Annual Report
and Accounts
2016
Serco is one of the world’s leading international providers of services
to governments. We operate in Asia Pacific, the Middle East, Europe,
the UK and North America, and provide services in Defence, Health,
Justice & Immigration, Transport and Citizen Services.
We employ 47,000 people, and our ambition is to be a trusted partner
of governments, delivering superb public services that transform
outcomes and make a positive difference for our fellow citizens. We
will achieve this by being the best-managed business in our sector.
Strategic Report
04 Chairman’s Statement
06 Our Business
Directors’ Report
74 Corporate Governance Report
Financial Statements
134 Independent Auditor’s Report
74 Board of Directors
139 Consolidated Income Statement
14 Key Performance Indicators
76 Chairman's Governance
16 Principal Risks and Uncertainties
24 Viability Statement
26 Chief Executive’s Review
35 Divisional Reviews
42 Finance Review
64 Corporate Responsibility
Overview
78 Board and Governance
80 Group Risk
140 Consolidated Statement
of Comprehensive Income
141 Consolidated Statement
of Changes in Equity
Committee Report
142 Consolidated Balance Sheet
82 Audit Committee Report
143 Consolidated Cash Flow
90 Nomination
Statement
Committee Report
144 Notes to the Consolidated
92 Corporate Responsibility
Committee Report
Financial Statements
208 Company Balance Sheet
94 Compliance with the UK
Corporate Governance Code
209 Notes to the Company
Financial Statements
96 Remuneration Report
214 Appendix: List of Subsidiaries
126 Directors' Report
217 Appendix: Supplementary
132 Directors' Responsibility
Statement
Information
218 Shareholder Information
219 Useful Contacts
Serco Group plc Annual Report and Accounts 2016 Strategic Report
Directors’ Report
Financial Statements
Strategic
Report
04 Chairman’s Statement
06 Our Business
14 Key Performance Indicators
16 Principal Risks and Uncertainties
24 Viability Statement
26 Chief Executive’s Review
35 Divisional Reviews
42 Finance Review
64 Corporate Responsibility
Legal Disclaimer
This Annual Report and Accounts contains certain statements
which are, or may be deemed to be, 'forward-looking
statements'. By their nature, these forward-looking statements
are subject to a number of known and unknown risks,
uncertainties and contingencies, many of which are beyond
Serco’s control or influence, and actual results and events
could differ materially from those currently being anticipated
as reflected in such statements. For a description of certain
factors that may affect Serco’s business, financial performance
or results of operations, please refer to the Principal Risks and
Uncertainties set out in this Annual Report and Accounts on
pages 16 to 23. These forward-looking statements speak only
as of the date of this publication. Past performance should not
be taken as an indication or guarantee of future results and
no representation or warranty, express or implied, is made
regarding future performance. Except as required by any
applicable law or regulation, Serco expressly disclaims any
obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained in this
publication to reflect any change in Serco's expectations or any
change in events, conditions or circumstances on which any such
statement is based. Accordingly, undue reliance should not be
placed on any such forward-looking statements.
Any references in this publication to other reports or materials,
including website addresses, are for the reader’s interest
only. Neither the content of Serco’s website nor any website
accessible from hyperlinks from Serco’s website, including any
materials contained or accessible thereon, are incorporated in
or form part of this publication.
Serco is subject to the regulatory requirements of the Financial
Conduct Authority of the United Kingdom.
03
03
Chairman’s Statement
I am very pleased to see the substantial
progress that was made in 2016. Having
stabilised the business in the preceding period,
we are now continuing with our plan to further
improve how we operate and compete. Once
the transformation stage is complete, we are
confident that the business will start to make
positive progress towards our long-term goals.
Serco is a remarkable company, supporting
governments around the world in the
delivery of essential public services. As
your Chairman, I am proud of the work we
do and of the achievements being made
to implement the new strategy that was
presented to shareholders in March 2015.
Our five-year plan is on track and we are
driving hard to achieve the ambition of being
a superb provider of public services by being
the best-managed business in the sector.
Delivering our strategic plan
Much has been achieved over the last three years in
order to renew Serco: recruiting a new management
team; carrying out the detailed Contract and Balance
Sheet Review; developing the new strategy and its
implementation plan; improving the morale of our
people; delivering the corporate renewal programme;
and strengthening the balance sheet. In 2016 we have
now seen the necessary shift in focus to begin to build a
successful future on these good foundations.
