute.
Second line of defence – As part of the ongoing management of the SMS, we have introduced a specific set of standards and
procedures on compliance assurance and implemented a Group Compliance Assurance Programme to ensure a consistent
approach across the Group in assuring business compliance with SMS controls. In 2015 we also rolled out a self-assessment
process to enable contracts to self-assess their compliance with the SMS and plan actions to close any gaps. As part of the
requirements of the Group Compliance Assurance Programme, the self-assessments are validated through selective compliance
assurance reviews and recommendations on future improvements are provided. This process will be repeated in future in order
to reinforce and continually improve compliance levels.
Third line of defence – Internal audit provides an independent assessment of the design and operating effectiveness of the
Group’s governance, risk management and controls that are in place to manage risk. The Internal Audit team carries out an annual
programme of risk-based audits reporting findings to the Audit Committee. The audit programme is approved by the Audit
Committee and is continually revised throughout the year to ensure it remains focused on appropriate areas of the business.
The in-house Internal Audit team uses KPMG as a co-sourced resource where appropriate.
The Board confirms that the three lines of defence have been in place for the year under review and up to the date of approval
of the 2015 Annual Report and Accounts.
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Corporate Governance Report continued
Roles and responsibilities
The following provides an overview of the roles and responsibilities across the Group with respect to the three lines of defence
approach and the Executive Committee and Board oversight of the effectiveness of the controls in place.
Functions
and Divisions
The Functions and Divisions of Serco are responsible for identifying and managing the risks in line with the policy
and standard defined within the SMS and implementing the controls defined in the SMS.
First line of defence – the business
The SMS requires every contract, business unit and division to identify and assess their business risks, to implement
mitigation actions and contingency plans to mitigate the probability and / or impact of their material risks (i.e. risks
that are likely to have a significant impact on our business objectives), and to monitor and report on these material
risks on a periodic basis.
Business leaders are responsible for the business activity and assign subject matter experts to material risks.
They are supported by appointed risk register managers trained on the Group Risk standard and procedures.
The subject matter experts are responsible for managing the risk and updating the risk on the risk register.
Business leaders own the register and are responsible for the risks registered on it; they are also responsible
for upward reporting of material risks to the next organisational level up on a periodic basis.
Subject matter experts for a material risk assess the effectiveness of the controls put in place and review the risk
ratings by: monitoring the status of mitigation actions; reviewing the results of SMS self-assessment checklists
completed by the business; reviewing the findings of the management assurance reviews and audits; monitoring
the status of key performance indicators; and identifying any issues or events either internal or external that impact
on the risk exposure or the ability of a control to mitigate a risk.
Divisional risk registers are developed by divisional Risk Directors and reviewed by the divisional Executive
Management Teams on a monthly basis. Material risks are reported upwards to the Group Risk and Compliance
Function on a quarterly basis to assist with the update of the status of the principal risks on the Group risk register.
Second line of defence – compliance assurance
Functions
and Divisions
The Group Compliance Assurance Programme is delivered through the divisional Compliance Assurance Plans.
These plans consist of the divisional compliance assurance reviews that will provide comfort that the business is
compliant with the SMS, external laws and regulations and customer contract obligations. A divisional Compliance
Lead is appointed by the divisional CEO with responsibility for developing and implementing the Divisional
Compliance Assurance Plan.
The divisional Compliance Assurance Plan is developed at the end of each year for the following year’s delivery; it
is reviewed and approved by the divisional Executive Management Team (EMT) and is signed off by the Group Risk
and Compliance Function.
The results of the divisional compliance assurance reviews are reviewed by the divisional EMT, and progress against
the plan is reported to the Group Risk and Compliance Function and Group Internal Audit on a quarterly basis.
The Group Risk and Compliance Function then reports overall progress of the Group Compliance Assurance
Programme to the Executive Committee and the Board’s sub-committees.
On an annual basis a compliance sign-off statement is received from each divisional CEO and reviewed by the Audit
Committee to confirm Group internal controls are being implemented and that there are no known control failures
that present an unmitigated material risk to the division or the Group.
The Group Risk and Compliance Function is responsible for managing the SMS, and for the development and
implementation of policies and standards associated with Risk Management and with Compliance Assurance.
The function is the custodian of the corporate enterprise risk management tool and is responsible for the
management of the Group risk register and for reporting the status of the principal risks to the Executive
Committee and the Corporate Responsibility and Risk Committee.
The function also provides assurance over the business – providing risk management oversight, assurance and
challenge of the divisional and corporate function registers; overseeing the Group-wide Compliance Assurance
Programme to ensure divisional and functional reviews take into account the Group principal risks; and is the
custodian of the SMS self-assessment tool, providing overall coordination and assessment of the results of the
annual completion of the checklists by the business.
Group
Risk and
Compliance
Function
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99
Third line of defence – internal audit programme
Group
Internal
Audit
Function
The Group Head of Internal Audit leads the Internal Audit function reporting functionally to the Chair of the Audit
Committee and is responsible for delivery of the internal audit programme, ensuring that it is risk-based and
aligned with the overall strategy of the Group.
The Group Head of Internal Audit also makes regular reports to the Corporate Responsibility and Risk Committee
and the findings of the overall internal audit programme are reported directly to the Audit Committee.
Executive Committee and Board Oversight
Executive
Committee
The Executive Committee owns the principal risks on the Group risk register. Each principal risk is assigned to a
senior executive who sponsors the management of the risk and assigns a subject matter expert to assist in the
identification and monitoring of the material controls required to mitigate the risk.
The Executive Committee then reviews the Group Risk Register quarterly ahead of formal review by the Corporate
Responsibility and Risk Committee and provides direction on the mitigation actions required to implement or
improve the effectiveness of material controls put in place (see pages 26 to 29).
Board
and sub-
committees
The Board has overall responsibility for our risk management and internal control system and for reviewing its
effectiveness. A formal review of the principal risks on the Group risk register is carried out on a quarterly basis by
the Corporate Responsibility and Risk Committee and a formal review of the findings of the overall internal audit
programme is carried out by the Audit Committee.
Risk management approach
Our risk management policies, standards, and risk management lifecycle processes align to the guidance contained within the UK
Corporate Governance Code and form part of the SMS. They ensure that we identify, review and report risks at all levels of our
business, reflecting the nature of the activities being undertaken at that level, the inherent business and operational risks, and the
level of control considered necessary to protect our interests and those of our stakeholders.
The risk management lifecycle includes five key stages that aim to identify the key risks of our operations and to ensure we have a
consistent approach to recording, analysing and mitigating them.
Risk identification – identifying the risks associated with the achievement of business objectives. In identifying the potential
risks both external factors arising from the environment within which we operate, and internal risks arising from the nature of our
business are considered as well as the associated controls, processes, and management decisions.
Risk analysis – assessing the level of risk exposure, based on an assessment of the probability of an identified risk materialising
and the impact if it does using a standard risk scoring system. Inherent and residual risk ratings are assessed at this stage and
risks are ranked according to both their ratings and their proximity. Risk registers are developed at this stage and maintained at
contract, division and Group level. Registers are periodically analysed to assess threats to our business objectives.
Risk mitigation – identifying controls that will reduce material risks to a target risk rating that is aligned with our risk appetite,
and implementing cost-effective mitigation actions that improve the effectiveness of the controls in mitigating the risk (including
contingency plans which reduce the severity of the impact of the risks should they occur).
Risk monitoring – includes monitoring mitigation actions and their impact (so as to improve the effectiveness of controls and
improving the residual risk rating) as well as monitoring changes to our business and the external environment, to ensure that we
have sight of and respond appropriately to reduce the impact of emerging risks, and removing those risks from the register that
are no longer relevant.
Risk reporting – reporting of the status of material risks up through the management chain to the next organisational level to
provide assurance that business risks are being appropriately managed and the controls in place are effective. Risk reports are also
used to provide insight on emerging risks which require additional management attention, as well as systematic risks which might
require Group-wide controls as appropriate.
Risk reporting processes are both 'bottom-up', whereby principal risks are communicated to the divisional Risk Directors, divisional
CEOs and the Executive Committee, and ‘top down’ assessment of the principal risks by the Executive Committee to ensure
divisional risk registers are focusing on risks that are considered most important to the organisation from a strategic perspective.
The divisional risk registers are reported on a quarterly basis to the Group Risk and Compliance Function, and the Group risk
registers are reported on a quarterly basis to both the Executive Committee and the Corporate Responsibility and Risk Committee.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 100
Corporate Governance Report continued
Group Compliance Assurance Programme
A structured approach to compliance assurance is delivered through the Group Compliance Assurance Programme; this
consists of individual divisional Compliance Assurance Plans, which are a series of formal reviews coordinated by divisional
Compliance Leads.
A divisional Compliance Assurance Plan will cover the business units, functional areas and contracts; it includes a selection of
legal and regulatory reviews, customer contract mandated reviews, process and control reviews, and any mandated Group and
divisional reviews. The Plan is designed to provide sampled assurance of compliance to support the divisional CEO statement of
internal control and risk management; improve the internal control environment through implementation of action plans following
identification of internal control weaknesses, and promote sharing of best practice.
The reviews are carried out by independent assurance personnel and coordinated by the divisional Compliance Lead. At the end
of each review, a report is provided to and discussed with the entity lead; this report provides the review findings and any agreed
corrective action plans.
A quarterly report of progress against the plan is discussed and approved by the divisional EMT; common trends or issues found
are highlighted to enable management to consider areas for improvement and ensure corrective action is taken.
These divisional reports are then consolidated at Group level by the Group Risk and Compliance Function for reporting to the
Executive Committee, the Board and its sub-committees.
Internal Audit Programme
The 2015 Internal Audit programme consisted of a programme of audits covering a sample of contracts, functions and risk themes
and has been delivered in full. Findings have been reported to the Audit Committee with senior management providing updates
on the status of significant business actions where appropriate. Findings and common themes have also been presented to the
Executive Committee to enable management to understand the themes and to ensure appropriate actions are being taken.
Improvements to the three lines of defence
During 2015, we have continued with the three-year programme established in 2014, refreshing our overall risk management
approach to better support the development and ongoing performance of the global business. In 2015 we further enhanced our
policies, processes and systems and gave more clarity on roles and responsibilities, governance and reporting.
During the year we have also continued training our business leaders and employees, improved risk management capacity and
capability in our global business, and improved visibility of risk focusing on periodic management information and decision-
making. Other improvements made in 2015 included:
• Executive Committee detailed review of principal risks and appointment of executive sponsors for each risk to oversee the
deployment of controls and actions to mitigate;
• rolling out a global SMS self-assessment process the results of which has helped us identify areas where compliance is to be
strengthened, inform changes needed to the SMS and inform compliance assurance reviews to be put in place for 2016;
• new Compliance Assurance procedures have been put in place which include specific divisional risk-based, regulatory or
customer required reviews as well as group mandated reviews. Group mandated reviews are derived from the principal risks
affecting the business;
• external review of the effectiveness of the Global Internal Audit function (GIA) was completed highlighting areas of good
practice and areas to focus on developing to further improve internal audit services. This has been incorporated into a revised
GIA strategy with the main focus on working with other lines of defence to provide a holistic approach to assurance and further
refining the risk based audit approach; and
• external review of the divisional risk processes was also carried out, and the results used to improve risk management processes
in 2016.
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Managing joint venture risks
We participate in a number of joint ventures and partnerships (JVs) with other companies or government enterprises in various
markets around the world. These JV arrangements take various forms and include contractual agreements to work collaboratively
and the setting up of special purpose vehicles (companies limited by shares, companies limited by guarantee, etc.) in order to bid
for and / or operate service contracts.
Serco ensure that these JV investments are set up appropriately via the governance and ownership arrangements which typically
include the following controls:
• partnership or JV Board – at the on-set a board is set up in line with the ownership and shareholder arrangements of a
particular JV. These arrangements will include customary voting rights and minority protection provisions that are designed
to appropriately protect Serco’s interests. Serco nominees participate in Board meetings on a periodic basis, and review the
financial and operational performance of the JV or partnership.
• line management oversight – performance of a JV is reported on a periodic basis by the JV’s management through the normal
line management which, depending on the nature of the JV, report to business unit MD or division CEO directly. Business
issues and material risks are monitored this way and, where appropriate, reported through the Divisional Performance Review
(DPR) processes.
• ethical compliance of third parties – due diligence checks are typically carried out on external parties, to ensure that Serco has a
good understanding of JV partner(s) and to gather information to actively manage criminal, regulatory or other reputational risks
that could arise.
Financial reporting process
The Company has a thorough assurance process in place in respect of the preparation, verification and approval of periodic
financial statements. The process includes:
• the involvement of qualified, professional employees with an appropriate level of experience in Group Finance
and across the Divisions;
• formal sign-offs from divisional Chief Executive Officers and Finance Directors;
• comprehensive review and, where appropriate, challenge from key internal Group functions;
• a transparent process to ensure full disclosure of information to the external auditor;
• engagement of a professional and experienced firm of external auditors; and
• oversight of the Audit Committee, involving amongst other duties:
• a detailed review of key financial reporting judgements which have been discussed by management; and
• review and where appropriate, challenge on matters including the consistency of, and any changes to, significant accounting
policies and practices during the year; significant adjustments resulting from an external audit; the going concern assumption;
and the Company’s statement on internal control systems, prior to endorsement by the Board.
The above processes provide comfort to the Board that the Group has undertaken an appropriate approach to include the necessary
information for it to consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Company’s performance, business model and strategy.
Business conduct
Serco operates within a management system that defines 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 Group. This policy outlines the Group’s position on a wide range of ethical and legal issues
including conflicts of interest, financial inducements, human rights and legal and regulatory compliance. 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. As the
leadership of the Company, the Executive Committee will make judgements about what it considers acceptable with reference,
where appropriate, to the Corporate Responsibility and Risk Committee.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 102
Corporate Governance Report continued
The Corporate Responsibility and Risk Committee provides oversight of our approach to corporate responsibility and its
governance, ethics, risk management, security and health, safety and environment matters. Each division has an Ethics Lead
responsible for the development and implementation of the division’s ethics and compliance programme in line with Group
strategy and assessed risks. Our Code of Conduct is provided to all staff (www.serco.com/codeofconduct) and included in
induction training. In 2015 we further strengthened ethical governance across the business with a refresh of our assessment
of ethical, human rights and compliance risks. We have revised and refreshed our Say No Toolkit (serco.saynotoolkit.net); and
strengthened our due diligence processes for third parties.
Serco’s externally managed ‘Speak Up’ service operated throughout the year, which enabled employees to report any concerns,
or report any wrongdoing that they did not feel able to raise with their line manager, human resources colleagues or through
other reporting channels. In addition to the service, which is available 24 hours a day, toll-free worldwide in several languages,
employees can also make reports via email or the internet. The Company Secretary independently investigates, with external
specialist support where required, any issues raised and reports back to the Executive Committee, Corporate Responsibility
and Risk Committee and, as appropriate, the Board.
The Group maintains a position of neutrality 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 the Group in the countries
in which it operates.
Going concern
In assessing the basis of preparation of the financial statements for the year ended 31 December 2015, the Directors have considered
the principles of the Financial Reporting Council’s ‘Guidance on Risk Management, Internal Control and Related Financial and
Business Reporting, 2014’; namely assessing the applicability of the going concern basis, the review period and disclosures.
The Group’s current principal debt facilities at the year-end comprised a £480m revolving credit facility, and £375m of US private
placement notes. Subsequent to year-end, the Group has repaid £113m of the US private placement notes, which left £262m of notes
outstanding. As at 31 December 2015, the Group had £855m of committed credit facilities and committed headroom of £777m.
Assessment of going concern – The Directors have undertaken a rigorous assessment of going concern and liquidity, taking
into account financial forecasts. In order to satisfy ourselves that we have adequate resources for the future, the Directors have
reviewed the Group’s existing debt levels, the committed funding and liquidity positions under our debt covenants, and our ability
to generate cash from trading activities.
Review period – In undertaking this review the Directors have considered the business plans which provide financial projections
for the foreseeable future. For the purposes of this review, we consider that to be the period ending 30 June 2017. The Directors
have also reviewed the principal risks considered on pages 16 to 25 of the Strategic Report and taken account of the results of
sensitivity testing.
Assessment – The Directors have a reasonable expectation that the Company and the Group will be able to operate within the
level of available facilities and cash for the foreseeable future and accordingly believe that it is appropriate to prepare the financial
statements on a going concern basis.
Engaging with shareholders
How we engage with shareholders
Serco uses a variety of means to gain insight into the views of shareholders and other stakeholders, and the Board is regularly
briefed on the feedback received through these engagement channels.
Primary responsibility for engaging with shareholders rests with the Chairman, Group Chief Executive Officer and Group Chief
Financial Officer. In addition, the Senior Independent Director is available to shareholders should these normal communication
channels fail to resolve an issue, or are inappropriate for any reason.
We have formal arrangements for engaging with shareholders, including those described opposite.
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Investor meetings
The Executive Directors and the Investor Relations team regularly meet with analysts and major investors to maintain effective
dialogue. The Chairman also offers to meet with the Company’s largest institutional investors each year. As part of an induction
programme following his appointment in 2015, the Chairman engaged with our five largest shareholders.
The Board reviews an investor relations report each quarter. This highlights share price movements, changes in the share
register, the Company’s recent and planned investor relations activities, analyst recommendations and financial forecasts for the
Company, and significant news from the market and the support services sector. This report contributes significantly to the Board’s
understanding of investors’ views.
Annual General Meetings (AGMs)
The AGM provides an opportunity to communicate with all shareholders, especially our private shareholders. Individual
shareholders have the opportunity to question the Chairman and, through him, the Chairs of the various Board Committees and
other Directors. The Notice of Meeting will set out the resolutions being proposed at the AGM to be held on 12 May 2016. It is
the Company’s policy at present for all resolutions to be voted at a general meeting by way of a poll. A poll reflects the number of
voting rights exercisable by each member and is considered by the Board to be a more democratic method of voting. 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.
Formal consultations
When a material change in remuneration policy is being considered, the Chairman of the Remuneration Committee consults with
major investors and seeks their views. From time to time, we seek the views of major shareholders on other Company proposals.
Direct communications initiated by shareholders and representative bodies
From time to time, we receive enquiries and circulars directly from major shareholders and representative bodies, such as the
Investment Management Association, the National Association of Pension Funds (now known as the Pensions and Lifetime Savings
Association) and Pensions Investment Research Consultants. We also review the various environmental, social and governance
reports published about us annually and consider whether any changes are needed and to respond to any specific comments.
External advisers
Legal, financial, remuneration and communications advisers gain insights into shareholder attitudes in the course of conducting
specific research or through their work with other clients. Relevant insights are shared with the Board and its committees.
Corporate website
The Group website www.serco.com is a primary source of information on the Group. The site includes an area tailored for investors,
including information such as an archive of all reports, announcements, presentations and webcasts, share price tools, the terms
of reference for all Board Committees, and information on voting at the Annual General Meeting. It also has a link directly to the
Company’s registrars, allowing shareholders to view their shareholding online and to vote on the resolutions set out in the notice
of Annual General Meeting.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Secretary
25 February 2016
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 104
Audit Committee Report
Chairman’s overview
The Audit Committee is an essential part of the Group’s governance framework. It is responsible for ensuring the integrity of the
financial reporting process and internal control environment, promoting continuous improvement in accounting and reporting
practices, overseeing the relationship with the external auditors and managing the internal audit function.
Committee’s responsibilities
The Committee’s detailed responsibilities are set out in its terms of reference, which are reviewed and approved annually by
the Board and are available at www.serco.com. These responsibilities include the monitoring and reviewing of:
• the integrity of the financial statements of the Company and the significant financial reporting judgements contained in them;
• the Annual Report and Accounts, to assess whether, as a whole, it is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Company’s performance, business model and strategy;
• the activities, findings and effectiveness of the Internal Audit function;
• the effectiveness of the Group’s internal control systems;
• the Group’s relationship with the external auditors, including their fees and the provision of non-audit services; and
• the effectiveness of the external audit process, including consideration of the appointment, re-appointment or removal
of the external auditor and assessment of their independence and objectivity.
During 2015 the Audit Committee discharged fully its responsibilities. This report describes the key issues considered by
the Committee during the year and the actions taken in each of its areas of responsibility.
Financial Reporting
The following key matters were considered by the Committee during 2015 and in respect of the 2015 Financial Year:
• Monitoring the integrity of the Financial Statements of the Company for inclusion in the 2014 and 2015 Annual Report and
Accounts and for inclusion in the 2015 Half Year Report.
• Accounting issues, judgements and information to support the financial statements, including but not limited to going
concern, revenue recognition, onerous contract provisions (OCPs), impairments, tax provisions, discontinued operations and
exceptional items.
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Significant issues and key judgements
The following key issues were considered by the Audit Committee in respect of the financial year ended 31 December 2015:
Financial reporting control environment
Nature of the issue
In light of the significant provisions and impairments made in 2014 and 2015, the Audit Committee spent time considering
the strength of the Group’s internal control environment with particular regard to the Group’s three lines of defence model.
Action taken
Outcome
• With the support of the Audit Committee, management
has made a number of key appointments to increase the
capability and leadership within the Finance function.
• We are satisfied that key finance positions within the
Group have been strengthened through the recruitment
of experienced and qualified individuals.
• The Audit Committee has challenged management
• The Audit Committee has reviewed management’s
on the effectiveness of its second line of defence. The
Audit Committee will continue to assess this through its
monitoring of the 'financial control and financial systems
failure' principal risk.
• The Audit Committee has promoted the strengthening of
the in-house Internal Audit function, and in 2015 increased
its focus on the wider controls operating within the Group.
• The Audit Committee has mandated a sign-off process
to establish compliance with financial and non-financial
controls across the Group.
• The material controls associated with the Group’s principal
risks are reviewed by the Corporate Responsibility and
Risk Committee (CRRC), and the Compliance Assurance
Programme is reviewed by the Board Oversight
Committee. The Audit Committee focuses on the
financial internal controls.
assessment of its current financial control environment
with regard to its three lines of defence model.
• Key improvements made include the strengthening of the
Serco Management System and associated assurance plans,
and the Divisional Performance Reviews, which take place on
a monthly basis and review the key financial and operational
aspects of the business. The Audit Committee has also
reviewed the plans to further improve the Group’s second
line of defence and are comfortable with the initial proposals.
• The internal audit plans and reports have been reviewed
by the Audit Committee and it is comfortable with the
progress made to date, the issues raised and the actions
taken by management on significant issues.
• The Audit Committee has reviewed the results of the annual
sign-off process across the Group to assess whether any
areas of financial control non-compliance present a critical,
severe or significant risk to the Group.
• The Audit Committee has reviewed internal audit’s testing
of the control environment, which includes financial and
non-financial controls.
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Audit Committee Report continued
Business disposals
Nature of the issue
As a result of the Strategy Review undertaken by the Board, a number of businesses were considered for disposal during the
year with full details provided in notes 4 and 9 to the financial statements. The financial reporting for the business disposals
required careful consideration to ensure that they are appropriately reflected in the financial statements.
Action taken
Outcome
• The financial conclusions reached by management and the
accounting treatment have been discussed and challenged,
with particular focus on the treatment of the majority of
the private sector BPO businesses as discontinued and
the removal of the Leisure and Environmental Services
businesses from assets held for sale.
• Following the Audit Committee review and discussion
with the External Auditors, we are satisfied that it is
appropriate to treat the onshore private sector BPO
business as discontinued operations in the current and
prior year income statement. We are also satisfied that,
as a result of the decision not to sell the Leisure and
Environmental Services businesses that it is correct that the
private sector BPO operation should be the only business
included in the balance sheet as assets held for sale as at
31 December 2015.
Onerous contract provisions
Nature of the issue
As part of the Strategy Review in 2014, material onerous contract provisions (OCPs) were established. The Audit Committee has
focused on changes to those provisions as well as additional OCPs made in 2015, to understand and challenge as appropriate
the significant assumptions, judgements, estimates and conclusions made by management during its review of contracts at the
end of 2015.
Action taken
Outcome
• Management presented to the Audit Committee their
basis and process of assessing the level of provisions
required. Our review of this process covered all major
OCPs created as part of the Contract and Balance Sheet
Review in 2014, together with any new contract provisions
identified in the current year. The Committee also
reviewed the levels of provisioning required particularly
for long-term and / or complex contracts, and discussed
these with the External Auditors.
• We satisfied ourselves that the overall level of provisions is
appropriate when taking account of the range of possible
outcomes particularly on complex, long-term contracts.
The judgement made in regard to the Armidale Class Patrol
Boat (ACPB) contract to release a significant portion of the
OCPs, following the contract modifications agreed between
the Company and the customer, was considered, and it was
concluded that the provision release was appropriate.
• As part of our review of the significant OCPs, we challenged
management on how the assessment process reflected
other key judgements being made in respect of asset
impairments, deferred tax asset recognition and future
liquidity and viability.
• The Committee concluded that the assumptions and
judgements made by management in the calculation
of OCPs are consistent with those used in the models
prepared by management for forecasting future profitability
and cash flows.
Serco Group plc Annual Report and Accounts 2015
Audit Committee Report
107
Use of alternative performance measures
Nature of the issue
The Group’s key performance indicators include measures which are not defined or specified in International Financial
Reporting Standards. During the year, a new measure was introduced, being Underlying Trading Profit, which is used by the
Board of Directors to review current performance against the prior year by removing the impact of adjustments to OCPs,
charges and releases made in respect of other items identified during the 2014 Contract and Balance Sheet Review, and other
significant non trading items.
Action taken
Outcome
• An assessment was made of the performance measures
• We concluded that the performance measures are
in light of whether they provide meaningful insight to the
users of the Annual Report and Accounts.
• The new measure of Underlying Trading Profit was
considered for relevance to the performance of the
business through review of the Group’s management
accounts and discussions with management.
• We have reviewed the treatment of items considered
as being exceptional and therefore requiring separate
disclosure. Management prepared supporting
documentation for exceptional items to support their
treatment in the Financial Statements, which was reviewed
and challenged by us in light of the guidance issued by the
Financial Reporting Council in December 2013.
appropriate as they are those which are being used by
management in the assessment of the performance of the
business and that sufficient information has been provided
to shareholders on the changes made in the year.
• We consider the measure of Underlying Trading Profit to be
a reasonable basis for the comparison of the performance
of the business.
• The Audit Committee is satisfied with the appropriateness
of items treated as exceptional. We consider it appropriate
for restructuring costs connected to the Strategy Review
to be treated as exceptional in the current year, as they
represent a continuation of the ongoing major restructuring
programme that commenced in 2013.
• The disclosures made in the Annual Report and Accounts
• It was concluded that clear and meaningful descriptions
were reviewed to ensure that the measures provide
transparency to the performance of the Group, appropriate
prominence is given to statutory measures and clear
reconciliations to statutory measures are provided.
have been given for the alternative performance measures,
and that statutory measures have been disclosed in
sufficient detail to enable the users of the Annual Report
and Accounts to make informed decisions.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 108
Audit Committee Report continued
Goodwill impairment
Nature of the issue
In the year ended 31 December 2014 the goodwill balances associated with three of the Group’s cash generating units (CGUs)
were impaired, and the low levels of headroom for the Health, Direct Services and Americas CGUs meant that a deterioration
in performance for these businesses during the course of 2015 could result in further impairments. In the year ended 31
December 2015 such a deterioration was noted in the Americas CGU, which resulted in a further impairment of £87.5m. Details
of the Group’s goodwill balances is provided in note 20 to the financial statements, and details of the judgements applied can
be found in note 3 to the financial statements. Core to the assessment of the value of the goodwill is management’s estimate of
the future cash flows associated with them, which is dependent on circumstances both within and outside of their control, and
discount rates that are adjusted to reflect risks specific to individual assets.
Action taken
Outcome
• The methodology and results of the impairment testing
• We are satisfied that the assumptions underlying the
were presented to the Audit Committee and were subject
to scrutiny and review. The Committee placed particular
focus on changes in discount rates applied and ensuring
that the underlying cash flows are consistent with the
Board-approved forecasts.
• The disclosures made in the financial statements have been
reviewed to ensure that they provide an appropriate level of
information to its users.
impairments made in the year are appropriate. In particular,
the cash flow forecasts used include assumptions consistent
with the reported contract attrition rates in the Americas.
• The underlying cash flow forecasts used for the assessment
of goodwill impairment are also consistent with those used
for the Group’s going concern and viability assessment and
the assessment of recoverability of deferred tax assets.
• The Audit Committee concluded that the disclosures
provided in the financial statements are transparent,
appropriate, and in compliance with financial
reporting requirements.
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109
Tax exposures
Nature of the issue
The Group has historically been exposed to a number of claims raised by tax authorities in the normal course of business,
generally in territories outside of the UK. The majority of these claims have arisen in India in respect of the offshore private
sector BPO business, the majority of which was sold in December 2015. Where the likelihood of our position being challenged is
more probable than not, the Group provides for the liability, including interest and penalties. Where the probability is assessed
as less likely than not, the Group does not provide for any of the liability and discloses material individual items as contingent
liabilities unless their likelihood is assessed as there being no present or possible obligation to pay tax or if there is, it is remote.
As part of the agreement to dispose of the offshore private sector BPO business in December 2015, the Group offered a limited
tax indemnity to the purchaser for general tax exposures that relate to historic tax claims. Accordingly, the Group continues to
provide for the exposures that may arise under this limited indemnity. In addition, the Group provides a further indemnity in
respect of withholding tax arising on an acquisition in India in 2011. Tax and interest thereon has been disclosed as a contingent
liability and penalties have been considered as remote. Further details are provided in note 32 to the Group’s financial statements.
Action taken
Outcome
• We reviewed the summary documentation prepared by
management supporting the tax provisions made and that
for significant claims not provided for.
• The Audit Committee has reviewed the general tax
indemnity provided on the disposal of the majority of the
offshore private sector BPO business, and the accounting
treatment thereof.
• The documentation has been discussed, and challenged
by the Committee. The Audit Committee is satisfied that
the conclusions reached are appropriate. In particular, the
Committee considered that the withholding tax exposure
arising on the acquisition in India in 2011 is appropriately
disclosed in note 32 to the financial statements.
• We are satisfied that management’s assessment of the likely
outflows resulting from the indemnities is reasonable and
consistent with historic treatment of the positions.
Deferred tax reporting
Nature of the issue
The Group recognises deferred tax assets in respect of temporary differences in relation to fixed assets and carried forward
losses. At 31 December 2015 total deferred tax assets were £42.2m (2014: £37.4m). Recognising such assets requires an
assessment of their likely recovery, which relies on judgement by management of the taxable profits expected to be made in
each of the relevant jurisdictions in future years.
Action taken
Outcome
• The Audit Committee considered whether it is appropriate
to recognise the full value of the deferred tax asset at the
year end and whether the recovery of the associated tax
losses can be foreseen. We reviewed relevant management
documentation in support of the conclusions reached,
including the forecast financial information, challenged the
assumptions underpinning the calculations and discussed
the conclusions with management.
• The Audit Committee is satisfied that it is appropriate to
recognise the deferred tax assets as shown in the Group’s
balance sheet.
• Contingent deferred tax assets of £195m are appropriately
not recognised on the balance sheet (gross £1.05bn).
• Deferred tax assets of £42.2m have been recognised in the
balance sheet.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 110
Audit Committee Report continued
Going concern and viability statement
Nature of the issue
Consideration of the going concern risk is a fundamental responsibility of the Board of Directors, and the Audit Committee
supported the Board in considering this matter. The going concern assertion has a significant impact on the financial
statements in terms of both the valuation and presentation of assets and liabilities. Further details of the Directors’
assessment of going concern is provided on page 102.
In addition to considering going concern, the Audit Committee has given due consideration to the requirements of the
UK Corporate Governance Code and the associated viability statement, which is on page 30.
Action taken
Outcome
• The Audit Committee has challenged the going
• We consider the going concern review to have been
concern assessment prepared by management and
their identification of material uncertainties, and
discussed its findings with the External Auditor.
• Consideration was given by the Audit Committee to the
period of review for going concern, which is expected to
be a period of at least 12 months from the date of approval
of the relevant financial statements.
• The Audit Committee has reviewed and considered the
work performed on assessing the viability of the Group
and the period of assessment, after taking account of the
Group’s current position, budget and forecasting periods
and its principal risks.
• The Audit Committee has given consideration to the
period of assessment under the viability statement,
which is expected to be a period that significantly
exceeds 12 months.
• The Audit Committee has reviewed the going concern
and viability statement disclosures made in the Annual
Report and Accounts. This review has taken into account
the changes to the UK Corporate Governance Code.
rigorous and are satisfied that the conclusions reached
are appropriate.
• As the going concern review has been prepared for 16
months to June 2017, we have concluded that the period
covered by the review is appropriate.
• The assessment performed enabled the Board of Directors
to produce the viability statement that is set out on
page 30. The Committee concluded that an appropriate
approach has been taken in:
i. Identifying the principal risks which could impact on
future viability;
ii. Preparing the forecasts supporting the viability
statement, the basis of which is set on page 30; and
iii. Sensitising these financial forecasts against the
principal risks.
• The Audit Committee considers the three-year period
under which the viability statement has been prepared to
be appropriate and concurs with the reasoning provided
within the statement on page 30.
• We are satisfied that pages 30, 102 and 164 of the Annual
Report and Accounts include detailed disclosures
regarding going concern and the viability statement.
Serco Group plc Annual Report and Accounts 2015 Audit Committee Report
111
Defined benefit pension schemes
Nature of issue
The Group is responsible for paying contributions into a number of defined benefit pension schemes directly linked to contracts
in addition to the main Company scheme, Serco Pension and Life Assurance Scheme (SPLAS), and several other small non-
contract specific schemes. SPLAS has a significant pension asset at the end of the year of £127.1m (2014: £143.9m) and the other
contract specific schemes have a combined pension liability of £11.5m (2014: £17.4m). The value of the individual schemes
fluctuates due to changes in underlying assumptions, which include the forecast bond yield rates and the forecast inflation rate.
Further details of the pension arrangements can be found in note 34 to the Group’s financial statements.
Action taken
Outcome
• We considered both the process management undertook
• We concluded that the process followed was appropriate
to finalise the assumptions for the main schemes, and
how these assumptions benchmark against the market.
Advice was taken from independent actuaries on the
appropriateness of the assumptions used.
and the resulting calculation appropriately balanced.
Internal audit
The Audit Committee’s responsibilities in respect of internal audit are to:
• exercise oversight over the internal audit function;
• review and approve the internal audit programme; and
• review reports issued, and monitor management’s actions to respond to findings and recommendations.
During the year the committee discussed:
• the implementation of the 2015 internal audit programme, changes to the 2015 programme particularly in light of the
ongoing restructuring project and disposal of the offshore private sector BPO business, and the proposed 2016 internal
audit programme, which were approved by the Committee;
• the effectiveness of the internal audit function; and
• during the year, an external effectiveness review was carried out by a third party which included reviewing and assessing
how internal audit is positioned within the organisation, the effectiveness of the function, including the internal audit team
and its processes; how it benchmarked against best practice; and compliance with the Institute of Internal Auditors Standards.
This was reviewed in detail by the Committee.
The effectiveness review found that overall the internal audit function provides a good internal audit service and identified
opportunities for further improvement which will be used in determining the strategy for the function.
Internal control and risk management
Information in relation to internal controls and risk management can be found in the accountability section of the Corporate
Governance report on pages 97 to 102.
External auditors
During the year the committee considered the following matters:
• the annual audit plan of the external auditors and the 2015 external audit fees;
• pre-approving any fees in respect of non-audit services provided by the external auditors and ensuring that the provision
of non-audit services did not impair the external auditors’ independence or objectivity; and
• the continuing independence of the external auditors and the effectiveness of the external audit process.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 112
Audit Committee Report continued
External audit
The Audit Committee has responsibility for making a recommendation on the appointment, re-appointment and removal of
external auditors. Deloitte LLP was re-appointed as auditor of the Group at the Annual General Meeting held in May 2015.
During the year, the Committee received and reviewed audit plans and reports from the external auditor. The external auditors
also met privately with the Audit Committee without any member of management or the Executive Directors being present, and
with the Chairman of the Audit Committee in between Audit Committee meetings.
Non-audit services
The Committee has reconfirmed its policy on the provision of audit and non-audit services by Deloitte LLP. It determined three
categories of services: Approved (e.g. audit and related assurance services), Permitted (e.g. tax compliance and due diligence) and
Not Permitted (e.g. design / implementation of financial information systems and quasi management services). The Committee, the
Company and Deloitte LLP all monitor compliance with the policy and review at each meeting the fees earned and the estimates
for the year.
The Committee acknowledges that the Group’s external auditors will have a significant understanding of the Group’s business
and this knowledge and experience can be utilised to the Group’s advantage in many areas, thus ensuring efficiency in costs to
the Group. They also operate to professional codes of conduct including the management of conflicts of interest. Accordingly, it
considers that the external auditors may be engaged for the following non-audit services:
• assistance in tax compliance activities (including the preparation of tax returns);
• tax advisory services;
• accountants’ reports for any Stock Exchange purposes;
• ad hoc reporting on historic financial information for any other purpose and ad hoc accounting advisory services;
• due diligence activities associated with potential acquisitions or disposals of businesses;
• other corporate finance advisory services required in support of potential transactions or bids, including the review of
financial models for internal consistency and compliance with Group financial accounting policies; and
• any other services which are not prohibited and are authorised by the Group Chief Financial Officer or Group
Company Secretary.
Where such services are considered to be recurring in nature, approval of the Committee may be sought for the full financial
year at the beginning of that year. Approval for other permitted non-audit services has to be sought on an ad hoc basis: where
no Audit Committee meeting is scheduled within an appropriate time frame, approval is to be sought from the Chairman of
the Committee (or his nominated alternate). The Committee may establish fee thresholds for pre-approved services and similar
approvals are required for work awarded to accounting firms other than the Company’s auditor, where fees are expected to exceed
pre-approved limits. The Group Company Secretary is nominated by the Audit Committee as the point of review and approval for
the engagement of non-audit services. The Committee is currently targeting a cap on fees permitted for non-audit services of 70%
of audit fees. In 2015 the non-audit fees paid to Deloitte totalled £3.0m (2014: £0.8m) and were 200% (2014: 38%) of the 2015 audit
fee. The majority of non-audit fees in 2015 were incurred in respect of the Rights Issue, which completed in April 2015 and including
work on the profit forecast, the working capital statement and a report on pro forma financial information. Excluding those fees,
the non-audit fee was 33% of the 2015 audit fee.
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. The fees paid to Deloitte LLP for audit,
audit-related and non-audit services for 2015 can be found in Note 12 to the Consolidated Financial Statements. The principal
areas of engagement of Deloitte LLP for audit-related and non-audit services were commissioned in full compliance with the above
policy. The services principally related to the Rights Issue, taxation advice, audit related assurance services and due diligence
and other corporate finance advisory services. In awarding this non-audit work to Deloitte, the Audit Committee took account of
Deloitte’s knowledge of the Group and considered it able to provide an effective and cost efficient service.
Effectiveness of external auditors
The Audit Committee reviewed the effectiveness of the external audit process during the year under review. An assessment of the
process was undertaken by the Committee with input received from management associated with the audits undertaken (Group
Finance and divisional Finance Directors). The assessment covered all aspects of the audit service provided by the audit firm. The
Committee also obtained a report on the audit firm’s own internal quality control procedures and consideration of audit firms’
annual transparency reports.
Serco Group plc Annual Report and Accounts 2015 Audit Committee Report
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The FRC’s Audit Quality Review team selected to review the audit of the 31 December 2014 Serco Group plc financial statements
as part of their 2015 annual inspection of audit firms. The focus of the review and their reporting is on identifying areas where
improvements are required rather than highlighting areas performed to or above the expected level. As Chairman of the Audit
Committee, I received a full copy of the findings of the Audit Quality Review team and discussed these with the Audit Committee
and Deloitte. The Audit Committee confirmed that there were no significant areas for improvement identified within the report.
The Audit Committee is also satisfied that there is nothing within the report which might have a bearing on the audit appointment.
Audit tendering
The Audit Committee has noted the Competition & Markets Authority’s final Order on mandatory tendering and audit committee
responsibilities for FTSE 350 companies (the ‘Order’) as well as the BIS and FRC consultations on options for UK implementation of
the EU Audit Directive (the ‘Consultation’).
The Order applies to financial years beginning on or after 1 January 2015 and is therefore applicable to the year under review.
The Committee notes that the Order requires mandatory tendering every ten years in line with EU Regulation. As a result of
Deloitte LLP being the Company’s auditor for in excess of 20 years, the transitional arrangements require that the Company must
undertake a competitive tender process in respect of the external auditor appointment made on or after 17 June 2020. However,
the independence and effectiveness of the External Auditor is considered annually by the Audit Committee and the assessment
of the need to tender the audit is also kept under consideration by the Audit Committee, therefore it is possible that a tender
process may take place before the required deadline.
Auditor independence
The independence, objectivity and effectiveness of the external auditors have been examined by the Committee and discussions
were held regarding their terms of engagement and remuneration. The Senior Statutory Auditor is Andrew Kelly, who was
appointed to the role in respect of the audit for the year under review. There are no contractual obligations that restrict the
Company’s current choice of external auditor. Following an assessment of the independence, objectivity and effectiveness of
Deloitte LLP, the Committee recommended to the Board that Deloitte LLP be proposed for reappointment at the forthcoming
2016 Annual General Meeting. This recommendation has been accepted by the Board and will be proposed to shareholders.
Membership and meetings
The members of the Audit Committee are myself (Chair), Mike Clasper and Rachel Lomax. All members are Non-Executive
Directors who are regarded as being independent and have recent and relevant financial experience.
The Chairman, Group Chief Executive Officer, Group Chief Operating Officer, the Group Chief Financial Officer and the Group
Financial Controller are invited to attend all Audit Committee Meetings. The Group Head of Internal Audit, KPMG LLP (the Group’s
co-sourced internal audit provider), the Senior Statutory Auditor for Deloitte LLP, and other members of the management team are
also invited as required. The Chairman of the Audit Committee reports to the Board on how the Committee had discharged
its responsibilities.
The Group Head of Internal Audit, who functionally reports directly to the Chairman of the Audit Committee, has the opportunity
to meet privately with the Audit Committee without any members of management present. The Chairman of the Audit Committee
also meets and holds discussions with the Group Head of Internal Audit between Audit Committee meetings.
The Committee’s Terms of Reference provide that it will meet at least three times each year and in practice, the Committee meets
at least four times each year to coincide with the key reporting cycle. The Committee held eight meetings during the 2015 financial
year. Four meetings were called specifically to consider matters and announcements relating to the Strategic Review (as more fully
set out in the Strategic Report) and the 2015 Rights Issue, whist these matters were also on the agenda of certain of the meetings
held within our normal reporting cycle.
The minutes of Committee meetings are circulated to all Directors.
Malcolm Wyman
Chair of the Audit Committee
25 February 2016
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 114
Nomination Committee Report
Annual statement by the Chair of the Nomination Committee
The Nomination Committee was engaged in the early part of 2015 in managing the appointment of a new Chairman to replace
Alastair Lyons. That process was run by Mike Clasper as Senior Independent Director. The process was an extremely thorough
one which followed best practice. The Committee agreed the candidate specification and appointed Zygos Partnership, an
external executive search consultancy (which is not connected with the Company in any way) to assist with the search for a new
Chairman. The Senior Independent Director discussed the specification with key shareholders, prepared an induction schedule
and led the Committee in the appraisal of candidates. The Committee discussed and agreed remuneration following discussion
at the Remuneration Committee and recommended the final candidate to the Board leading to the Board approving my
appointment. As part of the recruitment process I met with other members of the Board before I was pleased to be appointed
in the summer of 2015.
In August, the Board received a detailed update on diversity and inclusion. It is clear that a lot of work is being done to improve
all areas of diversity. In the Group’s employee engagement survey, diversity and inclusion was rated as one of the Group’s current
global engagement strengths so we continue our efforts to develop in this area from a strong platform. There are a number of
different plans that are being progressed across the Group and these are reported on in different sections of this Annual Report.
In 2016, the Committee will keep these under review and will monitor progress both through the employee engagement survey
and through general benchmarking that is relevant to the sectors we operate in.
Following the completion of my induction programme I will look to carry out a Board evaluation exercise to determine the
effectiveness of the Board and its Committees and to also ensure that the skills are in place to enable the Group to successfully
deliver its strategy and to ensure that the succession plans that are in place also meet the requirements of the Group as we
progress through our strategy. The Nomination Committee will be responsible for implementing and monitoring any actions that
result from these exercises and I will report back to you in next year’s Annual Report on the progress that is made during the year.
Committee’s responsibilities
The terms of reference of the Nomination Committee are available on the Company’s website at www.serco.com. The principal
areas of responsibility are as follows:
• reviewing the size, structure and composition of the Board;
• recommending membership of Board Committees;
• undertaking succession planning for the Chairman, Group Chief Executive Officer and other Directors;
• searching for candidates for the Board, and recommending Directors for appointment;
• determining the independence of Directors;
• assessing whether Directors are able to commit enough time to discharge their responsibilities;
• reviewing induction and training needs of Directors; and
• recommending the process and criteria for assessing the effectiveness of the Board and Board Committees and the contribution
of the Chairman and individual Directors to the effectiveness of the Board and helping to implement these assessments.
Process for Board appointments
Before making any appointment to the Board, the Nomination Committee will evaluate the balance of skills, knowledge and
experience on the Board and, in the light of this evaluation, prepare a description of the experience and capabilities required for a
particular appointment. The Committee will also make recommendations to the Board concerning the appointment of any Director
or the Company Secretary and give full consideration to succession planning in the course of its work, taking into account the
challenges and opportunities facing the Company and the necessary skills and expertise required on the Board.
Where external recruitment is appropriate, or to benchmark a suitable internal candidate, the Committee will engage the
services of an independent search consultant. Specifications are drawn up for the roles, which include the personal attributes
and experience that are felt to be essential for the effective performance of any new appointment. For the appointment of Non-
Executive Directors and Chairman, consideration is also given to the time commitment that is required for a Director to fulfil the
obligations to the Company.
The Board strongly supports the principle of diversity and recognises the benefits that diversity can have across all areas of the
Group believing this adds to Serco’s continued success and advantage. The Board will always seek to appoint on merit against
objective criteria, including diversity. When considering the optimum composition of the Board, the benefits of diversity of the
Board are appropriately reviewed and balanced where possible, including in terms of differences of skills, industry experience,
approach, gender, race, age, nationality, background and other contributions that individuals may bring.
Serco Group plc Annual Report and Accounts 2015 Nomination Committee Report
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Governance in action
During the year Liz Benison, CEO of the UK and Europe Local and Regional Government Division and a member of the Executive
Committee, established an ‘Inspiring Women in Serco’ network, which aims to support the progression of our female employees
into senior roles and to promote Serco as being a good place for women to work.
The network, which is entirely self-selecting, has only been up and running for six months and already has over 200 active members
who have been organised into seven regional groups. Each group was asked to identify various initiatives which drive the four
overarching objectives: how the network can give benefit back to Serco; how it can advance individual development; how it can
support social responsibility and how it can promote a positive image of public sector outsourcing in the market.
The progress made is reviewed at quarterly steering committee meetings which are attended by the leads for each region as well
as Liz Benison. The network started in the UK and is growing with members now including overseas employees and employees in
joint ventures. The network is fully endorsed by the Board, and both Angie Risley and Rupert Soames have been invited to speak
at meetings, which are attended by a large number of employees and the recordings have also been made available afterwards.
I look forward to following the network as it goes from strength to strength in 2016.
Membership and meetings
I chair the Nomination Committee and the other members are Mike Clasper, the Senior Independent Director, Angie Risley,
Malcolm Wyman and Rupert Soames, the Group Chief Executive Officer. The majority of members are independent Non-Executive
Directors. The Committee met six times in 2015.
The minutes of the Committee meetings are circulated to all Directors.
Sir Roy Gardner
Chair of the Nomination Committee
25 February 2016
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 116
Corporate Responsibility and Risk Committee Report
Annual statement by the Chair of the Corporate Responsibility and Risk Committee
2015 has been another busy year for the Corporate Responsibility and Risk Committee. There has been good progress in all
areas, with particular focus on risk management. The Committee has had detailed discussions with divisional CEOs and risk and
compliance teams to review the management of ethics; compliance; health, safety and the environment; risk management and
assurance; and current business and other risks across the Group.
The Board has recently considered the responsibilities of each of the Board Committees, in particular focussing on the
responsibilities of this Committee and the Board Oversight Committee. As set out in the Chairman’s Governance Overview on
page 86, the responsibility of this Committee will change in 2016 and it will become the Risk Committee. This will ensure greater
oversight of risk management across the Group as we look to further strengthen the Group's capabilities and processes in this
area. The other responsibilities of the Committee will be moved to either the Board or the Board Oversight Committee as set out
elsewhere in this Annual Report. This change is due to take effect after the AGM in May 2016.
Set out below is a summary of the Committee’s current responsibilities together with a summary of the key activities carried out
in the year.
Committee’s responsibilities
The terms of reference of the Corporate Responsibility and Risk Committee are available on the Company’s website at
www.serco.com. The principal areas of responsibility are as follows:
• overseeing the effectiveness of the Group’s risk management framework including the principal risks facing the Group
and the actions being taken by management to mitigate those risks;
• overseeing the Group’s approach to health, safety and the environment;
• overseeing the Group’s contribution to the communities in which its people live and work; and
• overseeing the impact on the environment in which the Group operates.
Principal activities during the year
During the year under review, the principal activities of the Committee were as follows:
• reviewing of the Group Risk Register;
• receiving presentations from four of the five divisions to get greater insight into their management of ethics, compliance
and risk management and assurance and to get a deeper understanding of current business and ethical risks;
• carrying out a detailed review of certain principal risks facing the Group, including cyber security, contract non-compliance
and the management of brand integrity and reputation;
• reviewing quarterly health, safety and environment reports;
• reviewing and agreeing the 2016–2018 health, safety and environment strategy; and
• receiving reports on whistleblowing.
Serco Group plc Annual Report and Accounts 2015 Corporate Responsibility and Risk Committee Report
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Governance in Action – Yarl’s Wood investigation
For a number of years the work of Yarl’s Wood Immigration Removal Centre has been the subject of intense scrutiny and criticism.
In March 2015 a report by Channel 4 News included undercover recording of Serco staff at the Centre making unacceptable and
derogatory comments. It is vital that the operation of such a sensitive part of the UK's immigration system has the confidence of
the public and policy makers. It is also important for Serco and its staff that significant problems, if they exist, are recognised and
promptly put right. Accordingly Serco asked Kate Lampard CBE to undertake an independent and comprehensive investigation
into the culture at Yarl’s Wood, and how the culture and management of the centre affect the well being of residents.
As Chair of the CRRC, I oversaw the investigation, including setting up and agreeing the terms of reference, holding regular
meetings with Kate and her team, and keeping the rest of the Board informed of progress.
The report of the independent investigation was published in January 2016. It highlighted the challenges of operating the
facility and concluded that there was not an abusive culture at Yarl’s Wood. However it did identify deficiencies in staffing levels
and training that needed to be addressed, and made a number of recommendations for improving the well being of residents,
nearly all of which Serco has already accepted or implemented. A copy of the full report and Serco's response to each of its
recommendations is available on www.serco.com.
Membership and meetings
The Committee currently comprises myself as Chair, Mike Clasper, Tamara Ingram, Sir Roy Gardner and Rupert Soames.
The majority of members are independent Non-Executive Directors. The Committee met four times in 2015.
The minutes of the Committee meetings are circulated to all Directors.
Rachel Lomax
Chair of the Corporate Responsibility and Risk Committee
25 February 2016
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 118
Board Oversight Committee Report
Annual statement by the Chair of the Board Oversight Committee
After joining the Board in June 2015, one of my first tasks was to receive a detailed briefing on the Corporate Renewal Programme
(Programme), which was developed in the last quarter of 2013 and started to be implemented in 2014. The key components of the
Programme were as follows:
• revising Serco’s Code of Conduct, Values Statement and Governing Principles, supported by extensive training and formalised
induction processes and appropriate performance management;
• comprehensively reassessing and reissuing the Serco Management System (SMS), being the Company’s framework of
management control, to include more prescriptive guidance on required operational processes and procedures, and providing
updated training on the SMS for management across the organisation;
• strengthening contract level governance, including improved contract bid processes to ensure appropriate levels of risk
assessment, senior management scrutiny and technical and operational input;
• enhancing transparency, with robust reporting of operational and financial contract KPIs to both executive management and,
in summary, to the Board and its Committees;
• achieving greater engagement of public sector customers at contract and government departmental level;
• creating a separate division for our UK Central Government work to achieve both focus on, and openness with, the UK
Government as a collective customer;
• strengthening risk management compliance and internal audit processes and capabilities;
• appointing three additional Non-Executive Directors to the Board;
• creating the Corporate Responsibility and Risk Committee of the Board to formalise the process of guidance and decision-
making on ethical issues;
• establishing Ethics Officers in each division, accompanied by the redesign and relaunch of our whistleblowing process;
• measuring the progress of attitudinal change throughout the organisation with ongoing independent culture and ethics
reviews; and
• implementing a comprehensive set of global training programmes to reinforce the various elements of the Programme.
It is clear that a huge amount of progress has been made in delivering the Programme, which has been very important for the
Group. As a direct result of the Programme, the Group now has significantly improved governance policies and procedures in
place. I can see that there is still work to be done to ensure that these policies and procedures become fully embedded across
the Group and it will naturally take time for this to happen but very good progress has been made to date. I can also see that
all employees that I have had the pleasure to meet with want to do the right thing in the right way for our customers, which
will ultimately be for the benefit of all of our stakeholders. The Board has retained the Board Oversight Committee to ensure
that the embedding of the Programme continues to happen across the Group. As previously set out in this Annual Report, the
responsibilities of the Committee will increase in 2016 to include governance and ethical standards, which is one of the elements
that resulted from the Programme, as well as corporate responsibility matters, and the Committee will become the Corporate
Responsibility Committee. This change to the Committee is due to be put in place after the AGM in May 2016.
Committee’s responsibilities
The principal areas of responsibility of the Committee are as follows:
• overseeing the embedding of the Corporate Renewal Programme across the Group;
• overseeing ethical standards across the Group;
• approving the Group’s Code of Conduct;
• overseeing the Group’s whistleblowing process; and
• overseeing the compliance and assurance of the Programme.
Serco Group plc Annual Report and Accounts 2015 Board Oversight Committee
119
Principal activities during the year
During the year under review, the principal activities of the Board Oversight Committee were as follows:
• oversight of activities associated with the Programme including:
• the SMS self-assessment process;
• contract management performance management and reporting;
• compliance assurance;
• the global personnel training programmes; and
• the review of culture and values present in the business.
• assessing and reinforcing the Group’s ethical compass; and
• assessing the commitment of the Group’s leadership throughout the business to ‘do what is right’ in the way it conducts
business with its customers and suppliers, and in the way it manages its employees and other stakeholders.
Governance in action
Lord Gold is an independent third-party member of the Committee providing independent oversight of the planning and
implementation of the Corporate Renewal Programme. In addition to his work on the Board Oversight Committee, Lord Gold
assessed Serco’s approach to governance and ethics in the Group during 2015 and this will continue into 2016. Lord Gold has
attended a meeting of the Executive Committee, he has met separately with each of the Executive Committee members and
he has met with other key employees both in central functions and in operations. He also attended a conference at which
approximately 250 senior managers from the UK were present. Lord Gold’s independent reporting to the Board Oversight
Committee enables the Committee to better understand the depth to which the Corporate Renewal Programme is being
embedded across the business.
Membership and meetings
The Board Oversight Committee is chaired by me. The other members are Ed Casey, Ralph Crosby and Malcolm Wyman. In
addition, Lord Gold is an independent third-party member of the Board Oversight Committee. The majority of members are
independent Non-Executive Directors. The Committee met three times during 2015.
The minutes of the Committee meetings are circulated to all Directors.
Sir Roy Gardner
Chair of the Board Oversight Committee
25 February 2016
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 120
Remuneration Report
Dear Shareholder
On behalf of your Board, I am pleased to present our Directors’
Remuneration Report for the year ended 31 December 2015.
The Remuneration Committee continues to focus on the need
for a clear link between pay and performance and provides
information on this in the Report by way of disclosures on our
reward structure and on our remuneration decisions in line with
the recommendations of the UK Corporate Governance Code
and the requirements of the UKLA Listing Rules. This Report also
complies with the provisions of the Companies Act 2006 and the
Large and Medium-sized Companies and Groups (Accounts and
Reports) (Amendment) Regulations 2013 (Regulations).
We have structured the Report into two sections:
1. Directors’ Remuneration Policy setting out all elements of
our Company’s remuneration policy and the key factors that
were taken into account in setting that policy. This policy
received overwhelming support from shareholders under
a binding shareholder vote at the General Meeting in May
2014 and will be resubmitted to shareholders for a vote at
least every third year.
2. Annual Report on Remuneration setting out payments and
awards made to our Directors and an explanation of the link
between Company performance and remuneration for
the financial year covered by the accounts. This report
on remuneration, together with this letter is subject to an
advisory shareholder vote at the Annual General Meeting
on 12 May 2016.
2015 Overview
The first few months of the year were hugely challenging for
the business as the new management team sought to stabilise
Serco through the Rights Issue and refinancing of the group.
These were exceptional circumstances and given the position
of the Company at that time, the new Group Chief Executive,
Rupert Soames, decided it would be in the best interests of
the Company if he were to waive payment of his annual bonus
in respect of 2014. Since then, and as reported in the Strategic
Report (pages 5 to 83) a great deal of progress has been made
in implementing the new strategy. The disposal of the offshore
private sector (BPO) business was materially completed by
year-end, net debt has been substantially reduced, and the
management team has over-delivered on the guidance given
at the beginning of 2015. Significant improvements have been
made to management information and financial reporting
systems, costs have been reduced and relationships with key
government customers have been improved. Serco has a highly
effective management team, who are committed to continuing
to transform the business over the coming two years in line with
the strategic plan; something the Committee has seen first-
hand in our work with the management team in shaping in-year
objectives and in our contract visits in the Middle East.
In addition to overseeing senior Executive remuneration, the
Committee has been briefed on wider issues, most notably
in 2015, the plans to deal with the implementation of the new
National Living Wage; Serco welcomes any measure that
addresses basic pay within the UK and provides a consistent
approach to pay levels across the industry. Further detail on the
Committee’s activities during the year can be found on page 142.
Rights Issue
Following the closure of the Rights Issue on 17 April 2015
the Remuneration Committee approved for the options and
awards granted under the Serco Employee Share Schemes to
be adjusted to compensate the option and award holders for
the effects of the Rights Issue (as permitted by the rules of the
relevant Serco Employee Share Schemes). The adjustments
were carried out using a standard formula called the 'TERP'
(Theoretical Ex Rights Price) formula and were approved by the
Company’s auditors. Further details on the adjustments can be
found on page 141.
Remuneration outcomes in respect of 2015
2015 Share Awards
Operating within our existing policy, in 2015 the Committee
consulted with our major shareholders on some small changes
to the performance measures with the intention of better
aligning Serco’s incentive plans with the outcomes of the
Group’s Strategy Review. The performance measures for the
2015 Performance Share Plan awards are Aggregate EPS,
Relative TSR and ROIC and are described in more detail in the
Implementation Report on page 138. These awards are subject
to malus, clawback and a holding period.
2015 Bonus Awards
Following the Rights Issue, we consulted with major shareholders
on some small changes to the performance measures for
incentive plans in order to align with the Group’s Strategy
Review. One of these was to increase the weighting on financial
performance such that for 2015 70% of the annual bonus is
driven by financial performance and 30% against non-financial
performance. It is the view of the Remuneration Committee
that the management team should be highly commended
for the exceptional progress made in stabilising the business
and delivering what was set out in the strategic plan during
challenging circumstances. After thorough consideration there
was unanimous support for the decision to make bonus awards
to reflect the contribution that each member of the team has
made to strengthening the business and ensuring a strong
foundation on which to build a successful future.
As a result of the achievement of strong financial and non-
financial performance over the year against the targets set,
a bonus award of 87% of maximum (130% of salary) has been
determined for Rupert in respect of 2015 performance. The
corresponding bonus amounts for Angus and Ed are 87%
of maximum (112% of salary) and 84% of maximum (125% of
salary) respectively.
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
121
These outcomes clearly demonstrate that our remuneration
policy is effective in aligning pay with performance.
Remuneration for 2016
We are not making any changes to our remuneration policy
this year.
The Committee conducted its regular review of salaries of the
Executive Directors, with consideration given to the overall pay
decisions for employees across the Group as a whole. Based on
current conditions within the Company, it was agreed with the
senior management team that with effect from 1 April 2016, the
salaries for the Executive Directors will remain unchanged.
Shareholder engagement
I and the Committee believe it is important to continue
to maintain effective channels of communication with our
shareholders. The Committee takes the views of shareholders
very seriously and these views have been influential in shaping
our policy and practice. We welcome shareholder feedback on
any aspect of Executive remuneration.
The voting outcome at the 6 May 2015 General Meeting in
respect of the Annual Report on Remuneration for the year
ending 31 December 2014 reflected very strong shareholder
support with a 98.87% vote in favour.
Having been approved in May 2014, our remuneration policy will
be resubmitted to shareholders for a binding vote in May 2017. In
preparation for this, the Committee intends to review the policy
during the course of 2016, and will discuss any possible changes
with our major shareholders as part of this review.
Summary
2015 has continued to be hugely challenging for the business.
I believe that the Remuneration Committee has rigorously
made the necessary decisions to ensure that reward is
demonstrably linked to performance and shareholder interests.
We will continue to engage with shareholders to ensure
that our new leadership team are rewarded appropriately to
incentivise them to realise Serco’s strategic objectives.
Angie Risley
Chair of the Remuneration Committee
The financial measures against which the outcome of the bonus
were determined comprised Revenue, Free Cash Flow and
Trading Profit. On both Free Cash Flow and Trading Profit, the
achievements of the business over the year were in excess of
the stretching maximum target set by the Committee at the
beginning of the year, and these components of bonus have
therefore paid out in full. The level of Revenue achieved over
the period was between the threshold and maximum target set
and as such 68% of this component of the bonus was achieved.
The financial bonus outcomes have been calculated after
appropriate adjustments (agreed at the beginning of the
year as part of the target-setting process) were made. These
related to the Contract and Balance Sheet Review undertaken
in December 2014, where a number of charges were taken
in respect of Onerous Contract Provisions (OCPs). These
provisions totalled £447m and relate to the multi-year net
cash outflows to the end of each of the obligated periods for
each of the individual contracts. The Committee believe that
it is important that management be incentivised to minimise
exposure on onerous contracts. However, variations to these
can have a very material impact on Reported Trading Profit as
under the accounting treatment, the multi-year effect of charges
or releases are included in a single year. The Committee has
spent considerable time reviewing the Trading Profit calculation
for bonus purposes, initially working with management to
determine a robust approach to decision-making, informed by a
review of each individual contract and with cross-referencing to
information shared with the Audit Committee. As a result of the
rigour applied to this process, the Committee is satisfied that the
annual bonus out-turn fairly reflects management performance
in the year. Further detail can be found on pages 133 to 134.
On the non-financial metrics, the leadership team have, in
their first full performance year together, shown strong and
visible leadership in successfully delivering the Rights Issue,
and delivering the transformation plan to achieve agreed
in-year savings. The pipeline for new business is now growing
again and there have been measurable increases in levels
of employee and leadership engagement. The process of
disposing of the offshore private sector (BPO) business was
completed by the year end, despite numerous challenges.
The Corporate Renewal Programme was implemented and
continued to be embedded with new values being launched.
The new Chairman regards the support that Rupert Soames
and his team have provided to him, in becoming effective in
role, as first class.
Vesting Share Awards
As a consequence of our financial performance falling short of
where we wanted it to be, the long-term incentive awards made
under the PSP and DBP in 2013, and due to vest in 2016 based
on 2015 results, will lapse. We were below median against our
peer group on a relative Total Shareholder Return basis and
EPS growth fell short of the threshold of 5.5% p.a. compound.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 122
Remuneration Report continued
At a glance: implementation of remuneration policy for 2016 and key decisions for 2015
The table below summarises how key elements of the remuneration policy will be implemented in 2016 and key decisions taken by
the Remuneration Committee in relation to base pay and incentives for Executive Directors in respect of 2015 year-end.
Element
CEO
(Rupert Soames)
CFO
(Angus Cockburn)
COO
(Ed Casey)
Base salary from 1 April 2016
£850,000
Pension
30% of salary
£500,000
30% of salary
$1,061,690
30% of salary including cost
of participation in US 401k plan
Annual bonus
Max 150% of salary
On-target 75% of salary
Max 130% of salary
On-target 65% of salary
Max 150% of salary
On-target 75% of salary
Annual bonus measures
• 70% financial targets including Revenue, Trading Profit, Free Cash Flow.
• 30% non-financial targets.
Deferred Bonus Plan (DBP)
Maximum of 50% of earned bonus can be deferred to purchase investment shares, each individual
investment share purchased will be matched (on a gross investment basis) by a maximum of two
‘matching’ shares.
DBP measures
EPS is the sole measure to determine the vesting of matching shares measured over three years.
Performance Share Plan (PSP)
Maximum 200% of salary
Maximum 175% of salary
Maximum 175% of salary
PSP measures
• Aggregate EPS – Statutory Earnings Per Share (EPS) before exceptional items (adjusted to reflect tax
paid on a cash basis), measured as an aggregate over the three-year performance period.
• Relative TSR – Total Shareholder Return (TSR) when ranked relative to companies in
the FTSE250 (excluding investment trusts).
• ROIC – Pre-tax Return on Invested Capital (ROIC), measured as an average over the
three-year performance period.
Holding requirement
Vested shares from the PSP to be held for two years post vesting (after payment of tax).
Shareholding requirement
200% of salary
150% of salary
150% of salary
Malus and clawback
• Clawback provisions will apply to the annual bonus plan.
• Malus provisions will apply to PSP and DBP awards during the three-year performance period
prior to vesting.
• Clawback provisions will apply during the two-year post-vesting holding period to shares
arising from PSP awards.
• Clawback provisions will apply to matching shares awarded under the DBP.
Changes for 2016
No change
Year-end decisions made
Executive Directors
1 April 2016 salary review
No change
No change
No change
2015 Bonus outcome:
• Currency value
£1,103,130
• % of salary
• % of maximum
2013 PSP vesting
Non-Executive Directors
Chairman fee effective
1 July 2015
129.78%
86.52%
N/a
£250,000 (previous Chairman £270,000)
£562,380
112.48%
86.52%
N/a
$1,330,085
125.28%
83.52%
Nil
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
123
2015 actual single figure versus remuneration policy
The following charts show the actual single figure for remuneration for the Executive Directors against the remuneration policy
scenarios applying for 2015:
Rupert Soames
Angus Cockburn
Ed Casey
£
6000
5000
4000
3000
2000
1000
0
£5,012
£3,070
£2,226
£1,128
Below
Threshold
Min.
Max.
Actual Single
Figure
£
2500
2000
1500
1000
500
0
£2,198
£1,436
£1,231
£673
Below
Threshold
Min.
Max.
Actual Single
Figure
US$
5000
4000
3000
2000
1000
0
$4,855
$3,130
$2,730
$1,405
Below
Threshold
Min.
Max.
Actual Single
Figure
Fixed elements of remuneration
Annual Variable
Multiple period variable
Notes: The scenarios in the above graphs are defined as follows:
Fixed elements of remuneration
Base salary as at 1 April 2015
Estimated value of benefits provided under the remuneration policy
Cash allowance in lieu of pension 30% of salary for CEO and CFO
Cash allowance in lieu of pension 30% of salary for COO less the cost of
participation in the US 401k plan
Ed Casey’s fixed elements of pay are converted into GBP with an exchange
rate of USD 1 = GBP 0.65398
Below Threshold
Target performance
Maximum performance
0%
Nil
Nil
75% CEO
65% CFO
75% COO
150% CEO
130% CFO
150% COO
1:1 Matching Shares1
2:1 Matching Shares1
50%1
100%1
Annual bonus
(payout as a % of salary)
Deferred Bonus Plan
Performance Share Plan
(as a % of face value)
Note:
1
The Deferred Bonus Plan and Performance Share Plan values reflect the target and maximum vesting scenarios for the 2015 awards, the CFO and COO did not participate in the
Deferred Bonus Plan in 2015. The Deferred Bonus Plan and Performance Share Plan values in the actual single figure reflects the vesting of the 2013 awards which was zero. The
CEO and CFO joined the Company in 2014 so did not receive awards in 2013. Share price movement and dividend equivalents have not been incorporated into the above figures.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report·
124
Remuneration Report continued
In this section
Remuneration Policy
Directors Remuneration Policy
Remuneration Policy for Other Employees
Recruitment Policy
Service Contracts and Loss of Office Policy
Non-Executive Director Policy
Directors’ Remuneration Policy
Page
Remuneration Report
124
128
129
130
131
Executive Single Figure
Variable Pay Outcomes
Non-Executive Director Single Figure
2015 Share Awards
Directors Share Interests
Remuneration Committee
Page
132
133
135
138
140
141
The following report details the remuneration policy and the decisions on remuneration of the Directors of the Group for the year ended
31 December 2015. This report has been drafted in compliance with the disclosure requirements of the UK Corporate Governance Code
and the requirements of the UKLA Listing Rules. This Report also complies with the provisions of the Companies Act 2006 and the Large
and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013 (Regulations).
The remuneration policy report was approved by shareholders at the 2014 AGM and will apply until shareholders next consider and
vote on the Policy at the AGM in 2017.
The Directors’ Remuneration Policy is displayed on the Company’s website, in the investor area.
Remuneration Policy
Serco’s remuneration policy supports the achievement of the Company’s long-term strategic objectives. Serco’s approach to
executive remuneration is designed to:
• Support Serco’s long-term future growth, strategy and values;
• Align the financial interests of executives and shareholders;
• Provide market competitive reward opportunities for performance in line with expectations and deliver significant financial
rewards for sustained out-performance;
• Enable Serco to recruit and retain the best executives with the required skills and experience in all our chosen markets;
• Be based on a clear rationale which participants, shareholders and other stakeholders are able to understand and support.
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
125
Future policy table
The remuneration package for Executive Directors consists of base salary, annual bonus, long-term share based incentives, pension
and other benefits. The Company’s policy is to ensure that a significant proportion of the package is related to performance.
The following table sets out each element of reward and how it supports the Company’s short and long-term strategic objectives.
Whilst the table is focused on Executive Directors, the table set out on page 128 provides further information of how pay policies
are set for the broader employee population.
How the element supports
our strategic objectives
Base Salary
To help recruit and retain
executives of the necessary
calibre to execute Serco’s
strategic objectives and to
recognise an individual’s
experience, responsibility and
performance.
To ensure base salaries are
competitive in the market in
which the individual is employed.
Benefits
To provide a competitive level of
benefits.
Operation of the element
Maximum potential value
and payment at threshold
Performance metrics used,
weighting and time period
applicable
None
Pay levels are designed to be
competitive and fair and reflect the
skills and performance of individuals.
Salaries are benchmarked from
time to time against salaries for the
Company’s relevant peer group, with
the market positioning dependent
on the scale of challenges intrinsic to
the individual’s role and individual’s
ability and experience. In some
circumstances there may be phased
movement to that positioning.
Salaries are reviewed annually and any
changes are effective from 1 April in
the financial year.
Over the policy period,
base salaries for Executive
Directors will be set at an
appropriate level within the
peer group and will normally
increase at no more than the
greater of inflation and salary
increases made to the general
workforce in the jurisdiction
the Executive Director is
based in.
Higher increases may
be made in exceptional
circumstances, for example
when there is a change in role
or responsibility.
None
The maximum opportunity
for benefits is defined by the
nature of the benefits and
the cost of providing them.
As the cost of providing
such benefits varies based
on market rates and other
factors, there is no formal
maximum monetary value.
Serco pays the cost of providing the
benefits on a monthly basis or as
required for one-off events such as
receiving financial advice.
These include but are not limited
to car allowances, private medical
insurance, permanent healthcare
insurance, life cover, annual allowance
for independent financial advice,
and voluntary health checks every
two years.
Relocation benefits will be provided
in a manner that reflects individual
circumstances and Serco’s relocation
benefits policy. For example, relocation
benefits could include temporary
accommodation for the Executive and
dependents and tax equalisation.
Benefits are reviewed annually against
market practice and are designed to
be competitive.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 126
Remuneration Report continued
How the element supports
our strategic objectives
Operation of the element
Maximum potential value
and payment at threshold
Annual Bonus
Incentivise executives to achieve
specific, predetermined goals
during a one-year period.
Reward ongoing stewardship
and contribution to core values.
Bonus result is determined by the
Committee after the year end, based
on performance against objectives
and targets.
Annual bonuses are paid after the end
of the financial year end to which they
relate. There is an optional deferral
of 50% of the total earned bonus into
Serco shares.
On change of control the
Remuneration Committee may pay
bonuses on a pro-rata basis measured
on performance up to the date of
change of control.
Maximum bonus opportunity:
150% of salary for CEO
130% of salary for CFO
150% of salary for COO
On-target bonus:
75% of salary for CEO
65% of salary for CFO
75% of salary for COO
Threshold bonus is 20% of
maximum bonus opportunity.
Performance is measured over
the financial year.
Deferred Bonus Plan (DBP)
This plan is to incentivise
executives to achieve superior
returns for shareholders and
to align executives to
shareholder interests.
Executive Directors can elect to defer,
for three financial years, up to 50%
of their annual bonus by purchasing
investment shares.
For maximum performance,
each investment share
is matched by two
matching shares.
Each individual investment share
purchased will be matched (on a gross
investment basis) by up to a maximum
of two ‘matching’ shares.
For threshold performance
each investment share
is matched by half a
matching share.
Dividends are reinvested and
distributed only in respect of
shares that vest at the end of the
performance period.
The Committee, at its discretion may
attach a post-vesting holding period
for awards.
In circumstances such as fraud,
misconduct and / or misstatement
by a participant, the Company will
be entitled to withhold before the
vesting date the value of any shares
to be released or the payment of cash
equivalents under the DBP.
On a change of control, awards vest
pro-rata for time and performance up
to the date of change of control unless
the Committee decides otherwise.
As provided in the plan rules approved
by shareholders, the Committee
has discretion to adjust awards in
the event of, for example, corporate
restructuring or capital events.
Performance metrics used,
weighting and time period
applicable
Bonus is earned on the basis of
achievement of a mix of financial
and non-financial objectives of
which at least 50% are financial.
Financial measures are based on
the Company’s Key Performance
Indicators (KPIs) and the non-
financial measures are based on
key strategic objectives.
The Committee has discretion
to vary the weighting of
performance metrics over the life
of this remuneration policy. Also
the Committee has discretion
in exceptional circumstances
to vary performance measures
part-way through a performance
year if there is a significant event
(such as a major transaction or
transition in role) which causes
the Committee to believe the
original performance conditions
are no longer appropriate.
Earnings Per Share (EPS) is the
sole measure to determine the
vesting of matching shares.
The performance condition is
measured over three years.
In exceptional circumstances the
Committee retains discretion to
change performance measures
and targets and the weightings
attached to performance
measures part-way through
the performance period if
there is a significant event (for
example a major transaction)
which causes the committee to
believe the original measures,
weightings or targets are no
longer appropriate.
The Committee has discretion
to vary the proportion of
awards that vest, to ensure
that the outcomes are fair and
appropriate and reflect the
underlying financial performance
of the Group.
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
127
How the element supports
our strategic objectives
Operation of the element
Maximum potential value
and payment at threshold
Performance metrics used,
weighting and time period
applicable
Performance Share Plan (PSP)
To drive achievement of
longer-term objectives, increase
shareholder value aligned
closely to creating shareholders’
interests.
Awards of nominal cost options /
conditional shares made annually.
Dividends are reinvested and
distributed only in respect of
shares that vest at the end of the
performance period.
The Committee, at its discretion may
attach a post-vesting holding period
for awards.
In circumstances such as fraud,
misconduct and / or misstatement by
a participant, the Company will be
entitled to withhold before the end
of the holding period the value of any
shares to be released or the payment
of cash equivalents under the PSP.
On a change of control awards vest
pro-rata for time and performance up
to the date of change of control unless
the committee decides otherwise.
As provided in the plan rules approved
by shareholders, the Committee
has discretion to adjust awards in
the event of, for example, corporate
restructuring or capital events.
Face value on grant of 200%
of base salary for the CEO and
175% for the CFO and COO.
Vesting is dependent on at least
two performance conditions
chosen from:
25% of the award vests for
threshold performance.
• EPS
• Relative TSR
• Share Price or absolute TSR
The measures are independent,
and are measured over three
years. The weighting of each
is determined prior to award.
The Remuneration Committee
has discretion to adopt other
measures following consultation
with major shareholders.
In exceptional circumstances the
Committee retains discretion to
change performance measures
and targets and the weightings
attached to performance
measures part-way through
the performance period if
there is a significant event
(such as a major transaction)
which causes the committee to
believe the original measures,
weightings or targets are no
longer appropriate.
The Committee has discretion
to vary the proportion of
awards that vest, to ensure
that the outcomes are fair and
appropriate and reflect the
underlying financial performance
of the Group.
Pension
To provide funding for retirement.
Shareholding Requirement
To support long-term
commitment to the Company
and the alignment of employee
interests with those of
shareholders.
Executive Directors may participate in
tax-approved pension plans operated
by the Company.
A cash allowance is available for those
not participating in a pension scheme
or whose participation exceeds one or
more tax allowances.
Unvested performance shares or
options are not taken into account.
Share price is measured at end of each
financial year.
Executives are required to retain
in shares 50% of the net value of
any performance shares vesting or
options exercised until they satisfy
the shareholding requirement.
None
None
Rupert Soames and Angus
Cockburn receive a cash
allowance in lieu of pension
equal to 30% of base salary.
Ed Casey participates in
the US 401k pension and
receives a cash allowance
in lieu of pension equal to
30% of base salary less the
cost of participation in the
US 401k plan.
CEO – 200% of salary
CFO – 150% of salary
COO – 150% of salary
The Committee has the
discretion to increase the
shareholding requirements
of the Executive Directors.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 128
Remuneration Report continued
Notes to the policy table:
Performance measures and targets
The table below sets out a rationale for the performance conditions chosen for annual bonus, Deferred Bonus Plan and
Performance Share Plans and how targets were set.
Performance measures and rationale
How targets are set
Element
Annual bonus
Deferred Bonus Plan
• Financial and non-financial performance
measures.
• The Committee selected the financial
measures based on the Company’s Key
Performance Indicators (KPIs) and the non-
financial measures were individually set and
based on key strategic goals.
• EPS is the sole measure to determine the
vesting of matching shares.
• The Committee selected EPS as it is a key
performance indicator both for the Company
and its major shareholders.
• The Committee believes EPS can be directly
influenced by executive decision-making
while also reflecting shareholder value.
• The performance targets are determined
annually by the Committee taking into
account analyst consensus and the
Company’s forecasts.
• EPS targets are set in reference to analyst
forecasts, company business plans, and
levels of EPS required to support our share
price goals.
• Share price targets reflect what the
Committee determines as stretching, taking
into account the recent fall in share price and
historic share price levels, but also what is
realistic and consistent with achievable levels
of financial performance.
• The Committee consults with a selection
of the largest shareholders and the voting
guidance services when determining targets
for the company’s LTI arrangements.
Performance Share Plan
• EPS, Relative TSR and Share Price or
absolute TSR.
• As set out above EPS is an important measure
of shareholder value which can also be
influenced by executive decision making.
• Relative TSR reflects our performance relative
to other companies in which investors could
chose to invest.
• The rationale for the share price measure is
explicitly to recognise the recent falls in share
price and to ensure that the full award is not
delivered unless shareholders benefit from
a significant recovery in value over the next
3 years.
Remuneration policy for other employees
The remuneration policy described in the previous table applies specifically to Executive Directors of the Group. The Committee
believes that the structure of management reward at Serco should be linked to Serco’s strategy and performance. The table
below explains how the remuneration policy has been cascaded below Executive Directors to achieve alignment of policy
across the organisation.
Element
Base salary
Benefits
Pension
Difference in remuneration policy for other employees
• The same principles and considerations that are applied to Executive Directors are, as far as possible,
applied to all employees.
• Serco also has provisions for market-aligned benefits for all employees.
• The Group operates a number of defined benefit schemes and defined contribution schemes.
Individuals who have exceeded certain tax allowances may be offered cash allowances in lieu of
pension benefits.
Annual bonus
• Approximately 350 members of the Global Leadership Team are eligible for a bonus award under The
Leadership Team Bonus Scheme.
Deferred Bonus Plan (DBP)
• Members of the Executive Committee are invited to participate in the DBP on the same terms as the
Executive Directors.
Performance Share Plan (PSP)
• The PSP is awarded to approximately 350 employees in the Global Leadership Team.
Sharesave
• An all-employee scheme. Options are normally granted at a discount of 10% to the market value
and have no performance conditions. The Executive Directors do not participate in Sharesave.
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
129
Considerations of conditions elsewhere in the Group
Although the Committee does not consult directly with employees on the Directors’ Remuneration Policy, the Committee does
consider the general base salary increase, remuneration arrangements and employment conditions for the broader employee
population when determining the remuneration policy for the Executive Directors.
Approach to recruitment remuneration
Serco operates in diverse markets and geographies and many of its competitors for talent are outside the UK. In the event of
hiring a new Executive Director, the Committee will typically align the remuneration package with the above Remuneration Policy,
which provides for a maximum total incentive under bonus, PSP and DBP combined of 500% of salary in any one year (assuming
maximum bonus, maximum investment in the DBP and maximum achievement of all PSP and DBP performance conditions). This
is the maximum level of incentives excluding buy-outs that will apply to new recruits. Different performance conditions may apply
for new recruits from those set out in the policy, depending on the particular circumstances at the time (which could, for example,
include the appointment of an interim Executive Director).
In determining appropriate base salary on hiring a new Executive Director, the Committee will take into account all factors it
considers relevant, including their experience and calibre, current total remuneration, levels of remuneration for companies in the
Committee’s chosen peer group, and the remuneration required to attract the best candidate for Serco. The Committee will seek
to ensure that the arrangement is in the best interests of the Company and its shareholders without paying more than is necessary.
New promotes or recruits to the Board may on occasion have their salaries set below the targeted policy level while they become
established in their role. In such cases, salary increases may be higher than inflation or the general UK workforce increase until the
targeted market positioning is achieved.
Where it is necessary to compensate a candidate for entitlements and / or unvested long-term incentive awards from an existing
employer that are forfeited, the Committee will seek to match the quantum, structure and timeframe of the award with that of
the awards forfeited. In determining the form and quantum of replacement awards, the Committee will consider whether existing
awards are still subject to performance requirements, and the extent to which those are likely to be met, with the aim of providing
an opportunity of broadly equivalent value. The principle will be to seek to replace awards that remain significantly at risk for
performance at the candidate’s current employer with awards subject to performance at Serco and to seek to make any other
replacement awards in the form of Serco shares, subject to appropriate vesting or holding requirements. Any compensation for
awards forfeited is not taken into account in determining the maximum incentive award level.
The recruitment policy also includes the additional provision of benefits in kind, pensions and other allowances, such as relocation,
education and tax equalisation in line with Serco policies as may be required in order to achieve a successful recruitment. The
policy for recruitment also includes benefits that are either not significant in value or are required by legislation. It is anticipated
that any new Executive Director would be offered a pension allowance equal to 30% of base salary in lieu of pension.
Where a new Executive Director is an internal promotion, the Committee reserves discretion to allow the new Executive Director
to continue to benefit from existing awards granted, or benefit entitlements (such as pension) prior to appointment to the Board.
The policy on the recruitment of new Non-Executive Directors is to apply the same remuneration elements as for the existing
Non-Executive Directors. It is not intended that day rates or benefits in kind be offered, although in exceptional circumstances
such remuneration may be required in currently unforeseen circumstances.
The Committee will include in future Annual Reports details of the implementation of the Policy in respect of any such
recruitment to the Board.