Over the course of the last 12 months we have therefore
delivered essential elements of the ‘Transform’
stage of our turnaround, including: completing the
rationalisation of our portfolio to achieve a strategic
focus on public services in five sectors and four
geographies; continued progress in reducing the
burden of loss-making contracts; and rebuilding
our business development capacity, which has
supported an increase in our pipeline of larger new
bid opportunities from £6.5bn at the end of 2015 to
£8.4bn at the end of 2016. Furthermore, we are making
progress on building differentiated capabilities and
strengthening our sector propositions, which includes
the successful development of our three Centres of
Excellence covering Health, Transport and Justice &
Immigration. These factors, together with clear progress
on rebuilding customer confidence and trust in Serco,
have contributed to a 40% increase in the value of order
intake, signing contracts with a total value of £2.5bn
during the year, or £3.2bn including our share of joint
venture contracts.
You can read more about all of these points in Rupert
Soames’ Chief Executive’s Review on pages 26 to 34.
Achieving our financial targets
Revenue from continuing and discontinued operations
for 2016 was £3.0bn and Underlying Trading Profit was
£82m, compared to our guidance at the start of the
year of £2.8bn and approximately £50m respectively.
The stronger performance reflected in part the benefit
of foreign exchange movements over the course of the
year, but to a larger degree reflected the resolution of
a number of commercial matters and certain contracts
running for longer. Whilst the benefits of these
resolutions and contract timings are not expected
to repeat in subsequent periods, they are the result
of considerable hard work to achieve a favourable
outcome in 2016. Elsewhere, it was the result of similar
hard work to deliver cost savings slightly ahead of target
and ensure our plans for operational improvements
were all achieved during the year.
Operating profit before exceptional items was £98.5m.
After exceptional items, net finance costs, tax and
losses from discontinued operations, the loss for the
year was £1.1m, compared to a loss of £153.1m for 2015.
Net Debt at year-end was £109m, also ahead of our
guidance at the start of the year. This equates to
EBITDA leverage of 0.7x, suitably below our medium-
term target range of 1–2x and very comfortably below
the 3.5x debt covenant requirement.
You can read more about the drivers of financial
performance in Rupert’s Chief Executive’s Review, with
further detail provided in the Divisional Reviews on
pages 35 to 41 and the Finance Review on pages 42
to 63.
04
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Strengthening our governance
Shaping our future success
On joining Serco in June 2015, I received a detailed
briefing on the Corporate Renewal Programme and the
independent oversight that was in place to ensure the
programme was fully carried out. We have continued
in 2016 to put in place additional actions to improve
further the effectiveness of our governance, operational
resilience and organisational change processes.
Of particular note has been the introduction of the
new Group Risk Committee which has overseen the
strengthening of the Company’s risk management
processes, and in turn has enabled a focusing of
the responsibilities of the Corporate Responsibility
Committee which has replaced the Board Oversight
Committee. Your Board has also been actively involved
in evaluating individual bids containing a particular
concentration of risks, as well as meeting regularly
with management responsible for the delivery of the
Company’s key operations and for the development
of new business.
I was delighted to welcome John Rishton as a Non-
Executive Director in September 2016, with John taking
over as Chair of the Audit Committee from Malcolm
Wyman on 1 November 2016. John brings to Serco
extensive executive and non-executive knowledge
and experience, across a range of industries, and
is already proving to be a valuable addition to the
Board in areas that are key to strengthening Serco
further. Having joined in 2013, Malcolm Wyman made
a significant contribution to Serco during the prior
period of stabilising the business, and more recently
in 2016 during the process of appointing KPMG as the
new External Auditor for the Group. Tamara Ingram
also stepped down from the Board in July following
her appointment as Chief Executive Officer of J.Walter
Thompson Company LLC and her relocation to the US.
I and the Board would like to express our appreciation
for the contribution, time and energy Malcolm and
Tamara spent supporting the strengthening of Serco.
You can read more about the background, structures
and progress in our Corporate Governance Report on
pages 74 to 125.
At the start of 2016 we refreshed Serco’s Values. These
are Trust, Care, Innovation and Pride, and sit at the
very core of how the business operates. I and the rest
of the Board have continued to benefit from seeing
at first hand our contracts in operation, seeing Serco
colleagues living our Values and demonstrating an
absolute commitment to delivering excellent public
services. We have also been able to see that the
Values have been embedded successfully through our
annual ‘Viewpoint’ employee engagement survey. I
was particularly proud that, based on the responses of
over 30,000 employees, Viewpoint has seen a further
increase in the level of employee engagement, which is
a key determinant of the future success of the business.
As we look ahead to 2017, it will be a further challenging
year in terms of financial performance, and we have
reiterated our guidance for revenue of approximately
£3.1bn and Underlying Trading Profit of between
£65m and £70m. 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 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 the coming year, 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.
I would like to thank all colleagues in the business for
their efforts in achieving a successful 2016, and for
their continued support in delivering the long-term
turnaround of Serco.
Sir Roy Gardner
Chairman
05
Financial StatementsDirectors’ ReportStrategic Report Our Business
Serco has deep expertise: overlaid on our
private sector techniques, drive and energy is
a public service ethos that means that we can
help deliver government services efficiently,
but in a way that recognises the need for public
accountability and trust.
What we do, and how we do it
Serco delivers services to governments and
other institutions who serve the public or
protect vital national interests. We focus on
five sectors: Defence, Justice & Immigration,
Transport, Health and Citizen Services,
and deliver them in the UK, Europe, North
America, Asia Pacific and the Middle East.
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 need to deliver, and we develop
new and more effective ways to deliver them. We
deliver innovative solutions to some of the most
complex challenges facing governments, bringing our
experience, capability and scale to deliver the service
standards, cost efficiencies and policy outcomes
governments want. In this way we make a positive
difference to the lives of millions of people around
the world, and help keep nations safe.
Governments have two basic responsibilities: to develop
policies, and to ensure that those policies are delivered.
Some policies can be delivered simply by enacting
legislation, relying on individuals and corporations to
deliver the policy themselves by acting in accordance
with the law, with the police and judiciary acting as
enforcers of behaviour. An example of this would be a
policy that required a speed limit of 20 mph near schools,
which can be enforced by the police in the normal course
of law enforcement. Other policies require substantial
specialist workforces to be employed to deliver them.
One example would be a policy that asylum seekers
should be housed in the community, rather than in
detention, whilst their applications are processed: such
a policy requires the government to employ – directly
or indirectly – the people required to arrange housing
and welfare services. Another example of a policy that
requires a dedicated workforce to deliver it would be
one that sought to help the long-term unemployed find
jobs, which requires local offices and staff to support and
encourage people through the job-finding process.
Public services require people
The delivery of many areas of government policy is
labour intensive, and the number of people involved in
the delivery of government services vastly outnumbers
those involved in developing policy; in some countries,
government is the largest employer. For example,
according to the United States Bureau of Labor Statistics,
nearly twice as many people (22 million) are employed
by local, state and federal government as are in
manufacturing (12 million).
Given that delivering public services is often labour
intensive, this demands strong management of the
processes to recruit, organise and oversee the hundreds
or even thousands of people required to deliver a public
service. Many public servants are talented managers,
but all governments find it hard to attract and retain in
the numbers required to deliver services in the face of
private sector competition for these skills. Serco helps
government by being a bridge between the drive, energy
and innovation of the private sector, and the very specific
requirements of public services.
06
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Public services and delivery by the private sector
Serco’s breadth and structure
Governments have used private contractors to deliver
public policy, often in very sensitive areas, for centuries.
In medieval times, fighting wars and tax collection were
often outsourced, in whole or part, to private enterprise.
The transportation of prisoners from the UK to Australia,
which started in 1788 and continued until 1868, was
carried out entirely by private contractors. Today, in
the UK, frontline medical services by the National
Health Service are provided by some 280,000 general
practitioners, the vast majority of whom are employed by
private partnerships and companies. Some of the most
sensitive and secret defence work, such as developing
and supporting strategic nuclear weapons, is carried
out by private companies.
Some services which governments need in order to
deliver public policy are similar or identical to those
required in the private sector, and suppliers can happily
operate in both markets. Running payroll, providing
telecoms networks and IT centres is not vastly different
in the public and private sectors. But some government
services – such as running prisons or providing air-
traffic control – are unique to government and have no
private sector equivalent. Many government services
are bought only by government, and providing them
is a specialist business, quite different from anything
found in the private sector. However, many of them can
be run efficiently on behalf of government by private
companies using techniques, management, technology
and processes developed in the private sector.
Unique demands of public service delivery
Providing government services to citizens, funded
by taxpayers, is different, and in many ways more
demanding, than providing services to the private sector
or consumers. Politics, transparency and accountability
to multiple stakeholders are seen only dimly in the
private sector, but are writ large in the public sector, and
need careful 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 that we can help deliver government services
efficiently, but in a way that recognises the need for
public accountability and trust, and the fact that we are
often looking after some of the most vulnerable and
disadvantaged in society.