Element of remuneration
Maximum percentage of salary
Maximum variable pay:
normally comprising:
• Annual bonus
• Long-term incentives
Pension allowance
500%
150%
350%
30% cash allowance in lieu of pension
Note: Maximum percentage of salary for annual bonus and long-term incentives excludes compensation for awards forfeited.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 130
Remuneration Report continued
Service contracts and loss of office payments
The policy for service contracts for new Directors is shown in the table below. Ed Casey has a service contract which has aspects
that differ from policy as highlighted underneath the table. The Committee may under this policy at any time, with the agreement
of a Director, alter aspects of their existing contracts so that they are in line with the policy for new Directors. Copies of the
Directors’ service contracts and letters of appointment are available for inspection at the Company’s registered office. The date
of appointment for each Director is shown in the table below:
Provision
Notice period
Detailed terms
• 12 months notice from the Company
• 12 months notice from the Director
Termination payment
• Payment in lieu of notice comprising:
– Base salary
– Pension allowance
– Selected benefits
• All of the above would be paid in instalments in accordance with the Director’s contractual payment schedule,
subject to an obligation on the part of the Director to mitigate his loss such that payments will either reduce
or cease completely, in the event that the Director gains new employment / remuneration. In the event
of a compromise or severance agreement, the Committee may make payments it considers reasonable
in settlement of potential legal claims. It may include in such payments reasonable reimbursement of
professional fees incurred by the Director in connection with such agreements and reasonable payments in
respect of restrictive undertakings.
• The Remuneration Committee may agree that if a Director steps down from the Board then for a transitional
period notice (including payment in lieu of notice) would continue to be based on the equivalent of up to
twelve months’ notice based on their rate of salary and benefits while a Director, payable in instalments and
subject to mitigation.
• The reimbursement of repatriation costs or fees for professional or outplacement advice may also be
included in the termination package, as deemed reasonable by the Committee, as may the continuation of
benefits for a limited period.
Treatment of annual bonus on
termination under plan rules
• No payment unless employed on date of payment of bonus except for ‘good leavers’: defined as death,
disability, redundancy and other circumstances at the Committee’s discretion.
Treatment of unvested
performance shares or
options and unvested
matching deferred share
awards on termination
under plan rules
• ‘Good leavers’ are entitled to a bonus pro-rated to the period of service during the year, subject to the
outcome of the performance metrics and paid at the usual time.
• The Committee has discretion to reduce the entitlement of a ‘good leaver’ in line with performance and the
circumstances of the termination.
• All awards lapse except for ‘good leavers’: ill-health, injury or disability, death, redundancy, retirement,
change of control (as defined in the plan rules) and other circumstances at the Committee’s discretion (to the
extent that they allow ‘good leaver’ treatment for particular awards).
• For ‘good leavers’ vesting is pro-rated on a time basis and is dependent on the achieved performance over
the performance period.
• The Committee has the discretion to vary the level of vesting to reflect the individual performance, and may,
depending on the circumstances of the departure, allow some awards to vest while lapsing others.
Provision
Detailed terms
Change of control
Exercise of discretion
NEDs
• Where the 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.
• Intended only to be used to prevent an outcome that is not consistent with performance. The Committee’s
determination will take into account the particular circumstances of the Executive Director’s departure and
the recent performance of the Company.
• Appointed for initial three-year term.
• Appointment may be terminated on 3 months’ written notice.
• All Non-Executive Directors are subject to annual re-election.
• No compensation or other benefits are payable on early termination.
Notes:
In respect of Ed Casey, operating within our existing policy, in 2014 the Committee increased the notice period to 12 months from the Company to align with the other directors,
and 4 months from the Director to more closely align with US employment practice.
Whilst unvested Awards will normally lapse, the Committee may in its absolute discretion allow for Awards to continue until the normal vesting date and be satisfied, subject to
achievement of the performance conditions. In such circumstances, Awards vesting will normally be prorated on a time apportioned basis, unless the Committee determines otherwise.
Any such discretion in respect of leavers would only be applied by the Committee to ‘good leavers’ where it considers that continued participation is justified, for example, by reference
to past performance to the date of leaving, or by the requirement to achieve an orderly transition. The claw-back provisions would continue to apply in the event that such discretion
were exercised.
Service contracts outline the components of remuneration paid to the individual but do not prescribe how remuneration levels may be adjusted from year to year.
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
131
The Chairman and Non-Executive Directors’ fees
In accordance with the Company’s policy, the fees of the Chairman and the Non-Executive Directors, which are determined by the
Board, are set at a level which is designed to attract individuals with the necessary experience and ability to make a substantial
contribution to the Group’s affairs. The Chairman and Non-Executive Directors' letters of appointment are available for inspection
at the Company's registered office.
Performance metrics used,
weighting and time period
applicable
Non-Executive Director fees
are not performance related.
How the element supports
our strategic objectives
Operation of the element
Maximum potential value and
payment at threshold
Over the policy period, base
fees for current Non-Executive
Directors will be set at an
appropriate level within the
peer group and increases will
typically be broadly in line
with market.
The base fees or fees for
specific Non-Executive
Directors roles may be reviewed
at any time based on the
anticipated responsibility and
time commitment involved.
Current fee levels are shown in
the section on implementation
of policy.
To attract Non-Executive
Directors with the necessary
experience and ability to make
a substantial contribution to the
Group’s affairs.
The fees of the Chairman are
determined and approved by the
Remuneration Committee (excluding
Chairman) and fees of the Non-
Executive Directors, are determined
and approved by the Board as a whole.
The Chairman receives a base fee.
The following fees are paid to Non-
Executive Directors in addition to
their base fee:
• SID fee
• Committee Chairmanship fee
• Committee membership fee
Fees are reviewed on an annual basis
against a relevant peer group and taking
into consideration market practice.
An allowance is payable to directors
for attendance at meetings outside
their country of residence where
such meetings involve inter-
continental travel.
In addition, reasonable travel and
business related expenses are paid.
Non-Executive Directors are not entitled
to receive incentives and pension.
Non-Executive Directors are
encouraged to hold shares in the
Group but are not subject to a
shareholding requirement.
Dates of Director’s Service Contracts / Letters of Appointment
Director
Rupert Soames
Angus Cockburn
Ed Casey
Sir Roy Gardner
Angie Risley
Date of appointment to the Board
8 May 2014
27 October 2014
25 October 2013
1 June 2015
1 April 2011
Ralph D. Crosby Jnr
30 June 2011
Malcolm Wyman
1 January 2013
Mike Clasper
Tamara Ingram
Rachel Lomax
3 March 2014
3 March 2014
3 March 2014
Notes:
All Directors are put forward annually for re-election at the AGM.
Alastair Lyons was appointed to the Board on 16 March 2010 and ceased to be a Director on 1 July 2015.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 132
Remuneration Report continued
Annual report on remuneration
The implementation of the remuneration policy for year ended 31 December 2015
The remuneration policy for the year ended 31 December 2015 was consistent with the policy on which shareholders voted on at
the 2014 AGM.
Single Figure – Directors remuneration (audited information)
Executive Director’s single figure
The following table shows a single total figure of remuneration in respect of qualifying services for 2015 for each Executive Director,
together with comparative figures for 2014. Details of NEDs’ fees are set out in the next section.
Salary and fees £
Taxable benefits1 £
Bonus2
LTI3
Pension4
Other5
Total
£
£
£
£
£
Rupert Soames
Angus Cockburn
Ed Casey6
2015
2014 (part-year)
2015
2014 (part-year)
2015
2014
850,000
566,667
500,000
83,333
694,324
733,604
18,154
10,988
1,103,130
N/a
–
N/a
18,154
562,380
N/a
103,031
–
N/a
20,836
869,849
–
9,960
689,650
–
255,000
170,000
150,701
27,016
200,318
171,850
–
–
–
111,068
–
–
2,226,284
747,655
1,231,235
324,448
1,785,327
1,605,064
Notes:
1.
The value of the taxable benefits relate to the provision of independent financial advice, provision of a car or car allowance (fully inclusive of all scheme costs including insurance
and maintenance), health-care, private medical assessments and expatriate benefits. Ed Casey’s 2015 benefits relate primarily to his expatriate status, including costs of £6,927
for accommodation and travel.
2. The bonuses shown include performance bonuses earned in the period under review, but not paid until the following financial year.
3. The 2013 PSP and DBP awards vested at zero.
4.
5.
The pension amount includes payments made in lieu of pension, calculated as a percentage of base salary, from which the Executive Directors make their own
pension arrangements.
The amount shown is to compensate Angus for the pro-rated bonus that he would have received from Aggreko in respect of the final three months of 2014 had he not left to
join Serco.
6. Ed Casey's remuneration is paid in US dollars, for the purpose of the 2015 single figure USD1 = GBP 0.65398. For the purpose of the 2014 single figure USD1 = GBP 0.60779.
The annual base salaries of the Executive Directors for the year ended 31 December 2015 were:
Director
Rupert Soames
Angus Cockburn
Ed Casey
Base salary
£850,000
£500,000
$1,061,690
Effective Date
8 May 2014
27 October 2014
1 April 2014
Increase
N/a
N/a
N/a
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
133
Variable pay outcomes (audited information)
Performance-related annual bonus
For 2015, the Executive Director bonus was based on achieving a mix of financial and non-financial objectives which were weighted
70:30. The financial measures were based on Revenue (20%), Free Cash Flow (40%) and Trading Profit (40%) and the non-financial
measures were individually set and based on key strategic goals.
The Remuneration Committee reviewed the achievements against the targets for the year and proposed annual incentive
payments for the Executive Directors. The table below shows the achievement against the financial and non-financial measures.
Financial performance
Performance Measure
Revenue
Free Cash Flow
Trading Profit
Non-financial performance
See table below
Weighting
for 2015
(% maximum
opportunity)
14%
28%
28%
30%
Total bonus payable as % of maximum
Bonus opportunity as % of salary
Bonus amount achieved as % of salary
Bonus amount earned
Threshold
target
(m)
Maximum
target
(m)
Actual
performance
(m)
£3,365.0
£3,612.0
£3,522.0
-£159.0
-£135.0
£82.3
£96.9
-£16.2
£112.5
Achievement
against
measure
(% maximum
opportunity)
68%
100%
100%
Rupert
Soames
70%
Angus
Cockburn
70%
Ed
Casey
60%
Rupert
Soames
Angus
Cockburn
Ed
Casey
86.52%
86.52%
83.52%
150%
130%
150%
129.78%
112.48%
125.28%
£1,103,130
£562,380
$1,330,085
As part of the Contract and Balance Sheet Review (CBSR) undertaken in December 2014, a number of charges were taken in
respect of Onerous Contract Provisions (OCPs). These provisions totalled £447m and relate to the anticipated multi-year net
cash outflows to the end of each of the obligated periods for each of the individual contracts. The Committee believe that it is
important that management be incentivised to minimise exposure on onerous contracts. However, variations to these can have a
very material impact on Reported Trading Profit as under the accounting treatment, the multi-year effect of charges or releases
are included in a single year. The Committee has therefore decided to use a measure for bonus calculations which is effectively
aligned to Underlying Trading Profit (Reported Trading Profit less foreign exchange and OCP charges and releases and other net
movements on CBSR items), to which is added or subtracted an amount related to over or under-performance against the various
CBSR items which fairly reflects management performance in the year. In coming to this judgement, the Committee has access
to detailed reports providing reasons behind the various movements, which included reviews of individual contracts with cross-
referencing to information shared with the Audit Committee.
Within Reported Trading Profit at constant currency of £137.1m, there is £41.2m credit relating to items, other than foreign
exchange, which are not considered in Underlying Trading Profit; these include adjustments made to CBSR items. Excluding these,
the constant currency Underlying Trading Profit is £95.9m. The Committee has considered how much of this £41.2m net benefit
should be adjusted out of Reported Trading Profit for bonus purposes. A total of £24.6m has been adjusted out for management
bonus purposes as these are not considered to be the result of management action. The resulting £112.5m therefore includes
£16.6m to reflect for bonus purposes the in-year performance of management action which has improved the CBSR position.
The Revenue and Free Cash Flow actual performances reflect constant currency and includes discontinued operations, making
them consistent with the basis on which the targets were set.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 134
Remuneration Report continued
Non-Financial Performance
Rupert
Soames
Angus
Cockburn
Rupert’s objectives focused on:
•
Leading the creation of effective Business
Development plans
Leading the delivery of the transformation plan with
agreed in-year savings
Implementing the Corporate Renewal Programme
ensuring commitments are delivered
Continuing to improve employee engagement through
transformation of culture
Achieving the planned Rights Issue and refinancing
of the Group
Executing the planned disposal of the offshore private
sector (BPO) business
Working with the new Chairman to ensure he became
effective in the shortest possible time
•
•
•
•
•
•
Angus’ objectives focused on:
•
•
Leading the assessment of contractual risk
Embedding improvements to management of financial
reporting and accounts
Reviewing the effectiveness of internal audit and risk
management
Leading the finance function transformation
Achieving the planned Rights Issue and refinancing of
the Group
•
•
•
Ed Casey
Ed’s objectives focused on:
• Development of business development plans
•
•
•
Leading delivery of a transformation plan to achieve
cost savings
Embedding new standards for bid governance and
contract management
Achieving the planned disposal of the offshore private
sector (BPO) business
• Developing the approach to risk management
The Committee deemed performance to be very strong. Rupert
has shown strong and visible leadership during 2015, successfully
completing the Rights Issue, and delivering the transformation
plan to achieve agreed in-year savings. The pipeline for new
business is now growing again and there have been measurable
increases in levels of employee and leadership engagement. The
process of disposing of the offshore private sector (BPO) business
was completed by year end, despite numerous challenges. The
Corporate Renewal Programme was implemented and continued to
be embedded with new values being launched. The new Chairman
regards the support Rupert has provided to him in becoming
effective in role as first class. Based on Rupert’s achievement the
Committee has awarded above target performance for the non-
financial element relating to these objectives.
The Committee deemed performance to be very strong against all
objectives. Examples of successes include successfully completing
the Rights Issue, embedding of formal monthly management
accounts processes to deliver timely and accurate financial reporting,
a review of the internal audit function with steps taken to develop
an appropriately rigorous risk management framework, and the
implementation of a new, improved finance model with strengthened
capability. Based on Angus’ achievement the Committee has
awarded above target performance for the non-financial element
relating to these objectives.
The Committee deemed performance to be very strong against
all objectives. Examples of successes include delivery of the
transformation plan to achieve agreed in-year savings. The process
of disposing of the offshore private sector (BPO) business was
completed by year end, despite numerous challenges and the
pipeline for new business is now growing again. Good progress has
been made in embedding new standards for bid governance and
in developing the approach to risk management. Based on Ed’s
achievement the Committee has awarded above target performance
for the non-financial element relating to these objectives.
Note:
1. All Executive Directors are entitled to participate in the Deferred Bonus Plan (the DBP) in 2016, up to a maximum of 50% of the bonus determined in respect of 2015 performance.
Performance Share Plan (PSP)
The LTI amount included in the 2015 single total figure of remuneration includes the PSP award which was awarded in 2013. For the PSP
awards which completed their performance period on 31 December 2015, achievement against the measure is shown in the table below:
Performance condition
EPS growth. For threshold performance 25% of the
award vests rising on a straight-line basis to 100% at
maximum performance.
Relative TSR. For median performance 25% of the
award vests rising on a straight-line basis to 100%
for upper quartile performance.
Total
Weighting
Threshold – 25%
vesting
Maximum –
100% vesting
50%
5.5%
10.5%
Actual
-53.31%
50%
Median
Upper Quartile
Below Median
The awards made to the Executive Directors were as follows:
2013 PSP share awards
Ed Casey
No of shares
awarded
No of shares
vesting
Vesting
date
93,553
0
15 April 2016
Notes:
1. Ed Casey’s PSP award was made prior to him being appointed to the Board.
2. Rupert Soames and Angus Cockburn joined the Company in 2014 and therefore do not have outstanding 2013 PSP awards.
Percentage of
max achieved
0%
0%
0%
Value of
vesting
£
0
Serco Group plc Annual Report and Accounts 2015
Remuneration Report
135
Single Figure – Non-Executive Directors remuneration (audited information)
Non-Executive Directors’ remuneration consists of cash fees paid monthly with increments for positions of additional responsibility.
In addition, an inter-continental travel allowance and 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.
Roy Gardner1
Chairman; Chairman of Nomination Committee and
Member of Audit, Remuneration, Nomination and Corporate
Responsibility & Risk Committees
Alastair Lyons2
Prior to 1 July 2015: Chairman; Chairman of Nomination
Committee and Member of Remuneration Committee
Mike Clasper
Senior Independent Director;
Member of Audit and Nomination Committees
Ralph D. Crosby Jnr
Tamara Ingram
Member of Corporate Responsibility & Risk
and Remuneration Committees
Rachel Lomax
Chairman of Corporate Responsibility & Risk Committee;
Member of Audit Committee
Angie Risley
Chairman of Remuneration Committee;
Member of Nomination Committee
Malcolm Wyman
Board fee (including
Chairmanship fees)
£
Allowances3
£
Total
£
2015
2014
2015
2014
2015
2014
129,167
N/a
5,000
N/a
134,167
N/a
135,978
270,000
Nil
10,000
135,978
280,000
88,000
60,833
5,000
5,000
93,000
65,833
50,000
50,000
35,000
30,000
85,000
80,000
63,000
52,500
5,000
5,000
68,000
57,500
70,000
58,333
5,000
5,000
75,000
63,333
60,000
60,000
5,000
5,000
65,000
65,000
Chairman of Audit Committee;
Member of Nomination and Remuneration Committees
Total
67,500
72,917
Nil
5.000
67,500
77,917
663,645
624,583
60,000
65,000 723,645
689,583
Notes:
1.
Sir Roy Gardner initially joined the Board on 1 June 2015 as a Non-Executive Director before being appointed as Non-Executive Chairman on 1 July. Fees shown are for the seven
months he served in 2015.
2. Alastair Lyons stepped down from the Board and left the Company on 1 July 2015, fees shown are for the six months he served in 2015.
3. £5,000 is payable for each occasion that requires inter-continental travel outside of the director’s country of residence.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 136
Remuneration Report continued
Annual NED Fees
Role
Chairman1
Senior Independent Director
Board fees
Audit Committee Chairmanship
Audit Committee Membership
Corporate Responsibility & Risk Committee Chairmanship
Corporate Responsibility & Risk Committee Membership
Remuneration Committee Chairmanship
Remuneration Committee Membership
Travel to international meetings
Note:
1. The Chairman fee reduced when Roy Gardner was appointed on 1 July 2015.
Performance graph and table
Base fee
1 April 2015
£
250,000
Base fee
1 April 2014
£
270,000
25,000
50,000
12,500
5,000
15,000
8,000
10,000
5,000
5,000
25,000
50,000
12,500
5,000
15,000
8,000
10,000
5,000
5,000
Percentage
change
(7.4%)
No change
No change
No change
No change
No change
No change
No change
No change
No change
This graph shows the value as at 31 December 2015, of a £100 investment in Serco on 31 December 2008 compared with £100
invested in the FTSE250 index on the same date. 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 chose the FTSE250 index as the comparator for this graph as Serco has been a constituent of that index throughout
the period.
Serco Performance Graph
400
350
300
250
200
150
100
50
0
Dec 2008
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Serco
FTSE250 Index
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
137
CEO’s pay in last seven financial years
Year ended 31 December Group CEO
CEO single
figure remuneration
(£)
Annual bonus outcome
(as % of maximum
opportunity)
LTI vesting outcome
(as % of maximum
opportunity)
2009
2010
2011
2012
2013
2014
2015
Christopher Hyman
Christopher Hyman
Christopher Hyman
Christopher Hyman
Christopher Hyman
Ed Casey
Ed Casey
Rupert Soames
Rupert Soames
3,625,830
2,646,894
2,826,038
2,582,185
893,451
294,782
1,605,064
747,655
2,226,284
90%
91%
81%
72%
N/a
74%
71%
0%
87%
295.42%
168.77%
80%
63.60%
0%
0%
0%
N/a
N/a
Percentage change in CEO’s remuneration
There were changes to the post-holder of CEO in 2014 and therefore a calculation of the change in CEO’s remuneration between
2014 and 2015 is not possible. Rupert Soames, CEO did not receive a base pay increase in 2015 (as agreed at appointment), and
there was also no increase in his annualised rate of benefits. Rupert chose to waive his 2014 annual bonus so no payment was made
to him. The average percentage changes for employees in the leadership team were 1.78%, 0% and a 7.13% decrease respectively.
This group has been chosen as it represents the most appropriate comparator group for reward purposes for our UK-based CEO.
Relative importance of spend on pay
The table below details the percentage change in dividends and overall expenditure on pay compared with the previous
financial year.
Serco considers overall expenditure on staff pay in the context of the general finances of the Company. This includes the
determination of the annual salary increase budget, the annual grant of shares and annual bonus for the business.
Dividend per share
Overall expenditure on wages and salaries
2015 vs 2014
-100.0%
-6.4%
2015
Zero
2014
3.10p
£1541.8m
£1646.8m
Dividend per share, and Overall expenditure on wages and salaries have the same meaning as in the Notes to the Company
Financial Statements.
Pensions (audited information)
As at 31 December 2015, there were no Executive Directors actively participating in or accruing additional entitlement in the Serco
Pension and Life Assurance Scheme which is a defined benefits scheme.
Payments for loss of office (audited information)
There were no loss of office payments in 2015.
Payments to Past Directors (audited information)
No payments were made in the year to past Directors other than the payments made to Andrew Jenner on him ceasing to be a
Director, details of which can be found on the Company website in the investor area under Remuneration Information.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 138
Remuneration Report continued
Awards made in 2015
Deferred Bonus Plan (DBP) (audited information)
The CEO’s participation in the 2015 DBP is based on the Bonus which he was awarded but which he chose to waive payment of.
For matching share awards in 2015, Aggregate EPS is the sole measure. The range for the three-year performance period is
10.30p at threshold and 12.50p at maximum. No matching shares will vest where performance is below threshold. For threshold
performance, each invested share will be matched by half a matching share. For maximum level performance each invested share
will be matched (on a gross investment basis) by two shares. For performance between threshold and maximum, the number of
matching shares will be determined on a straight line basis.
The definition of EPS is Statutory Earnings Per Share before exceptional items (adjusted to reflect tax paid on a cash basis),
measured as an aggregate over the three-year performance period.
Basis
of Award
(% of salary)
Award
date
Market price
at award
(p)1
Face value
£
Percentage
vesting at
threshold
performance
Number
of shares
Performance
period
end date
106.87% 29 May '15
138
908,437
25%
658,288
31 December
2017
Director
Scheme
Rupert
Soames
Note:
Deferred Bonus
Plan (conditional
share award)
1.
Rupert Soames investment shares were already owned, 138 pence was used to determine the number of shares he was entitled to invest as this was the market price of the
investment shares that were purchased for other participants in the DBP.
Performance Share Plan (PSP) (audited information)
In 2015 the Executive Directors received awards equivalent to 200% of salary for the CEO and COO and 175% for the CFO.
The shares will normally only vest at the end of the performance period, if the Executive Directors are still in employment with
Serco and the performance measures have been met. The measures are:
Performance
Measure
Weighting
of Measure
Aggregate EPS
1/3rd
Relative TSR
1/3rd
ROIC
1/3rd
Performance Target
Statutory Earnings Per Share (EPS) before exceptional
items (adjusted to reflect tax paid on a cash basis) of
10.30p (threshold, 25% vesting) to 12.50p (maximum,
100% vesting), measured as an aggregate over the three-
year performance period.
Total Shareholder Return (TSR) of median (threshold,
25% vesting) to upper quartile (maximum, 100% vesting)
when ranked relative to companies in the FTSE250
(excluding investment trusts), measured from the 30-day
period following the completion of the Rights Issue
to the 30-day period following announcement of the
Company’s 2017 results.
Pre-tax Return on Invested Capital (ROIC) of 8.4%
(threshold, 25% vesting) to 10.2% (maximum, 100%
vesting), measured as an average over the three-year
performance period.
Performance period end date
31 December 2017
30 days following the
announcement of the
Company’s 2017 results.
31 December 2017
The structure for vesting is the same for all measures and no shares vest where performance is below Threshold.
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
139
Each element of the PSP award is subject to a post-vesting holding requirement that takes the total term of the award (i.e.
performance period plus holding period) to a minimum of five years. Pre-vesting malus and post-vesting clawback is also
applicable to these awards.
Directors
Scheme
Rupert
Soames
Angus
Cockburn
Performance Share
Plan (nominal cost
options)
Performance Share
Plan (nominal cost
options)
Ed Casey Performance Share
Plan (conditional
share award)
Note:
Basis
of Award
(% of salary)
Award
date
Market
price at
award
(pence)1
Face
value
£
Percentage
vesting at
threshold
performance
Number
of shares
Performance
period
end date
200% 29 May '15
136.9
1,700,000
25%
1,241,782
See above
175% 29 May '15
136.9
875,000
25%
639,152
See above
175% 29 May '15
136.9
1,210,863
25%
884,487
See above
1. The market price at award was the preceding day's Middle Market Quotation (MMQ).
Statement of voting at the general meeting
At the last annual general meeting, votes on the Remuneration Report were cast as follows:
2014 annual report on remuneration
2013 annual report on remuneration
2013 remuneration policy
2012 remuneration report
2011 remuneration report
Notes:
For
%
Number
98.87%
760,294,709
99.61%
367,080,126
98.08%
358,418,242
95.82%
Against
%
Number
1.13%
8,671,241
0.39%
1,442,674
1.92%
7,033,412
4.18%
Withheld
%
Number
N/a
24,080
N/a
2,302,116
N/a
5,373,262
N/a
346,071,397
15,084,901
5,923,160
93.72%
6.28%
N/a
351,474,463
23,547,217
8,299,355
1. A 'Vote Withheld' is not a vote in law and is not counted in the calculation of the proportion of votes 'For' or 'Against' a Resolution.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 140
Remuneration Report continued
External appointments
The Board believes that the Group can benefit from its Executive Directors holding appropriate non-executive directorships
of companies or independent bodies. Such appointments are subject to the approval of the Board. Fees are retained by the
Executive Director concerned.
During the year, Rupert Soames and Angus Cockburn served as Non-Executive Directors of Electrocomponents plc and GKN
plc respectively. Ed Casey served as a Director of Talen Energy Corporation. Fees payable in the year were £55,000, £60,000 and
USD61,250 and deferred stock with a face value of USD75,833 respectively.
No other fee-paying external positions were held by the Executive Directors.
Directors’ shareholding and share interests (audited information)
Current shareholdings are summarised in the table below. Shares are valued for these purposes at the year-end price, which was
94.5p per share at 31 December 2015.
Number
of shares
owned
outright
(including
connected
persons)
607,000
125,840
169,200
25,000
56,000
–
–
40,000
20,508
–
Share
ownership
requirements
(% of salary)
200%
150%
150%
N/a
N/a
N/a
N/a
N/a
N/a
N/a
Vested but
unexercised
share
options
Restricted
share awards
subject to
performance
conditions
Restricted
share
awards not
subject to
performance
conditions
Share
ownership
requirements
met3
Weighted
average
exercise
price of
vested
options
Weighted
average
exercise
price of
restricted
share awards
–
–
–
N/a
N/a
N/a
N/a
N/a
N/a
N/a
2,861,349
108,527
See note 3
1,401,389
–
No
1,286,211
89,585
See note 3
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
N/a
0.02
Nil
0.02
N/a
N/a
N/a
N/a
N/a
N/a
N/a
Rupert Soames
Ed Casey
Angus Cockburn
Roy Gardner
Mike Clasper
Ralph D. Crosby Jnr
Tamara Ingram
Rachel Lomax
Angie Risley
Malcolm Wyman
Notes:
1. Ordinary shares are beneficial holdings which include the Directors’ personal holdings and those of their spouses and minor children.
2. Executives are required to retain in shares 50% of the net value of any performance shares vesting or options exercised until they satisfy the shareholding requirement.
3.
Rupert Soames and Angus Cockburn were recruited to the Board in 2014, they have two and three years respectively from appointment to build their investment. On joining in
2014 Rupert invested 100% of salary, in May 2015 he invested a further 50% of salary ensuring his first two shareholding requirement hurdles were met. Angus invested 25% of
salary on joining ensuring his first shareholding requirement hurdle was met.
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
141
Gain on exercise of share awards
Number of options
exercised
Exercise price (p)
Market value on
exercise (p)
Gain on exercise of
share award £
Rupert Soames
19,911
0
103.6
Aggregate gain on exercise of share awards
Other shareholding information (audited information)
20,628
20,628
Shareholder 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 Investment Association (formerly the ABI) in respect of all share plans is
10% in any rolling ten-year period and in respect of discretionary share plans is 5% in any rolling ten-year period. Based on the
Company’s issued share capital at 31 December 2015, our dilution level was 2.83% against all share plans and 1.79% against
discretionary share plans.
The Group has an employee share ownership trust which is administered by an independent trustee and which holds ordinary
shares in the Company to meet various obligations under the share plans.
The Trust held 10,659,290 and 10,540,181 ordinary shares at 1 January 2015 and 31 December 2015 respectively.
Rights Issue
The options and awards granted under the Serco Employee Share Plans were adjusted using a standard formula called the 'TERP'
(Theoretical Ex Rights Price) formula. The TERP formula uses a theoretical ex-rights price and the last 'cum rights' share price
(this is the last price when the shares were traded with the right to take part in the Rights Issue included).
The theoretical ex-rights price was calculated as 132.00p (the theoretical ex-rights price used here is not the same as the
theoretical ex-rights price referred to in the Prospectus as it is based on the price on the last dealing day cum rights rather than
the closing price on 11 March 2015) and the last cum rights price was 163.00p. The adjusted number of shares in each Award was
increased by a factor of 1.23484848 and each exercise price was reduced by a factor of 0.80981595.
The Remuneration Committee
The Committee determines the overall remuneration policy for senior management and the individual remuneration of the
Executive Directors and the members of the Executive Committee. This includes the base salary, bonus, long-term incentives,
pensions and terms of employment (including those terms on which service may be terminated). The Committee also determines
the remuneration of the Chairman.
Terms of reference
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 remain appropriate. Details of the Directors’ attendance at meetings of the Committee can be found in the Corporate
Governance Report on page 96.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 142
Remuneration Report continued
Members of the Committee
All members of the Committee are independent. 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.
Remuneration Committee members and attendees (the Committee met six times during 2015):
Remuneration Committee members
Position
Comments
Angie Risley
Roy Gardner
Alastair Lyons
Malcolm Wyman
Tamara Ingram
Remuneration Committee
attendees during the year
Rupert Soames
Ed Casey
Angus Cockburn
Geoff Lloyd
Chairman of Remuneration
Committee from 14 May 2012
Member from 1 June 2015
Member from 10 May 2011
Member from 1 January 2013
Member from 3 March 2014
Position
CEO
COO
CFO
Group HR Director
Tara Gonzalez
Group HR Director, Reward
Resigned from the Board on 1 July 2015
Comments
Attended by invitation
Attended by invitation
Attended by invitation
Attends as an executive responsible for
advising on the remuneration policy
Attends as an executive responsible for
advising on the remuneration policy
David Eveleigh
Steve Williams
Group General Counsel & Company Secretary
Attends as the secretary to the Committee
Deputy Company Secretary
Attends as the secretary to the Committee
No person is present during any discussion relating to their own remuneration arrangements.
Summary of the Committee’s activities during the financial year
Meeting
Regular items
Ad hoc items
February
Consider salary review proposals for the Executive Directors and members
of the Executive Committee; review the final draft of the Remuneration
Report; confirmation of bonus payable; review of achievement of
performance conditions for the LTI vesting.
Agree the treatment of the share
awards under the Rights Issue;
Approve changes to the PSP,
DBP, EOP and Sharesave rules.
April
Review the performance measures for the LTI awards; review bonus objectives. Consider the feedback from
shareholder consultation.
May
Approve the performance measures for the LTI awards; review bonus objectives. Update on the Rights Issue
August
Review bonus objectives; briefing on market trends and Corporate
Governance update; update on in-flight share awards.
October
Review performance of the Executive Directors against bonus objectives;
review initial draft of the Remuneration Report; review Committee terms of
reference; review the Committees annual programme of work.
adjustments to share awards;
Review of wider employee
arrangements and conditions
across the Group.
Consider the treatment of the
Contract and Balance Sheet
Review items for the bonus plan.
Update on changes to National
Living Wage.
Serco Group plc Annual Report and Accounts 2015 Remuneration Report
143
Advisers to the Remuneration Committee
The Committee has been advised during the year by PricewaterhouseCoopers LLP ('PwC'). PwC were selected as advisers to the
Committee through a competitive tendering process in 2012 and no conflicts of interest were identified.
PwC have provided advice throughout the year mainly around the following key executive reward areas:
• Support in reviewing the Directors' Remuneration Report
• Advice on calibration of performance targets
• Advice on the impact of the Rights Issue on outstanding share awards
• Informing the Committee on market practice and governance issues
• Responding to general and technical reward queries.
The advisers attended each meeting of the Remuneration Committee. Consulting services have also been provided to the Group
by PwC in relation to retirement benefits and pay data, accounting and taxation services.
Fees paid to PwC as advisers to the Committee during the year totalled £75,600, fees are charged on an hourly rate basis.
PwC are members of the Remuneration Consultants’ Group, which oversees the voluntary code of conduct in relation to executive
consulting in the UK.
The Committee reviews the objectivity and independence of the advice it receives from PwC each year. It is satisfied that PwC
is providing robust and professional advice. In the course of its deliberations, the Committee considers the views of the Chief
Executive on the remuneration and performance of the other members of the Executive Committee. The Committee have also
received legal advice from Linklaters LLP and Clifford Chance LLP during the year.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Secretary
25 February 2016
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 144
Directors' Report
Annual Report and Accounts
The Directors present the Annual Report and Accounts of the Group for the year ended 31 December 2015. Comparative figures
used in this report are for the year ended 31 December 2014 unless otherwise stated. The Corporate Governance Report set out
on pages 85 to 143 forms part of the Statutory Directors’ Report.
The Chairman’s Statement on pages 5 to 6 and the Chief Executive's Review and Divisional Reviews on pages 34 to 50 report
on the activities during the year and likely future developments. The information in these reports which is required to fulfil the
requirements of the Business Review is incorporated in this Directors’ Report by reference.
Articles of Association
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.
Share capital
The issued share capital of the Company, together with the details of shares issued during the year is shown in note 35 to the
Consolidated Financial Statements. In April 2015, an additional 549,265,547 ordinary shares were issued, as a result of the Rights
Issue, on a basis of one new ordinary share for every one existing share previously held. In addition, 28,687 shares have been issued
in the year to 31 December 2015 to satisfy the exercises of options and vesting of awards pursuant to the terms of the Company's
employee share and incentive schemes.
The powers of the Directors to issue or buy back shares are restricted to those approved at the Company’s Annual General Meeting.
At the 2015 Annual General Meeting, pursuant to Section 570 of the Companies Act 2006, shareholders approved the issue of
shares for cash up to 5% of the existing issued share capital and an additional 5% (only to be used in connection with an acquisition
or specified capital investment) in each case without the application of pre-emption rights. The Company intends to seek
shareholder approval at the 2016 AGM to renew this authority for a further year and details will be contained in the Notice of AGM.
Rights attaching to shares
Each ordinary share of the Company carries one vote at general meetings of the Company. There are no restrictions on the transfer
of ordinary shares in the capital of the Company other than certain restrictions which may from time to time be imposed by law. In
accordance with the Listing Rules of the Financial Conduct Authority, certain employees are required to seek the approval of the
Company to deal in its shares.
The Company is not aware of any agreement between shareholders that may result in restrictions on the transfer of securities and /
or voting rights.
Dividends
No interim dividend was paid in respect of the 2015 financial year (2014: 3.10p per ordinary share). The Directors do not recommend
a final dividend to be paid for 2015 (2014: Nil).
Serco Group plc Annual Report and Accounts 2015 Directors' Report
145
Interests in voting rights
At 31 December 2015 the Company had been notified under Rule 5 of the Disclosure and Transparency Rules of the Financial
Conduct Authority of the following holdings of voting rights in its shares:
Number of
shares (millions)
as at date of
notification
Nature of
holding
% held
as at 31
December 2015
GIC Private Limited
JPMorgan Chase & Co.
Lancaster Investment Management LLP
Majedie Asset Management Limited
Marathon Asset Management LLP
MSD Partners, L.P.
Odey Asset Management LLP
Orbis Holdings Limited
Templeton Global Advisors Limited
Notes:
12.4
Direct
65.0
39.1
Indirect
9.4 Right of Recall
Equity Swap
Total
Swap
Direct
Indirect
Indirect
Direct
77.5
56.0
58.3
109.9
2.4
25.0
Contract for
Difference
Total
Indirect
Indirect
33.1
109.8
5.9
3.6
0.9
1.1
5.6
7.1
5.1
5.3
10.0
0.4
4.6
5.0
3.0
9.99
Between 1 January 2016 and the date of this report, the Company has been advised of the following changes of interests in shares:
– both Valarc Master Fund Ltd and Woodford Investment Management LLP notified that they no longer had a holding of shares, at 31 December 2015 or
subsequently, that is notifiable under the Disclosure and Transparency Rules;
– on 13 January 2016 Tameside MBC re: Greater Manchester Pension Fund notified the Company that they have a 3.11% direct interest in voting rights;
– on 16 February 2016 JPMorgan Chase & Co. notified the Company that their interest in voting rights had changed to 5.9% (3.6% indirect and 2.3% cash settled
equity swap); and
– on 18 February 2016 GIC Private Limited notified the Company that their holding had reduced from 5.9% to 4.81% direct interest in voting rights.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 146
Directors' Report continued
Directors
The current members of the Board together with biographical details of each Director are set out on pages 88 to 89.
On 28 May 2015, the Company announced the appointment of Sir Roy Gardner as Non-Executive Chairman with effect from
1 July 2015, joining the Board as Non-Executive Director from 1 June 2015 to enable a handover period with the outgoing
Chairman, Alastair Lyons. Alastair stepped down from the Board on 1 July 2015. Sir Roy will stand for election at the Company’s
AGM on 12 May 2016.
As in previous years, and in accordance with the UK Corporate Governance Code, all other Directors will stand for re-election at
the 2016 AGM.
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 of control conditions are included in the service contracts of Directors which provide compensation or reduction
of notice periods in the event of a change of control of the Company.
Details of the Directors’ interests in the ordinary shares and options over the ordinary shares of the Company as at 31 December 2015
are set out in the Directors’ Remuneration Report on page 140. Between 1 January 2016 and the date of this report there were no
changes in Directors' interests in ordinary shares and options.
Directors’ indemnities
Directors’ and officers’ insurance cover has been established for all Directors to provide cover against their reasonable actions on
behalf of the Company. As permitted under the Articles of Association and in accordance with best practice, deeds of indemnity
were executed in 2015 indemnifying each of the Directors and Secretary of the Company in respect of their positions as officers of
the Company as a supplement to the Directors’ and officers’ insurance cover. The indemnities, which constitute a qualifying third
party indemnity provision as defined by Section 234 of the Companies Act 2006, remain in force for all current Directors and the
Secretary of the Company.
Branch offices
In certain jurisdictions, the Group will operate through a branch.
Authority for the purchase of shares
As at the date of this report authority granted at the Company’s AGM in May 2015 remains in force, as set out in the 2015 Notice of
Meeting which is available on the Company’s website.
Significant agreements that take effect, alter or terminate upon a change of control
Given the business to Government nature of many of the services provided by the Company and its subsidiaries, many agreements
contain provisions entitling the other parties to terminate them in the event of a change of control, which can be triggered by
a takeover of the Company. The following agreements are those individual agreements which the Company considers to be
significant to the Group as a whole that contain provisions giving the other party a specific right to terminate them if the Company
is subject to a change of control.
Serco Group plc Annual Report and Accounts 2015 Directors' Report
147
Material customer contracts
• Australian Immigration Services: On 11 December 2014, Serco Australia Pty Limited entered into a contract with the
Commonwealth of Australia (acting through the Department of Immigration and Border Protection) for the provision of detention
services at all onshore immigration facilities in Australia. The contract has an initial five-year term, with two available two-year
extension options. In the event of a change in control or ownership of Serco Australia Pty Limited, which in the reasonable
opinion of the Commonwealth adversely affects the Company’s ability to perform the Services, the contract may be terminated
by the Commonwealth.
• AWE: Serco Holdings Limited is a shareholder in AWE Management Limited (the ‘AWE JV’). Serco Holdings Limited’s joint
venture partners and the other shareholders in the AWE JV are UK subsidiary companies of Lockheed Martin Corporation and
Jacobs Engineering Group. The AWE JV oversees the design, development, maintenance and manufacture of warheads for the
UK’s strategic nuclear deterrent. This work is carried out by the AWE JV under a management and operation contract with the
Secretary of State for Defence (the ‘AWE Contract’). The AWE Contract was entered into on 1 December 1999 and has a 25-year
term. In the event that there is a change of control of Serco Holdings Limited or the Group then the other shareholders in the
AWE JV are entitled to purchase the AWE JV shares and loans held by Serco Holdings Limited and any other member of the
Serco Group.
• SSA: In order to bid and perform on certain classified contracts involving US national security, Serco Inc. was required to mitigate
its foreign ownership through a Special Security Agreement (SSA) between the US Government, Serco Inc., and Serco Group plc.
The effective date of the SSA is 18 June 2008. In the event of a sale of Serco Inc. to a company or person that is under Foreign
Ownership, Control or Influence (FOCI), the SSA may be terminated by the US Department of Defense.
Financing facilities
• Revolving credit facility: the Company has a £480,000,000 revolving credit facility dated 28 March 2012 (amended and restated
12 March 2015) with the Bank of America Securities Limited, Barclays Bank PLC, Commonwealth Bank of Australia, Credit Agricole
Corporate and Investment Bank, DBS Bank Limited, HSBC Bank PLC, J.P. Morgan Limited, Lloyds TSB Bank PLC, The Bank of
Tokyo-Mitsubishi UFJ. Limited and The Royal Bank of Scotland PLC as mandated lead arrangers, and Barclays Bank PLC as
Facility Agent. The facility provides funds for general corporate and working capital purposes, and bonds to support the Group’s
business needs. The facility agreement provides that in the event of a change of control of the Company each lender may, within
a certain period, call for the prepayment of the amounts owed to it and cancel its commitments under the facility.
• US Notes: the Company has notes outstanding under three US Private Placement Note Purchase Agreements (the ‘USPP
Agreements’) dated 9 May 2011, 20 October 2011 and 13 May 2013, respectively. The total amount of the notes outstanding
under the three USPP Agreements was $551,873,649 at 31 December 2015, and their maturity is between 9 May 2016 and
14 May 2024. Following the disposal of the offshore private sector BPO operations, the Group was required to offer disposal
proceeds less certain deductions to the debt holders in prepayment. Two thirds of the proceeds were offered to private
placement note holders at par and one third to repay any outstanding drawdowns on the revolving credit facility (nil outstanding
at 31 December 2015). As a result of this process, $166,566,681 of private placement notes were repaid on 16 February 2016,
leaving $385,316,967 of private placement notes in issue at that date. Under the terms of the USPP Agreements, if a change of
control of the Company occurs it is required to offer to prepay the entire principal amount of the notes together with interest to
the prepayment date but without payment of any make-whole amount.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 148
Directors' Report continued
Share plans
The Company’s share plans contain provisions in relation to a change of control. Outstanding options and awards may vest and
become exercisable on a change of control of the Company, in accordance with the rules of the plans.
Annual General Meeting
The Annual General Meeting (AGM) of the Company will be held at the Institute of Directors, 116 Pall Mall, London, SW1Y 5ED on
12 May 2016 at 10.00am.
Financial risk policies
A summary of the Group’s treasury policies and objectives relating to financial risk management, including exposure to associated
risks, is on pages 211 to 217.
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 policies and 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 diversity, respect
for human rights and equality of opportunity regardless of gender, sexual orientation, age, marital status, disability, race, religion
or other beliefs and ethnic or national origin.
The Group promotes diversity so that all employees are able to be successful regardless of their background. 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 recognises the importance of protecting human rights. We respect the United Nations Declaration of Human Rights
and its Guiding Principles on Business and Human Rights as well as the national laws of the jurisdictions in which we operate.
These are embedded in the Company’s policies and standards and considered when reviewing business opportunities.
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 is 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 in 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. These mechanisms ensure employee’s views are considered in decision-making and that they have a common
awareness of Group strategy, matters of concern to them and the financial and economic factors affecting the performance of
the Company.
Participation by staff in the success of the Group is encouraged by the availability of a share option scheme, and long-term
incentive arrangements for senior management, which effectively aligns their interests with those of shareholders by requiring
that performance criteria are achieved prior to exercise.
Serco Group plc Annual Report and Accounts 2015 Directors' Report
149
Corporate responsibility
The Group maintains a focus on corporate responsibility through a model that is applied across the business focusing on our
people, safety, the environment and the communities we serve. This model forms an integral part of our Serco Management
System and is supported by defined policies in all of the areas it covers. More information on Corporate Responsibility, including
Greenhouse Gas Emission reporting, can be found in the Strategic Report on pages 72 to 83.
Research and development
Serco undertakes a limited amount of research and development (R&D), given that our primary business model is the delivery of
public services through our people. In 2015, we spent £4.3m on R&D on IT related projects, which compared to £21.5m in 2014, of
which over 85% in 2014 was accounted for by our contract at the National Physical Laboratory, which was operated by Serco on
behalf of the UK’s Department for Business Innovation and Skills (BIS) and which ended on 1 January 2015.
Political donations
During the year neither the Company nor the Group made political donations and they intend to continue with this policy.
However, it is possible that certain routine activities may unintentionally fall within the broad scope of the Companies Act
provisions relating to political donations and expenditure. As in previous years, the Company will therefore propose to
shareholders that the authority granted at the 2015 AGM regarding political donations be renewed. Details will be included in the
notice of AGM. 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 or she ought to have taken as a Director in order to make himself or herself
aware of any relevant audit information and to establish that the Group’s auditors are aware of that information.
Auditors
Deloitte LLP has expressed their willingness to continue in office as auditors and a resolution to reappoint them will be proposed
at the forthcoming AGM.
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report· 150
Directors' Report continued
Index of Directors’ Report disclosures
The information required to be disclosed in the Directors’ Report can be found in this Annual Report on the pages listed below.
Pursuant to Listing Rule 9.8.4C, the information required to be disclosed in the Annual Report under Listing Rule 9.8.4R is marked
with an asterisk (*).
Amendment of the Articles
Appointment and replacement of Directors
Board of Directors
Change of control
Community
Directors’ insurance and indemnities
Directors’ inductions and training
Directors’ responsibilities statement
Disclosure of information to auditors
Diversity
Dividends
Employee involvement
Corporate responsibility
Employees with disabilities
Future developments of the business
Going concern
Greenhouse gas emissions
Independent auditors
Long-term incentive plans under Listing Rule 9.4.3*
Political donations
Powers for the Company to issue or buy back its shares
Powers of the Directors
Research and development activities
Restrictions on transfer of securities
Rights attaching to shares
Risk management and internal control
Share capital
Significant agreements
Significant related party agreements*
Significant shareholders
Statement of corporate governance
Strategic report
Viability statement
Voting rights
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Secretary
25 February 2016
Page 144
Page 114
Pages 88 to 89
Pages 146 to 147
Pages 78 to 79
Page 146
Pages 94 to 95
Page 151
Page 151
Pages 75 to 76
Pages 37 and 144
Pages 74, 75 and 148
Pages 72 to 83
Page 148
Pages 9 to 14
Pages 102 and 164
Pages 33, 82 and 83
Pages 153 to 158
Pages 120 to 143
Page 149
Page 144
Pages 90 to 93
Page 149
Page 144
Page 144
Pages 16 to 29 and 97 to 101
Page 144
Pages 146 to 147
Page 231
Page 145
Pages 85 to 86
Pages 5 to 83
Page 30
Page 144
Serco Group plc Annual Report and Accounts 2015 Directors' Responsibilities Statement
151
Directors' Responsibilities Statement
The Directors are responsible for preparing the annual report and financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are
required to prepare the Group financial statements in accordance with International Financial Reporting Standards (IFRS) as
adopted by the European Union and Article 4 of the IAS Regulation and have elected to prepare the Parent Company financial
statements in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework. Under company law the Directors
must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and
of the profit or loss of the Company for that period.
In preparing the Parent Company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether Financial Reporting Standard 101 Reduced Disclosure Framework has been followed, subject to any material
departures disclosed and explained in the financial statements; and
• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will
continue in business.
In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:
• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance with the specific requirements in IFRS are insufficient to enable users to understand
the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue as a going concern.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the
Company’s website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.
Responsibility statement
We confirm that to the best of our knowledge:
1.
2.
3.
The financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU,
give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings
included in the consolidation taken as a whole.
The Strategic 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 that they face.
The annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the
information necessary for shareholders to assess the Company’s performance, business model and strategy.
By order of the Board
Rupert Soames
Group Chief Executive Officer
Angus Cockburn
Group Chief Financial Officer
25 February 2016
Financial StatementsDirectors’ ReportStrategic ReportDirectors’ Report·
152
Financial
Statements
153 Independent Auditor’s Report
236 Company Balance Sheet
159 Consolidated Income Statement
160 Consolidated Statement of
Comprehensive Income
237 Notes to the Company
Financial Statements
242 Appendix: List of Subsidiaries
161 Consolidated Statement of
244 Appendix: Supplementary
Changes in Equity
Information
162 Consolidated Balance Sheet
245 Directors, Secretary and Advisers
163 Consolidated Cash Flow
246 Shareholder Information
Statement
164 Notes to the Consolidated
Financial Statements
Serco Group plc Annual Report and Accounts 2015 Independent Auditor's Report
153
Independent Auditor's Report
to the members of Serco Group plc
Opinion on financial
statements of Serco
Group plc
Going concern and the
Directors’ assessment
of the principal risks
that would threaten
the solvency or
liquidity of the Group
Independence
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the Group’s and of the Parent
company’s affairs as at 31 December 2015 and of the Group’s and the Parent company’s loss
for the year then ended;
the Group financial statements have been properly prepared in accordance with International
Financial Reporting Standards (IFRS) as adopted by the European Union;
the Parent company financial statements have been properly prepared in accordance with
United Kingdom Generally Accepted Accounting Practice, including FRS 101 'Reduced
Disclosure Framework'; and
the financial statements have been prepared in accordance with the requirements of
the Companies Act 2006 and, as regards the Group financial statements, Article 4 of
the IAS Regulation.
The financial statements comprise the Consolidated Income Statement, the Consolidated Statement
of Comprehensive Income, the Consolidated and Parent Company Balance Sheets, the Consolidated
Cash Flow Statement, the Consolidated Statement of Changes in Equity and the related notes 1 to
57. The financial reporting framework that has been applied in the preparation of the Group financial
statements is applicable law and IFRS, as adopted by the European Union. The financial reporting
framework that has been applied in the preparation of the Parent company financial statements is
applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice), including FRS 101 'Reduced Disclosure Framework'.
As required by the Listing Rules, we have reviewed the Directors’ statement regarding the
appropriateness of the going concern basis of accounting, contained within note 2 to the financial
statements and the Directors’ statement on the longer-term viability of the Group contained within
the strategic report, on page 30.
We have nothing material to add or draw attention to in relation to:
•
•
•
•
the Directors' confirmation on page 16 that they have carried out a robust assessment of the
principal risks facing the Group, including those that would threaten its business model, future
performance, solvency or liquidity;
the disclosures on pages 16 to 29 that describe those risks and explain how they are being
managed or mitigated;
the Directors’ statement in note 2 to the financial statements, about whether they considered
it appropriate to adopt the going concern basis of accounting in preparing them and their
identification of any material uncertainties to the Group’s ability to continue to do so over a
period of at least twelve months from the date of approval of the financial statements; and
the Directors' explanation on page 30 as to how they have assessed the prospects of the Group,
over what period they have done so and why they consider that period to be appropriate, and
their statement as to whether they have a reasonable expectation that the Group will be able to
continue in operation and meet its liabilities as they fall due over the period of their assessment,
including any related disclosures drawing attention to any necessary qualifications or assumptions.
We agreed with the Directors’ adoption of the going concern basis of accounting and we did not
identify any such material uncertainties. However, because not all future events or conditions can be
predicted, this statement is not a guarantee as to the Group’s ability to continue as a going concern.
We are required to comply with the Financial Reporting Council’s Ethical Standards for Auditors
and we confirm that we are independent of the Group and we have fulfilled our other ethical
responsibilities in accordance with those standards. We also confirm we have not provided any
of the prohibited non-audit services referred to in those standards.
Our assessment of risks
of material misstatement
The assessed risks of material misstatement described below are those that had the greatest
effect on our audit strategy, the allocation of resources in the audit and directing the efforts
of the engagement team.
Financial StatementsStrategic ReportDirectors’ ReportFinancial Statements· 154
Independent Auditor's Report
to the members of Serco Group plc continued
Risk
Revenue and profit recognition including
onerous contract provisions
Revenue and profit recognition on contracts requires
significant management judgement in the assessment of
current and future financial performance. Complex areas
in determining the Group’s right to recognise revenue and
profit in the current period include:
•
•
•
•
interpretation of contract terms and conditions, including
the billing and cash flow arrangements
consideration of onerous contract terms
recognition and recoverability of pre contract costs
assessment of stage of completion and forecast costs
to complete
The Group is required to make an assessment of the stage of
completion and costs to complete over periods that can extend
up to 15 years into the future in order to estimate the onerous
contract provisions. The prediction of future events contains
inherent risk and a high degree of management judgement.
At 31 December 2014, the Group recognised provisions for a
number of contracts that became onerous of £447.1m to cover
the excess of unavoidable costs of meeting the obligations
under the contracts over the economic benefits expected to
be received over the remaining term of such contracts. Such
provisions arose predominantly where contractual volume and
/ or price risk rest with the Group and forecast revenues are
largely fixed.
During 2015, the Group has continued to assess both those
contracts for which onerous contract provisions were made
at 31 December 2014, and other contracts which may display
similar characteristics and potential onerous outcomes. The
total onerous contract provision at 31 December 2015 was
£302.1m following utilisation of £116.8m, new provisions of
£89.1m, release of £93.0m of provisions no longer required
and net movement of £7.6m relating to foreign exchange,
unwinding of discount, and reclassifications.
Refer to notes 2 and 3 for the Group’s accounting policy
and critical accounting judgements over revenue and profit
recognition and refer to note 30 for detailed disclosures of
onerous contract provisions recognised by the Group as at
31 December 2015.
How the scope of our audit responded to the risk
The key procedures we have performed are:
•
•
•
•
•
•
Where we have taken a controls approach, we tested
the operating effectiveness of controls over the contract
lifecycle including tendering controls and estimating,
contract monitoring, billings and approvals, contract
ledger reconciliations and contract forecasting.
We have challenged the right to recognise revenue
through review of contractual terms and assessed
management’s judgement regarding the appropriate
timing of revenue recognition, including where a
percentage of completion basis was applied. We obtained
contract forecasts and compared the assumptions
to contract terms and where relevant inspected
correspondence with parties to the contract.
We developed an expectation of revenue from contracts
where the contracts stipulate fixed revenue on a regular
basis or by using external volume data and applying the
rates per unit as per the contract to test the revenue
recognised by the Group.
Where the revenue is not based on a fixed amount or fixed
rates per unit, we have performed test of details by testing
the underlying work order / change orders for the contracts
and the actual expenses incurred to provide those services.
We challenged management's judgements of specific
contract forecasts and historic operational costs comparing
contract forecasts to past performance versus contractual
targets to assess whether contracts are deemed to
be onerous and reviewed provisions for anticipated
losses. This has included a review and challenge of
evidence produced by third party experts, where used by
management in determining certain future contract costs
and the models for these onerous contracts.
For contracts where onerous contract provisions have
been recognised or released during the year, we have
assessed whether the provisions or releases were a
change of estimate arising from new circumstances in the
year or whether they represented the correction of a prior
period error.
•
We have verified capitalised contract costs to underlying
documentation and assessed the accounting treatment
adopted by management.
Serco Group plc Annual Report and Accounts 2015 Independent Auditor's Report
155
Risk
Impairment of goodwill
How the scope of our audit responded to the risk
The key procedures we performed are:
The Group has previously recognised goodwill of £541.5m
allocated to its various cash generating units (CGUs). In
the current year, the Group has recognised an impairment
of £87.5m of goodwill as a result of worsening cash flows
experienced by the Americas division compared to the
2014 forecasts.
The Group is required to assess goodwill for impairment
on an annual basis. In making that assessment, management
estimate the recoverable amounts for the CGU to which
the goodwill attaches. This requires management
judgement to make assumptions in respect of forecast
operating cash flows and discount rates. In so doing
consideration will be given to anticipated revenue growth,
cash conversion and wider economic inputs together with
any changes in the Group's strategy.
Further details on the impairment can be found at notes 11
and 20 and notes 2 and 3 for the Group’s accounting policy
and critical judgements over impairment of goodwill.
•
•
•
•
•
•
•
We have challenged the results of management’s strategy
review and its implications on the carrying value of goodwill
for certain CGUs through our review of the forecasts.
We challenged management’s assumptions within the cash
flow forecasts used in the value in use calculations for CGUs
including revenue, growth, discount rates and economic
assumptions such as long-term growth rates (by reference
to independent data where possible) and by performing
tests on historical forecasting accuracy.
We have challenged the discount rate applied to the
separate CGUs by utilising valuation experts, the
prevailing Group cost of capital at the year end and our
understanding of the future prospects of the Group.
We have tested the consistency of forecasts used by
management for assessment of contracts for onerous
contract provisions, recoverability of deferred tax assets
and going concern.
We have challenged the sensitivity of changes to
the various inputs into the impairment model by
reperformance of the calculations using different levels
of discount rates and other inputs.
We have recalculated the goodwill balance to determine
whether changes to the business in 2015 have been
appropriately reflected.
We also considered the adequacy of the Group’s
disclosures in respect of its goodwill impairment testing
and whether disclosures about the sensitivity of the
outcome of the impairment assessment to reasonably
possible changes in key assumptions properly reflected
the risks inherent in such assumptions.
Financial StatementsStrategic ReportDirectors’ ReportFinancial Statements· 156
Independent Auditor's Report
to the members of Serco Group plc continued
Risk
Pension commitments
How the scope of our audit responded to the risk
The key procedures we performed are:
The Group has a net pension related asset of £115.6m as at
31 December 2015, comprising £1.308.9m assets and £1,196.4m
liabilities adjusted by £1.9m for franchise arrangements and
£1.2m for the members' share of scheme deficits. The net
asset value is based on actuarial assumptions used in the
measurement of the Group’s pension commitments which
involves judgements in relation to mortality, price inflation,
discount rates, and rate of pension and salary increases,
around which there are inherent uncertainties. Judgement
is also exercised in determining whether a pension surplus
should be recognised as an asset, and the extent of the
Group’s pension liability in respect of franchise and other
contractual agreements.
Please refer to note 34 which details the valuation of the
pension assets and the actuarial assumptions used in
measuring the Group's pension commitments. The Group’s
accounting policy and critical judgement disclosures in relation
to recognition of pension assets and liabilities are set out in
note 2 and 3.
•
•
•
•
•
We evaluated the appropriateness of the principal actuarial
assumptions used in the calculation of the Group’s pension
commitments, using our own actuarial experts, and by
benchmarking certain assumptions to independent data.
As part of our work we reviewed advice received by the
Group from its external actuaries and used our actuaries
to challenge the advice in relation to the Group’s
unconditional right of refund and the recoverability
of pension surplus amounts.
We challenged contract specific pension
commitments recorded including those arising
from franchise arrangements.
We performed substantive audit procedures on the
data provided by management to their actuaries, to
determine whether it is accurate and complete.
We have substantively tested pension contributions to
and from the pension scheme to determine whether they
reflect payroll deductions and pension payments.
Changes in risk
In the current year, we no longer present going concern and covenant compliance (for which there
was an emphasis of matter) and presentation of exceptional items as risks.
Our application
of materiality
The risk related to going concern and covenant compliance was removed following the successful
completion of the Group’s rights issue and reduction in the Group’s net debt together with the
conclusion of the Group’s strategy review. The risk with respect to exceptional items was removed as
exceptional items are significantly lower and involve a lower level of judgement in the current year.
As a result the impact on our audit strategy and allocation of audit resource has also changed.
The description of risks above should be read in conjunction with the significant issues considered
by the Audit Committee discussed on page 105.
These matters were addressed in the context of our audit of the financial statements as a whole, and
in forming our opinion thereon, and we do not provide a separate opinion on these matters.
We define materiality as the magnitude of misstatement in the financial statements that makes it
probable that the economic decisions of a reasonably knowledgeable person would be changed
or influenced. We use materiality both in planning the scope of our audit work and in evaluating the
results of our work.
We determined materiality for the Group to be £9m (2014: £20m).
In the prior year, the materiality of £20m was around 3% of adjusted pre-tax loss. Pre-tax loss was
based on adding back net exceptional costs of £661.5m; this base was used to reflect the particular
circumstances of 2014, where the exceptional costs were one-off and did not represent the
underlying performance of the business.
As part of the Rights Issue in April 2015, the Company provided Trading Profit guidance to the
market for the year-ended 31 December 2015 of £90m. Trading Profit is a key measure of the
business. The requirements of the London Stock Exchange are that any deviation of 10% from their
estimate (£9m) would necessitate an announcement to the market. As such we considered £9m to
be the most important measure for the shareholders and the best measure on which to base our
materiality. Our selected materiality is less than 1% of total assets of the Group.
We agreed with the Audit Committee that we would report to the Committee all audit differences
in excess of £0.18m (2014: £0.4m), as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure
matters that we identified when assessing the overall presentation of the financial statements.
Serco Group plc Annual Report and Accounts 2015 Independent Auditor's Report
157
An overview of the
scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment,
including Group-wide controls, and assessing the risks of material misstatement at the Group level.
Based on that assessment, we focused our Group audit scope primarily on the audit work at seven
(2014: seven) components, all of which were subject to a full scope audit. The seven components,
and the levels of materiality applicable to each component, are described below:
Component
UK Central Government (CG)
UK & Europe Local &
Regional Government (LRG)
Asia Pacific (AsPac)
Middle East (ME)
Serco Global Services (SGS)
Americas
Corporate
Component
auditor used
2015 Materiality
(£ million)
2014 Materiality
(£ million)
No
No
Yes
Yes
Yes
Yes
No
4.20
4.20
3.85
3.50
3.85
3.85
3.50
4.60
3.90
3.90
3.50
3.90
3.90
3.50
The scope of work over the components above provided us with 100% coverage over the Group’s
revenue and net assets.
The CG and LRG divisions were audited by the Group audit team.
The ME division has been audited using a component audit team under instructions from the Group
team; in the prior year this was audited directly by the Group team.
The Group audit team continued to follow a programme of planned visits to the component audit
teams, visiting America (Americas component), Australia (AsPac component) and the United Arab
Emirates (ME component) during the current year audit. During the year we did not visit India (SGS
component) however we included the component audit team in our team briefing, discussed their
risk assessment, and reviewed documentation of the findings from their work.
In addition to the components described above, we have directed the performance of the audit
procedures at the Group’s shared service centre in India, including visiting the audit team during the
current year audit.
At the Parent entity level we also tested the consolidation process and carried out analytical
procedures to confirm our conclusion that there were no significant risks of material misstatement of
the aggregated financial information of the remaining components not subject to audit or audit of
specified account balances.
Included within the components above are some joint ventures; the joint venture auditors report to
the relevant component teams and we review the work of the component teams in respect of their
supervision of the joint venture auditors.
In our opinion:
•
•
the part of the Directors’ Remuneration Report to be audited has been properly prepared in
accordance with the Companies Act 2006; and
the information given in the Strategic Report and the Directors’ Report for the financial year
for which the financial statements are prepared is consistent with the financial statements.
Opinion on other
matters prescribed
by the Companies
Act 2006
Financial StatementsStrategic ReportDirectors’ ReportFinancial Statements· 158
Independent Auditor's Report
to the members of Serco Group plc continued
Matters on which we are required to report by exception
Adequacy of explanations
received and accounting
records
Directors’ remuneration
Corporate Governance
Statement
Our duty to read other
information in the Annual
Report
Respective responsibilities
of Directors and auditor
Scope of the audit of the
financial statements
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
•
•
adequate accounting records have not been kept by the Parent company, or returns adequate
for our audit have not been received from branches not visited by us; or
the Parent company financial statements are not in agreement with the accounting records
and returns.
We have nothing to report in respect of these matters.
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of
Directors’ remuneration have not been made or the part of the Directors’ Remuneration Report to
be audited is not in agreement with the accounting records and returns. We have nothing to report
arising from these matters.
Under the Listing Rules we are also required to review part of the Corporate Governance Statement
relating to the company’s compliance with certain provisions of the UK Corporate Governance Code.
We have nothing to report arising from our review.
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our
opinion, information in the annual report is:
• materially inconsistent with the information in the audited financial statements; or
•
apparently materially incorrect based on, or materially inconsistent with, our knowledge of the
Group acquired in the course of performing our audit; or
• otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between
our knowledge acquired during the audit and the Directors’ statement that they consider the annual
report is fair, balanced and understandable and whether the annual report appropriately discloses
those matters that we communicated to the audit committee which we consider should have been
disclosed. We confirm that we have not identified any such inconsistencies or misleading statements.
As explained more fully in the Directors’ Responsibilities Statement, the Directors are responsible for
the preparation of the financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance
with applicable law and International Standards on Auditing (UK and Ireland). We also comply with
International Standard on Quality Control 1 (UK and Ireland). Our audit methodology and tools aim to
ensure that our quality control procedures are effective, understood and applied. Our quality controls
and systems include our dedicated professional standards review team and independent partner reviews.
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.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements
sufficient to give reasonable assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an assessment of: whether the
accounting policies are appropriate to the Group’s and the Parent company’s circumstances
and have been consistently applied and adequately disclosed; the reasonableness of significant
accounting estimates made by the Directors; and the overall presentation of the financial statements.
In addition, we read all the financial and non-financial information in the annual report to identify
material inconsistencies with the audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by
us in the course of performing the audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
Andrew J. Kelly FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, UK
25 February 2016
Serco Group plc Annual Report and Accounts 2015 Consolidated Income Statement
159
Consolidated Income Statement
For the year ended 31 December
Continuing operations
Revenue
Cost of sales
Gross profit / (loss)
Administrative expenses
General and administrative expenses
Exceptional loss on disposal of subsidiaries and operations
Other exceptional operating items
Other expenses – amortisation and impairment of intangibles arising on acquisition
Share of profits in joint ventures, net of interest and tax
Operating loss
Operating profit / (loss) before exceptional items
Investment revenue
Finance costs
Exceptional finance costs
Total net finance costs
Loss before tax
Tax on profit / (loss) before exceptional items
Tax credit on exceptional items
Tax (charge) / credit
Loss for the year from continuing operations
Loss for the year from discontinued operations
Loss for the year
Attributable to:
Equity owners of the Company
Non-controlling interests
Earnings per share (EPS)
Basic EPS from continuing operations
Diluted EPS from continuing operations
Basic EPS from discontinued operations
Diluted EPS from discontinued operations
Basic EPS from continuing and discontinued operations
Diluted EPS from continuing and discontinued operations
Note
10
9,11
11
7
14
15
11
16
16
4
19
19
19
19
19
19
2015
£m
3,177.0
(2,849.1)
327.9
2014
£m
3,595.7
(3,661.4)
(65.7)
(253.9)
(2.6)
(107.3)
(4.8)
37.0
(3.7)
106.2
6.1
(39.0)
(32.8)
(65.7)
(69.4)
(17.9)
0.4
(17.5)
(86.9)
(66.2)
(573.0)
(2.3)
(323.4)
(18.1)
30.0
(952.5)
(626.8)
4.6
(42.6)
–
(38.0)
(990.5)
(7.2)
8.2
1.0
(989.5)
(357.6)
(153.1)
(1,347.1)
(152.6)
(1,347.3)
(0.5)
0.2
(8.78p)
(8.78p)
(6.69p)
(6.69p)
(15.47p)
(15.47p)
(151.12p)
(151.12p)
(54.54p)
(54.54p)
(205.66p)
(205.66p)
Financial StatementsStrategic ReportDirectors’ ReportFinancial Statements· 160
Consolidated Statement of Comprehensive Income
For the year ended 31 December
Loss for the year
Other comprehensive income for the year:
Items that will not be reclassified subsequently to profit or loss:
Net actuarial (loss) / gain on defined benefit pension schemes1
Actuarial (loss) / gain on reimbursable rights1
Tax relating to items not reclassified1
Share of other comprehensive income in joint ventures
Items that may be reclassified subsequently to profit or loss:
Net exchange gain on translation of foreign operations2
Fair value gain / (loss) on cash flow hedges during the year2
Share of other comprehensive expense in joint ventures
Total other comprehensive income for the year
Total comprehensive expense for the year
Attributable to:
Equity owners of the Company
Non-controlling interest
Notes:
1 Recorded in retirement benefit obligations reserve in the Consolidated Statement of Changes in Equity.
2 Recorded in hedging and translation reserve in the Consolidated Statement of Changes in Equity.
Note
2015
£m
2014
£m
(153.1)
(1,347.1)
34
34
16
7
7
(15.8)
(0.4)
4.1
5.0
(40.9)
2.2
2.6
(43.2)
52.8
13.5
(12.9)
1.9
24.9
(2.7)
(3.8)
73.7
(196.3)
(1,273.4)
(195.9)
(1,273.7)
(0.4)
0.3
Serco Group plc Annual Report and Accounts 2015 Consolidated Statement of Changes in Equity
161
Consolidated Statement of Changes in Equity
Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Retained
earnings
£m
Retirement
benefit
obligations
reserve
£m
Share
based
payment
reserve
£m
Own
shares
reserve
£m
Hedging
and
translation
reserve
£m
Total
shareholders’
equity
£m
Non-
controlling
interest
£m
At 1 January 2014
10.0
327.8
0.1
941.0
(142.4)
70.2
(70.5)
(41.0)
1,095.2
Total comprehensive
(expense) for the year
Issue of share capital
Shares transferred to
option holders
on exercise of
share options
Dividends paid
Expense in relation
to share based
payments
Tax charge in relation
to share based
payments
Change in non-
controlling interest
–
1.0
–
–
–
–
–
–
–
0.1
–
–
–
–
–
–
–
–
–
–
–
(1,349.2)
53.4
155.3
–
(53.1)
–
–
–
–
–
–
–
–
–
–
–
–
–
(3.8)
6.0
–
5.4
(0.4)
–
–
–
–
–
22.1
(1,273.7)
–
–
–
–
–
–
156.3
2.3
(53.1)
5.4
(0.4)
–
At 1 January 2015
11.0
327.9
0.1
(306.0)
(89.0)
71.4
(64.5)
(18.9)
(68.0)
0.7
0.3
–
–
–
–
–
0.8
1.8
Total comprehensive
expense for the year
–
Issue of share capital1
11.0
Shares transferred
to option holders
on exercise of share
options
Transfer on disposal
Expense in relation
to share based
payments
Change in non-
controlling interest
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(145.0)
(12.1)
519.3
–
–
–
–
–
–
–
(0.3)
4.7
0.2
(0.2)
–
–
–
–
–
9.8
–
–
–
–
(38.8)
(195.9)
(0.4)
–
–
–
–
–
530.3
4.4
–
9.8
–
–
–
–
–
0.1
1.5
At 31 December 2015
22.0
327.9
0.1
68.5
(101.3)
80.9
(59.8)
(57.7)
280.6
1
During the year the Group raised £530.3m via a Rights Issue. A cash box structure was used in such a way that merger relief was available under Companies Act 2006, section 612 and thus
no share premium needed to be recorded. As the redemption of the cash box entity’s preference shares was in the form of cash, the transaction was treated as qualifying consideration
and the premium is therefore considered to be a realised profit.
Strategic ReportDirectors’ ReportFinancial Statements·Financial Statements 162
Consolidated Balance Sheet
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interests in joint ventures
Trade and other receivables
Derivative financial instruments
Deferred tax assets
Retirement benefit assets
Current assets
Inventories
Trade and other receivables
Current tax assets
Cash and cash equivalents
Derivative financial instruments
Assets classified as held for sale
Total assets
Current liabilities
Trade and other payables
Derivative financial instruments
Current tax liabilities
Provisions
Obligations under finance leases
Loans
Liabilities directly associated with assets classified as held for sale
Non-current liabilities
Trade and other payables
Deferred tax liabilities
Provisions
Obligations under finance leases
Loans
Retirement benefit obligations
Total liabilities
Net assets / (liabilities)
Equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings / (loss)
Retirement benefit obligations reserve
Share based payment reserve
Own shares reserve
Hedging and translation reserve
Equity attributable to owners of the Company
Non-controlling interest
Total equity
Note
At 31 December 2015
£m
At 31 December 2014
£m
20
21
22
7
24
33
17
34
23
24
26
33
41
27
33
30
28
29
41
27
17
30
28
29
34
35
36
509.9
89.8
73.2
13.8
50.2
7.8
42.2
127.1
914.0
26.4
519.7
6.6
323.6
9.4
885.7
39.8
925.5
1,839.5
(548.8)
(2.4)
(14.2)
(168.6)
(15.8)
(132.2)
(882.0)
(32.5)
(914.5)
(18.3)
(22.3)
(313.1)
(28.0)
(249.7)
(11.5)
(642.9)
(1,557.4)
282.1
22.0
327.9
0.1
68.5
(101.3)
80.9
(59.8)
(57.7)
280.6
1.5
282.1
541.5
118.8
38.4
1.6
38.1
7.0
37.4
143.9
926.7
31.2
498.8
16.5
180.1
5.9
732.5
564.7
1,297.2
2,223.9
(581.9)
(17.7)
(12.6)
(205.7)
(9.6)
(43.9)
(871.4)
(219.9)
(1,091.3)
(29.7)
(9.2)
(372.2)
(16.9)
(753.4)
(17.4)
(1,198.8)
(2,290.1)
(66.2)
11.0
327.9
0.1
(306.0)
(89.0)
71.4
(64.5)
(18.9)
(68.0)
1.8
(66.2)
The financial statements were approved by the Board of Directors on 25 February 2016 and signed on its behalf by:
Rupert Soames
Group Chief Executive Officer
Angus Cockburn
Group Chief Financial Officer
Serco Group plc Annual Report and Accounts 2015
Consolidated Cash Flow Statement
163
Consolidated Cash Flow Statement
For the year ended 31 December
Net cash inflow from operating activities before exceptional items
Exceptional items
Net cash (outflow) / inflow from operating activities
Investing activities
Interest received
Increase in security deposits
Dividends received from joint ventures
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of intangible assets
Note
40
Proceeds on disposal of subsidiaries and operations
4,9
Acquisition of subsidiaries, net of cash acquired
Acquisition of other investments
Purchase of other intangible assets
Purchase of property, plant and equipment
Net cash inflow / (outflow) from investing activities
Financing activities
Interest paid
Exceptional finance costs paid
Dividends paid
Repayment of loans
Repayment of non recourse loans
Increase in loans to joint ventures
New loan advances
Capital element of finance lease repayments
Costs of equity Rights Issue
Rights Issue and share placement net proceeds
Proceeds from issue of other share capital and exercise of share options
Net cash (outflow) / inflow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Net exchange (loss) / gain
Cash reclassified to assets held for sale
Cash and cash equivalents at end of year
18
26
2015
£m
56.5
(56.6)
(0.1)
3.4
0.3
32.5
0.8
0.9
165.6
(0.2)
–
(37.5)
(36.7)
129.1
(34.7)
(31.8)
–
(448.4)
–
(1.6)
–
(18.8)
–
530.3
4.4
(0.6)
128.4
180.1
(2.1)
17.2
323.6
2014
£m
103.5
(40.4)
63.1
2.7
–
34.8
5.8
1.1
1.9
(6.5)
(3.5)
(20.0)
(23.4)
(7.1)
(42.3)
–
(53.1)
(36.0)
(3.1)
–
17.4
(18.2)
(4.1)
156.3
2.3
19.2
75.2
125.1
2.2
(22.4)
180.1
Financial StatementsStrategic ReportDirectors’ ReportFinancial Statements· 164
Notes to the Consolidated Financial Statements
1. General Information
Serco Group plc (the Company) is a company incorporated in the United Kingdom under the Companies Act 2006. The address
of the registered office is Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire, RG27 9UY.
These consolidated financial statements (the financial statements) are presented in pounds Sterling because this is the currency
of the primary economic environment in which Serco 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 159 to 235 have been prepared in accordance with International Financial Reporting
Standards adopted for use in the European Union (IFRS) and therefore comply with the requirements set out in Article 4 of the
EU IAS regulation.
The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments.
Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. The following
principal accounting policies adopted have been applied consistently in the current and preceding financial year.
Going Concern
In assessing the basis of preparation of the financial statements for the year ended 31 December 2015, the Directors have considered
the principles of the Financial Reporting Council’s ‘Guidance on Risk Management, Internal Control and Related Financial and
Business Reporting, 2014’; namely assessing the applicability of the going concern basis, the review period and disclosures.
The Group’s current principal debt facilities at the year end comprised a £480m revolving credit facility, and £375m of US private
placements notes. Subsequent to the year end, the Group has repaid £113m of the US private placement notes, which left £262m of
notes outstanding. As at 31 December 2015, the Group had £855m of committed credit facilities and committed headroom of £777m.
Assessment of going concern
The Directors have undertaken a rigorous assessment of going concern and liquidity, taking into account financial forecasts. In order
to satisfy ourselves that we have adequate resources for the future, the Directors have reviewed the Group’s existing debt levels, the
committed funding and liquidity positions under our debt covenants, and our ability to generate cash from trading activities.
Review period
In undertaking this review the Directors have considered the business plans which provide financial projections for the foreseeable
future. For the purposes of this review, we consider that to be the period ending 30 June 2017. The Directors have also reviewed
the principal risks considered on pages 16 to 29 of the Strategic Report and taken account of the results of sensitivity testing.
Assessment
The Directors have a reasonable expectation that the Company and the Group will be able to operate within the level of available
facilities and cash for the foreseeable future and accordingly believe that it is appropriate to prepare the financial statements on a
going concern basis.
Serco Group plc Annual Report and Accounts 2015 165
Basis of Consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the
Company (together, the Group) up to 31 December each year. Control is achieved when the Company:
(i) has the power over the investee;
(ii)
is exposed, or has rights to variable returns from its involvement with the investee; and
(iii) has the ability to use its power to affect the returns.
The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one
or more of the three elements of control listed above.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the
effective date of acquisition or up to the effective date of disposal as appropriate. Where necessary, adjustments are made
to the financial statements of subsidiaries to bring accounting policies 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 profits or losses and net assets in subsidiaries that is not held by the Group and
is presented within equity in the consolidated balance sheet, separate from equity of shareholders of Serco Group plc.
Adoption of New and Revised Standards
The following changes to IFRS became effective in the current reporting period:
Title
Type
Background
Impact on Serco
Amendments
Covers various matters:
Annual
Improvements
to IFRS: 2011–
2013 Cycle
•
•
•
•
IFRS 1 First-time Adoption of
International Financial
Reporting Standards
IFRS 3 Business Combinations
IFRS 13 Fair Value Measurement
IAS 40 Investment Property
Effective for annual periods beginning
on or after 1 January 2015, following
EU Adoption.
The interpretation was issued to clarify the
timing of recognition of a levy payment,
being a payment to a government for which
no specific goods or services are received.
IFRS 1 is not relevant as IFRS have
already been adopted.
IFRS 3 changes relate to accounting
within joint arrangements themselves
and are therefore not relevant.
IFRS 13 was amended to clarify the scope
of the portfolio exception, which is not
applied in the Group financial statements.
IAS 40 is not relevant to Serco as no
investment properties are held.
No material levy payments are made
by the Group.
IFRIC 21 Levies New interpretation
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 166
2. Significant Accounting Policies continued
New Standards and Interpretations not Applied
At the date of authorisation of these financial statements, the following changes to IFRS have not been applied in these financial
statements but could potentially have a significant impact:
Title
Type
Status
Background
Impact on Serco
IFRS 9
Financial
Instruments
New
standard
Pending EU
endorsement,
expected prior to
the effective date
of 1 January 2018
IFRS 15
Revenue
New
standard
Pending EU
endorsement,
expected prior to
the effective date
of 1 January 2018
IFRS 16
Leases
New
standard
Pending EU
endorsement,
expected prior to
the effective date
of 1 January 2019
The standard replaces IAS 39 and
introduces new requirements for
classifying and measuring financial
instruments and puts in place a
new hedge accounting model
that is designed to be more closely
aligned with how entities undertake
risk management activities when
hedging financial and non-financial
risk exposures.
The new standard supersedes all
of the following:
•
•
•
•
•
•
IAS 11 Construction contracts;
IAS 18 Revenue;
IFRIC 13 Customer loyalty
programmes;
IFRIC 15 Agreements for the
construction of real estate;
IFRIC 18 Transfers of assets
from customers; and
SIC-31 Revenue – Barter
transactions involving
advertising services.
The new standard is intended to
bring greater transparency and
comparability to financial reporting.
The standard replaces IAS 17 Leases
and has been introduced in order to
improve the comparability of financial
statements through developing an
approach that is more consistent with
the conceptual framework definitions
of assets and liabilities.
IFRS 9 will impact both the
measurement and disclosures of
financial instruments and the total
value of financial instruments at
31 December 2015 was £545.9m of
assets (2014: £354.0m) and £521.7m
of liabilities (2014: £941.3m), further
detail of which can be seen in note 33.
However, it is not practicable to provide
a reasonable estimate of the effect of
this standard until a detailed review
has been completed.
The new revenue standard could result
in a delay of revenues and profits
over those previously recognised, in
particular with respect of percentage
of completion accounting and where
elements of revenues associated with
transition activities (also referred to as
'phase in') have been recognised in the
early stages of contracts. An ongoing
project is being undertaken to assess
the full impact of the new standard but
we are unable to provide the quantum
of any such impact at this time.
It is not anticipated that the standard
will be adopted early, which would be
permitted on endorsement by the EU.
The key change will be in respect of
leases currently classified as operating
leases. Under the new standard leases
will be recognised on the balance
sheet as liabilities with corresponding
assets being created, grossing up the
balance sheet but with no net effect on
net assets at the start of the lease. The
income statement impact will be a new
interest charge arising from the rate
implicit in the liability and as currently
the full impact is a charge to operating
profit, the change will result in an
improvement to operating results.
We have not assessed the likely
impact of the new standard, nor
concluded whether it will be adopted
early which is allowed from the date
IFRS 15 is adopted.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 167
In addition to the items detailed above, the changes to IFRS listed below have not been applied in these financial statements and
the Directors do not expect that the adoption of these standards will have a material impact on the Group’s financial statements in
the period of initial application.
Title
Type
Status
Background
Annual
Improvements
to IFRS:
2010–2012
cycle
Annual
Improvements
to IFRS: 2012–
2014 cycle
Amendments Endorsed 17 December
The amendments cover various matters:
2014. Effective for annual
periods beginning on or
after 1 February 2015
•
•
•
•
•
•
•
IAS 16 Property, Plant and Equipment
IAS 24 Related Party Disclosures
IAS 38 Intangible Assets
IFRS 2 Share based Payment
IFRS 3 Business Combinations
IFRS 8 Operating Segments
IFRS 13 Fair Value Measurement
Amendments Endorsed 15 December
The amendments cover various matters:
2015. Effective for annual
periods beginning on or
after 1 January 2016
IAS 1
Presentation
of Financial
Statements
Amendment
Endorsed 18 December
2015. Effective for annual
periods beginning on or
after 1 January 2016
•
•
•
IAS 19 Employee Benefits
IAS 34 Interim Financial Reporting
IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations
•
IFRS 7 Financial Instruments: Disclosures
The changes are made as part of the disclosure initiative and
make certain points of clarification, particularly that:
•
•
Disclosures are only required for material matters.
Items in the statement of other comprehensive income
for equity accounted entities should be presented as
single items based on whether or not they will
subsequently be reclassified to profit or loss or not.
•
Primary financial statement line items can be disaggregated
or aggregated as relevant.
IAS 16
Property,
Plant and
Equipment
and IAS 38
Intangible
Assets
IAS 19
Employee
Benefits
IAS 12
Income Taxes
Amendment
Pending EU endorsement,
expected prior to the
effective date of
1 January 2017
The amendments clarify that unrealised losses on debt
instruments measured at fair value in the financial statements
but at cost for tax purposes can give rise to deductible
temporary differences.
Amendment
Endorsed 2 December
2015. Effective for annual
periods beginning on
or after 1 January 2016
Clarification is made of acceptable methods of depreciation
and amortisation, including the prohibition of revenue based
depreciation and limiting the use of revenue based amortisation.
Amendment
Endorsed 17 December
2014. Effective for annual
periods beginning on or
after 1 February 2015
Endorsed 24 November
2015. Effective for annual
periods beginning on or
after 1 January 2016
Clarification provided on accounting for employee contributions
set out in the formal terms of a defined benefit plan.