As well as providing a bridge between the private and
public sector, Serco also provides the international and
inter-departmental sharing of ideas and best practice
which governments often find hard to achieve. New
approaches for running prisons and reducing youth re-
offending in the UK come from Australia; hospitals we
manage in the Middle East use processes developed in
the UK; likewise our Defence business in the Middle East
serves Australian armed forces. We transfer our insights,
skills and processes 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 policy
delivery, internationally.
We focus our activities in five areas of government
service: Defence, Justice & Immigration, Transport,
Health and Citizen Services. All these sectors are
characterised by large and growing demand, and the
requirement to employ significant numbers of people
in service delivery.
We structure ourselves with four types of function:
Divisions, Group, Centres of Excellence (CoEs)
and Shared Services. All operational delivery is
executed through five geographic Divisions: UK
Central Government, UK & Europe Local & Regional
Government, the Americas, Asia Pacific and the Middle
East. Within their domains, Divisions are responsible for
everything involved in winning and delivering contracts;
97% of our employees work in these Divisions. A lean
Group function provides governance, strategy, asset
allocation, policy-setting and oversight, as well as certain
specialist consolidation and functional roles in Finance,
Risk and HR. The Group also manages CoEs which
provide focused expertise and support to the Divisions,
and enable sharing of best practice and the development
of common propositions in areas such as Transport,
Justice & Immigration and Health. Shared Services
provide common functional and processing support
in areas such as IT, HR and finance to the Divisions.
07
Financial StatementsDirectors’ ReportStrategic Report Our Business continued
Our Strategy
As managers, our job is to ensure Serco
delivers value to the people and institutions
who have an interest in our success: to our
customers and service-users, by providing
high-quality, resilient and innovative
public services; to our shareholders, by
providing sustainable and growing returns
on capital; to our lenders, by providing
them with a solid and secure credit; and to
our colleagues, by enabling them to have
interesting and rewarding careers.
We believe that good strategies are 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 B2G (Business to Government) business,
specialising across five sectors: Defence, Justice &
Immigration, Transport, Health and Citizen Services.
We deliver these services in four regions: UK & Europe,
North America, Asia Pacific and the Middle East.
The decision to focus on being a B2G business was taken
in 2014, and was a change from the previous strategy
which had been to serve both private and public sector
customers. The strategy was changed as a result of the
need to recapitalise the business following a troubled
diversification into private sector outsourcing and the
realisation that Serco had taken on a number of very
heavily loss-making contracts. As a result of this the
management team was changed in 2013 and 2014, and
over £700m was raised by way of an equity Rights Issue in
early 2015 and the disposal of non-core businesses later
in that year.
Focusing the business on the public sector market was,
in effect, going back to our roots. For some 20 years up
until 2010, the company had delivered rapid growth and
very significant value creation by being largely focused
on the public sector. In recent years the public sector
market has become more difficult as governments
struggled with the effects of the financial crisis in 2008,
slowdowns in military spending, and the election of
governments committed to reducing public expenditure.
Furthermore, governments have become much more
skilled at contracting and focused on risk-transfer; as a
consequence margins and risk-adjusted returns earned
by many suppliers to government are much lower today
than they were ten years ago.
However, despite what is now a more mature and difficult
market than it was around the turn of the century, the
business of providing services to government has
attractions. We believe that the market is growing and
will continue to do so because of two fundamental
truths. 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, that governments
will continue to face huge pressure to deliver more and
better public services, for less, and that this will lead
them to focus relentlessly on value for money and the
quality of service provision. This pressure comes from
what we call ‘the Four Forces’ comprising:
• The relentless increase, at rates above GDP
growth, of demand for public services across
important areas of government. Examples are
the pressures on health and social care driven by
ageing populations, and growing prison populations.
• The need to reduce public debt and
expenditure deficits.
• Rising expectations of service quality amongst
public service users.
• The unwillingness of voters and corporate
taxpayers to countenance tax increases.
The challenge facing governments worldwide can, like
our strategy, be simply expressed: to deliver more, and
better, for less.
In the face of this challenge, and having over recent
years already plucked from the savings tree the low-
hanging fruit, governments are having to find ever-more
inventive and sophisticated ways of providing better
public services at lower cost. For governments, as for
companies in the private sector, when under pressure
it is often best to focus intellectual and management
energy on their core mission, and leave it to others to
provide the development and operation of supporting
activities. A modern army, air force or navy needs
to concentrate its efforts on maintaining its fighting
capability, not running the payroll, maintaining buildings
or manoeuvring ships around in port with tugs. Likewise,
hospitals need to concentrate their intellectual and
management energy on delivering clinical services,
not delivering meals to patients, cleaning the loos and
maintaining the air-conditioning.