The accounting for acquisitions of interests in joint operations
has been amended to follow the normal business combination
accounting for acquisitions.
IFRS 11 Joint
Arrangements
Amendment
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 168
2. Significant Accounting Policies continued
Fair Value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date, regardless of whether that price is directly observable or is estimated using another
valuation technique. There are certain transactions in these financial statements which are similar to fair value, but are determined
by the treatment set out in their respective standards. These are share based payment transactions that are within the scope of
IFRS 2 Share based Payment, leasing transactions that are within the scope of IAS 17 Leases, or the calculation of net realisable
value under IAS 2 Inventories or value in use under IAS 36 Impairment of Assets.
Revenue Recognition
Revenue is measured as 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. Calculating the fair value of
revenue typically does not require a significant level of judgement, the exceptions to this are the following areas (further detail of
which is provided in note 3):
• Uncontracted variations or claims.
• Payments by results contracts.
• Long-term project based contracts.
Revenue is deferred when payment is received in advance of performing the related service or delivering the associated goods,
and released when the relevant contractual commitment is fulfilled.
Revenue Recognition: Repeat Service-based Contracts
Revenue on repeat service-based contracts is recognised as services are provided. Where initial contract costs (phase in costs) are
paid for by the customer, revenue is recognised when the related costs are incurred.
Revenue Recognition: Long-Term Project-based 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 normally measured by the proportion of contract costs incurred for work performed to date compared to the
estimated total contract costs, but where a more accurate basis is available that alternative methodology is used. Contract costs
include a rational allocation of overheads.
Where the outcome of a long-term project-based contract cannot be estimated reliably, contract revenue is recognised to the
extent that it is probable that contract costs will be recovered. Contract costs are recognised as expenses in the period in which
they are incurred.
When it is probable that the total contract costs will exceed total contract revenue, the expected loss is recognised as an expense
immediately. Such amounts are not discounted.
Revenue Recognition: Other
Sales of goods are recognised when goods are delivered and title has passed.
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable,
which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s
net carrying amount.
Dividend income from investments is recognised when the right to receive payment has been established.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 169
Bid Costs and Phase In Costs
All bid costs are expensed through the income statement up to the point where contract award (or full recovery of costs) is virtually
certain, being the point at which the Group has at least reached preferred bidder status. 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. Bid costs are
only capitalised to the extent that it is expected that the related contract will generate sufficient future economic benefits to at
least offset the amortisation charge.
Phase in costs that are incremental and directly related to the initial set-up of contracts are capitalised within trade and other
receivables and are recognised on a straight line basis over the life of the contract, except where they are specifically reimbursed
as part of the terms of the contract when they are recognised as revenue.
Determining whether bid and phase in costs are recoverable involves a high level of judgement as it requires a forecast to be
prepared for the expected future profitability of the contract, taking into account the likely future costs and revenues associated
with the services not yet performed. The level of bid and phase in costs can be seen in note 24 and further detail of the judgements
can be seen in note 3.
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. Gains and losses arising on retranslation are included in the net profit or loss for the period,
except for exchange differences arising on non-monetary assets and liabilities where the changes in fair value are recognised
directly in equity through 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.
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 profit 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 adjustments (which is subject to a maximum of one year). All other subsequent
changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with the relevant
accounting standards. Changes in the fair value of contingent consideration classified as equity are not recognised.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 (2008)
Business Combinations are recognised at their fair value at the acquisition date, except where a different treatment is mandated by
another standard.
Assets Classified as Held For Sale
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale
transaction rather than through continuing use. This condition is only met when the sale is highly probable, the asset or disposal
group is available for immediate sale in its present condition and the Group expects the sale to be completed within one year.
Amounts classified as held for sale are measured as the lower of the carrying amount and fair value less cost to sell.
Assessing whether the criteria are met requires judgement, in particular with regards to whether the subject of the assessment is in
a suitable condition for sale. In addition, the calculation of the value of any goodwill to be allocated to the sale is dependent on an
assessment of the likely sales proceeds and the likely structure of the transaction.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 170
2. Significant Accounting Policies continued
Investments in Joint Ventures
A joint venture is an arrangement whereby the owning parties have joint control and rights over the net assets of the arrangement.
The Group’s investments in joint ventures are incorporated using the equity method of accounting.
Under the equity method, an investment in an associate or a joint venture is initially recognised in the consolidated balance
sheet at cost and adjusted thereafter to recognise the Group's share of the profit or loss and other comprehensive income of the
associate or joint venture. Any excess of the cost of acquisition over the Group’s share of net fair value of the identifiable assets,
liabilities and contingent liabilities of the joint venture recognised at the date of acquisition is recognised as goodwill. Goodwill is
included within the carrying value amount of the investment and is assessed for impairment as part of that investment. Any excess
of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition,
after reassessment, is recognised immediately in profit or loss. Where the Group entity transacts with a joint venture, profits and
losses are eliminated to the extent of the Group’s interest in the arrangement.
Determining whether joint control exists requires a level of judgement, based upon specific facts and circumstances which exist at
the year end. Details of the unconsolidated joint ventures are provided in notes 6 and 7.
Goodwill
Goodwill is measured as the excess of the fair value of purchase consideration over the fair value of the net assets acquired and is
recognised as an intangible asset when control is achieved. Negative goodwill is recognised immediately in the income statement.
Fair value measurements are based on provisional estimates and may be subject to amendment within one year of the acquisition,
resulting in an adjustment to goodwill.
Goodwill itself does not generate independent cash flows and therefore, in order to perform required tests for impairment,
it is allocated at inception to the specific cash generating units (CGUs) or groups of CGUs which are expected to benefit from
the acquisition.
On the disposal of a business which includes all or part of a CGU, any attributable goodwill is included in the determination of the
profit or loss on disposal. Where part of a CGU with goodwill is sold, the attributable amount is calculated based on the future
discounted cash flows leaving the Group as a proportion of the total CGU future discounted cash flows.
The fair values associated with material business combinations are valued by external advisers and any amount of consideration
which is contingent in nature is evaluated at the end of each reporting period, based on internal forecasts. There were no material
acquisitions in the current or prior year.
Other Intangible Assets
Material intangible assets are grouped into classes of similar nature and use and separately disclosed. Other intangible assets are
amortised from the date of completion.
Customer relationships can arise on the acquisition of subsidiaries and represent the incremental value expected to be gained as a
result of existing contracts in the purchased business. These assets are amortised over the average length of the related contracts.
Licences comprise premiums paid for the acquisition of licences, while franchises represent costs incurred in obtaining franchise
rights arising on the acquisition of franchises. These are amortised on a straight-line basis over the life of the respective licence
or franchise.
Software and IT represent computer systems and processes used by the Group in order to generate future economic value through
normal business operations. The underlying assets are amortised over the period from which the Group expects to benefit, which
is typically between three to eight years.
Development expenditure is capitalised as an intangible asset only if all of certain conditions are met, with all research costs
and other development expenditure being expensed when incurred. The period of expected benefit, and therefore period
of amortisation, is typically between three and eight years. The capitalisation criteria are as follows:
• an asset is created that can be separately identified, and which the Group intends to use or sell;
• the finalisation of the asset is technically feasible and the Group has adequate resources to complete its development
for use or sale;
• it is probable that the asset created will generate future economic benefits; and
• the development cost of the asset can be measured reliably.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 171
While customer relationship and licence assets will arise from specific transactions and can be clearly identified, both software and
development type assets can include a significant level of internal costs and determining whether these are directly incremental to
the creation of the specific asset requires a high level of judgement (further detail of which is provided in note 3).
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. Assets are grouped into classes of similar nature and use and
separately disclosed except where this is not material.
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 assets
The higher of 10% or the rate produced by the lease term
Machinery
Motor vehicles
Furniture
Office 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. Given that there is limited history of material gains
or losses on disposal of fixed assets, the level of judgement involved in determining the depreciation rates is not considered to
be significant.
Asset Impairment
The Group reviews the carrying amounts of its tangible and intangible assets (including goodwill) at each reporting period,
together with any other assets under the scope of IAS 36 Impairment of Assets, in order to assess whether there is any indication
that those assets have suffered an impairment loss. As the impairment of assets has been identified as both a key source of
estimation uncertainty and a critical accounting judgement, further details around the specific judgements and estimates can
be seen in note 3.
If any indication of impairment exists, the recoverable amount of the asset is estimated in order to determine if there is any
impairment loss. Goodwill is assessed for impairment annually, irrespective of whether there are any indicators of impairment.
Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable
amount of the CGU to which the asset belongs.
Recoverable amount is defined as the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value with reference to pre-tax discount rates that reflect the risks specific to the
asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount is estimated to be less than the carrying amount of the asset, the carrying amount is impaired to its
recoverable amount. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any
goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in the CGU 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 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 in prior years.
Impairment losses and reversals are recognised immediately within administrative expenses within the income statement unless
it is considered to be an exceptional item.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 172
2. Significant Accounting Policies continued
Retirement Benefit Costs
Payments to defined contribution pension schemes are charged as an expense as they fall due.
For defined benefit pension schemes, the cost of providing benefits is determined using the projected unit credit 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.
Both current and past service costs are the amounts recognised in the income statement, reflecting the expense associated with
the individuals. Current service cost represents the increase in the present value of the scheme liabilities expected to arise from
employee service in the current period. Past service cost is recognised immediately to the extent that the benefits are already
vested. Gains and losses on curtailments or settlements are recognised in the income statement in the period in which the
curtailment or settlement occurs.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation
as adjusted for unrecognised past service costs, and as reduced by the fair value of scheme assets. Any asset resulting from this
calculation is limited to past service cost, plus the present value of available refunds (which is only recognised to the extent that the
Group has an unconditional right to receive it) and reductions in future contributions to the scheme. To the extent that an economic
benefit is available as a reduction in future contributions and there is a minimum funding requirement required of the Group, the
economic benefit available as a reduction in contributions is calculated as the present value of the estimated future service cost in
each year, less the estimated minimum funding contributions required in respect of the future accrual and benefits in that year.
Calculation of the amounts recognised in the consolidated financial statements in respect of defined benefit pension schemes
requires a high level of judgement, as further explained in note 3.
Defined Benefit Obligations Arising from Contractual Obligations
Where the Group takes on a contract and assumes the obligation to contribute variable amounts to the defined benefit pension
scheme throughout the period of the contract, the Group’s share of the defined benefit obligation less its share of the pension
scheme assets that it will fund over the period of the contract is recognised as a liability at the start of the contract with a
corresponding amount being recognised as an intangible asset. The intangible asset, which reflects the Group’s right to manage
and operate the contract, is amortised over the contract period. The Group’s share of the scheme assets and liabilities is calculated
by reducing the scheme assets and liabilities by a franchise adjustment. The franchise adjustment represents the estimated
amount of scheme deficit 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.
Multi-employer Pension Schemes
Multi-employer pension schemes are classified as either a defined contribution pension scheme or a defined benefit pension
scheme under the terms of the scheme.
Derivative Financial Instruments and Hedging Activities
The Group enters into a variety of derivative financial instruments to manage the exposure to interest rate, foreign exchange risk
and price risk, including currency swaps, foreign exchange forward contracts, interest rate swaps and commodity future contracts.
Further details of derivative financial instruments are given in note 33.
Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-
measured to their fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately
unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit
or loss depends on the nature of the hedge relationship. The Group designates certain derivatives as either hedges of the fair
value of recognised assets or liabilities (fair value hedges) or hedges of highly probable forecast transactions or hedges of firm
commitments (cash flow hedges).
At the inception of the hedge relationship, the Group 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. Both at the
inception of the hedge and on a periodic basis, the Group assesses whether the hedging instrument that is used in a hedging
relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item.
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. Derivatives, which mature within 12 months, are
presented as current assets or current liabilities.
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 33.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 173
Fair Value Hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss
immediately, together with any changes in the fair value of the hedged item that is attributable to the hedged risk. The change in
the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognised in the
line of the income statement relating to the hedged item.
Hedge accounting is discontinued when the Group de-designates the hedging relationship, the hedging instrument expires or is
sold, terminated, exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the hedged
item arising from the hedged risk is amortised to profit or loss from that date.
Cash Flow Hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred
in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in
equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line of the income
statement as the recognised hedged item.
Hedge accounting is discontinued when the Group de-designates the hedging relationship, the hedging instrument expires or
is sold, terminated, exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that
time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast
transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in
profit or loss.
Tax
The tax expense represents the sum of current tax expense and deferred tax expense.
Current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted
or substantively enacted by the balance sheet date.
Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between the tax bases of
assets and liabilities and their carrying amounts for accounting purposes.
Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised
for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable
that taxable profits will be available against which these items can be utilised.
Deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition
of an asset and liability in a transaction other than a business combination and, at the time of the transaction, affects neither the
tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the
Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in
the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be utilised.
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.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 174
2. Significant Accounting Policies continued
Share based Payment
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 38. 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.
Inventories
Inventories are stated at the lower of cost and net realisable value and comprise service spares, parts awaiting installation and work
in progress for projects undertaken for customers where payment is received on completion. Cost comprises direct materials and,
where applicable, direct labour costs that have been incurred in bringing the inventories to their present location and condition.
Trade Receivables
Trade receivables are recognised initially at cost (being the same as fair value) and subsequently at amortised cost less any
provision for impairment, to ensure that amounts recognised represent the recoverable amount.
A provision for impairment arises where there is evidence that the Group will not be able to collect amounts due, which is achieved
by creating an allowance for doubtful debts recognised in the income statement within administrative expenses. Determining
whether a trade receivable is impaired requires judgement to be applied based on the information available at each reporting
date. Key indicators of impairment include disputes with customers over commercial positions, or where debtors have significant
financial difficulties such as historic default of payments or information that suggests bankruptcy or financial reorganisation are
a reasonable possibility. The majority of contracts entered into by the Group are with government organisations or are blue chip
private sector companies and therefore historic levels of default are relatively low and as a result the risks associated with this
judgement are not considered to be significant.
When a trade receivable is expected to be uncollectible, it is written off against the allowance for doubtful debts. Subsequent
recoveries of amounts previously provided for or written off are credited against administrative expenses.
Cash and Cash Equivalents
Cash and cash equivalents comprise cash in hand and balances with banks and similar institutions, which are readily convertible to
known amounts of cash and which are subject to insignificant changes in value and have a maturity of three months or less from the
date of acquisition. This definition is also used for the consolidated cash flow statement.
Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership
to the lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at fair value or, if lower, at the present value of minimum
lease payments determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet
as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation
so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the
income statement, 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 the income statement on a straight-line basis over the term of the
relevant lease.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 175
Loans
Loans 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 classified as such only if no Group company other than the relevant borrower has an
obligation, under a guarantee or other arrangement, to repay the debt.
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.
Provisions
Provisions are recognised when the Group has an obligation to make a cash outflow as a result of a past event. Provisions are
measured at the best estimate of the expenditure required to settle the obligation at the balance sheet date when settlement is
considered to be likely.
Onerous contract provisions (OCPs) arise when the unavoidable costs of meeting contractual obligations exceed the remuneration
expected to be received. Unavoidable costs include total contract costs together with a rational allocation of shared costs that
can be directly linked to fulfilling contractual obligations which have been systematically allocated to OCPs on the basis of key
cost drivers except where this is impracticable, where contract revenue is used as a proxy to activity. The provision is calculated
as the lower of the termination costs payable for an early exit and the expected loss over the remaining contract period. Where
a customer has an option to extend a contract and it is likely that such an extension will be made, any loss expected to be made
during the extension period, is included within the calculation. However, where a profit can be reasonably expected in the
extension period, no credit is taken on the basis that such profits are uncertain given the potential for the customer to either not
extend or offer an extension under lower pricing terms. Further details of the judgements can be seen in note 3.
Net Investments in Foreign Operations
Exchange differences arising on monetary items that form part of the Group’s net investment in foreign operations are initially
recognised in equity and accumulated in the hedging and translation reserve and reclassified from equity to profit or loss on
disposal of the net investment.
Dividends Payable
Dividends are recorded in the Group’s consolidated financial statements in the period in which they are declared, appropriately
authorised and no longer at the discretion of the Company.
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 (CODM) in order to allocate resources to the segments and to assess their performance. The
CODM is considered to be the Board of Directors as a body.
Segmental revenue is analysed on an external basis. Inter-segment revenue is not presented as it is not significant in the context of
revenue as a whole. Net finance costs are not presented for each operating segment as they are reviewed on a consolidated basis
by the CODM.
Specific corporate expenses are allocated to the corresponding segments. Segment assets comprise goodwill, other intangible
assets, property, plant and equipment, inventories, trade and other receivables (excluding corporation tax recoverable) and any
retirement benefit asset. Segment liabilities comprise trade and other payables and retirement benefit obligations.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 176
3. Critical Accounting Judgements and Key Sources of Estimation Uncertainty
In the process of applying the Group’s accounting policies, which are described in note 2 above, management has made the
following judgements that have the most significant effect on the amounts recognised in the financial statements. As described
below, many of these areas of judgement also involve a high level of estimation uncertainty.
Provisions for Onerous Contracts
Determining whether provisions are required for loss making contracts requires significant judgements to be made regarding the
ability of the company to maintain or improve operational performance. Judgements can also be made regarding the outcome of
matters dependent on the behaviour of the customer in question or other parties involved in delivering the contract.
The level of uncertainty in the estimates made, either in determining whether a provision is required, or in the calculation of a
provision booked, is linked to the complexity of the underlying contract and the form of service delivery.
In the current year material revisions have been made to historic provisions, which have led to a charge to contract provisions of
£89.1m (excluding £12.8m in respect of businesses held for sale) and releases of £93.0m (excluding £1.3m in respect of businesses
held for sale). All of these revisions have resulted from triggering events in the current year, either through changes in contractual
positions or changes in circumstances which could not have been reasonably foreseen at the previous balance sheet date. To
mitigate the level of uncertainty is making these estimates Management regularly compares actual performance of the contracts
against previous forecasts and considers whether there have been any changes to significant judgements. A detailed bottom up
review of the provisions is performed as part of the Group’s formal annual budgeting process.
Impairment of Assets
Identifying whether there are indicators of impairment for assets involves a high level of judgement and a good understanding of
the drivers of value behind the asset. At each reporting period an assessment is performed in order to determine whether there
are any such indicators, which involves considering the performance of our business and any significant changes to the markets in
which we operate. The total value of assets which are covered by this assessment process (after previous impairments) is £1,255.0m
(2014: £1,252.9m), which is the maximum exposure related to this judgement. We mitigate the risk associated with this judgement
by putting in place processes and guidance for the finance community and internal review procedures.
Determining whether assets with impairment indicators require an actual impairment involves an estimation of the expected value
in use of the asset (or CGU to which the asset relates). The value in use calculation involves an estimation of future cash flows and
also the selection of appropriate discount rates, both of which involve considerable judgement. The future cash flows are derived
from approved forecasts, with the key assumptions being revenue growth, margins and cash conversion rates. Discount rates are
calculated with reference to the specific risks associated with the assets and are based on advice provided by external experts.
Our calculation of discount rates are performed based on a risk free rate of interest appropriate to the geographic location of the
cash flows related to the asset being tested, which is subsequently adjusted to factor in local market risks and risks specific to Serco
and the asset itself. Discount rates used for internal purposes are post tax rates, however for the purpose of impairment testing in
accordance with IAS 36 Impairment of Assets we calculate a pre tax rate based on post tax targets.
During the year, goodwill associated with the Americas CGU was determined to be impaired, resulting in an exceptional charge
in respect of continuing operations of £87.5m (2014: three CGUs impaired resulting in charges of £182.2m). In addition, a charge of
£9.0m (2014: £32.4m) was recognised in respect of certain intangible assets. A charge of £2.0m (2014: £36.7m) was recognised in
respect of certain items of property, plant and equipment and a credit of £6.8m (2014: charge of £17.4m) was recognised in respect
of billed receivables.
Valuation of Assets Held for Sale
Held for sale assets are measured at the lower of their carrying amount and fair value less costs to sell and up to the point a sales
price has been formally agreed a level of judgement is required in assessing the value of these assets. All assets included as held
for sale are based on the latest offer received which is likely to be acceptable to us and the customer of the affected contract, but
unforeseen events may lead to a change in this price prior to completion of the transaction. The total value of assets held for sale
is £7.3m (2014: £344.8m) which is stated after an impairment charge for the year of £72.4m (2014: £39.2m), which corresponded to
£65.9m in relation to goodwill and £6.5m for other assets (2014: all other assets).
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 177
Revenue and Recognition
Calculating the fair value of the Group’s revenue typically does not require a significant level of judgement, the exceptions to this
are the following areas:
• Uncontracted variations or claims. Where work has been performed outside of the normal contracting framework at the
request of the customer or a claim has been made for work performed but in a dispute, judgement is required in order to
determine whether there is sufficient certainty that the Group will be financially compensated. Revenue is only recognised to the
extent that they have been orally agreed by the customer or are virtually certain of being received.
• Payments by results contracts. When returns are directly linked to performance through cost savings or other customer
driven key performance indicators over a period of time an estimate is made of the likelihood of achieving the necessary level
of performance when the period covers a financial year end. Revenue is only recognised when we can be reasonably certain of
achieving the required level of performance.
• Long-term contracts. Revenue and profit is recognised for certain long-term project-based contracts based on the stage
of completion of the contract activity. The assessment of the stage of completion requires the exercise of judgement and is
measured by the proportion of costs incurred to estimated whole-life contract costs, except where whole life contract costs
exceed the contract value, in which case the excess is expensed immediately.
Separation of Income Statement Items from Underlying Results
IAS 1 requires material items to be disclosed separately in a way that enables users to assess the quality of a company's
profitability. In practice, these are commonly referred to as 'exceptional' items, but this is not a concept defined by IFRS and
therefore there is a level of judgement involved in determining what to include in underlying profit. We consider items which are
material, non-recurring and outside of the normal operating practice of the company to be suitable for separate presentation.
Retirement Benefit Obligations
The calculation of retirement benefit obligations is dependent on material key assumptions including discount rates, mortality
rates, inflation rates and future contribution rates (see note 34). The value of net retirement benefit obligations at the balance
sheet date is an asset of £115.6m (2014: £126.5m). Details of the impact of changes in assumptions relating to retirement benefit
obligations are disclosed in note 34.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 178
4. Discontinued operations
Following the transfer of the public sector Business Process Outsourcing (BPO) operations to the UK and Europe Local and
Regional Government division in 2014, the Global Services division represented only onshore and offshore private sector BPO
operations. While the exit of the whole of the private sector BPO operations had been planned and announced in 2014, certain
UK onshore contracts were planned to be exited early rather than be sold and therefore it was not appropriate to treat these
operations as discontinued in 2014.
On 16 September 2015 the disposal of the offshore private sector BPO operations was agreed and completion of the sale of
the majority of these operations occurred on 31 December 2015. The disposal of the remaining offshore business to the same
purchaser is expected to complete in 2016 following receipt of the necessary regulatory approval and the balance sheet items
associated with these operations remain within items held for sale at 31 December 2015. As at 31 December the net assets relating
to the remaining element, being the operations based in the Middle East, were equal to the expected consideration in respect of
the disposal of £15.0m.
During the course of 2015 the UK onshore private sector BPO businesses have either been sold, are planned to be sold, or have
been exited early and as a result the Global Services division is deemed to be a discontinued operation. Those UK onshore BPO
businesses which have not yet been sold are also treated as held for sale.
The decision to exit these operations is a core element of the strategy to focus Serco on being a leading supplier of public services.
This not only strengthens the balance sheet position but also enables the Group to focus on the five core markets.
The results of the discontinued operations were as follows:
For the year ended 31 December
Revenue
Expenses
Operating profit / (loss) before exceptional items
Exceptional gain / (loss) on disposal of subsidiaries and operations
Other exceptional operating items
Operating loss
Investment revenue
Finance costs
Loss before tax
Tax charge on profit / (loss) before exceptional items
Tax credit on exceptional items
Net loss attributable to discontinued operations presented in the income statement
Attributable to:
Equity owners of the Company
Non-controlling interests
2015
£m
337.6
(311.1)
26.5
5.4
(83.0)
(51.1)
2.1
(1.2)
(50.2)
(18.7)
2.7
(66.2)
(66.0)
(0.2)
2014
£m
359.3
(388.3)
(29.0)
(3.1)
(332.7)
(364.8)
1.6
(0.3)
(363.5)
(3.9)
9.8
(357.6)
(357.3)
(0.3)
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 179
Included above are items classified as exceptional as they are considered to be material, non recurring and outside of the normal
course of business. These are summarised as follows:
For the year ended 31 December
Exceptional items arising on discontinued operations
Loss on disposal of discontinued operations prior to reserve recycling
Recycling of gains in hedging and translation reserves
Exceptional gain / (loss) on disposal
Other exceptional operating items
Restructuring costs
Impairment of goodwill
Impairment of other assets transferred to held for sale
Other exceptional operating items
Exceptional operating items arising on discontinued operations
2015
£m
(45.6)
51.0
5.4
(2.2)
(65.9)
(14.9)
(83.0)
(77.6)
2014
£m
(3.1)
–
(3.1)
(8.7)
(284.8)
(39.2)
(332.7)
(335.8)
In 2015 a charge of £2.2m (2014: £8.7m) has arisen in discontinued operations in relation to the restructuring programme resulting
from the Strategy Review. This includes redundancy payments, provisions and other charges relating to the exit of the UK private
sector BPO business, external advisory fees and other incremental costs.
During 2015, an impairment test of the Global Services business was conducted based on a level 3 fair value measurement,
with reference to offers received less costs of disposal. The impairment testing identified a non-cash exceptional impairment of
goodwill relating to discontinued operations of £65.9m (2014: £284.8m) which was recorded at the half year. Assets other than
goodwill have also been impaired by a total of £14.9m (2014: £39.2m). The impairment of goodwill relates primarily to the offshore
Global Services business, the majority of which was disposed of on 31 December 2015, with the other asset impairments relating to
the UK onshore business.
The net assets at the date of disposal of discontinued operations were:
Goodwill
Other intangible assets
Property, plant and equipment
Trade and other receivables
Deferred tax assets
Cash and cash equivalents
Trade and other payables
Obligations under finance leases
Provisions
Corporation tax liabilities
Deferred tax liabilities
Minority interest disposed
Net assets / (liabilities) disposed
Offshore
£m
156.7
30.4
35.1
82.8
9.1
31.0
(51.5)
(1.1)
(16.8)
(32.0)
(5.1)
0.4
239.0
UK onshore
£m
–
–
0.8
0.5
–
0.8
(0.5)
(0.1)
(4.9)
(0.3)
–
–
(3.7)
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 180
4. Discontinued operations continued
The loss on disposal of discontinued operations is calculated as follows:
Cash consideration
Face value of Loan Note received
Gross consideration
Loan Note fair value adjustment
Indemnities provided
Net consideration
Less:
Net (assets) / liabilities disposed
Disposal related costs
Loss on disposal of discontinued operations prior to reserve recycling
Recycling of gains on translation of foreign operations
Recycling of gains on hedged derivative financial instruments from reserves
Exceptional gain / (loss) on disposal
Offshore
£m
UK onshore
£m
212.8
30.0
242.8
(10.5)
(30.7)
201.6
(239.0)
(7.5)
(44.9)
43.0
8.0
6.1
(1.6)
–
(1.6)
–
(2.3)
(3.9)
3.7
(0.5)
(0.7)
–
–
(0.7)
Total
£m
211.2
30.0
241.2
(10.5)
(33.0)
197.7
(235.3)
(8.0)
(45.6)
43.0
8.0
5.4
The recycling items relate to the cumulative gains taken through the Consolidated Statement of Comprehensive Income. These
are in respect of the historic movements in exchange differences on the net investment held in these overseas operations and fair
value movements on the hedged foreign exchange derivatives closed out prior to completion. The disposal has crystallised these
gains previously recognised in reserves, resulting in their recognition in the income statement as an additive item to the normal
losses made on disposal.
Offshore consideration includes £58.2m in respect of amounts owed by the disposed business to other parts of Serco which were
settled by the purchaser at the point of completion.
The net cash inflow arising on disposal of discontinued operations and the impact on net debt is as follows:
Cash consideration
Less:
Cash and cash equivalents disposed
Cash amounts on settlement of derivatives
Disposal related costs
Net cash flow on disposal
External debt disposed
Loan Note received
Movement in net debt
Offshore
£m
212.8
(31.0)
(7.0)
(3.7)
171.1
1.1
19.5
191.7
UK onshore
£m
(1.6)
(0.8)
–
(0.1)
(2.5)
0.1
–
(2.4)
Total
£m
211.2
(31.8)
(7.0)
(3.8)
168.6
1.2
19.5
189.3
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued
181
The net cash flows resulting from the discontinued operations were as follows:
For the year ended 31 December
Net cash inflow from operating activities before exceptional items
Exceptional items
Net cash inflow from operating activities
Net cash inflow / (outflow) from investing activities
Net cash outflow from financing activities
Net increase in cash and cash equivalents attributable to discontinued operations
2015
£m
67.7
(1.5)
66.2
93.5
(26.5)
133.2
2014
£m
41.7
(3.3)
38.4
(4.7)
(1.6)
32.1
5. Segmental Information
The Group’s operating segments reflecting the information reported to the Board in 2015 under IFRS 8 Operating Segments
are as set out below. The only material change on the prior year is the Global Services segment being reclassified as a
discontinued operation.
Reportable segments
Operating segments
UK Central Government
Frontline services for sectors including Defence, Justice & Immigration and Transport delivered
to UK Government and devolved authorities;
UK & Europe Local &
Regional Government
Services for sectors including Health, Local Government Direct Services, Citizen Services and
BPO services delivered to UK & European public sector customers;
Americas
AsPac
Middle East
Corporate
Professional, technology and management services for sectors including Defence, Transport
and Citizen Services delivered to US federal and civilian agencies, selected state and municipal
governments and the Canadian Government;
Frontline services for sectors including Defence, Justice & Immigration, Transport, Health and
Citizen Services in the Asia Pacific region including Australia, New Zealand and Hong Kong;
Frontline services for sectors including Defence, Transport and Health in the Middle East region; and
Central and head office costs.
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 2.
Geographic Information
Year ended 31 December
United Kingdom
United States
Australia
Middle East
Other countries
Total
Revenue
2015
£m
1,529.2
632.0
514.7
291.3
209.8
3,177.0
Non-current
assets*
2015
£m
259.2
347.7
125.5
16.2
34.0
782.6
Revenue
2014
£m
1,789.4
642.1
657.0
260.4
246.8
Non-current
assets*
2014
£m
464.7
336.6
140.3
14.6
246.4
3,595.7
1,202.6
*Non-current assets exclude financial instruments, deferred tax assets and loans to joint ventures and include assets of £1.2m (2014: £405.4m) reclassified as held for sale.
Revenues from external customers are attributed to individual countries on the basis of the location of the customer.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 182
5. Segmental Information continued
Information about Major Customers
The Group has two major governmental customers which each represent more than 10% of Group revenues. The customers’
revenues were £1,480.9m (2014: £1,709.3m) for the UK Government across UK Central Government and UK & Europe Local &
Regional Government, and £558.5m (2014: £574.6m) for the US Government within the Americas segment.
The following is an analysis of the Group’s revenue, results, assets and liabilities by reportable segment:
Year ended 31 December 2015
Revenue
Result
CG
£m
LRG
£m
Americas
£m
AsPac
£m
Middle
East
£m
Corporate
£m
Total
£m
742.1
905.8
693.0
544.7
291.4
– 3,177.0
Trading profit / (loss)*
60.2
(14.5)
27.0
58.8
27.4
(47.9)
111.0
Amortisation and impairment of intangibles
arising on acquisition
–
(1.1)
Operating profit / (loss) before exceptional items
60.2
(15.6)
Exceptional profit / (loss) on disposal of subsidiaries
and operations
Other exceptional operating items
Operating profit / (loss)
Investment revenue
Finance costs
Loss before tax
Tax charge
Loss for the year from continuing operations
0.5
(0.2)
0.3
(1.7)
60.5
(17.0)
(2.5)
24.5
–
(87.5)
(63.0)
(1.2)
57.6
(2.6)
(1.3)
53.7
–
–
(4.8)
27.4
(47.9)
106.2
–
(0.8)
(2.6)
(1.8)
25.6
(14.8)
(107.3)
(63.5)
(3.7)
6.1
(71.8)
(69.4)
(17.5)
(86.9)
*Trading profit / (loss) is defined as operating (loss) / profit before exceptional items and amortisation and impairment of intangible assets arising on acquisition.
Supplementary Information
Share of profits in joint ventures, net of interest and tax
33.8
1.5
Depreciation of plant, property and equipment
Impairment of plant, property and equipment
Total depreciation and impairment of plant,
property and equipment
Amortisation of intangible assets arising on acquisition
Amortisation of other intangible assets
Impairment and write down of other intangible assets
(1.9)
(1.6)
(13.3)
–
(3.5)
(13.3)
–
(0.4)
–
(1.1)
(2.0)
(9.0)
0.1
(3.0)
(0.4)
(3.4)
(2.5)
(1.1)
–
0.8
(5.4)
–
(5.4)
(1.2)
(1.5)
–
–
(1.1)
–
0.8
(1.4)
–
37.0
(26.1)
(2.0)
(1.1)
(1.4)
(28.1)
–
–
(4.8)
(0.7)
(18.0)
(23.7)
–
–
(9.0)
Total amortisation and impairment of intangible assets
(0.4)
(12.1)
(3.6)
(2.7)
(0.7)
(18.0)
(37.5)
Segment assets
Interests in joint ventures
Other segment assets
Total segment assets
Unallocated assets, including assets held for sale
Consolidated total assets
Segment liabilities
Segment liabilities
Unallocated liabilities, including liabilities
linked to assets held for sale
Consolidated total liabilities
4.4
6.5
0.2
2.3
0.4
–
13.8
126.0
202.2
473.6
235.0
100.7
218.9 1,356.4
130.4
208.7
473.8
237.3
101.1
218.9 1,370.2
469.3
1,839.5
(104.3)
(130.8)
(63.7)
(109.3)
(60.0)
(135.4)
(603.5)
(953.9)
(1,557.4)
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 183
Year ended 31 December 2014
Revenue
Result
CG
£m
LRG
£m
Americas
£m
961.4
959.8
708.1
AsPac
£m
706.0
Middle
East
£m
260.4
Corporate
£m
Total
£m
–
3,595.7
Trading (loss) / profit)*
(242.8)
(90.4)
16.5
(201.6)
(0.2)
(90.1)
(608.6)
Amortisation and impairment of intangibles
arising on acquisition
(0.1)
Operating (loss) / profit before exceptional items
(242.9)
(7.2)
(97.6)
(2.3)
14.2
(8.6)
–
–
(18.2)
(210.2)
(0.2)
(90.1)
(626.8)
Exceptional (loss) / profit on disposal of subsidiaries
and operations
1.9
0.4
–
–
Other exceptional operating items
(42.7)
(95.9)
(101.7)
(41.3)
Operating loss
Investment revenue
Finance costs
Loss before tax
Tax credit
(283.7)
(193.1)
(87.5)
(251.5)
Loss for the year from continuing operations
*Trading (loss) / profit is defined as operating profit / (loss) before exceptional items and amortisation and impairment of intangible assets arising on acquisition.
–
(1.7)
(1.9)
(4.6)
(2.3)
(40.1)
(323.4)
(134.8)
(952.5)
Supplementary Information
Share of profits in joint ventures, net of interest and tax
Depreciation of plant, property and equipment
Impairment of plant, property and equipment
Total depreciation and impairment of plant,
property and equipment
Amortisation of intangible assets arising on acquisition
Impairment of intangible assets arising on acquisition
Amortisation of other intangible assets
Impairment and write down of other intangible assets
Total amortisation and impairment of intangible assets
Segment assets
Interests in joint ventures
Other segment assets
Total segment assets
Unallocated assets, including assets held for sale
Consolidated total assets
Segment liabilities
Segment liabilities
Unallocated liabilities, including liabilities
linked to assets held for sale
Consolidated total liabilities
29.6
(10.9)
(17.5)
(28.4)
(0.1)
–
(1.5)
(2.9)
(4.5)
1.2
(13.1)
(1.8)
(14.9)
(1.6)
(5.5)
(14.2)
(11.0)
(32.3)
0.1
(2.5)
–
(2.5)
(2.3)
–
(1.5)
(3.1)
(6.9)
(7.0)
135.1
128.1
5.0
431.9
436.9
0.2
458.9
459.1
(0.9)
(6.4)
(12.9)
–
(0.8)
–
–
(0.7)
(4.5)
(19.3)
(0.8)
(5.2)
(2.2)
(6.4)
(1.3)
(0.2)
(10.1)
3.0
236.3
239.3
–
–
(0.9)
–
(0.9)
–
–
(5.5)
(3.3)
(8.8)
0.4
99.7
100.1
–
178.9
178.9
(146.1)
(247.5)
(62.0)
(99.2)
(55.2)
(93.3)
(703.3)
(1,586.8)
(2,290.1)
4.6
(42.6)
(990.5)
1.0
(989.5)
30.0
(34.4)
(36.7)
(71.1)
(6.2)
(11.9)
(24.9)
(20.5)
(63.5)
1.6
1,540.8
1,542.4
681.5
2,223.9
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 184
6. List of Principal Undertakings
The following are considered to be the principal undertakings of the Group:
Principal Subsidiaries
United Kingdom
Australia
USA
Principal joint venture undertakings
United Kingdom
Serco Limited
Serco Australia Pty Limited
Serco Inc.
AWE Management Limited
Northern Rail Holdings Limited
2015
100%
100%
100%
2015
33%
50%
2014
100%
100%
100%
2014
33%
50%
A full list of subsidiaries and related undertakings is included in the Appendix on pages 242 to 243 which form part of the
financial statements.
7. Joint Ventures
The Group has certain arrangements where control is shared equally with one or more parties. As each arrangement is a separate
legal entity and legal ownership and control are equal with all other parties, there are no significant judgements required to be made.
AWE Management Limited and Northern Rail Holdings Limited are the only joint ventures which are material to the Group.
Dividends of £17.8m (2014: £16.8m) and £5.9m (2014: £8.9m) respectively were received from these companies in the year.
Summarised financial information of AWE Management Limited and Northern Rail Holdings Limited, and an aggregation of the
other joint ventures in which the Group has an interest, is as follows:
31 December 2015
Summarised financial information
Revenue
Operating profit
Net investment revenue / (finance costs)
Income tax expense
Profit from continuing operations
Other comprehensive income
Total comprehensive income
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Proportion of group ownership
Carrying amount of investment
AWE
Management
Limited (100%
of results)
£m
Northern
Rail Holdings
Limited (100%
of results)
£m
978.3
585.3
61.2
0.4
(5.9)
55.7
–
55.7
464.2
358.8
(342.6)
(461.7)
18.7
33%
6.2
19.4
0.4
(3.5)
16.3
11.9
28.2
10.3
97.2
(93.4)
(3.8)
10.3
50%
5.2
Other joint
venture
arrangements
(100% of
results)
£m
Group
portion of
material joint
ventures*
£m
Group portion
of other
joint venture
arrangements*
£m
277.1
27.0
(1.4)
(3.8)
21.8
5.0
26.8
52.7
85.6
(75.1)
(52.3)
10.9
–
2.5
618.7
30.1
0.3
(3.7)
26.7
5.9
32.6
159.9
168.2
(160.9)
(155.8)
11.4
–
11.4
118.5
12.5
(0.7)
(1.5)
10.3
1.7
12.0
17.3
35.7
(32.7)
(17.9)
2.4
–
2.4
Total
£m
737.2
42.6
(0.4)
(5.2)
37.0
7.6
44.6
177.2
203.9
(193.6)
(173.7)
13.8
–
13.8
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued
Supplementary material
AWE
Management
Limited (100%
of results)
£m
Northern
Rail Holdings
Limited (100%
of results)
£m
Other joint
venture
arrangements
(100% of
results)
£m
Group
portion of
material joint
ventures*
£m
Group portion
of other
joint venture
arrangements*
£m
Cash and cash equivalents
111.4
44.9
45.5
59.6
21.1
185
Total
£m
80.7
Current financial liabilities excluding trade
and other payables and provisions
Non-current financial liabilities excluding
trade and other payables and provisions
Depreciation and amortisation
Interest income
Interest expense
(5.6)
(0.1)
–
0.4
–
(4.3)
(1.3)
(4.6)
0.5
(0.1)
(4.1)
(4.0)
(2.2)
(6.2)
(20.9)
(5.9)
0.2
(1.6)
(0.7)
(2.2)
0.4
(0.1)
(3.3)
(2.3)
0.1
(0.8)
(4.0)
(4.5)
0.5
(0.9)
*Total results of the joint ventures multiplied by the respective proportion of Group ownership.
The financial statements of Northern Rail Holdings Limited are for a period which is different from that of the Group, being for the
53 week period ended 9 January 2016. The 53 week period reflects the joint venture’s internal reporting structure and is sufficiently
close so as to not require adjustment to match that of the Group.
Certain employees of the groups headed by AWE Management Limited and Northern Rail Holdings Limited are members of
sponsored defined benefit pension schemes. Given the significance of the schemes to understanding the position of the joint
ventures the following key disclosures are made:
Main assumptions: 2015
Rate of salary increases (%)
Inflation assumption (CPI %)
Discount rate (%)
Post-retirement mortality:
Current male industrial pensioners at 65 (years)
Future male industrial pensioners at 65 (years)
Retirement benefit funding position (100% of results)
Present value of scheme liabilities
Fair value of scheme assets
Net amount recognised
Members’ share of deficit
Franchise adjustments*
Related asset, right to reimbursement
Net retirement benefit obligation
AWE
Management
Limited
Northern
Rail Holdings
Limited
2.2%
2.2%
4.0%
22.7
25.4
£m
(1,649.6)
1,188.0
(461.6)
–
–
461.6
–
3.0%
2.1%
3.9%
N/a
N/a
£m
(918.3)
682.6
(235.7)
94.3
141.3
–
(0.1)
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
The Northern Rail defined benefit pension scheme uses a mortality rate multiplier of 96% based on the S1 normal males (heavy)
table, adjusted for the geographic location of members.