08
Strategic ReportSerco Group plc Annual Report and Accounts 2016 There are other factors that make the public sector
marketplace attractive to us: whilst some niches may be
disrupted by technology or other exogenous factors,
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 for decades to come. The
bank teller or shop assistant may be rightly fearful that
technology will disintermediate their role, but a prison
custody officer can sleep soundly in the knowledge that
his or her skills will be required for years to come.
An international footprint also helps us build customer
interest and confidence. The fact that we are involved
in running major urban rail infrastructure in the UK and
Dubai helps us in rail bids in the United States; our
proven track record in reducing recidivism amongst
offenders in Australia is of interest to authorities in
the UK. But, more broadly, when governments are
considering awarding us an important project, the fact
that other governments trust us to help them manage
some of their most critical and secret areas of national
security infrastructure is helpful in building confidence.
Risk management is central to our thinking at both a
strategic and an operational level. In terms of strategy,
although being a focused and specialist B2G business,
we think it beneficial, and a competitive advantage, to
diversify our exposure to individual governments and
sectors. Governments can be capricious; decision-
making processes regularly come to a halt around
elections; the attitude to using private companies can
be volatile; political priorities can change in the blink of
an eye, switching discretionary resources from defence
to immigration to healthcare and back again. In this
environment, being diversified both by sector and
geography reduces risk and volatility. Most companies
operating in our market are heavily focused in either a
particular sector, or within a geography; in our market,
Serco is a rare beast, operating amongst five sectors and
four regions.
But management of risk is only one reason we favour a
strategy of operating across a number of jurisdictions
and sectors. Governments across the world face similar
challenges, and we believe that we can gain competitive
advantage and deliver value to customers by operating
internationally. At a detailed operational level, providing
cleaning and catering services in a hospital is very similar
in Western Australia and in Abu Dhabi. In terms of
capability, many of our contracts employ hundreds, and
some, thousands, of people; so recruitment, training,
staff rostering and time management are key capabilities
applicable across all our sectors and geographies.
The same is true of project and case management; we
are also able to adopt consistent approaches to key
operational tools such as Continuous Improvement.
Market size
People ask: how large is the market for the private sector
provision of public services? This is hard to determine
with precision, as the boundaries of the market are
fiendishly hard to define. Does the maintenance contract
for a mainframe computer operated by the government
fall within the definition of the market? How should we
treat services provided by government-owned agencies
operating on an arm’s-length basis? Within Defence, do
we count supply and support of, say, missile systems,
or just the types of services we currently (as opposed
to could) supply? And how do we disentangle the very
different definitions of, and accounting for, expenditure
used by the various governments with whom we deal?
In the last year we have done a lot of work to try and
size the market in the sectors and geographies we
currently operate in, which are clearly a subset of the
global market. Our best guess is that the total annual
value of government services in our target segments
and geographies which could be provided by the private
sector is around £300bn, of which around £100bn is
delivered by private companies. Rather than concentrate
on the absolute number, some key conclusions from our
work are:
• the market for private sector delivery of government
services is very large;
• the supply-side is fragmented; as a leading
international supplier, our market share within our
existing footprint, at around 3%, is small, although
it is larger in some specific segments within certain
sectors; and
• there is significant opportunity for growth, given
that around two-thirds of the services that could be
provided by the private sector are currently self-
delivered by government.
09
Financial StatementsDirectors’ ReportStrategic Report Our Business continued
Our core sectors
Our business is focused on five sectors: Defence, Justice & Immigration, Transport, Health
and Citizen Services. Our revenues, jurisdictions by region and key services in each of these
sectors are shown below.
Revenue in 2016 (continuing
operations, including share of
joint ventures and associates) £3,492m
Defence
Justice &
Immigration
Transport
Health
Citizen Services
£1,112m
32%
£569m
16%
£606m
17%
£355m
10%
£850m
25%
UK & Europe
Americas
Asia Pacific
Middle East
Asia Pacific
UK & Europe
Base and
operational
support
Engineering,
management
and information
services
Maritime services
Custodial
services
Immigration
detention and
services
Detainee
transport and
monitoring
Regions
UK & Europe
Middle East
Americas
Asia Pacific
Key Services
Rail and ferries
Road traffic
management
Air traffic control
UK & Europe
Asia Pacific
Middle East
UK & Europe
Americas
Asia Pacific
Middle East
Non-clinical
support services
Patient
administration
and contact
Contact centres
and case
management
Middle and back
office services; IT
services
Employment and
skills services
10
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Implementing our strategy
We combine people, processes and technology to deliver superb services. Serco is not a
process consultant or a technology business; we use process and technology as enabling
tools, not as products to sell. Furthermore, since processes and technology depend entirely
on people, it can be simply said that the success of our strategy will depend upon how well
we manage, organise, motivate, develop and select 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 aspiration, and
one that we can use to inspire our management teams and customers. 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.
We are great believers in succinctness and simplicity. Accordingly, we have managed to fit our strategy and
performance framework – of what is a very complex and diverse business – into a single graphic that we use
throughout the business:
Our performance framework
Our values
Trust
Care
Innovation
Pride
Our purpose – what we want to be
A trusted partner of governments, delivering superb public services that
transform outcomes and make a positive difference for our fellow citizens
Our organising principles
Flair, agility, innovation
Empowerment
Decentralisation of execution
Loose – Tight management
Disciplined entrepreneurialism
Rigour, discipline
Common processes
Centralised intent
Our method
Winning good business
Executing brilliantly
Being the best-managed
company in the sector
A place people are proud to work
Profitable and sustainable
Our deliverables
Engagement
>60% and increasing
Revenue growth
of ~5–7%
Trading margin
~5–6%
11
Financial StatementsDirectors’ ReportStrategic Report Our Business continued
Our performance framework continued
The purpose of the performance framework is to
provide a structure which will deliver value to our
customers, shareholders, and to the people who
work in the business. We start with our Values.
Our values
Whilst we use technology and processes, the core
of our business is using people – many thousands
of them – to deliver public services. It is of central
importance to our success that our colleagues –
many of whom are former public servants – and our
customers believe that we have values appropriate to
a company delivering services funded by taxpayers to
often vulnerable and disadvantaged citizens. “Working
at the leading edge of technology” may be inspiring
to people working for IT businesses, but they are not
reasons why a prison officer makes a cup of tea for a
suicidal prisoner at two o’clock in the morning; why a
housing officer leaves the comfort of an office to walk
a nervous asylum seeker’s child to school on their first
day; why an engineer crawls into that impossibly small
space in the foetid bowels of an aircraft-carrier to make
sure the cable-ties are secured just right so they will
stay in place for the next 20 years. It is because they
care about their work and take pride in it. Before our
customers will give us sensitive work, they have to
trust us. And to win business we have to come up with
innovative solutions which will enable governments to
deliver more, and better, for less. This is why our Values
of Trust, Care, Innovation and Pride are important.
Our organising principles
Our organising principles have to reflect the fact that many
of the things our customers want are mutually exclusive:
they want excellent and resilient services, delivered by
highly motivated staff, but they want them to be low
cost; they want local accountability and flexibility, but
they also want strong governance and risk management.
As a management team, we believe in the principle of
subsidiarity: that decisions should be taken by managers
who are as close to the customer as possible. But we
are also conscious of the fact that many of our contracts
carry with them risks that need careful management and
supervision. So we describe our organising principles
with two concepts: 'loose-tight', and 'disciplined
entrepreneurialism'. Neither of these is our own invention;
they are based on the work of, respectively, Tom Peters
and Jim Collins. They describe in subtly different ways
an approach to management which recognises the
need for both local management autonomy and strong
governance. Two quotations from their works give a taste
of the type of organisation we are trying to achieve:
“Loose-Tight...is the co-existence of firm central direction
and maximum individual autonomy. … Organisations
that live by the loose-tight principle, are on the one hand
rigidly controlled, yet at the same time allow (indeed insist
on), autonomy, entrepreneurship, and innovation from
their people." Tom Peters: In Search of Excellence
“Avoid bureaucracy and hierarchy and instead create a
culture of discipline. When you put two complementary
forces together – a culture of discipline with an ethic
of entrepreneurship – you get a magical alchemy of
superior performance and sustained results.”
Jim Collins: Good to Great
Our method
The method we use to deliver our aspiration to be the best-managed business in our sector and to deliver our
strategy is to concentrate on doing four things really well. These are the things we want Serco to be famous for:
Winning good business
Executing brilliantly
Being a place people
are proud to work
Being profitable
and sustainable
We try to make sure that everything we do improves our performance against one or more of these objectives, and
start from a position where we know we can do much better. We can improve the way we bid and manage contracts;
develop innovative propositions; measure performance; reduce the cost and improve the quality of our administrative
systems and processes. None of these comes easily 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.