AWE Management Limited is not liable for any deficiency in the defined benefit pension scheme under current contractual
arrangements. The deficit reflected in the financial statements of Northern Rail Holdings Limited covers only that portion of the
deficit that is expected to be funded over the term of the franchise arrangement the entity operates under. In addition, the defined
benefit position reflects an adjustment in respect of funding required to be provided by employees.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 186
7. Joint Ventures continued
31 December 2014
Summarised financial information
Revenue
Operating profit
Net investment revenue / (finance costs)
Income tax expense
Profit from continuing operations
Other comprehensive income / (expense)
Total comprehensive income
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Proportion of group ownership
Carrying amount of investment
Supplementary material
AWE
Management
Limited
(100% of
results)
£m
Northern
Rail Holdings
Limited (100%
of results)
£m
Other joint
venture
arrangements
(100% of
results)
£m
Group
portion of
material joint
ventures*
£m
Group portion
of other
joint venture
arrangements*
£m
989.3
577.5
397.0
618.5
54.9
0.3
(4.6)
50.6
–
50.6
583.7
246.5
(230.1)
(583.3)
16.8
33%
5.5
17.7
0.4
(5.1)
13.0
0.8
13.8
10.5
72.9
(83.5)
(6.0)
(6.1)
50%
(3.0)
23.8
(1.4)
(7.0)
15.4
(4.3)
11.1
44.9
74.4
(65.7)
(51.1)
2.5
–
(0.9)
27.2
0.3
(4.1)
23.4
0.4
23.8
199.8
118.6
(118.4)
(197.5)
2.5
–
2.5
179.8
10.7
(0.6)
(3.5)
6.6
(2.3)
4.3
18.1
31.5
(29.4)
(21.1)
(0.9)
–
(0.9)
AWE
Management
Limited
(100% of
results)
£m
Northern
Rail Holdings
Limited (100%
of results)
£m
Other joint
venture
arrangements
(100% of
results)
£m
Group
portion of
material joint
ventures*
£m
Group portion
of other
joint venture
arrangements*
£m
Group
portion
Total
£m
798.3
37.9
(0.3)
(7.6)
30.0
(1.9)
28.1
217.9
150.1
(147.8)
(218.6)
1.6
–
1.6
Group
portion
Total
£m
Cash and cash equivalents
106.1
33.5
41.0
52.1
19.1
71.2
Current financial liabilities excluding trade
and other payables and provisions
Non-current financial liabilities excluding
trade and other payables and provisions
Depreciation and amortisation
Interest income
Interest expense
(2.2)
(10.3)
(3.6)
–
–
0.3
–
(2.3)
(4.3)
0.5
(0.1)
(16.0)
(6.4)
0.3
(1.7)
(5.9)
(1.2)
(2.2)
0.4
(0.1)
(1.8)
(4.2)
(2.6)
0.1
(0.7)
(7.7)
(5.4)
(4.8)
0.5
(0.8)
*Total results of the joint ventures multiplied by the respective proportion of Group ownership.
The financial statements of Northern Rail Holdings Limited are for the 52 week period ended 3 January 2015.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued Key disclosures with respect of the defined benefit pension schemes of material joint ventures:
Main assumptions: 2014
Rate of salary increases (%)
Inflation assumption (CPI %)
Discount rate (%)
Post-retirement mortality:
Current male industrial pensioners at 65 (years)
Future male industrial pensioners at 65 (years)
Retirement benefit funding position (100% of results)
Present value of scheme liabilities
Fair value of scheme assets
Net amount recognised
Members’ share of deficit
Franchise adjustments*
Related asset, right to reimbursement
Net retirement benefit obligation
187
AWE
Management
Limited
Northern
Rail Holdings
Limited
3.0%
2.1%
3.8%
22.9
24.6
£m
(1,708.7)
1,125.6
(583.1)
–
–
583.1
–
3.0%
2.1%
3.7%
N/a
N/a
£m
(902.9)
640.6
(262.3)
104.9
156.0
–
(1.4)
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
The Northern Rail defined benefit pension scheme uses a mortality rate multiplier of 98% based on the S1 normal males (heavy)
table, adjusted for the geographic location of members.
8. Acquisitions
Deferred consideration payments of £0.2m were made in the period in relation to the prior year acquisition of MENA Business
Services LLC, which is part of discontinued operations. In addition, the fair value of deferred contingent consideration on this
acquisition was finalised, resulting in a reduction of the provisional goodwill of £1.6m.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 188
9. Disposals
Disposals relating to discontinued operations are included in Note 4.
In May 2015 the Group completed the sale of its Great Southern Rail (GSR) business in Australia for a cash consideration of £2.9m,
resulting in a loss on disposal of £2.8m. The transaction is part of the disposal programme of businesses identified as not being
core to Serco's future strategy, as announced initially in November 2014. In addition, in January 2015, the Group disposed of its
National Physical Laboratory (NPL) business for a consideration of £12.1m, with no gain or loss on disposal. AgPlus was a subsidiary
of NPL which was retained and sold separately with a gain of £0.5m recognised. All of these businesses were classified as held for
sale as at 31 December 2014.
In June 2015, the Group also disposed of its Serco India Private Limited business, representing the Group’s frontline public services
operations in the Indian transport sector, for a consideration of £1.0m, resulting in a loss on disposal of £0.8m. Details of these
transactions are given below:
The net assets at the date of disposal were:
Goodwill
Other intangible assets
Property, plant and equipment
Deferred tax assets
Current tax assets
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Tax liabilities
Non recourse loans
Other loans
Provisions
Net assets disposed
The (loss) / profit on disposal is calculated as follows:
Cash consideration
Less:
Net assets disposed
Non-controlling interest dispose of
Impairment of loan receivable in respect of prior year disposal
Disposal related costs
(Loss) / profit on disposal
The net cash inflow / (outflow) arising on disposals is as follows:
Consideration received
Less:
Deferred consideration
Cash and cash equivalents disposed
Disposal related costs paid during the period
Net cash (outflow) / inflow on disposal
Great
Southern
Rail
2015
£m
National
Physical
Laboratory
2015
£m
–
–
0.9
–
–
1.2
9.7
7.3
–
–
25.4
1.1
–
–
13.9
10.6
(14.2)
(14.9)
–
–
–
(0.7)
4.2
–
(24.0)
–
–
12.1
Other
2015
£m
–
–
–
–
0.9
–
0.8
0.4
–
(0.4)
–
(0.1)
–
1.6
Total
2015
£m
–
–
26.3
1.1
0.9
1.2
24.4
18.3
(29.1)
(0.4)
(24.0)
(0.1)
(0.7)
17.9
Total
2014
£m
3.4
0.2
0.2
–
–
–
6.3
1.0
(1.8)
(0.1)
–
–
–
9.2
2.9
12.1
1.4
16.4
6.3
(4.2)
(12.1)
–
–
(1.5)
(2.8)
–
–
–
–
(1.6)
0.4
–
–
0.2
(17.9)
0.4
–
(1.5)
(2.6)
(9.2)
–
(4.6)
5.2
(2.3)
2.9
12.1
1.4
16.4
8.3
–
(7.3)
(1.1)
(5.5)
–
–
–
(10.6)
(0.4)
(18.3)
–
1.5
–
1.0
(1.1)
(3.0)
0.5
(1.0)
(2.3)
5.5
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 10. Revenue
An analysis of the Group’s revenue is as follows:
Year ended 31 December
Rendering of services
Revenue from long-term project based contracts
Revenue as disclosed in the consolidated income statement
Investment revenue (note 14)
Operating lease income
Total revenue as defined in IAS 18
189
2015
£m
3,141.2
35.8
3,177.0
6.1
0.8
2014
£m
3,564.6
31.1
3,595.7
4.6
0.3
3,183.9
3,600.6
11. Exceptional Items
Exceptional items are non recurring items of financial performance that are outside normal operations and are material to the
results of the Group either by virtue of size or nature. As such, the items set out below require separate disclosure on the face of
the income statement to assist in the understanding of the underlying performance of the Group.
In the year exceptional items have arisen on both the continuing and discontinued operations of the Group. Exceptional items
arising on discontinued operations are disclosed on the face of the income statement within the loss attributable to discontinued
operations, those arising on continuing operations are disclosed on the face of the income statement within exceptional operating
items. Further information regarding the exceptional items arising on discontinued operations can be seen in note 4.
Net (loss) / profit on disposal of subsidiaries and operations
The exceptional net loss on disposal of subsidiaries and operations is included in note 9.
Other Exceptional Operating Items arising on continuing operations
For the year ended 31 December
Impairment of goodwill
Restructuring costs
Aborted transaction costs
Costs associated with UK Government review
UK frontline clinical health contract provisions
Provision for settlement relating to DLR pension deficit funding dispute
Other provision for legal claims
Impairment and related charges of Australian rail business
Other exceptional operating items
2015
£m
(87.5)
(19.7)
(1.7)
(1.2)
2.8
–
–
–
2014
£m
(181.2)
(24.0)
–
(9.2)
(16.1)
(35.6)
(20.1)
(37.2)
(107.3)
(323.4)
Goodwill is tested for impairment annually or more frequently if there are indications that there is a risk that it could be impaired.
The recoverable amount of each cash generating unit (CGU) is based on value in use calculations derived from forecast cash flows
based on past experience, adjusted to reflect market trends, economic conditions, the Group’s strategy and key risks. These
forecasts include an estimated level of new business wins and contract attrition and an assumption that the final year forecast
continues into perpetuity at a CGU-specific terminal growth rate. The terminal growth rates are provided by external sources and
are based on the long-term inflation rates of the geographic market in which the CGUs operate and therefore do not exceed the
average long-term growth rates forecast for the individual markets.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 190
11. Exceptional Items continued
In 2015, we conducted impairment testing of our CGUs that has identified a non-cash exceptional impairment to continuing
operations of £87.5m (2014: £181.2m), due primarily to a higher level of contract attrition than previously forecast and the associated
impact on future cash flows. This arose in the Americas CGU in the current year, which is also a reportable segment as defined in
IFRS8. In the prior year, impairments arose in the Direct Services & Europe business and UK Health operations, both of which form
part of the UK Local & Regional Government segment.
Year ended 31 December
UK Local & Regional Government: Direct Services & Europe
UK Local & Regional Government: UK Health
Americas
Total exceptional goodwill impairment charge
2015
£m
–
–
(87.5)
(87.5)
2014
£m
(57.6)
(22.9)
(100.7)
(181.2)
In 2015, a charge of £19.7m (2014: £24.0m) arose in relation to the restructuring programme resulting from the Strategy Review.
This included redundancy payments, provisions, external advisory fees and other incremental costs.
The disposal of the Environmental and Leisure businesses were aborted in the year and as a result one-off costs of £1.7m
associated with the aborted sale have been treated as exceptional.
In 2014 there were exceptional costs totalling £9.2m associated with the UK Government reviews and the programme of Corporate
Renewal. This reflected external costs related to these reviews and the Corporate Renewal Programme. In 2015, £1.2m of external
adviser costs arose from dealing with these historical matters.
In 2015 the exit of the UK Frontline Clinical Health contracts was completed with the Cornwall Out of Hours contract exited in
May and the Suffolk Community Healthcare contract exited in September. On completion of the contract exits, onerous contract
provisions of £2.8m, for which the charges were recorded as exceptional costs and that are no longer expected to be utilised, were
released as credits through exceptional items.
In November 2014 the Group agreed to settle a dispute with the Trustees of the Docklands Light Railway (DLR) Pension Scheme
over the extent of its liability to fund the deficit on the scheme. The settlement resulted in a total exceptional charge inclusive of
costs of £35.6m, consisting of the full and final settlement amount of £33.0m and costs of £2.6m. The settlement is to be paid over
four equal annual instalments from January 2015 to January 2018 covering all past and any future DLR associated pension liabilities.
In 2014 an exceptional provision of £20.1m was recognised for legal claims made against Serco for commercial disputes. This provision
was based on legal advice received by the Company. There have been no further charges in 2015 in relation to these disputes.
In 2014 an impairment review was performed on the Australian rail business, Great Southern Rail (GSR), resulting in a charge
totalling £37.2m. This consisted of an impairment of £23.1m to reduce the carrying value of its net assets to the estimated
recoverable amount and a charge of £14.1m in relation to the break costs of leases relating to the business. The GSR business was
exited in May 2015, with the loss on disposal included within loss on disposal of businesses.
Exceptional Finance Costs
In December 2014, agreement was reached for the Group to defer its December 2014 covenant test until 31 May 2015. As a result,
costs were incurred in 2015 to preserve the existing finance facilities. In addition, payments were made to the US Private Placement
(USPP) Noteholders as a result of early settlement following the Group refinancing. Total charges of £32.8m have been treated as
exceptional items as they are outside of the normal financing arrangements of the Group and are significant in size.
Tax Impact of above Items
The tax impact of these exceptional items was a tax credit of £0.4m (2014: £8.2m). Further details are provided in note 16.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 12. Operating Profit
Operating profit is stated after charging / (crediting):
Year ended 31 December
Research and development costs
Exceptional goodwill impairment (note 11)
Loss / (profit) on disposal of property, plant and equipment
Loss on disposal of intangible assets
Depreciation and impairment of property, plant and equipment
Amortisation and impairment of intangible assets – arising on acquisition
Amortisation, write down and impairment of intangible assets – other
Exceptional net loss on disposal of subsidiaries and operations (note 9)
Staff costs (note 13)
Allowance for doubtful debts (credited) / charged to income statement
Net foreign exchange charge
Movement on non-designated hedges and reclassified cash flow hedges
Minimum lease payments recognised as an operating lease expense
Operating lease income from sub-leases (note 10)
191
2015
£m
4.3
87.5
1.5
1.7
28.1
4.8
32.7
2.6
2014
£m
21.5
181.2
(1.0)
0.2
71.1
18.1
45.4
2.3
1,532.2
1,672.0
(6.8)
21.0
(20.7)
104.4
(0.8)
17.4
31.6
(42.0)
123.8
(0.3)
Included within 2014 general and administrative expenses on the face of the consolidated income statement were charges in
relation to non-OCP items arising from the 2014 Contract and Balance Sheet review. In 2015, there was a credit of £17.5m,
relating primarily to the release of accruals and other provisions where liabilities have either been settled for less than the
amounts provided or accrued, or have lapsed due to the passage of time.
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.
Year ended 31 December
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
– Audit–related assurance services
– Other taxation advisory services
– Other services
Total non-audit fees
2015
£m
0.9
0.6
1.5
0.2
0.2
2.6
3.0
2014
£m
1.3
0.8
2.1
0.2
0.4
0.2
0.8
Fees payable to Deloitte LLP and their associates for non-audit services to the Company are not required to be disclosed
separately because the consolidated financial statements are required to disclose such fees on a consolidated basis.
Details of the Company’s policy on the use of auditors for non-audit services and how the auditor’s independence and
objectivity was safeguarded are set out in the Audit Committee Report on page 112. No services were provided pursuant
to contingent fee arrangements.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 192
13. Staff Costs
The average monthly number of employees (including Executive Directors) was:
Year ended 31 December
UK Central Government
Local & Regional Government
Americas
AsPac
Middle East
Global Services**
Private Sector**
Unallocated
*restated to reflect new reportable segments adopted in 2015
** relates to discontinued operations
Aggregate remuneration comprised:
Year ended 31 December
Wages and salaries
Social security costs
Other pension costs (note 34)
Share based payment expense (note 38)
14. Investment Revenue
Year ended 31 December
Interest receivable on other loans and deposits
Net interest receivable on retirement benefit obligations (note 34)
Movement in discount on other debtors
2015
Number
10,182
11,357
9,727
8,885
3,996
48,169
3,052
1,094
96,462
2014
(Restated*)
Number
11,555
11,799
9,479
7,125
3,406
46,733
4,260
1,098
95,455
2015
£m
2014
£m
1,337.5
1,444.1
100.7
85.1
1,523.3
8.9
1,532.2
2015
£m
1.1
4.9
0.1
6.1
117.3
106.3
1,667.7
4.3
1,672.0
2014
£m
1.5
3.1
–
4.6
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 15. Finance Costs
Year ended 31 December
Interest payable on non recourse loans
Interest payable on obligations under finance leases
Interest payable on other loans
Facility fees and other charges
Movement in discount on provisions
16. Tax
16 (a) Income Tax Recognised in the Income Statement
2015
£m
–
2.5
24.7
6.2
5.6
39.0
Year ended 31 December
Continuing operations
Current income tax
Current income tax charge / (credit)
Adjustments in respect of prior years
Deferred tax
Current year charge / (credit)
Adjustments in respect of prior years
Before
exceptional
items
2015
£m
Exceptional
items
2015
£m
4.5
6.0
12.7
(5.3)
17.9
(0.4)
–
–
–
(0.4)
Before
exceptional
items
2014
£m
Exceptional
items
2014
£m
41.4
(15.9)
(32.7)
14.4
7.2
–
–
(8.2)
–
(8.2)
Total
2015
£m
4.1
6.0
12.7
(5.3)
17.5
The tax expense for the year can be reconciled to the profit in the consolidated income statement as follows:
Year ended 31 December
Profit / (loss) before tax
Tax calculated at a rate of 20.25% (2014: 21.5%)
Expenses not deductible for tax purposes
UK unprovided deferred tax
Other unprovided deferred tax
Overseas rate differences
UK Branch exemption
Adjustments in respect of prior years
Adjustments in respect of equity accounted
investments
Tax charge / (credit)
Before
exceptional
items
2015
£m
73.3
14.9
6.7
17.4
(15.0)
3.2
(2.7)
0.7
(7.3)
17.9
Exceptional
items
2015
£m
(142.7)
(28.9)
(0.2)
3.6
24.9
0.2
–
–
–
(0.4)
Before
exceptional
items
2014
£m
Exceptional
items
2014
£m
(664.8)
(142.9)
(325.7)
(70.1)
40.5
102.9
28.2
(13.1)
(0.5)
(1.5)
(6.4)
7.2
47.5
17.9
0.4
(3.9)
–
–
–
(8.2)
Total
2015
£m
(69.4)
(14.0)
6.5
21.0
9.9
3.4
(2.7)
0.7
(7.3)
17.5
193
2014
£m
0.8
2.9
29.4
9.5
–
42.6
Total
2014
£m
41.4
(15.9)
(40.9)
14.4
(1.0)
Total
2014
£m
(990.5)
(213.0)
88.0
120.8
28.6
(17.0)
(0.5)
(1.5)
(6.4)
(1.0)
The income tax charge / (credit) for the year is based on the blended UK statutory rate of corporation tax for the period of 20.25%
(2014: 21.5%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 194
16. Tax continued
16 (b) Income Tax Recognised in the SOCI
Year ended 31 December
Current tax
Taken to retirement benefit obligations reserve
Deferred tax
Relating to cash flow hedges
Taken to retirement benefit obligations reserve
16 (c) Tax on Items Taken Directly to Equity
Year ended 31 December
Current tax
Recorded in share based payment reserve
Deferred tax
Recorded in share based payment reserve
2015
£m
0.1
–
4.0
4.1
2015
£m
–
–
–
2014
£m
0.6
–
(13.5)
(12.9)
2014
£m
–
(0.4)
(0.4)
17. Deferred Tax
Deferred income taxes are calculated in full on temporary differences under the liability method using local substantively enacted
tax rates.
The movement in net deferred tax assets during the year was as follows:
At 1 January – asset
Income statement credit (note 16)
Items recognised in equity and in other comprehensive income (note 16)
Eliminated on disposal of subsidiary
Exchange differences
Reclassified to assets held for sale
At 31 December – asset
2015
£m
(28.2)
3.7
(4.2)
5.5
3.3
–
2014
£m
(23.5)
(30.3)
13.9
–
3.2
8.5
(19.9)
(28.2)
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 195
The movement in deferred tax assets and liabilities during the year was as follows:
Temporary
differences
on assets /
intangibles
£m
Share based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
Derivative
financial
instruments
£m
At 1 January 2015
7.5
(9.5)
21.7
(Credited) / charged to income
statement (note 16a)
Items recognised in equity
and in other comprehensive
income (note 16b&c)
Eliminated on disposal of subsidiary
Exchange differences
At 31 December 2015
17.3
(0.5)
0.3
–
–
2.0
26.8
–
–
0.3
(9.7)
(4.2)
–
–
17.8
–
–
–
–
–
–
Tax
losses
£m
(10.7)
Other
temporary
differences
£m
Total
£m
(37.2)
(28.2)
(0.1)
(13.3)
3.7
–
–
–
–
5.5
1.0
(4.2)
5.5
3.3
(10.8)
(44.0)
(19.9)
Of the amount credited to the income statement, £0.3m has been taken to costs of sales in respect of the R&D Expenditure
credit. Other temporary differences comprise mainly of onerous contract provisions which at 31 December 2015 amount to
£28.3m (2014: £30.5m).
The movement in deferred tax assets and liabilities during the previous year was as follows:
At 1 January 2014
(Credited) / charged to income
statement (note 16a)
Items recognised in equity
and in other comprehensive
income (note 16b&c)
Exchange differences
Reclassified to assets held for sale
At 31 December 2014
Temporary
differences
on assets /
intangibles
£m
Share based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
8.6
(1.9)
–
1.6
(0.8)
7.5
(9.4)
(1.4)
0.4
(0.1)
1.0
(9.5)
6.9
0.5
14.4
(0.2)
0.1
21.7
Derivative
financial
instruments
(restated)
£m
(15.0)
Tax
losses
£m
(25.2)
Other
temporary
differences
£m
10.6
Total
£m
(23.5)
6.3
15.4
(49.2)
(30.3)
–
–
8.7
–
(0.9)
–
–
(10.7)
–
1.9
(0.5)
(37.2)
13.9
3.2
8.5
(28.2)
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against
current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following is the analysis of the
deferred tax balances (after offset) for financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
2015
£m
22.3
(42.2)
(19.9)
2014
£m
9.2
(37.4)
(28.2)
The total deferred tax asset held by the Group at 31 December 2015 amounted to £42.2m (2014: £48.4m) The total deferred tax
liability held by the Group at 31 December 2015 amounted to £22.3m (2014: £11.7m). Amounts held for sale on the balance sheet
include £nil in respect of deferred tax assets (2014: £11.0m) and deferred tax liabilities (2014: £2.5m).
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 196
17. Deferred Tax continued
As at 31 December 2015 the Group has a gross unrecognised deferred tax asset of £1.05bn. The group has unused tax losses
(excluding assets held for sale) of £890.1m (2014: £647.0m) available for offset against future profits. A deferred tax asset has
been recognised in respect of £59.9m (2014: £53.5m) of such losses, of which £58.3m (net £10.5m) relates to losses incurred in
the UK and £1.6m (net £0.3m) relates to other jurisdictions. Recognition has been based on forecast future taxable profits. No
deferred tax asset has been recognised in respect of the remaining losses (net £153.2m) as there are expected to be insufficient
taxable profits available.
Losses of £105.5m (2014: £0.9m) expire within five years, losses of £0.2m (2014: £nil) expire within 6–10 years and losses of £784.4m
(2014: £646.1m) may be carried forward indefinitely.
In addition, as at the balance sheet date, the group has the following in relation to held for sale assets:
Unused tax losses of £7.3m (2014: £51.6) available for offset against future profits. No deferred tax asset has been recognised
in respect of these losses (net £1.3m) as it is not probable that there will be future taxable profits available. Losses of £nil (2014:
£20.7m) expire within 5 years, losses of £nil (2014 £16.6m) expire within 6–10 years, losses of £nil (2014: £1.9m) expire within 11–15
years, losses of £nil (2014: £12.4m) expire within 16–20 years and losses of £7.3m (2014: £nil) may be carried forward indefinitely.
18. Dividends
Amounts recognised as distributions to equity holders in the year:
Final dividend for the year ended 31 December 2014 of £nil per share (2014: Final dividend
for the year ended 31 December 2013 of 7.45p per share on 487.4 million ordinary shares)
Interim dividend for the year ended 31 December 2015 of £nil per share (2014: Interim dividend for
the year ended 31 December 2014 of 3.10p per share on 538.4 million ordinary shares)
Proposed final dividend for the year ended 31 December 2015 of £nil per share
(2014: £nil per share)
2015
£m
–
–
–
–
2014
£m
36.4
16.7
53.1
–
A dividend waiver is effective for those shares held on behalf of the Company by its Employee Share Ownership Trust (note 37).
19. Earnings per Share
Basic and diluted earnings per ordinary share (EPS) have been calculated in accordance with IAS 33 Earnings per Share.
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
*Restatement of earnings per share reflects adjustments associated with the Rights Issue
2015
Millions
986.5
–
986.5
2014
(restated*)
Millions
655.1
–
655.1
At 31 December 2015 options over 560,060 (2014 (restated): 1,855,924) 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.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 197
A further 26.5m shares are potentially dilutive but are not included in the above calculation due to the loss making position
in the year.
Earnings per share
Continuing and Discontinued
EPS
Earnings for the purpose of basic EPS
Effect of dilutive potential ordinary shares
Diluted EPS
Basic EPS Excluding Exceptional Items
Earnings for the purpose of basic EPS
Add back exceptional operating items
Add back tax on exceptional items
Earnings excluding exceptional operating items for the purpose of basic EPS
*Restatement of earnings per share reflects adjustments associated with the rights issue
Earnings per share
Continuing
EPS
Earnings for the purpose of basic EPS
Effect of dilutive potential ordinary shares
Diluted EPS
Basic EPS Excluding Exceptional Items
Earnings for the purpose of basic EPS
Add back exceptional operating items
Add back tax on exceptional items
Earnings excluding exceptional operating items for the purpose of basic EPS
*Restatement of earnings per share reflects adjustments associated with the rights issue
Earnings per share
Discontinued
EPS
Earnings for the purpose of basic EPS
Effect of dilutive potential ordinary shares
Diluted EPS
Basic EPS Excluding Exceptional Items
Earnings for the purpose of basic EPS
Add back exceptional operating items
Add back tax on exceptional items
Earnings excluding exceptional operating items for the purpose of basic EPS
*Restatement of earnings per share reflects adjustments associated with the rights issue
Earnings
2015
£m
Per share
amount
2015
Pence
Earnings
2014
(restated*)
£m
Per share
amount
2014
Pence
(152.6)
(15.47)
(1,347.3)
(205.66)
–
–
–
–
(152.6)
(15.47)
(1,347.3)
(205.66)
(152.6)
(15.47)
(1,347.3)
(205.66)
220.3
22.33
(3.1)
64.6
(0.31)
6.55
661.5
(18.0)
100.98
(2.75)
(703.8)
(107.43)
Earnings
2015
£m
Per share
amount
2015
Pence
Earnings
2014
(restated*)
£m
Per share
amount
2014
(restated*)
Pence
(86.6)
(8.78)
(990.0)
(151.12)
–
–
–
–
(86.6)
(8.78)
(990.0)
(151.12)
(86.6)
142.7
(0.4)
55.7
(8.78)
(990.0)
(151.12)
14.47
(0.04)
5.65
325.7
(8.2)
49.72
(1.25)
(672.5)
(102.66)
Earnings
2015
£m
Per share
amount
2015
Pence
Earnings
2014
(restated*)
£m
Per share
amount
2014
(restated*)
Pence
(66.0)
(6.69)
(357.3)
(54.54)
–
–
–
–
(66.0)
(6.69)
(357.3)
(54.54)
(66.0)
77.6
(2.7)
8.9
(6.69)
7.87
(0.28)
0.90
(357.3)
335.8
(9.8)
(31.3)
(54.54)
51.26
(1.5)
(4.78)
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements
198
20. Goodwill
At 1 January 2014
Additions
Disposals
Exchange differences
Impairment (exceptional)
Transfer to held for sale
At 1 January 2015
Exchange differences
Impairment (exceptional)
Transfer from held for sale
At 31 December 2015
Accumulated
impairment
losses
£m
–
–
–
(5.4)
(466.0)
339.7
(131.7)
(7.8)
(87.5)
(62.2)
(289.2)
Cost
£m
1,270.8
4.4
(3.4)
20.2
–
(618.8)
673.2
17.6
–
108.3
799.1
Carrying
amount
£m
1,270.8
4.4
(3.4)
14.8
(466.0)
(279.1)
541.5
9.8
(87.5)
46.1
509.9
Further details of the exceptional impairment can be seen in note 11.
Movements in the balance since the prior year end can be seen as follows:
Goodwill
balance 31
December
2014
£m
Additions
2015
£m
Disposals
2015
£m
Exchange
differences
2015
£m
Impairment
2015
£m
Transfer
from held
for sale
2015
£m
Goodwill
balance
2015
£m
Headroom
on
impairment
analysis
2015
£m
Headroom
on
impairment
analysis
2014
£m
UK Central Government
Justice & Immigration
49.6
Local & Regional
Government
UK Health
Direct Services
& Europe
Americas
AsPac
Middle East
60.6
18.5
303.6
100.4
8.8
541.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(0.9)
15.9
(5.7)
0.5
9.8
–
–
–
(87.5)
–
–
–
49.6
59.3
147.0
–
60.6
2.3
46.1
–
–
–
63.7
232.0
94.7
9.3
83.5
–
161.6
134.2
440.9
–
–
–
314.8
136.5
598.3
(87.5)
46.1
509.9
Included above is the detail of the headroom on the CGUs existing at the year end. For the Americas CGU impaired in the year,
no headroom exists and therefore any reduction in forecasts or unfavourable movements in key assumptions would lead to an
additional impairment. Headroom shown in respect of the other CGUs reflects where future discounted cash flows are greater
than the underlying assets and includes all relevant cash flows, including where provisions have been made for future costs and
losses. The increase in the Direct Services & Europe headroom partly reflects the impact of the decision that the Environmental
and Leisure businesses no longer be sold, reflecting the fact that the expected proceeds on disposal were less than the expected
future cash flows.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 199
The key assumptions applied in the impairment review are set out below:
UK Central Government
Justice & Immigration
Local & Regional Government
UK Health
Direct Services & Europe
Americas
AsPac
Middle East
Discount
rate
2015
%
Discount
rate
2014*
%
Terminal
growth
rates
2015
%
Terminal
growth
rates
2014
%
10.3
10.1
10.1
10.3
10.7
9.7
9.2
9.7
9.7
11.3
12.4
9.0
2.0
2.0
2.0
2.4
2.4
2.1
1.9
1.9
1.9
2.0
2.3
2.2
*
The Americas discount rate for 2014 of 11.3% has been amended from 13.3% to correct a typographical error.
Discount Rate
Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital have been used in discounting the
projected cash flows. These rates are reviewed annually with external advisers and are adjusted for risks specific to the market in
which the CGU operates.
Short-term Growth Rates
The annual impairment test is performed immediately prior to the year end, based initially on five year cash flow forecasts
approved by senior management. Short-term revenue growth rates used in each CGU five year plan are based on internal data
regarding our current contracted position, the pipeline of opportunities and forecast growth for the relevant market.
Short-term profitability and cash conversion is based on our historic experiences and a level of judgement is applied to expected
changes in both. Where businesses have been poor performers in recent history, turnaround has only been assumed where a
detailed and achievable plan is in place and all forecasts include cash flows relating to contracts where onerous contract provisions
have been made.
Terminal Growth Rates
The calculations include a terminal value based on the projections for the fifth year of the short-term plan, with a growth rate
assumption applied which extrapolates the business into perpetuity. The terminal growth rates are based on long-term inflation
rates of the geographic market in which the CGUs operate and therefore do not exceed the average long-term growth rates
forecast for the individual markets. These are provided by external sources.
Sensitivity Analysis
Sensitivity analysis has been performed for each key assumption and the only CGUs impacted by a reasonably possible change in
a key assumption are the Americas and Health. A 2% movement in discount rates and a 1% movement in terminal growth rates are
considered to be reasonably possible.
The impact of changes in key assumptions on CGUs with marginal headroom is as follows:
• Health: The CGU represents the UK healthcare market segment. A 2% increase in the discount rate gives rise to an impairment
of £8m and a 1% decline in the terminal growth rate by itself leads to an impairment of £7m. If there is both a 2% increase in the
discount rate and a 1% decline in the terminal growth rates an impairment charge of £22m would occur.
• Americas: If the terminal growth rate were to fall by 1%, the impairment charge would increase by £114m, whereas a 2% increase
in the discount rate results in an additional impairment charge of £92m. If both assumptions moved adversely by these rates, the
impairment charge would increase by £161m.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 200
21. Other Intangible Assets
Cost
At 1 January 2015
Eliminated on disposal
Additions from internal development
Additions from external acquisition
Disposals
Reclassification to held for sale assets
Reclassification from / (to) other intangible
asset categories
Reclassification to property, plant
and equipment
Research and Development expenditure credit
Exchange differences
At 31 December 2015
Accumulated amortisation and impairment
At 1 January 2015
Eliminated on disposal
Impairment charge
Amortisation charge – internal development
Amortisation charge – external
Disposals
Reclassification to held for sale assets
Reclassification to property, plant
and equipment
Exchange differences
At 31 December 2015
Net book value
At 31 December 2015
Acquisition related
Other
Customer
relationships
£m
Licences
and
franchises
£m
Internally
generated
development
expenditure
£m
Software
and IT
£m
Pension
related
intangibles
£m
Total
£m
116.8
1.6
146.9
–
–
–
(26.8)
(38.5)
–
–
–
0.4
51.9
76.3
–
–
–
4.8
(26.1)
(22.2)
–
0.3
33.1
–
–
–
–
(0.6)
–
–
–
–
1.0
1.4
–
–
–
0.1
–
(0.6)
–
–
0.9
(0.2)
10.2
7.8
(51.9)
(3.8)
67.3
(2.7)
14.0
–
(14.7)
(2.8)
1.3
(1.3)
(0.3)
–
0.2
110.2
100.5
(0.2)
–
12.7
3.6
(51.0)
(2.6)
(0.3)
0.2
62.9
–
(0.8)
0.1
59.1
35.6
(0.2)
9.0
7.4
–
(14.0)
(2.4)
–
0.1
35.5
18.8
0.1
47.3
23.6
15.7
348.3
–
–
–
(6.2)
(9.5)
–
–
–
–
–
(2.9)
24.2
7.8
(99.6)
(55.2)
–
(0.3)
(0.8)
0.7
222.2
15.7
229.5
–
–
–
–
(6.2)
(9.5)
–
–
–
–
(0.4)
9.0
20.1
8.5
(97.3)
(37.3)
(0.3)
0.6
132.4
89.8
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 201
Cost
At 1 January 2014
Eliminated on disposal
Additions from internal development
Additions from external acquisition
Disposals
Reclassification to held for sale assets
Reclassification from / (to) other intangible
asset categories
Reclassification to property, plant
and equipment
Write down of assets under construction
Exchange differences
At 31 December 2014
Accumulated amortisation and impairment
At 1 January 2014
Eliminated on disposal
Exceptional impairment charge
Impairment charge
Amortisation charge – internal development
Amortisation charge – external
Disposals
Reclassification to held for sale assets
Reclassification from / (to) other intangible
asset categories
Reclassification to property, plant and
equipment
Exchange differences
At 31 December 2014
Net book value
At 31 December 2014
Acquisition related
Other
Customer
relationships
£m
Licences
and
franchises
£m
Internally
generated
development
expenditure
£m
Software
and IT
£m
Pension
related
intangibles
£m
Total
£m
137.2
(1.0)
–
–
(19.8)
(2.0)
–
–
–
2.4
116.8
69.6
(0.8)
4.7
12.3
–
11.1
(19.8)
(1.8)
–
–
1.0
76.3
40.5
1.2
–
–
0.4
–
–
–
–
–
–
1.6
0.8
–
0.3
–
–
0.3
–
–
–
–
–
1.4
0.2
151.6
68.8
15.7
374.5
–
12.7
4.6
(3.4)
(19.7)
0.2
(0.5)
–
1.4
146.9
79.5
–
1.0
17.5
16.1
2.3
(3.1)
(14.9)
1.6
(0.5)
1.0
100.5
–
3.7
–
(2.0)
(0.2)
(0.2)
(0.1)
(2.9)
0.2
67.3
–
–
–
–
–
–
–
–
–
(1.0)
16.4
5.0
(25.2)
(21.9)
–
(0.6)
(2.9)
4.0
15.7
348.3
24.2
14.7
188.8
–
–
5.9
7.9
–
(1.0)
(0.2)
(1.6)
–
0.4
35.6
–
–
–
–
1.0
–
–
–
–
–
(0.8)
6.0
35.7
24.0
14.7
(23.9)
(16.9)
–
(0.5)
2.4
15.7
229.5
46.4
31.7
–
118.8
Included in Software and IT and other internally generated development expenditure is an amount of £11.8m (2014: £14.3m) in
respect of leased intangibles.
Customer relationships are amortised over the average length of contracts acquired. The Group is carrying £18.8m (2014: £40.5m)
in relation to Customer relationships. A further £nil (2014: £0.2m) is held within assets reclassified to held for sale. Amortisation of
intangibles arising on acquisition consists of amortisation in relation to Customer relationships and Licences and franchises and
totals £4.9m (2014: £11.4m).
The net book value of internally generated intangible assets as at 31 December 2015 was approximately £23.6m (2014: £31.7m) in
development expenditure and £36.5m (2014: £43.1m) in software and IT, of which £0.2m (2014: £2.5m) is classified as held for sale.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 202
22. Property, Plant and Equipment
Cost
At 1 January 2015
Additions
Reclassification (to) / from other plant,
property and equipment categories
Reclassification from intangible assets
Reclassification (to) / from held for sale assets
Disposals
Eliminated on disposal
Exchange differences
At 31 December 2015
Accumulated depreciation and impairment
At 1 January 2015
Charge for the year – impairment
Charge for the year – depreciation
Reclassification (to) / from other plant,
property and equipment categories
Reclassification from intangible assets
Reclassification (to) / from held for sale assets
Disposals
Eliminated on disposal
Exchange differences
At 31 December 2015
Net book value
At 31 December 2015
Freehold
land and
buildings
£m
Short-
leasehold
assets
£m
Machinery,
motor vehicles,
furniture and
equipment
£m
5.7
–
(0.9)
–
–
(0.1)
(0.7)
–
4.0
3.1
–
0.2
(0.2)
–
–
(0.1)
(0.7)
–
2.3
42.3
1.1
0.9
0.3
(2.8)
(9.2)
(2.7)
(0.1)
29.8
30.8
0.1
2.8
0.2
0.3
(2.0)
(8.7)
(2.7)
(0.1)
20.7
117.6
15.0
–
–
128.1
(22.1)
(24.7)
(4.2)
209.7
93.3
1.9
22.6
–
–
77.0
(20.1)
(23.9)
(3.5)
147.3
Total
£m
165.6
16.1
–
0.3
125.3
(31.4)
(28.1)
(4.3)
243.5
127.2
2.0
25.6
–
0.3
75.0
(28.9)
(27.3)
(3.6)
170.3
1.7
9.1
62.4
73.2
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 203
Total
£m
365.8
1.7
42.6
0.6
(218.1)
(26.3)
(0.5)
(0.2)
165.6
Freehold
land and
buildings
£m
Short-
leasehold
assets
£m
Machinery,
motor vehicles,
furniture and
equipment
£m
Cost
At 1 January 2014
Arising on acquisition
Additions
Reclassification from intangible assets
Reclassification to held for sale assets
Disposals
Eliminated on disposal
Exchange differences
At 31 December 2014
Accumulated depreciation and impairment
At 1 January 2014
Arising on acquisition
Charge for the year – impairment (exceptional)
Charge for the year – impairment
Charge for the year – depreciation
Reclassification from intangible assets
Reclassification to held for sale assets
Disposals
Eliminated on disposal
Exchange differences
At 31 December 2014
Net book value
At 31 December 2014
5.4
–
0.2
–
–
–
–
0.1
5.7
2.1
–
0.5
0.2
0.3
–
–
–
–
–
3.1
2.6
61.4
0.3
3.6
0.1
(18.5)
(5.3)
(0.1)
0.8
42.3
299.0
1.4
38.8
0.5
(199.6)
(21.0)
(0.4)
(1.1)
117.6
31.9
155.0
189.0
0.3
6.6
2.9
5.9
–
(12.4)
(4.7)
(0.1)
0.4
30.8
11.5
0.9
11.5
19.0
35.6
0.5
(111.2)
(16.2)
(0.2)
(1.6)
93.3
24.3
1.2
18.6
22.1
41.8
0.5
(123.6)
(20.9)
(0.3)
(1.2)
127.2
38.4
The carrying amount of the Group’s Machinery, motor vehicles, furniture and equipment includes an amount of £36.5m (2014:
£48.6m) in respect of assets held under finance leases, of which £nil (2014: £40.5m) is classified as held for sale.
The carrying amount of the Group’s Short-leasehold assets includes an amount of £0.3m (2014: £0.3m) in respect of assets held
under finance leases.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements
204
23. Inventories
Service spares
Parts awaiting installation
Work in progress
2015
£m
15.7
5.8
4.9
26.4
2014
£m
22.3
5.7
3.2
31.2
Total inventories held by the Group at 31 December 2015 amount to £26.4m (2014: £33.9m) and include £26.4m (2014: £31.2m)
shown above and £nil (2014: £2.7m) included within amounts held for sale on the balance sheet.
24. Trade and Other Receivables
Trade and other receivables: non-current
Amounts owed by joint ventures
Loans receivable (note 29)
Other investments
Other receivables
Trade and other receivables: current
Trade receivables
Accrued income
Prepayments
Amounts recoverable on long-term contracts (note 25)
Amounts owed by joint ventures
Loans receivable (note 29)
Security deposits
Other receivables
2015
£m
7.2
19.5
3.4
20.1
50.2
2015
£m
173.6
225.5
57.6
2.3
0.8
0.4
0.2
59.3
519.7
2014
£m
9.0
–
3.9
25.2
38.1
2014
£m
146.8
217.3
71.1
5.7
0.1
1.0
0.2
56.6
498.8
Total trade and other receivables held by the Group at 31 December 2015 amount to £590.7m (2014: £682.7m) and include £569.9m
(2014: £536.9m) shown above and £20.8m (2014: £145.8m) included within amounts held for sale on the balance sheet.
Included within current other receivables are capitalised bid costs of £9.0m (2014: £8.5m) and phase in costs of £19.3m (2014:
£17.6m) that are realised as a part of the normal operating cycle of the Group. These assets represent up-front investment in
contracts which are expected to provide benefits over the life of those contracts.
In addition to the above, capitalised bid costs of £nil (2014: £5.4m) and phase in costs of £0.3m (2014: £5.1m) are held within assets
held for sale.