12
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Our deliverables
Progress to date
The tangible evidence of our success or otherwise will
be a return to industry rates of growth and margins. In
recent years our revenues have been shrinking and our
underlying trading margins are far too low at around
2–3%. Our challenge, and our opportunity, is to get back
to long-term industry rates of Revenue growth, which
we believe are around 5–7%, and Trading Profit margins
across Serco’s mix of business in the range of 5–6%.
If this turns out to be correct, and markets turn out as
expected, we believe that after a period of restructuring
and transformation, it will be possible to increase growth
rates and margins towards the average of our peers.
In terms of progress towards our goals, in 2014 we
identified three distinct phases in the implementation of
our strategy. The first phase – Stabilisation – recognised
the urgent need to recapitalise the business and restore
customer and employee confidence following the
very significant write-downs following the realisation
that Serco had a number of very heavily loss-making
contracts. This phase was completed in 2014, and we are
now mid-way through the Transformation phase. This will
be followed from 2018 by the Growth phase as we seek to
reap the rewards of Transformation and start our journey
back towards industry-average growth rates and margins.
Our Ambition
To be a superb provider of public services by being the best-managed business in our sector
2014 Stabilise
2015–2017 Transform
2018–2020 Grow
Planned Outcome
• Hire new management
• Identify issues
• Develop strategy and
implementation plan
• Undertake Contract and
Balance Sheet Review
• Stabilise morale
• Roll out corporate renewal
• Strengthen balance sheet
• Rebuild confidence and trust
• Improve risk management
• Rationalise portfolio
• Mitigate loss-making contracts
• Strengthen sector propositions
• Re-build business development
and pipeline
• Build differentiated capability
• Improve execution and cost efficiency
• Harvest benefits
of transformation
• Leverage scale
and capability
• Build out geographical
footprint
• Move into new
sub-segments
• Continuously
review portfolio
Chosen sectors will
grow at ~5–7%
Industry margins in
our sectors ~5–6%
We believe our
performance can
match this
In terms of progress in the Transformation phase:
• We continue to strengthen our sector propositions,
• We have successfully strengthened our balance sheet,
following the Rights Issue completed in April 2015
and the disposal of our private sector BPO business;
together these raised over £700m, and our Net Debt:
EBITDA now stands at 0.7x, with period-end net debt
reduced from £745m at the end of 2013 to £109m at
the end of 2016.
• We have made excellent progress rebuilding
confidence and trust with our major customers,
in large part due to greatly improved operational
performance.
• Portfolio rationalisation has been completed,
concluding with the disposal of the majority of our
private sector BPO business at the end of 2015.
• We continue to mitigate the impact of loss-making
contracts; we have always regarded our Onerous
Contract Provisions as a portfolio, knowing that the
actual out-turn on individual contracts would almost
certainly be different from the original estimates
made at the end of 2014. To the end of 2016, actual
expenditure against the £447m of Onerous Contract
Provisions has been very close to the original
estimate, with £209m spent to date against the
original plan of approximately £220m.
most particularly through the work carried out by our
new CoEs covering Health, Justice & Immigration, and
Transport. These CoEs have been heavily involved in
developing propositions to support major bids such
as Barts Health NHS Trust (won in 2016), Doha and
Riyadh metros, and Grafton prison in Australia.
• Our pipeline of bidding opportunities has grown very
substantially – from £5bn at the end of 2014 to £8.4bn
at the end of 2016. This reflects a greatly improved
business development capability.
• We have succeeded in reducing the businesses'
operating costs; in 2016 they were £1.1bn lower
than in 2013. The majority of this reduction relates
to costs removed from contracts which have ended
and businesses disposed of, but it is certainly an
achievement to have reduced costs broadly in line
with revenues. Improving our cost efficiency is a major
focus for us in 2017.
Summary
We believe we have the right strategy for our business,
and to date we have held to our original implementation
plan. So far, so good, but the real test of the strategy will
be our ability to start growing revenues and improving
margins in the Growth phase of our plan.
13
Financial StatementsDirectors’ ReportStrategic Report Key Performance Indicators
We use Key Performance Indicators (KPIs) to monitor our performance, ensuring
we have a balance and an appropriate emphasis to both financial and non-financial
aspects. Alongside this, in 2016 we have continued to further improve our Management
Information, including the contract performance monitoring process which tracks
KPIs specific to each customer operation, our monthly management accounts and
our Divisional Performance Review (DPR) processes.