Also included within current other receivables are deferred transaction costs of £nil (2014: £4.1m) which were taken as a reduction
to reserves on completion of the Rights Issue.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued
205
The Group has a receivables financing facility of £30.0m (2014: £60.0m), of which £30.0m had been utilised at 31 December 2015
(31 December 2014: £32.8m utilised). This is a UK facility provided on a non-recourse basis with all relevant debtors requiring
approval in advance by the facility provider.
The management of trade receivables is the responsibility of the operating segments, although they report to Group on a monthly
basis on debtor days, debtor ageing and significant outstanding debts. The average credit period taken by customers is 20 days
(2014: 21 days) and no interest is charged on overdue amounts.
Each customer has an external credit score which determines the level of credit provided. However, the majority of our customers
either have a sovereign credit rating as a result of being government organisations or are blue chip private sector companies.
Of the trade receivables balance at the end of the year, £39.6m (2014: £65.2m) is due from agencies of the UK Government, the
Group’s largest customer. A further £nil (2014: £5.4m) of trade receivables due from agencies of the UK Government is held within
assets held for sale. There are no other customers who represent more than 5% of the total balance of trade receivables. 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.
As at 31 December 2015, a total of £1.4m (2014: £4.4m) of trade receivables held by the Group were considered to be impaired
and include £1.4m (2014: £1.8m) shown below and £nil (2014: £2.6m) included within amounts held for sale. Impairments to trade
receivables are based on specific estimated irrecoverable amounts and provisions on outstanding balances greater than a year
old unless there is firm evidence that the balance is recoverable. The total amount of the provision for the Group was £11.3m as of
31 December 2015 (2014: £26.1m) and included £11.3m (2014: £23.5m) as shown below and £nil (2014: £2.6m) of provision for trade
receivables held for sale.
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
2015
£m
99.0
56.3
7.8
20.4
1.4
(11.3)
173.6
2014
£m
97.3
32.4
16.9
21.9
1.8
(23.5)
146.8
Of the total overdue trade receivable balance, 35.5% (2014: 24.4%) relates to the UK, US or Australian governments, and a further
34.4% (2014: 26.7%) relates to the government of the United Arab Emirates. The total allowance for doubtful debts is greater
than the assets identified as impaired due to provision being made for partial impairment of balances held within one of the
ageing categories.
Movements on the Group allowance for doubtful debts are as follows:
At 1 January
(Released) / charged to income statement
Utilised
Exchange differences
Reclassified to held for sale
At 31 December
2015
£m
23.5
(6.8)
(2.8)
0.8
(3.4)
11.3
2014
£m
4.7
22.0
(1.6)
1.0
(2.6)
23.5
Included in the other receivables balance at the end of the year is a further £72.1m (2014: £79.7m) due to agencies of the UK
Government; with a further £nil (2014: £4.4m) being reclassified to assets held for sale.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 206
25. Long-term Contracts
Contracts in progress at the balance sheet date:
Amounts due from long-term project-based contract customers included
in trade and other receivables
Long-term project-based contract costs incurred plus recognised profits
less recognised losses to date
Less: progress payments
2015
£m
2.3
2.3
109.9
(107.6)
2.3
As at 31 December 2015, the Group had £nil (2014: £nil) of contract retentions held by customers.
26. Cash and Cash Equivalents
Customer advance payments*
Other cash and short-term deposits
Total cash and cash equivalents
Sterling
2015
£m
–
293.7
293.7
Other
currencies
2015
£m
3.1
26.8
29.9
Total
2015
£m
3.1
320.5
323.6
Sterling
2014
£m
–
82.3
82.3
Other
currencies
2014
£m
0.2
97.6
97.8
2014
£m
5.7
5.7
113.9
(108.2)
5.7
Total
2014
£m
0.2
179.9
180.1
* Customer advance payments totalling £3.1m (2014: £0.2m) are encumbered cash balances. A further £nil (2014: £8.4m) of encumbered cash has been reclassified as held for sale.
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.
Total cash and cash equivalents held by the Group at 31 December 2015 amount to £328.8m (2014: £202.5m) and include £323.6m
(2014: £180.1m) shown above and £5.2m (2014: £22.4m) included within amounts held for sale on the balance sheet.
27. Trade and Other Payables
Trade and other payables: Current
Trade payables
Other payables
Accruals
Deferred income
The average credit period taken for trade purchases is 20 days (2014: 25 days).
Trade and other payables: Non-current
Other payables
2015
£m
93.6
96.4
303.1
55.7
548.8
2015
£m
18.3
18.3
2014
£m
99.8
112.6
308.3
61.2
581.9
2014
£m
29.7
29.7
Total trade and other payables held by the Group at 31 December 2015 amount to £574.5m (2014: £715.3m) and include £567.1m
(2014: £611.6m) shown above and £7.4m (2014: £103.7m) included within amounts held for sale on the balance sheet.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 207
Minimum lease
payments
2015
£m
Present value of
minimum lease
payments
2015
£m
Minimum lease
payments
2014
£m
Present value of
minimum lease
payments
2014
£m
17.0
28.7
0.6
46.3
(2.5)
43.8
(17.0)
26.8
15.8
27.4
0.6
43.8
–
43.8
(15.8)
28.0
10.4
17.5
0.1
28.0
(1.5)
26.5
(10.4)
16.1
28. Obligations under Finance Leases
Amounts payable under finance leases:
Within one year
Between one and five years
After five years
Less: future finance charges
Present value of lease obligations
Less: amount due for settlement within one year
(shown within current liabilities)
Amount due for settlement after one year
Total obligations under finance leases held by the Group at 31 December 2015 amount to £44.3m (2014: £63.6m) and include
£43.8m (2014: £26.5m) shown above and £0.5m (2014: £37.1m) included within amounts held for sale on the balance sheet.
Finance lease obligations are secured by the lessors’ title to the leased assets.
The Directors estimate that the fair value of the Group’s lease obligations approximates their carrying amount.
29. Loans
Loans are repayable as follows:
On demand or within one year*
Between one and two years
Between two and five years
After five years
Less: assets classified as held for sale
Less: amount due for settlement within one year
(shown within current liabilities)
Less: amounts shown in receivables (note 24)
Amount due for settlement after one year
Total
2015
£m
Non recourse
loans
2014
£m
Other loans
2014
£m
131.9
–
62.5
167.6
362.0
–
(132.2)
19.9
249.7
3.7
3.7
9.4
7.2
24.0
(24.0)
–
–
–
43.7
32.1
302.0
419.3
797.1
(0.8)
(43.9)
1.0
753.4
*
Included in loans repayable on demand or within one year are loan receivable amounts of £0.4m (2014: £1.0m).
The carrying amounts and fair values of the loans are as follows:
Other loans
Loan receivables
Carrying
amount
2015
£m
381.9
(19.9)
362.0
Fair value
2015
£m
379.0
(19.9)
359.1
Carrying
amount
2014
£m
797.3
(1.0)
796.3
Fair value
2014
£m
806.8
(1.0)
805.8
The fair values are based on cash flows discounted using a market rate appropriate to the loan. All loans are held at amortised cost.
9.6
16.8
0.1
26.5
–
26.5
(9.6)
16.9
Total
2014
£m
47.4
35.8
311.4
426.5
821.1
(24.8)
(43.9)
1.0
753.4
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 208
29. Loans continued
Analysis of Net Debt
At 1
January
2015
£m
Cash
flow
£m
Reclassified
as held for
sale
£m
Acquisitions*
£m
Disposals
£m
Exchange
differences
£m
Non cash
movements
£m
At 31
December
2015
£m
Cash and cash equivalents
180.1
128.8
Loan receivables
Other loans
1.0
(0.6)
(797.3)
449.0
Obligations under finance leases
(26.5)
9.3
(642.7)
586.5
At 1
January
2014
£m
125.1
5.8
(20.3)
(788.0)
(68.0)
Cash
flow
£m
74.1
(0.2)
(3.7)
18.8
18.2
(745.4)
107.2
Cash and cash equivalents
Loan receivables
Non recourse loans
Other loans
Obligations under finance leases
17.2
–
(0.8)
(26.7)
(10.3)
–
–
–
–
–
(0.4)
–
–
–
(2.1)
–
–
19.5
323.6
19.9
(30.8)
(2.0)
(381.9)
(0.4)
(32.9)
–
0.1
17.6
(43.8)
(82.2)
Reclassified
as held for
sale
£m
Acquisitions*
£m
Disposals
£m
Exchange
differences
£m
Non cash
movements
£m
(22.4)
2.1
(1.0)
–
24.0
0.8
37.1
39.5
–
–
–
–
–
–
–
–
2.1
(1.0)
2.2
–
–
(32.5)
(0.1)
(30.4)
–
(4.6)
–
3.6
(13.7)
(14.7)
At 31
December
2014
£m
180.1
1.0
–
(797.3)
(26.5)
(642.7)
* Acquisitions represent the net cash / (debt) acquired on acquisition.
Total net debt held by the Group amounts to £77.5m (2014: £682.2m) of which £82.2m (2014: £642.7m) is shown above and £4.7m
(asset) (2014: £39.5m (debt)) is included within amounts held for sale on the balance sheet.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 30. Provisions
At 1 January 2014
Reclassified from trade and other receivables
Recognised on acquisition of subsidiary
Charged to income statement – exceptional
Charged to income statement – other
Released to income statement
Utilised during the year
Transferred to trade payables
Transfer to assets held for sale
Unwinding of discount
Exchange differences
At 1 January 2015
Reclassified from trade and other payables
Charged to income statement – exceptional
Charged to income statement – other
Released to income statement – exceptional
Released to income statement – other
Utilised during the year
Reclassification
Transfer (to) / from assets held for sale
Unwinding of discount
Exchange differences
At 31 December 2015
Analysed as:
Current
Non-current
Employee
related
£m
Property
£m
Contract
£m
15.7
–
0.2
8.8
19.8
(0.2)
(7.7)
–
(1.7)
–
0.2
35.1
–
5.1
16.6
(1.4)
(1.0)
(10.7)
–
(8.0)
–
0.7
36.4
14.2
22.2
5.3
–
0.1
2.2
15.1
(0.1)
(1.7)
–
–
0.1
0.5
25.9
(3.9)
–
19.4
456.7
(3.5)
(36.3)
–
(21.5)
–
(6.4)
21.5
430.4
–
–
89.1
(2.8)
(90.2)
(116.8)
0.3
(4.9)
5.5
(8.5)
–
–
3.1
–
(0.5)
(6.0)
(0.3)
–
0.1
0.4
18.3
5.7
12.6
Other
£m
14.2
–
–
57.7
41.5
(4.2)
(5.1)
(8.2)
(6.8)
–
1.8
90.9
15.9
30.7
14.0
(0.8)
(13.5)
(16.6)
–
2.6
–
1.7
302.1
124.9
90.5
211.6
58.2
66.7
209
Total
£m
61.1
(3.9)
0.3
88.1
533.1
(8.0)
(50.8)
(8.2)
(30.0)
0.1
(3.9)
577.9
15.9
35.8
122.8
(5.0)
(105.2)
(150.1)
–
(10.3)
5.6
(5.7)
481.7
168.6
313.1
Total provisions held by the Group at 31 December 2015 amount to £506.2m (2014: £607.9m) and include £481.7m (2014: £577.9m)
shown above and £24.5m (2014: £30.0m) included within amounts held for sale on the balance sheet.
Contract provisions relate to onerous contracts which will be utilised over the life of each individual contract, up to a maximum
of 8 ¼ years from the balance sheet date. The present value of the estimated future cash outflows required to settle the contract
obligations as they fall due over the respective contracts has been used in determining the provision. The individual provisions are
discounted where the impact is assessed to be material.
A full analysis is performed at least annually of the future profitability of all contracts with marginal performances and of the
balance sheet items directly linked to these contracts.
Due to the significant size of the balance and the inherent level of uncertainty over the amount and timing of the related cash
flows upon which onerous contract provisions are based, if the expected operational performance varies from the best estimates
made at the year end, a material change in estimate may be required. The key drivers behind operational performance is the
level of activity required to be serviced, which is often directed by the actions of the UK Government, and the efficiency of Group
employees and resources.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 210
30. Provisions continued
Employee related provisions are for 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. There are also amounts included in relation to restructuring. The provisions will be utilised over
various periods driven by local legal or regulatory requirements, the timing of which is not certain.
Property provisions relate to leased properties which are either underutilised or vacant and where the unavoidable costs
associated with the lease exceed the economic benefits expected to be generated in the future. The provision has been calculated
based on the discounted cash outflows required to settle the lease obligations as they fall due, with the longest running lease
ending in April 2039.
Other provisions are held for indemnities given on disposed businesses, 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 and will be utilised with reference to the specific facts and circumstances,
with the majority expecting to be settled by 31 December 2021.
31. Capital and Other Commitments
Capital expenditure contracted but not provided:
– Property, plant and equipment
– Intangible assets
2015
£m
9.3
6.9
2014
£m
4.4
0.8
Of the above, £nil (2014: £2.6m) in relation to property, plant and equipment commitment is associated with assets which have
been reclassified as held for sale.
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under non-cancellable
operating leases, which fall due as follows:
Within one year
Between one and five years
After five years
2015
£m
36.9
64.1
12.3
113.3
2014
£m
69.6
160.3
57.5
287.4
Of the above, £0.5m (2014: £97.9m) is associated with assets which have been reclassified as held for sale. Of this £0.3m (2014: £14.2m)
is due within one year, £0.2m (2014: £44.3m) is due between one and five years, and £nil (2014: £39.4m) is due after five years.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 211
32. Contingent Liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures up to a maximum value of
£21.1m (2014: £26.2m). The actual commitment outstanding at 31 December 2015 was £20.8m (2014: £21.4m).
The Company and its subsidiaries have provided certain guarantees and indemnities in respect of performance and other bonds,
issued by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 31 December 2015 was
£211.8m (2014: £192.1m).
The Group is aware of other 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 financial position.
On 31 May 2011 we filed a claim with the Authority for Advance Rulings (AAR) to seek confirmation that Serco was not obliged to
withhold Indian income tax from the purchase price on the acquisition of Intelenet. The AAR declined to rule on the matter, so
Serco filed a claim with the High Court to decide or direct the AAR to rule on the matter. The High Court has issued a judgement in
favour of Serco, that is, there was no requirement to withhold income tax. Further litigation to a higher court is a possibility. Should
the matter be decided against Serco, it would be liable for unprovided tax of £27m together with accrued interest to 31 December
2015 of £14m. Having taken appropriate professional advice, management considers it likely that Serco will ultimately be successful
in this matter.
As we have disclosed before, we are under investigation by the Serious Fraud Office. In November 2013, the UK’s Serious Fraud
Office announced that it had opened an investigation, which remains ongoing, into the Group’s Electronic Monitoring Contract.
We are cooperating fully with the Serious Fraud Office’s investigation but it is not possible to predict the outcome. However,
disclosed in the Principal Risks and Uncertainties in this Report is a description of the range of possible outcomes in the event
that the Serious Fraud Office decides to prosecute the individuals and /or the Serco entities involved.
33. Financial Risk Management
33. a) Fair Value of Financial Instruments
i) Hierarchy of fair value
The classification of the fair value measurement falls into three levels, based on the degree to which the fair value is observable.
The levels are as follows:
Level 1: inputs derived from unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2: inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either
directly or indirectly; and
Level 3: inputs are unobservable inputs for the asset or liability.
Based on the above, the derivative financial instruments held by the Group at 31 December 2015 and the comparison fair values
for loans and finance leases, are all considered to fall into Level 2. Market prices are sourced from Bloomberg and third party
valuations. The valuation models incorporate various inputs including foreign exchange spot and forward rates and interest rate
curves. There have been no transfers between levels in the year.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 212
33. Financial Risk Management continued
33. a) Fair Value of Financial Instruments continued
i) Hierarchy of fair value continued
The Group held the following financial instruments which fall within the scope of IAS 39 Financial Instruments: Recognition and
Measurement at 31 December:
Financial assets
Financial assets – current
Cash and bank balances
Derivatives designated as FVTPL
Forward foreign exchange contracts
Derivative instruments in designated
hedge accounting relationships
Cross currency swaps
Forward foreign exchange contracts
Loans and receivables
Trade receivables (note 24)
Loan receivables (note 24)
Security deposits (note 24)
Amounts owed by joint ventures (note 24)
Financial assets – non-current
Derivative instruments in designated hedge
accounting relationships
Cross currency swaps
Loans and receivables
Loan receivables (note 24)
Other investments (note 24)
Amounts owed by joint ventures (note 24)
Financial liabilities – current
Derivatives designated as FVTPL
Forward foreign exchange contracts
Derivative instruments in designated
hedge accounting relationships
Cross currency swaps
Forward foreign exchange contracts
Financial liabilities at amortised cost
Trade payables (note 27)
Loans (note 29)
Obligations under finance leases (note 28)
Financial liabilities – non-current
Financial liabilities at amortised cost
Loans (note 29)
Obligations under finance leases (note 28)
Carrying amount
(measurement basis)
Comparison
fair value
Carrying amount
(measurement basis)
Comparison
fair value
Amortised
cost
2015
£m
Fair value –
Level 2
2015
£m
Level 2
2015
£m
Amortised
cost
2014
£m
Fair value –
Level 2
2014
£m
Level 2
2014
£m
323.6
–
323.6
180.1
–
180.1
–
–
–
173.6
0.4
0.2
0.8
6.6
2.6
0.2
–
–
–
–
–
7.8
19.5
3.4
7.2
–
–
–
(93.6)
(132.2)
(15.8)
(249.7)
(28.0)
–
–
–
(2.4)
–
–
–
–
–
–
–
–
–
–
173.6
146.8
0.4
0.2
0.8
19.5
3.4
7.2
1.0
0.2
0.1
–
–
3.9
9.0
–
–
–
(93.6)
(132.2)
(15.8)
(99.8)
(43.9)
(9.6)
(246.8)
(28.0)
(753.4)
(16.9)
5.6
0.1
0.2
–
–
–
–
7.0
–
–
–
(17.3)
(0.3)
(0.1)
–
–
–
–
–
146.8
1.0
0.2
0.1
–
3.9
9.0
(99.8)
(43.9)
(9.6)
(762.9)
(16.9)
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 213
The Directors estimate that the carrying amounts of cash, trade receivables and trade payables approximate to their fair value due
to the short-term maturity of these instruments.
The fair values of loans and finance lease obligations are based on cash flows discounted using a rate based on the borrowing rate
associated with the liability.
The fair value of derivatives is calculated using a discounted cash flow approach applying discount factors derived from observable
market data to actual and estimated future cash flows. Credit risk is considered in the calculation of these fair values.
ii) Fair value of derivative financial instruments
The fair valuation of derivative financial instruments results in a net asset of £14.8m (2014: net liability of £4.8m) comprising non-
current assets of £7.8m (2014: £7.0m), current assets of £9.4m (2014: £5.9m), current liabilities of £2.4m (2014: £17.7m) and non-current
liabilities of £nil (2014: £nil).
Currency swaps
Forward foreign exchange contracts
Currency swaps
Forward foreign exchange contracts
Interest rate swaps
Movement in fair
value of derivatives
designated in hedge
accounting relationships
£m
Movement in fair value
of derivatives not
designated in hedge
accounting relationships
£m
3.6
0.1
3.7
–
15.9
15.9
1 January 2015
£m
6.8
(11.6)
(4.8)
31 December
2015
£m
10.4
4.4
14.8
Movement in fair
value of derivatives
designated in hedge
accounting relationships
£m
Movement in fair value
of derivatives not
designated in hedge
accounting relationships
£m
31 December
2014
£m
1 January 2014
£m
(0.6)
(31.9)
(0.1)
(32.6)
7.4
0.2
–
7.6
–
20.1
0.1
20.2
6.8
(11.6)
–
(4.8)
The fair value of financial liabilities at fair value through profit and loss is £2.4m (2014: £17.3m) and relates to derivatives that are
not designated in hedge accounting relationships. The fair value of the derivatives and their credit risk adjusted fair value are
not materially different, and are approximately equal to the amount contractually payable at maturity due to the short tenor of
the instruments.
33 (b) Financial Risk
The Board is ultimately responsible for ensuring that financial and non-financial risks are monitored and managed within
acceptable and known parameters. The Board delegates authority to the executive team to manage financial risks. The Group’s
treasury function acts as a service centre and operates within clearly defined guidelines and policies that are approved by the
Board. The guidelines and policies define the financial risks to be managed, specify the objectives in managing these risks,
delegate responsibilities to those managing the risks and establish a control framework to regulate treasury activities to minimise
operational risk.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 214
33. Financial Risk Management continued
33 (c) Liquidity Risk
i) Credit facilities
The Group maintains committed credit facilities to ensure that it has sufficient liquidity to maintain its ongoing operations.
As at 31 December, the Group’s committed bank credit facilities and corresponding borrowings were as follows:
Syndicated revolving credit facility
Syndicated revolving credit facility
Currency
GBP
Currency
GBP
Amount
2015
millions
480.0
Amount
2014
millions
730.0
Utilised
for bonding
facility
2015
£m
Total
facility
available
2015
£m
9.0
471.0
Undrawn
2014
£m
545.0
Total
facility
2014
£m
730.0
Drawn
2015
£m
–
Drawn
2014
£m
185.0
On 30 April 2015, the Group’s committed revolving facility was reduced in size from £730.0m to £480.0m and the maturity increased
by two years to April 2019.
In addition to the banking facility the Group has outstanding US private placements of £374.6m which will be repaid as bullet
repayments between 2016 and 2024.
In addition to the bank and private placement facilities the Group has a £30.0m receivables financing facility (2014: £60.0m) of which
£30.0m (2014: £32.8m) was drawn at year end.
ii) Maturity of financial liabilities
The Group’s financial liabilities will be settled on both a net and a gross basis over the remaining period between the balance sheet
date and the contractual maturity date. The amounts disclosed below are the contractual undiscounted cash flows based on the
earliest date on which the Group can be required to pay.
At 31 December 2015
Trade payables (note 27)
Obligations under finance leases (note 28)
Loans* (note 29)
Future loan interest
Derivative financial liabilities settled on net basis
Derivatives settled on gross basis
Outflow
Inflow
*
Loans are stated gross of capitalised finance costs
At 31 December 2014
Trade payables (note 27)
Obligations under finance leases (note 28)
Loans* (note 29)
Future loan interest
Derivative financial liabilities settled on net basis
Derivatives settled on gross basis
Outflow
Inflow
* Loans are stated gross of capitalised finance costs
On demand or
within one year
£m
Between one
and two years
£m
Between two
and five years
£m
After
five years
£m
93.6
17.0
132.2
14.6
–
291.8
(298.8)
250.4
–
13.1
–
12.6
–
3.6
(3.7)
25.6
–
15.6
64.9
33.1
–
67.2
(75.2)
105.6
–
0.6
187.6
19.1
–
–
–
207.3
Total
£m
93.6
46.3
384.7
79.4
–
362.6
(377.7)
588.9
On demand or
within one year
(restated)
£m
Between one
and two years
(restated)
£m
Between two
and five years
£m
After
five years
£m
Total
(restated)
£m
99.8
10.4
43.9
25.4
15.6
457.5
(461.0)
191.6
–
10.1
32.1
22.4
–
35.1
(37.2)
62.5
–
7.4
304.6
61.2
–
111.3
(116.6)
367.9
–
0.1
420.1
48.0
–
–
468.2
99.8
28.0
800.7
157.0
15.6
603.9
(614.8)
1,090.2
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 215
Gross cash flows in the table above relating to forward foreign exchange contracts total £274.0m (inflows) and £269.7m (outflows) on
demand or within one year and £0.7m (inflows) and £0.7m (outflows) between one and two years (2014: £447.9m (inflow) and £444.2m
(outflow) all on demand or within one year).
Total loans on demand or within one year for the Group amount to £132.2m (2014: £44.7m) at December 2015 of which £132.2m
(2014: £43.9m) is included above and £nil (2014: £0.8m) is classified as held for sale.
33 (d) Foreign Exchange Risk
i) Transactional
It is the Group’s policy to hedge material transactional exposures using forward foreign exchange contracts to fix the functional
currency value of non-functional currency cash flows. At 31 December 2015, there were no material unhedged non-functional
currency monetary assets or liabilities, firm commitments or highly probable forecast transactions.
ii) Translational
Where possible the Group will raise external funding to match the currency profile of its foreign operations, in order to mitigate
translation exposure. If matched funding is not possible, currency derivatives may be used to protect against movements in
foreign exchange.
iii) Hedge accounting
For the purposes of hedge accounting, hedges are classified as either fair value hedges, cash flow hedges or hedges of net
investments in foreign operations. Pages 172 and 173 detail the Group’s accounting policies in relation to derivatives qualifying for
hedge accounting under IAS 39.
At 31 December 2015, the Group held cross currency swaps designated as cash flow hedges against $138.6m of the US Dollar
private placements. Fixed interest cash flows denominated in US Dollars are exchanged for fixed interest cash flows denominated
in Sterling.
The profile of these cross currency swaps held by the Group in the current and prior year is as follows:
Maturity
August 2015
May 2016
May 2018
October 2019
2015 Receivable
2014 Receivable
Notional
amount
USDm
USD interest
rate
%
Payable GBP
interest rate
%
Notional a
mount
USDm
USD interest
rate
%
Payable GBP
interest rate
%
–
31.5
63.0
44.1
–
3.6
4.4
3.8
–
4.3
4.9
4.1
11.0
50.0
100.0
70.0
5.7
3.6
4.4
3.8
5.7
4.3
4.9
4.1
The Group also held a number of forward foreign exchange contracts designated as cash flow hedges. These derivatives are
hedging highly probable forecast foreign currency trade payments in the UK business. The net notional amounts are summarised
by currency below:
Sterling
US Dollar
Euro
Indian Rupee
2015
£m
(10.8)
–
11.0
–
2014
£m
(8.5)
(2.9)
4.4
7.0
All derivatives designated as cash flow hedges are highly effective and as at 31 December 2015 a net fair value loss of £2.7m (2014:
£4.9m) has been deferred in the hedging reserve. During the course of the year to 31 December 2015, £0.6m (2014: £2.7m) of fair
value gains were transferred to the hedging reserve and £2.8m (2014: £nil) reclassified to the consolidated income statement.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements
216
33. Financial Risk Management continued
33 (d) Foreign Exchange Risk continued
iv) Currency sensitivity
The Group’s currency exposures in respect of monetary items at 31 December 2015 that result in net currency gains and losses
in the income statement and equity arise principally from movement in US Dollar and Euro exchange rates. The impact is
summarised below:
US Dollar
Euro
Indian Rupee
33 (e) Interest Rate Risk
Pre-tax profits
gain / (loss)
2015
£m
Equity gain /
(loss) 2015
£m
Pre-tax profits
gain / (loss)
2014
£m
Equity gain /
(loss) 2014
£m
0.3
–
–
0.3
(0.7)
1.0
–
0.3
19.7
–
(6.7)
13.0
(0.4)
(0.4)
–
(0.8)
The Group’s policy is to minimise the impact of interest rate volatility on earnings to provide an appropriate level of certainty to
cost of funds. Exposure to interest rate risk arises principally on changes to US Dollar and Sterling interest rates.
i) Interest rate management
An analysis of financial assets and liabilities exposed to interest rate risk is set out below:
Financial assets
Cash and cash equivalents
Other loan receivables
Financial liabilities
Non recourse Sterling loans
Sterling loans
US Dollar loans
Other loans
Floating rate
2015
£m
Fixed rate
2015
£m
323.6
0.4
324.0
–
19.5
19.5
Floating rate
2015
£m
Fixed rate
2015
£m
–
–
–
10.1
10.1
–
–
374.6
–
374.6
Weighted
average
interest rate
2015
%
–
7.0
Weighted
average
interest rate
2015
%
–
–
5.10
–
Floating rate
2014
£m
180.1
1.0
181.1
Fixed rate
2014
£m
Weighted
average interest
rate 2014
%
–
–
–
–
–
Floating rate
2014
£m
Fixed rate
2014
£m
Weighted
average interest
rate
2014
%
–
205.3
–
10.6
215.9
–
16.6
568.2
–
584.8
–
2.72
4.12
–
Total cash and cash equivalents held by the Group at 31 December 2015 amount to £328.8m (2014: £202.5m) and include £323.6m
(2014: £180.1m) shown above and £5.2m (2014: £22.4m) included within amounts held for sale on the balance sheet.
Total floating rate and fixed rate loans held by the Group at 31 December 2015 amount to £10.1m (2014: £216.7m) and £374.6m
(2014: £608.8m) respectively and include £10.1m (2014: £215.9m) and £374.6m (2014: £584.8m) shown above and £nil (2014: £0.8m)
and £nil (2014: £24.0m) included within amounts held for sale on the balance sheet.
Exposure to interest rate fluctuations is mitigated through the issuance of fixed rate debt and the use of interest rate derivatives.
Excluded from the above analysis is £43.8m (2014: £26.5m) of amounts payable under finance leases, which are subject to fixed
rates of interest.
ii) Interest rate sensitivity
The effect of a 100 basis point increase in LIBOR rates on the net financial liability position at the balance sheet date, with all other
variables held constant, would have resulted in an increase in pre-tax loss for the year to 31 December 2015 of £3.2m (2014: £0.1m).
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 217
33 (f) Credit Risk
The Group’s principal financial assets are cash and cash equivalents and trade and other receivables.
Credit risk is the risk that a counterparty could default on its contractual obligations. In this regard, the Group’s principle exposure
is to cash and cash equivalents, derivative transactions and trade receivables.
The Group’s trade receivables credit risk is relatively low given that a high proportion of our customer base are Government bodies
with strong sovereign, or sovereign like, credit ratings. However, where the assessed credit worthiness of a customer, Government
or non-government, falls below that considered acceptable, appropriate measures are taken to mitigate against the risk of
contractual default using instruments such as credit guarantees.
The Group’s Treasury function only transacts with counterparties that comply with Board policy. The credit risk is measured by way
of a counterparty credit rating from any two recognised rating agencies. Pre-approved limits are set based on a rating matrix and
exposures monitored accordingly. The Group also employs the use of set-off rights in some agreements.
33 (g) Capital Risk
The Board’s objective is to maintain a capital structure that supports the Group’s strategic objectives, including but not limited to
reshaping the portfolio through mergers, acquisitions and disposals. In doing so the Board seeks to manage funding and liquidity
risk, optimise shareholder return and maintain an implied investment grade credit position. This strategy is unchanged from the
prior year.
The Board reviews and approves at least annually a treasury policy document which covers, inter alia, funding and liquidity risk,
capital structure and risk management. This policy details targets for committed funding headroom, diversification of committed
funding and debt maturity profile.
The Group plans to maintain sufficient funds and distributable reserves to allow payments of projected dividends to shareholders.
The following table summarises the capital of the Group:
Cash and cash equivalents
Loans
Obligations under finance leases
Equity
Capital
2015
£m
(323.6)
362.0
43.8
282.1
364.3
2014
£m
(180.1)
796.3
26.5
(66.2)
576.5
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 218
34. Retirement Benefit Schemes
The Group has accounted for pensions in accordance with IAS 19 Employee Benefits. The Group operates a number of defined
benefit schemes and defined contribution schemes. The pension charge for the year ended 31 December 2015 (excluding pension
arrangements operated by joint ventures), was £87.3m (2014: £108.8m).
34 (a) Defined Benefit Schemes
The Group operates defined benefit schemes for qualifying employees of its subsidiaries in the UK and Europe.
The assets of the funded schemes are held independently of the Group’s assets in separate trustee administered funds. The
trustees of the pension fund are required by law to act in the interest of the fund and of all relevant stakeholders in the scheme.
The trustees of the pension fund are responsible for the investment policy with regard to the assets of the fund. The Group’s major
schemes are valued by independent actuaries annually using the projected unit credit actuarial cost method. This reflects service
rendered by employees to the dates of valuation and incorporates actuarial assumptions primarily regarding discount rates used
in determining the present value of benefits, projected rates of salary growth, and life expectancy of pension plan members.
Discount rates are based on the market yields of high-quality corporate bonds in the country concerned. Pension assets and
liabilities in different defined benefit schemes are not offset unless the Group has a legally enforceable right to use the surplus in
one scheme to settle obligations in the other scheme and intends to exercise this right.
In accounting for the defined benefit schemes, the Group has applied the following principles.
• Asset recognised for SPLAS is based on the assumption that the full surplus will ultimately be available to the Group as a future
refund of surplus.
• No foreign exchange item is shown in the disclosures as the non-UK liabilities are not material.
• No pension assets are invested in the Group’s own financial instruments or property.
The schemes in the UK typically expose the Group to actuarial risks such as: investment risk, interest rate risk, longevity risk and
salary risk.
• Investment Risk
The present value of the defined benefit schemes’ liability is calculated using a discount rate determined by reference to high
quality corporate bond yields; if the return on plan assets is below this rate, a deficit will be created.
• Interest risk
A decrease in the bond interest rate will increase the scheme liability but this will be partially offset by an increase in the return of
the plan’s debt investments.
• Longevity risk
The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan
participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the
plan’s liability.
• Salary risk
The present value of the defined benefit scheme liability is calculated by reference to the future salaries of plan participants, as
such, an increase in the salary of the plan participants will increase the plan’s liability.
i) Balance sheet values
The amounts recognised in the balance sheet are grouped together as follows:
Contract specific
These are pre-funded defined benefit schemes. The Group has obligations to contribute variable amounts to the pension schemes
over the terms of the related contracts. At rebid, any deficit or surplus would be expected to transfer to the next contractor. The
Group has recognised as a liability the defined benefit obligation less the fair value of scheme assets that it will fund over the
period of the contracts with a corresponding amount recognised as intangible assets at the start of the contracts. Subsequent
actuarial gains and losses in relation to the Group’s share of the pension obligations have been recognised in the SOCI. The
intangible assets are amortised over the term of the contracts.
Non contract specific
These consist of two pre-funded defined benefit schemes (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 defined benefit scheme. These schemes
do not relate to any specific contract. Any liabilities arising are recognised in full.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 219
ii) Triennial funding valuation
Among our non contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The estimated
actuarial deficit of SPLAS as at 31 December 2015 was approximately £28.0m (2014: £5.0m). The most recent full actuarial valuation
of this scheme was undertaken as at 5 April 2012 and resulted in an actuarially assessed deficit of £24m. Following this review, the
Group agreed with the trustees to make a small increase in contributions, bringing cash contributions of up to 33% of members’
pensionable salaries until 2021. An actuarial valuation of the scheme as at 5 April 2015 is being undertaken and is due to be
released in July 2016. The level of benefits and contributions under the scheme is kept under continual review in light of the needs
of the business and changes to pension legislation.
The assets and liabilities of the schemes at 31 December are:
Contract
specific
2015
£m
Non contract
specific
2015
£m
1,144.4
1,144.4
Total
2015
£m
41.9
0.3
68.1
0.6
31.6
22.0
1,308.9
(1,196.4)
112.5
1.9
1.2
115.6
(11.5)
127.1
Total
2014
£m
86.6
59.9
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
Franchise adjustment*
Members' share of deficit
Analysed as:
Net pension liability
Net pension asset
2.8
0.3
–
–
0.6
0.9
–
4.6
(7.7)
(3.1)
1.9
1.2
–
–
–
39.1
–
68.1
–
30.7
22.0
1,304.3
(1,188.7)
115.6
–
–
115.6
(11.5)
127.1
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
Contract
specific
2014
£m
Non contract
specific
2014
£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
Franchise adjustment*
Analysed as:
Net pension liability
Net pension asset
48.1
44.3
12.8
22.2
3.5
3.5
–
134.4
(161.3)
(26.9)
22.9
(4.0)
(4.0)
–
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
38.5
15.6
1,252.8
1,265.6
–
–
31.0
23.9
22.2
3.5
34.5
23.9
1,361.8
(1,231.3)
1,496.2
(1,392.6)
130.5
–
130.5
(13.4)
143.9
103.6
22.9
126.5
(17.4)
143.9
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 220
34. Retirement Benefit Schemes continued
34 (a) Defined Benefit Schemes continued
Liabilities in relation to unfunded schemes included above amount to £0.3m (2014: £0.3m).
The Serco Pension and Life Assurance Scheme (SPLAS) has a Liability Driven Investment (LDI) strategy which aims to reduce
volatility risk by better matching assets to liabilities. The main asset classes that make up the LDI investments are gilts and
corporate bonds with inflation and interest swap overlays. The value of these investments vary in line with gilt yields, which has
dropped from 3.83% p.a. to 2.55% p.a. during 2015 resulting in a decrease in these assets. In addition, LDI assets were transferred
to a separate gilt portfolio in late December to back a longevity swap. The decrease in the value of LDI investments was less than
the increase in scheme liabilities and the increase in gilt yields was less than the fall in yields of high quality corporate bonds
resulting in a decrease in the surplus in the year.
As required by IAS19, the Group has considered the extent to which the pension plan assets should be classified in accordance with
the fair value hierarchy of IFRS13. Virtually all equity and debt instruments have quoted prices in active markets. Annuity policies
and property assets can be classified as Level 3 instruments.
In some schemes, employee contributions vary over time to meet a specified proportion of the overall costs, including a
proportion of any deficit. The liabilities recognised in the balance sheet for these schemes are net of the proportion attributed
to employees. In addition, the amounts charged to the income statement for these schemes are net of the proportion attributed
to employees. The amounts attributed to employees are shown separately in the reconciliation of changes in the fair value of
scheme assets and liabilities.
The amounts recognised in the financial statements for the year are analysed as follows:
Contract
specific
2015
£m
Non contract
specific
2015
£m
Recognised in the income statement
Current service cost – employer
Past service cost
Settlement gain recognised
Administrative expenses and taxes
Recognised in arriving at operating profit
Interest income on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Finance income
Included within the SOCI
Actual return on scheme assets
Less: interest income on scheme assets
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurements recognised in the SOCI
Change in franchise adjustment
Change in members’ share
Actuarial losses on reimbursable rights
Total pension (loss) / gain recognised in the SOCI
1.5
–
(3.3)
–
(1.8)
(1.1)
–
1.2
0.1
1.3
(1.1)
0.2
–
1.5
0.5
2.2
(0.1)
(0.3)
(0.4)
1.8
8.4
0.4
–
4.6
13.4
(48.6)
–
43.6
(5.0)
(18.5)
(48.6)
(67.1)
(0.2)
42.7
6.6
(18.0)
–
–
–
Total
2015
£m
9.9
0.4
(3.3)
4.6
11.6
(49.7)
–
44.8
(4.9)
(17.2)
(49.7)
(66.9)
(0.2)
44.2
7.1
(15.8)
(0.1)
(0.3)
(0.4)
(18.0)
(16.2)
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 221
Total
2014
£m
16.5
2.5
5.6
24.6
(61.9)
(1.6)
60.4
(3.1)
272.2
(62.8)
209.4
3.2
(159.7)
(0.1)
52.8
17.4
(3.9)
13.5
66.3
Contract
specific
2014
£m
Non contract
specific
2014
£m
7.7
–
2.1
9.8
(10.6)
(1.6)
12.1
(0.1)
29.8
(10.6)
19.2
–
(42.9)
4.2
(19.5)
17.4
–
17.4
(2.1)
8.8
2.5
3.5
14.8
(51.3)
–
48.3
(3.0)
242.4
(52.2)
190.2
3.2
(116.8)
(4.3)
72.3
–
(3.9)
(3.9)
68.4
Recognised in the income statement
Current service cost – employer
Past service cost
Administrative expenses and taxes
Recognised in arriving at operating profit
Interest income on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Finance income
Included within the SOCI
Actual return on scheme assets
Less: interest income on scheme assets
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurements recognised in the SOCI
Change in franchise adjustment
Change in members’ share
Actuarial losses on reimbursable rights
Total pension gain / (loss) recognised in the SOCI
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 222
34. Retirement Benefit Schemes continued
34 (a) Defined Benefit Schemes continued
Changes in the fair value of scheme liabilities are analysed as follows:
At 1 January 2014
Current service cost – employer
Current service cost – employee
Past service costs
Scheme participants’ contributions
Interest cost – employer
Interest cost – employee
Benefits paid
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Eliminated on disposal of a pension scheme
At 31 December 2014
At 1 January 2015
Current service cost – employer
Current service cost – employee
Past service costs
Scheme participants’ contributions
Interest cost – employer
Interest cost – employee
Benefits paid
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Arising on acquisition
Plan settlements
Disposal of scheme
At 31 December 2015
Contract
specific
£m
Non contract
specific
£m
267.8
7.7
–
–
0.8
12.1
–
(4.1)
–
42.9
(4.2)
(161.7)
161.3
1,091.2
8.8
0.2
2.5
0.4
48.3
1.1
(39.1)
(3.2)
116.8
4.3
–
1,231.3
Total
£m
1,359.0
16.5
0.2
2.5
1.2
60.4
1.1
(43.2)
(3.2)
159.7
0.1
(161.7)
1,392.6
161.3
1,231.3
1,392.6
1.5
0.2
–
0.3
1.2
0.1
(0.8)
–
(1.5)
(0.5)
7.8
(34.4)
(127.5)
8.4
–
0.4
0.6
43.6
–
(46.5)
0.2
(42.7)
(6.6)
–
–
–
9.9
0.2
0.4
0.9
44.8
0.1
(47.3)
0.2
(44.2)
(7.1)
7.8
(34.4)
(127.5)
7.7
1,188.7
1,196.4
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued Changes in the fair value of scheme assets are analysed as follows:
At 1 January 2014
Interest income on scheme assets – employer
Interest income on scheme assets – employee
Administrative expenses and taxes
Employer contributions
Contributions by employees
Benefits paid
Return on scheme assets less interest income
Eliminated on disposal of a pension scheme
At 31 December 2014
At 1 January 2015
Interest income on scheme assets – employer
Interest income on scheme assets – employee
Administrative expenses and taxes
Employer contributions
Contributions by employees
Benefits paid
Return on scheme assets less interest income
Arising on acquisitions
Plan settlements
Eliminated on disposal of a pension scheme
At 31 December 2015
223
Contract
specific
£m
Non contract
specific
£m
Total
£m
227.2
10.6
–
(2.1)
13.3
0.8
(4.1)
19.2
(130.5)
134.4
134.4
1.0
–
–
0.6
0.3
(0.8)
0.3
4.5
(31.0)
(104.7)
1,145.9
1,373.1
51.3
0.9
(3.5)
15.4
0.7
(39.1)
190.2
–
61.9
0.9
(5.6)
28.7
1.5
(43.2)
209.4
(130.5)
1,361.8
1,496.2
1,361.8
1,496.2
48.6
–
(4.5)
11.5
0.6
(46.5)
(67.2)
–
–
–
49.6
–
(4.5)
12.1
0.9
(47.3)
(66.9)
4.5
(31.0)
(104.7)
4.6
1,304.3
1,308.9
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 224
34. Retirement Benefit Schemes continued
34 (a) Defined Benefit Schemes continued
Changes in the franchise adjustment is analysed as follows:
At 1 January 2014
Interest on franchise adjustment
Taken to SOCI
Eliminated on disposal of scheme
At 31 December 2014
At 1 January 2015
Interest on franchise adjustment
Taken to SOCI
Arising on acquisition of scheme
Eliminated on disposal of scheme
At 31 December 2015
Total
£m
35.1
1.6
17.4
(31.2)
22.9
22.9
–
(0.1)
2.0
(22.9)
1.9
On 1 April 2015 Serco Caledonian Sleepers Limited became part of the Serco Group. As a result of franchising obligations under
the Caledonian Sleepers contract, the Group now sponsors a section of an industry wide defined benefit scheme, the Railways
Pension Scheme (RPS). This has resulted in the addition of fair value of scheme assets of £4.5m, present value of scheme liabilities
of £7.8m, a change in members’ share of £1.3m and a franchise adjustment of £2.0m.
The RPS section is required to be funded over the period for which the franchise is held with a defined benefit liability recognised
on the balance sheet to the extent of that obligation in accordance with IAS 19. The RPS is a shared cost arrangement. All costs,
and any deficit or surplus is shared 60% by the employer and 40% by the members. Furthermore, under the franchising obligations,
the responsibility of the employer is to pay the contributions requested of the trustee whilst it operates the franchise. There is no
residual liability or asset for any deficit, or surplus, which remains at the end of the franchise period. Under this scheme members
build a 1/60th pension and 1/40th lump sum based upon their pensionable pay. Some members of the RPS are subject to Protected
Persons legislation, which requires individual consent to changes to benefits, and certain rights upon transfer between sections of
the scheme.
The NPL contract and its associated defined benefit pension scheme ceased to be part of the Serco Group on 1 January 2015. As
at 31 December 2014, the group consolidated balance sheet included the scheme’s fair value of scheme assets of £104.6m, present
value of scheme liabilities of £127.5m and franchise adjustment of £22.9m.
The normal contributions expected to be paid during the financial year ending 31 December 2016 are £11.9m (financial year ended
31 December 2015: £13.5m).
The average duration of the benefit obligation at the end of the reporting period is 16.7 years (2014: 18.3 years).
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 225
Assumptions in respect of the expected return on scheme assets are required when calculating the franchise adjustment for the
contract-specific plans. These assumptions are based on market expectations of returns over the life of the related obligation. Due
consideration has been given to current market conditions as at 31 December 2015 in respect to inflation, interest, bond yields and
equity performance when selecting the expected return on assets assumptions.
The expected yield on bond investments with fixed interest rates is derived from their market value. The yield on equity
investments contains an additional premium (an ‘equity risk premium’) to compensate investors for the additional anticipated risks
of holding this type of investment, when compared to bond yields. Management have concluded that an appropriate equity risk
premium is 4.6% (2014: 4.6%).
The overall expected return on assets is calculated as the weighted average of the expected returns for the principal asset
categories held by the scheme.
Main assumptions:
Rate of salary increases
Rate of increase in pensions in payment
Rate of increase in deferred pensions
Inflation assumption
Discount rate
Post-retirement mortality:
Current pensioners at 65 – male
Current pensioners at 65 – female
Future pensioners at 65 – male
Future pensioners at 65 – female
2015
%
2.80
2014
%
2.70
2.00 (CPI) and 3.00 (RPI)
2.00 (CPI) and 3.00 (RPI)
2.10 (CPI) and 3.10 (RPI)
2.10 (CPI) and 3.10 (RPI)
2.10 (CPI) and 3.10 (RPI)
2.10 (CPI) and 3.10 (RPI)
3.80
2015
Years
22.6
25.1
24.4
27.1
3.60
2014
Years
22.5
25.0
24.3
27.0
Management considers the significant actuarial assumptions with regards to the determination of the defined benefit obligation to
be the discount rate, inflation, the rate of salary increases and mortality.
Sensitivity analysis is provided below, based on reasonably possible changes of the assumptions occurring at the end of the
reporting period, assuming all other assumptions are held constant.
The sensitivities have been derived in the same manner as the defined benefit obligation as at 31 December 2015 where the
defined benefit obligation is estimated using the Projected Unit Credit method. Under this method each participant’s benefits are
attributed to years of service, taking into consideration future salary increases and the scheme’s benefit allocation formula. Thus,
the estimated total pension to which each participant is expected to become entitled at retirement is broken down into units, each
associated with a year of past or future credited service.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 226
34. Retirement Benefit Schemes continued
34 (a) Defined Benefit Schemes continued
The defined benefit obligation as at 31 December 2015 is calculated on the actuarial assumptions agreed as at that date. The
sensitivities are calculated by changing each assumption in turn following the methodology above with all other things held
constant. The change in the defined benefit obligation from updating the single assumption represents the impact of that
assumption on the calculation of the defined benefit obligation.
Assumption
Discount rate
Inflation
Rate of salary increase
Assumption
2015
3.8%
2.1% (CPI)
3.1% (RPI)
2.6%
Change in
assumption
+0.5%
(0.5%)
+0.5%
(0.5%)
+0.5%
(0.5%)
Mortality
22.6 – 27.1* Increase by one year
* Post retirement mortality range for male and female, current and future pensioners.
Change in
present value
of scheme
liabilities
2015
(9%)
+10%
+9%
(8%)
+1%
(1%)
+2%
Change in
present value
of scheme
liabilities
2014
(9%)
+10%
+9%
(8%)
+1%
(1%)
+2%
Management acknowledges that the method used of presuming that all other assumptions remaining constant has inherent
limitation given that it is more likely for a combination of changes, but highlights the value of each individual risk and is therefore
a suitable basis for providing this analysis.
34 (b) Defined Contribution Schemes
The Group paid employer contributions of £75.7m (2014: £84.2m) into UK and other defined contribution schemes and foreign state
pension schemes.
Pre-funded defined benefit schemes treated as defined contribution
Serco accounts for certain pre-funded defined benefit schemes relating to contracts as defined contribution schemes because
the contributions are fixed until the end of the current concession and at rebid any surplus or deficit would transfer to the next
contractor. Cash contributions are recognised as pension costs and no asset or liability is shown on the balance sheet.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 35. Share Capital
Issued and fully paid:
549,265,547 (2014: 499,328,896) ordinary shares of 2p each at 1 January
Issued on the exercise of share options and the Rights Issue
2015
£m
Number
2015
Millions
11.0
11.0
549.3
549.3
1,098,559,781 (2014: 549,265,547) ordinary shares of 2p each at 31 December
22.0
1,098.6
The Company has one class of ordinary shares which carry no right to fixed income.
227
2014
£m
10.0
1.0
11.0
Number
2014
Millions
499.3
50.0
549.3
In April 2015 the Group successfully completed an equity Rights Issue, raising approximately £555m of gross proceeds (£530m
net after expenses of £25m), with trading in new shares commencing on 17 April 2015 and 549,265,547 new shares being issued.
36. Share Premium Account
At 1 January
Premium on shares issued
At 31 December
37. Reserves
37 (a) Retirement Benefit Obligations Reserve
2015
£m
327.9
–
327.9
2014
£m
327.8
0.1
327.9
The retirement benefit obligations reserve represents the actuarial gains and losses recognised in respect of annual actuarial
valuations for defined benefit retirement schemes, the fair value adjustments on reimbursable rights and the related movements
in deferred tax balances.
37 (b) Share based Payment Reserve
The share based payment reserve represents credits relating to equity-settled share based payment transactions and any gain
or loss on the exercise of share options satisfied by own shares.
37 (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 (ESOT) to satisfy options under the Group’s share options schemes. At 31 December 2015, the
ESOT held 10,540,181 (2014: 10,659,290) shares equal to 1.0% of the current allotted share capital (2014: 1.9%). The market value of
shares held by the ESOT as at 31 December 2015 was £10.1m (2014: £17.1m).
37 (d) Hedging and Translation Reserve
The hedging and translation reserve represents foreign exchange differences arising on translation of the Group’s overseas
operations and movements relating to cash flow hedges.
At 1 January 2014
Total comprehensive (expense) / income for the year
At 1 January 2015
Total comprehensive income / (expense) for the year
At 31 December 2015
Hedging
reserve
£m
Translation
reserve
£m
(2.3)
(2.7)
(5.0)
2.2
(2.8)
(38.7)
24.8
(13.9)
(41.0)
(54.9)
Total
£m
(41.0)
22.1
(18.9)
(38.8)
(57.7)
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 228
38. Share Based Payment Expense
The Group recognised the following expenses related to equity-settled share based payment transactions:
Long-term Incentive Scheme and Plan
Performance Share Plan
Deferred Bonus Plan
Sharesave 2012
Executive Option Plan (EOP)
2015
£m
–
9.9
0.3
(0.4)
9.8
2014
£m
0.1
5.5
–
(0.2)
5.4
Options granted under the EOP may be exercised after the third anniversary of grant, dependent upon the achievement of a
financial performance target over three years. The options are granted at market value and awards made to eligible employees are
based on between 50% and 100% of salary as at 31 December prior to grant. If the options remain unexercised after a period of ten
years from the date of grant, the options expire. Furthermore, options may be forfeited if the eligible employee leaves the Group
before the options vest. Details of the movement in all EOP options are as follows:
Outstanding at 1 January
Rights Issue adjustment
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2015
Thousands
Weighted
average
exercise price
2015
£
336
79
–
(228)
187
4.16
4.16
–
4.48
3.77
Number of
options
2014
Thousands
1,469
–
(536)
(597)
336
Weighted
average
exercise price
2014
£
3.24
–
2.81
3.11
4.16
Of these options 187,308 (2014: 335,886) were exercisable at the end of the year, with a weighted average exercise price of £3.77
(2014: £4.16).
The options outstanding at 31 December 2015 had a weighted average contractual life of 1.6 years (2014: 2.7 years).
The exercise prices for options outstanding at 31 December 2015 ranged from £3.39 to £4.55 (2014: £3.39 to £4.55).
The weighted average share price at the date of exercise approximates to the weighted average share price during the year,
which was £3.30 (2014: £3.45).
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 Plan during the year.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 229
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. 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 or service period conditions.
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
Rights Issue adjustment
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2015
Thousands
Weighted
average
exercise price
2015
£
Number of
options
2014
Thousands
Weighted
average
exercise price
2014
£
276
64
(70)
(30)
240
Nil
Nil
Nil
Nil
Nil
488
–
(212)
–
276
Nil
–
Nil
Nil
Nil
Of these options, 240,058 (2014: 275,831) were exercisable at the end of the year. The options outstanding at 31 December 2015
had a weighted average contractual life of 1.3 years (2014: 2.3 years).
There were no new options granted under either LTIS or LTIP during the year.
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 to five years and are subject to the achievement of four performance measures with the exception
of new non-performance awards granted in 2014. These non-performance options are only subject to continued employment on
vesting dates which vary from six months to three years after the grant dates.
On the performance related awards, the primary performance measure is TSR and the second performance measure is based on
EPS growth. Two additional measures on new grants in 2014 were Absolute Share Price and Strategic Objectives.
If the options remain unexercised after a period of ten years from the date of grant, the options expire.
Outstanding at 1 January
Granted during the year
Rights Issue adjustment
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2015
Thousands
Weighted
average
exercise price
2015
£
Number of
options
2014
Thousands
Weighted
average
exercise price
2014
£
10,743
15,053
2,565
(654)
(3,936)
23,771
0.02
0.02
0.02
0.02
0.02
0.02
10,471
5,077
–
(128)
(4,677)
10,743
0.02
0.02
–
0.02
0.02
0.02
Of these options 23,771,076 (2014: 10,743,178) were exercisable at the end of the year. The options outstanding at 31 December
2015 had a weighted average contractual life of 2.0 years (2014: 8.6 years).
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 230
38. Share Based Payment Expense continued
Performance Share Plan (PSP) continued
In the year, six grants were made, of which one grant was a non-performance buy out award to an executive. The remaining
five performance based awards are with Absolute Share Price and TSR and EPS performance conditions each attached to
33.3% of options.
The options subject to Absolute Share Price and TSR performance conditions were valued using the Monte Carlo Simulation
model. The options subject to EPS growth and Strategic Objectives 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 Absolute Share Price or 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
Annual dividend yield
Expected life
Risk free rate
2015
138p
2p
41.6%
N/a
3 years
0.7%
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 and ROIC performance conditions are:
Weighted average share price
Weighted average exercise price
Expected volatility
Annual Dividend Yield
Expected life
Risk free rate
The weighted average fair value of options granted under this scheme in the year is £1.20 (2014: £2.23).
2015
138p
2p
N/a
N/a
3 years
N/a
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 231
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 performance
measures have been met, the Group will make a matching share award, up to a maximum of two times the gross bonus deferred.
Outstanding at 1 January
Granted during the year
Rights issue adjustment
Lapsed during the year
Outstanding at 31 December
Number of
options
2015
Thousands
Weighted
average
exercise price
2015
£
Number of
options
2014
Thousands
Weighted
average
exercise price
2014
£
351
759
83
(287)
906
Nil
Nil
Nil
Nil
Nil
825
–
–
(474)
351
Nil
Nil
–
Nil
Nil
None of these options were exercisable at the end of the year (2014: none). The options outstanding at 31 December 2015 had a
weighted average contractual life of 2.08 years (2014: 0.72 years).
There were 759,094 new options granted under the Deferred Bonus Plan in the year, with 100% of the deferred bonus subject to the
same EPS performance conditions as the PSP.
The portion subject to EPS 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.
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 performance conditions are:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
The weighted average fair value of options granted under this scheme in the year is £1.36.
2015
1.38
Nil
N/a
3 years
N/a
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 232
38. Share Based Payment Expense continued
Sharesave 2012
The Sharesave 2012 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 2012 options
are as follows:
Outstanding at 1 January
Exercised during the year
Rights issue adjustment
Lapsed during the year
Outstanding at 31 December
Number of
options
2015
Thousands
Weighted
average
exercise price
2015
£
2,875
–
504
(1,328)
2,051
5.14
5.14
5.14
5.14
5.14
Number of
options
2014
Thousands
5,132
(1)
–
(2,256)
2,875
Weighted
average
exercise price
2014
£
5.14
5.14
–
5.14
5.14
Of these options, none (2014: none) were exercisable at the end of the year. The options outstanding at 31 December 2015 had
a weighted average contractual life of 0.4 years (2014: 1.4 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.
There were no new options granted under Sharesave Plan in the year.
39. 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.
Trading transactions
During the year, Group companies entered into the following material transactions with joint ventures:
Royalties and management fees receivable
Dividends receivable
2015
£m
–
32.5
32.5
2014
£m
1.7
34.8
36.5
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued The following receivable balances were held relating to joint ventures:
Current:
Loans and other receivables
Non-current:
Loans and other receivables
233
2015
£m
1.4
2015
£m
7.2
2014
£m
0.1
2014
£m
9.0
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
specified in IAS 24 Related Party Disclosures:
Short-term employee benefits
Post-employment benefits
Share based payment expense
2015
£m
8.4
–
1.1
9.5
2014
£m
8.4
0.1
0.9
9.4
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive
Committee (2015: 19 individuals, 2014: 19 individuals).
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 234
40. Notes to the Consolidated Cash Flow Statement
Reconciliation of Operating Profit to Net Cash Inflow from Operating Activities
Year ended 31 December
Operating profit / (loss) for the year –
continuing operations
Operating profit / (loss) for the year –
discontinued operations
Operating profit / (loss) for the year
Adjustments for:
Share of profits in joint ventures
Share based payment expense
Exceptional impairment of goodwill
Exceptional impairment of property,
plant and equipment
Exceptional impairment of intangible assets
Impairment and write down of intangible assets – other
Impairment of property, plant and equipment – other
Depreciation of property, plant and equipment
Amortisation of intangible assets
Exceptional profit on disposal of subsidiaries
and operations
Exceptional impairment of loan receivable
Loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Non cash R&D expenditure offset against
intangible assets
2015
Before
Exceptional
Items
£m
2015
Exceptional
Items
£m
2014
Before
Exceptional
Items
£m
2014
Exceptional
Items
£m
2015
Total
£m
2014
Total
£m
106.2
(109.9)
(3.7)
(626.8)
(325.7)
(952.5)
26.5
132.7
(77.6)
(187.5)
(51.1)
(54.8)
(29.0)
(655.8)
(335.8)
(364.8)
(661.5)
(1,317.3)
(37.0)
9.8
–
–
–
11.5
2.1
28.9
29.0
–
–
0.1
1.5
0.8
–
–
(37.0)
(30.0)
9.8
5.4
153.4
153.4
0.8
(0.3)
–
–
–
–
0.8
(0.3)
11.5
2.1
28.9
29.0
(2.8)
(2.8)
–
–
–
–
–
0.1
1.5
0.8
–
–
–
38.6
22.1
41.8
38.7
–
–
–
0.2
–
–
–
466.0
18.6
6.0
–
–
–
–
0.8
4.6
–
–
–
(30.0)
5.4
466.0
18.6
6.0
38.6
22.1
41.8
38.7
0.8
4.6
–
0.2
–
Increase / (decrease) in provisions
(116.0)
(9.5)
(125.5)
472.6
85.5
558.1
Increase in deferred consideration in relation
to prior year acquisition
Other non cash movements
Impairment of working capital items (non cash)
–
19.1
–
–
–
–
–
19.1
–
Total non cash items
(13.2)
141.6
128.4
Operating cash inflow / (outflow) before
movements in working capital
Decrease / (increase) in inventories
Decrease in receivables
(Decrease) / increase in payables
Movements in working capital
Cash generated by operations
Tax (paid) / repaid
Non cash R&D expenditure
Net cash (outflow) / inflow from operating activities
82.5
5.6
20.6
(48.8)
(22.6)
59.9
(2.7)
(0.7)
56.5
(45.9)
–
–
(10.7)
(10.7)
(56.6)
–
–
(56.6)
36.6
5.6
20.6
(59.5)
(33.3)
3.3
(2.7)
(0.7)
(0.1)
4.0
–
148.8
772.2
86.4
(1.4)
8.7
9.7
17.0
103.4
0.6
(0.5)
–
–
–
4.0
–
148.8
581.5
1,353.7
(80.0)
–
18.8
20.8
39.6
(40.4)
–
–
6.4
(1.4)
27.5
30.5
56.6
63.0
0.6
(0.5)
63.1
103.5
(40.4)
Additions to fixtures and equipment during the year amounting to £5.2m (2014: £12.5m) were financed by new finance leases.
Serco Group plc Annual Report and Accounts 2015Notes to the Consolidated Financial Statements continued 235
41. Assets Held For Sale
As part of the Strategy Review, certain assets and liabilities have been designated as non-core and are held for sale.
As at 31 December 2015 this is limited to the Middle East elements of the offshore private sector BPO operations and
the remaining onshore private sector BPO businesses, all of which is expected to be sold in 2016.
Following the agreement to dispose of the offshore private sector BPO operations it was determined that the Environmental
Services and Leisure businesses would no longer be disposed for both strategic and financial reasons. As a result, these
operations were transferred out of held for sale at 15 December 2015, the point at which this decision was made and
publically announced.
The balances included as held for sale are as follows:
Assets
Goodwill
Other intangible assets
Property, plant and equipment
Deferred tax assets
Other non-current assets
Inventories
Current tax
Cash and cash equivalents
Other current assets
Assets classified as held for sale
Liabilities
Other current liabilities
Current tax liabilities
Provisions
Obligations under finance leases
Loans
Deferred tax liabilities
Other non-current liabilities
At 31 December
2015
£m
At 31 December
2014
£m
Note
20
21
22
17
24
23
26
24
27
30
28
29
17
27
7.8
0.4
0.9
–
0.2
–
4.7
5.2
20.6
39.8
(7.4)
(0.1)
(24.5)
(0.5)
–
–
–
279.1
5.0
94.5
11.0
26.8
2.7
4.2
22.4
119.0
564.7
(96.1)
(21.8)
(30.0)
(37.1)
(24.8)
(2.5)
(7.6)
Liabilities directly associated with assets classified as held for sale
(32.5)
(219.9)
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Consolidated Financial StatementsFinancial Statements 236
Company Balance Sheet
At 31 December
Fixed assets
Investments in subsidiaries
Current assets
Debtors: amounts due within one year
Debtors: amounts due after more than one year
Derivative financial instruments due within one year
Derivative financial instruments due after more than one year
Cash at bank and in hand
Total assets
Creditors: amounts falling due within one year
Trade and other payables
Borrowings
Provisions
Corporation tax liability
Derivative financial instruments
Net current assets
Creditors: amounts falling due after more than one year
Borrowings
Amounts owed to subsidiary companies
Deferred tax liability
Provisions
Total liabilities
Net assets
Capital and reserves
Called up share capital
Share premium account
Capital redemption reserve
Profit and loss account
Share based payment reserve
Own shares reserve
Hedging and translation reserve
Total shareholders' funds
Note
2015
£m
2014
£m
43
44
44
48
48
45
46
47
48
46
49
47
50
51
52
53
55
1,994.9
1,963.8
3.1
793.5
9.0
7.8
147.6
961.0
2,955.9
(248.4)
(132.2)
(3.2)
(0.1)
(0.9)
(384.8)
576.2
(239.5)
(1,265.7)
–
(27.9)
(1,533.1)
(1,917.9)
1,038.0
22.0
327.9
0.1
673.6
66.3
(59.8)
7.9
1,038.0
10.1
734.3
5.1
7.0
–
756.5
2,720.3
(236.6)
(150.0)
–
–
(1.8)
(388.4)
368.1
(742.8)
(874.7)
–
–
(1,617.5)
(2,005.9)
714.4
11.0
327.9
0.1
364.8
56.9
(64.5)
18.2
714.4
The financial statements (registered number 02048608) were approved by the Board of Directors on 25 February 2016 and signed
on its behalf by:
Rupert Soames
Group Chief Executive Officer
Angus Cockburn
Group Chief Financial Officer
Serco Group plc Annual Report and Accounts 2015
Notes to the Company Financial Statements
237
42. 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
The Company meets the definition of a qualifying entity under FRS 100 (Financial Reporting Standard 100) issued by the Financial
Reporting Council. The financial statements have therefore been prepared in accordance with FRS 101 (Financial Reporting
Standard 101) ‘Reduced Disclosure Framework’ as issued by the Financial Reporting Council.
As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation
to share based payments, financial instruments, capital management, presentation of comparative information in respect of certain
assets, presentation of a cash-flow statement, standards not yet effective, impairment of assets and related party transactions.
The financial statements have been prepared on the historical cost basis and on the going concern basis, except for the revaluation
of certain financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for the
goods and services. The principal accounting policies adopted are the same as those set out in note 2 to the consolidated financial
statements, except as noted below.
Fixed Asset Investments
Investments held as fixed assets are stated at cost less provision for any impairment in value.
43. Investments Held as Fixed Assets
Shares in subsidiary companies at cost:
At 1 January 2014
Options over parent’s shares awarded to employees of subsidiaries
Additions:
Serco Holdings Limited
Garden Funding Limited
Capital repayment – Garden Funding Limited
At 1 January 2015
Options over parent’s shares awarded to employees of subsidiaries
Impairment
Additions:
Serco Holdings Limited
At 31 December 2015
The Company directly owns 100% of the ordinary share capital of the following subsidiaries.
Name
Serco Holdings Limited
Garden Funding Limited
£m
815.5
4.6
1,143.7
156.6
(156.6)
1,963.8
8.7
(127.6)
150.0
1,994.9
% ownership
100%
100%
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Company Financial StatementsFinancial Statements 238
44. Debtors
Amounts due within one year
Corporation tax recoverable
Other debtors
Amounts due after more than one year
Amounts owed by subsidiary companies
Amounts owed by joint ventures of Serco Group
45. Trade and Other Payables
Amounts owed to subsidiary companies
Trade creditors
Accruals and deferred income
Other creditors including taxation and social security
46. Borrowings
Loans
Less: amounts included in creditors falling due within one year – loans
Less: amounts included in creditors falling due within one year – bank loans and overdrafts
Amounts falling due after more than one year
Loans:
Within one year or on demand
Between one and two years
Between two and five years
After five years
2015
£m
–
3.1
3.1
788.8
4.7
793.5
796.6
2015
£m
237.4
–
11.0
–
248.4
2015
£m
371.7
(132.2)
–
239.5
132.2
–
52.4
187.1
371.7
2014
£m
6.1
4.0
10.1
730.2
4.1
734.3
744.4
2014
£m
223.3
0.2
11.0
2.1
236.6
2014
£m
892.8
(23.7)
(126.3)
742.8
150.0
32.0
291.4
419.4
892.8
Serco Group plc Annual Report and Accounts 2015Notes to the Company Financial Statements continued 47. Provisions
At 1 January 2015
Charged to income statement – exceptional
Charged to income statement – other
At 31 December 2015
Analysed as:
Current
Non-current
239
Employee
related
£m
–
0.1
0.3
0.4
0.4
–
Other
£m
–
–
30.7
30.7
2.8
27.9
Total
£m
–
0.1
31.0
31.1
3.2
27.9
Total provisions held by the Company at 31 December 2015 amount to £31.1m (2014: £nil).
Employee related provisions relate to restructuring. Other provisions are held for indemnities given on disposed businesses, 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.
48. Derivative Financial Instruments
Currency swaps
Forward foreign exchange contracts
Analysed as:
Non-current
Current
Assets
2015
£m
10.4
6.4
16.8
7.8
9.0
16.8
Liabilities
2015
£m
–
(0.9)
(0.9)
–
(0.9)
(0.9)
Assets
2014
£m
7.1
5.0
12.1
5.1
7.0
12.1
The Company holds derivative financial instruments in accordance with the Group’s policy in relation to its financial risk
management. Details of the disclosures are set out in note 33 of the Group’s consolidated financial statements
49. 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 profit and loss account
Items taken directly to equity
At 31 December
The deferred tax not provided is as follows:
Capital allowances in excess of depreciation
Short-term timing differences
Losses
At 31 December
2015
£m
–
–
–
2015
£m
–
–
–
–
2015
£m
0.3
2.8
30.1
33.2
Liabilities
2014
£m
(0.3)
(1.5)
(1.8)
–
(1.8)
(1.8)
2014
£m
–
–
–
2014
£m
2.9
(2.8)
(0.1)
–
2014
£m
0.2
1.4
14.4
16.0
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Company Financial StatementsFinancial Statements 240
50. Called up Share Capital
Issued and fully paid:
549,265,547 (2014: 499,328,896) ordinary shares of 2p each at 1 January
Issued on the exercise of share options and the share placement
2015
£m
Number
2015
Millions
11.0
11.0
549.3
549.3
1,098,559,781 (2014: 549,265,547) ordinary shares of 2p each at 31 December
22.0
1,098.6
The Company has one class of ordinary shares which carry no right to fixed income.
2014
£m
10.0
1.0
11.0
Number
2014
Millions
499.3
50.0
549.3
In April 2015 the Group successfully completed an equity Rights Issue, raising approximately £555m of gross proceeds (£530m net
after expenses of £25m), with trading in new shares commencing on 17 April 2015 and 549,265,547 new shares being issued.
51. Share Premium Account
At 1 January
Premium on shares issued
At 31 December
52. Profit and Loss Account
At 1 January
Reclassification to hedging and translation reserve
Loss for the year
Issue of shares from Rights Issue
Equity dividends
At 31 December
2015
£m
327.9
–
327.9
2015
£m
364.8
–
(210.5)
519.3
–
673.6
2014
£m
327.8
0.1
327.9
2014
£m
363.7
(21.4)
(79.7)
155.3
(53.1)
364.8
As permitted by Section 408 of the Companies Act 2006, the profit and loss account of the Company is not presented as part of
these accounts.
53. Share based Payment Reserve
At 1 January
Options over parent’s shares awarded to employees of subsidiaries
Share based payment charge
Share options to holders on exercise
At 31 December
2015
£m
56.9
8.7
1.1
(0.4)
66.3
2014
£m
55.3
4.6
0.8
(3.8)
56.9
Details of the share based payment disclosures are set out in note 38 of the Group’s consolidated financial statements.
54. Own Shares
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 (ESOT) to satisfy options under the Group’s share options schemes. At 31 December 2015, the
ESOT held 10,540,181 (2014: 10,659,290) shares equal to 1.0% of the current allotted share capital (2014: 1.9%). The market value of
shares held by the ESOT as at 31 December 2015 was £10.1m (2014: £17.1m).
Serco Group plc Annual Report and Accounts 2015Notes to the Company Financial Statements continued 55. Hedging and Translation Reserve
At 1 January
Reclassification from profit and loss account
Fair value loss on cash flow hedges during the period
Net exchange loss on translation of foreign operations
At 31 December
241
2015
£m
18.2
–
2.1
(12.4)
7.9
2014
£m
(0.2)
21.4
(3.0)
–
18.2
56. Contingent Liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures up to a maximum value of
£21.1m (2014: £26.2m). The actual commitment outstanding at 31 December 2015 was £20.8m (2014: £21.4m).
The Company has provided certain financial guarantees and indemnities in respect of the loans, overdraft and bonding facilities,
and other financial commitments of its subsidiaries. The total commitment outstanding as at 31 December 2015 was £191.6m (2014:
£189.6m). These are not expected to result in any material financial loss.
In addition to this, the Company and its subsidiaries have provided performance guarantees and indemnities relating to
performance bonds and letters of credit issued by its banks on its behalf, in the ordinary course of business. These are not
expected to result in any material financial loss.
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 financial position.
57. 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 101 from disclosing related party transactions with entities that are 100% owned by
Serco Group plc.
Strategic ReportDirectors’ ReportFinancial Statements·Notes to the Company Financial StatementsFinancial Statements 242
Appendix: List of Subsidiaries
Company Name
Aeradio Technical Services WLL4
Agbar Serco Technology Solutions Limited2
Antab Operations & Contracting LLC
AWE Management Limited3
BAS-Serco Limited
Braintree Clinical Services Limited
CCM Software Services Ltd2
Djurgardens Farjetrafik AB
DMS Maritime Pty Limited
Eagle BPO Mauritius
Equity Aviation Holdings (Pty) Ltd2
Equity Aviation Investment Holdings (Pty) Ltd
Equity-Serco (Pty) Limited2
Garden Funding Limited1
Hong Kong Parking Limited
Integrated Clinical Services Limited
International Aeradio (Emirates) LLC – Abu Dhabi
International Aeradio (Emirates) LLC – Dubai
JBI Properties Services Company LLC
Khadamat Facilities Management LLC
LOGTEC Inc.
Mena Business Services LLC4
Merseyrail Services Holding Company Limited
Northern Rail Holdings Limited3
Priority Properties North West Limited
Serco (Jersey) Limited
Serco Australia Pty Limited3
Serco Belgium S.A
Serco Business Services LLC
Serco Caledonian Ferries Limited
Serco Caledonian Sleepers Limited
Serco Canada Inc.
Serco Citizen Services Pty Ltd
Serco Consulting Bahrain WLL
Serco Corporate Services Limited
Serco Environmental Services Limited
Serco Ferries (Guernsey) Crewing Limited
Serco Ferries (HR) Limited
Serco Geografix Limited
Serco Gestion de Negocios SL
Serco Group (HK) Limited
Serco Group Consultants (Shanghai) Company Limited2
Serco Group Pty Limited
Serco Holdings Limited1
Serco Inc.3
Serco Group interest
Country of incorporation
49%
50%
60%
33%
10%
100%
100%
50%
100%
100%
50%
50%
50%
100%
40%
100%
49%
49%
49%
49%
100%
70%
50%
50%
100%
100%
100%
100%
49%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Bahrain
United Kingdom
Saudi Arabia
United Kingdom
Bermuda
United Kingdom
Ireland
Sweden
Australia
Mauritius
South Africa
South Africa
South Africa
Jersey
Hong Kong
United Kingdom
United Arab Emirates
United Arab Emirates
United Arab Emirates
United Arab Emirates
United States
Saudi Arabia
United Kingdom
United Kingdom
United Kingdom
Jersey
Australia
Belgium
Abu Dhabi
United Kingdom
United Kingdom
Canada
Australia
Bahrain
United Kingdom
United Kingdom
Guernsey
United Kingdom
United Kingdom
Spain
Hong Kong
China
Australia
United Kingdom
United States
Serco Group plc Annual Report and Accounts 2015 Appendix: List of Subsidiaries
243
Company Name
Serco Group interest
Country of incorporation
Serco Insurance Company Limited
Serco Integrated Transport Private Limited
Serco International Limited
Serco International S.à r.l
Serco Leasing Limited
Serco Leisure Operating Limited
Serco Limited3
Serco Listening Company Limited
Serco Luxembourg S.A.
Serco Manchester Leisure Limited
Serco Nederland B.V.
Serco New Zealand (Asset Management Services) Limited
Serco New Zealand Limited
Serco New Zealand Training Limited
Serco North America (Holdings), Inc.
Serco North America Limited
Serco Paisa Limited
Serco Pension Trustee Limited
Serco Projects LLC
Serco Public Services Limited2
Serco Regional Services Limited
Serco Sarl
Serco SAS
Serco Saudi Arabia LLC
Serco Services GmbH
Serco Services Inc.
Serco Services Ireland Limited
Serco Societa per Azioni
Serco Sodexo Defence Services Pty Ltd
Serco Switzerland SA
Serco Traffic Camera Services (VIC) Pty Limited
Serco-IAL Limited
Service Glasgow LLP
VIAPATH Group LLP
100%
100%
100%
100%
100%
100%
100%
100%
100%
81%
100%
100%
100%
100%
100%
100%
50%
100%
49%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
100%
50%
33%
Guernsey
India
United Kingdom
Luxembourg
United Kingdom
United Kingdom
United Kingdom
United Kingdom
Luxembourg
United Kingdom
Netherlands
New Zealand
New Zealand
New Zealand
United States
United Kingdom
United Kingdom
United Kingdom
Qatar
United Kingdom
United Kingdom
France
France
Saudi Arabia
Germany
United States
Ireland
Italy
Australia
Switzerland
Australia
United Kingdom
United Kingdom
United Kingdom
1 Serco Holdings Limited and Garden Funding Limited are directly owned by Serco Group plc. All other subsidiaries and associated undertakings are held indirectly via Group companies.
2 Companies in liquidation as at 31 December 2015.
3 Companies key to the consolidated numbers, all of which are engaged in the provision of support services.
4 Companies with a non-controlling interest
Strategic ReportDirectors’ ReportFinancial Statements·Financial Statements
244
Appendix: Supplementary Information
Five-year Record (unaudited)
Adjusted Revenue
Less: Share of revenue of joint ventures
Revenue
2015
£m
4,252
(737)
3,515
2014
£m
4,753
(798)
3,955
2013
£m
5,140
(856)
4,284
2012
£m
4,910
(853)
4,057
2011
£m
4,607
(819)
3,788
Trading profit / (loss)*
137.6
(632.1)
257.4
310.7
226.3
Amortisation and impairment of intangibles
arising on acquisition
Operating profit / (loss) before exceptional items
Exceptional profit / (loss) on disposal of subsidiaries
and operations
Other exceptional operating items
Operating (loss) / profit
Net finance costs
Exceptional finance costs
Exceptional other gain
(Loss) / profit before tax
Tax (charge) / credit
(Loss) / profit after tax
Recourse net debt
Net debt
(Loss) / earnings per share before exceptional items**
Basic (loss) / earnings per share**
Dividend per share
(4.9)
132.7
2.8
(190.3)
(54.8)
(32.0)
(32.8)
–
(23.7)
(655.8)
(5.4)
(656.1)
(1,317.3)
(36.7)
–
–
(119.6)
(1,354.0)
(33.5)
6.9
(153.1)
(1,347.1)
(82.2)
(82.2)
Pence
6.55
(15.47)
–
(642.7)
(642.7)
Pence
(107.43)
(205.66)
3.10
(21.4)
236.0
19.2
(109.7)
145.5
(37.2)
–
–
108.3
(9.9)
98.4
(725.1)
(745.4)
Pence
32.74
20.12
10.55
(24.1)
286.6
5.6
(5.0)
287.2
(42.2)
–
51.1
296.1
(39.0)
257.1
(606.9)
(632.0)
Pence
40.37
52.22
10.10
(20.0)
206.3
–
–
206.3
(36.5)
–
–
169.8
(28.7)
141.1
(669.8)
(685.3)
Pence
28.75
28.75
8.40
*
Included in 2014 Trading Loss were charges totalling £745.3m arising from the Contract and Balance Sheet Review undertaken in 2014, with £718.0m charged to Adjusted Operating Profit
and £27.3m charged to Management estimate of items relating to UK Government reviews.
** 2014 is restated for effect of Rights Issue in April 2015
Serco Group plc Annual Report and Accounts 2015 Directors, Secretary and Advisers
245
Directors, Secretary and Advisers
Chairman
Sir Roy Gardner
Directors
Mike Clasper CBE1,2
Rupert Soames OBE
Edward J Casey Jr
Angus Cockburn
Ralph D Crosby Jr1
Tamara Ingram1
Rachel Lomax1
Angie Risley1
Malcolm Wyman1
1 Non-Executive Director
2 Senior Independent Director
Secretary
David Eveleigh
Auditor
Deloitte LLP
2 New Street Square
London
EC4A 3BZ
Investment Bankers
N M Rothschild & Sons Limited
New Court
St Swithin’s Lane
London
EC4N 8AL
Stockbrokers
J.P.Morgan Cazenove
25 Bank Street
London
E14 5JP
Bank of America
Merrill Lynch
2 King Edward Street
London
EC1A 1HQ
Principal Bankers
HSBC Bank PLC
8 Canada Square
London
E14 5HQ
Solicitors
Clifford Chance LLP
10 Upper Bank Street
London
E14 5JJ
Registrars
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Financial Statements·Financial StatementsStrategic ReportDirectors’ Report 246
Shareholder Information
Serco Group website
Shareholders are encouraged to visit the Serco website www.serco.com which has a wealth of information about the Company.
There is a section designed specifically for investors at serco.com/investors. This year's Annual Report and Notice of AGM,
together with prior year documents can be viewed there along with information on share price and avoiding shareholder fraud.
Registrar
The Company's shareholder register is maintained by its Registrar, Equiniti. Information on how to manage your shareholding(s)
can be found at help.shareview.co.uk.
Shareholders can contact Equiniti in relation to all administrative enquiries relating to their shares, such as change of personal
details, the loss of a share certificate, and out of date dividend cheques.
Shareholders who have not yet elected to receive shareholder documentation in electronic form can sign up by registering at
shareview.co.uk, or by contacting.
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Telephone: 0371 384 2932
Telephone number from outside the UK: +44 (0)121 415 7047
Telephone lines are open 8.30am to 5.30pm Monday to Friday.
There is a text phone available on 0371 384 2255 for shareholders with hearing difficulties. Calls to an 03 number cost no more than
a national rate call to an 01 or 02 number.
ShareGift
Shareholders who only have a small number of shares whose value make it uneconomic to sell them may wish to consider donating
them to charity through ShareGift, the independent charity share donation scheme (registered charity no. 1052686). Further
information may be obtained from ShareGift on 0207 930 3737, www.sharegift.org.
Share dealing
Serco does not endorse any one service for the buying and selling of its shares. However, arrangements have been made with
Stocktrade, the independent share dealing provider to offer all shareholders competitive charges. See details below.
Alternatively, if shareholders hold a share certificate they can also use any bank, building society or stockbroker offering share
dealing facilities. Shareholders in any doubt about buying or selling their shares should seek professional financial advice.
Warning to Shareholders
Please be very wary of any unsolicited contact about your investments or offers of free company reports. It may be from an
overseas 'broker' who could sell you worthless or high risk shares. If you deal with an unauthorised firm, you would not be eligible
to receive payment under the Financial Services Compensation Scheme. Further information and a list of unauthorised firms
that have targeted UK investors is available from the Financial Conduct Authority at fca.org.uk/consumers/protect-yourself/
unauthorised-firms
REMEMBER: if it sounds too good to be true, it probably is!
Ordinary shares
Ordinary shares in Serco Group plc are listed on the London Stock Exchange (Code: SRP, ISIN number GB0007973794).
Serco Group plc Annual Report and Accounts 2015 Shareholder Information
247
American Depositary Receipts (ADRs)
Serco has established a sponsored Level I ADR programme. Serco ADRs are traded on the US over-the-counter (OTC) market
with the ticker symbol SCGPY. For queries relating to ADR holdings, please contact the ADR depositary bank, Deutsche Bank:
Deutsche Bank Shareholder Services
American Stock Transfer & Trust Company
Operations Center
6201 15th Avenue
Brooklyn NY 11219
USA
Tel: +1 866 249 2593 (toll free within USA) or +1 718 921 8124 (from outside USA)
Email: db@amstock.com
www.adr.db.com
Stocktrade
We have arranged a telephone sharedealing service with Stocktrade for purchases / sales of Serco Group plc shares. You should
call +44 (0)131 240 0414 between 8.00am and 4.30pm, Monday to Friday and quote 'Serco dial and deal service'. Commission is
charged at 1%, subject to a minimum charge of £25.00. Further details of an account with Stocktrade can be obtained by calling
+44 (0)131 0240 0412 and requesting an account opening pack. This service is not available to US residents.
Please note that UK share purchases will be subject to 0.5% stamp duty.
Shareholder profile
The range and size of ordinary shareholdings as at 31 December 2015 is set out below:
Number of
shareholders
3,736
2,487
460
418
122
46
62
31
%
50.75
33.78
6.25
5.68
1.66
0.62
0.84
0.42
Number
of shares
1,495,934
5,653,255
3,263,085
11,889,127
27,507,155
32,411,533
179,477,609
836,862,083
7,362
100.00
1,098,559,781
%
0.14
0.51
0.30
1.08
2.50
2.95
16.34
76.18
100.00
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
Company registered office
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY
United Kingdom
Company registration number
2048608
Financial Statements·Financial StatementsStrategic ReportDirectors’ Report
www.serco.com
Serco Group plc
Serco House
16 Bartley Wood Business Park
Bartley Way, Hook
Hampshire, RG27 9UY
For general enquiries contact
T: +44 (0)1256 745 900
E: generalenquiries@serco.com