For each KPI we explain the definition, relevance to
our strategy and the performance in 2016. We have
made some changes to the KPIs presented in order to
achieve comparability and consistency with our focus
in the business and the guidance that we provide.
Certain financial information has been restated for
a change in accounting policy, as described in the
Finance Review on page 43. The Finance Review
also provides further detail on our use of Alternative
Performance Measures (APMs). Information on our
carbon emissions that was previously presented
in this section can be found within our Corporate
Responsibility Report on pages 71 and 72.
1. Underlying Trading Profit (UTP), £m
350
280
210
140
70
0
£310.7m
£257.4m
2012
2013
£113.2m
2014
£95.9m
2015
£82.1m
2016
Definition
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 interest and tax of its joint ventures. Underlying
Trading Profit excludes Contract and Balance Sheet Review
adjustments (principally Onerous Contract Provision (OCP) releases
or charges), the beneficial treatment of depreciation and amortisation
of assets held for sale, and other material one-time items as set out
in the Finance Review. Trading Profit measures include discontinued
operations for consistency with previous guidance.
Relevance to strategy
The level of absolute UTP and the relationship of UTP with revenue –
i.e. the margin we earn on what our customers pay us – is at the heart
of our ‘profitable and sustainable’ business objective, as well as being
an output of ‘winning good business’ and ‘executing brilliantly’. We
describe on page 13 that the delivery of strategic success, after the
completion of further transformation in the coming year, has potential
to deliver revenue growth of 5–7% and trading margins of 5–6%.
Performance
A materially better outcome than expected at the start of the year,
driven largely by non-repeating factors such as the successful
resolution of a number of commercial issues. The £14m decline
was a reduction of £4m excluding the £19m effect of discontinued
operations that reflect the disposal of the private sector offshore
BPO business at the end of 2015 and excluding the £9m net currency
benefit. The underlying margin was flat at 2.7%.
2. Underlying Earnings Per Share (EPS), pence
40
30
20
10
0
35.15p
28.64p
4.73p
3.44p
4.13p
2012
2013
2014
2015
2016
Definition
Underlying EPS reflects 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.
Relevance to strategy
EPS builds on the relevance of UTP, and further reflects the
achievement of being ‘profitable and sustainable’ by taking into
account not just our ability to grow revenue and margin but also the
strength and costs of our financial funding and tax arrangements.
EPS is therefore a measure of financial return for our shareholders.
Performance
The increase reflects the reduction in UTP being more than offset by
the lower finance costs and tax charge, partially offset by the increase
in the average number of shares as a consequence of the Rights Issue
completed in April 2015.
3. Free Cash Flow (FCF), £m
200
150
100
50
0
(50)
£181.2m
£62.9m
£62.2m
(£35.5m)
(£33.0m)
2012
2013
2014
2015
2016
Definition
Free Cash Flow is the net cash flow from operating activities before
exceptional items as shown on the face of the Group’s Consolidated
Cash Flow Statement, adding dividends we receive from joint ventures
and deducting net interest paid and net capital expenditure on
tangible and intangible asset purchases.
Relevance to strategy
FCF is a further reflection on how ‘sustainable’ our profits are, as well
as the sustainability of the overall business, by showing a measure
of how much of our effort turns into cash to reinvest back into the
business or to deploy in other ways. Furthermore, ‘winning good
business’ should reflect that which generates appropriate cash returns,
and ‘executing brilliantly’ should include appropriate management of
our working capital cash flow cycles.
Performance
Cash generated from UTP was largely offset by the outflows related to
loss-making contracts subject to OCPs. These cash outflows lessened
year-on-year, as reflected in the lower rate of OCP utilisation. There
was a working capital outflow of £25m as we continued to reduce
the utilisation of the Group's receivables financing facility. Capital
expenditure was lower, reflecting the benefit of the disposal of the
private sector BPO business.
14
Strategic ReportSerco Group plc Annual Report and Accounts 2016 4. Pipeline of larger new bid opportunities, £bn
6. Major incident frequency rate, per 1m hours worked
15
10
5
0
£12bn
n/a
2012
2013
£5bn
2014
£6.5bn
£8.4bn
2015
2016
0.60
0.40
0.20
0
0.53
0.25
0.33
0.34
0.27
2012
2013
2014
2015
2016
Definition
The estimated aggregate value at the end of the reporting period
of new bid opportunities that have an estimated Annual Contract
Value (ACV) of at least £10m or a Total Contract Value (TCV) of at least
£100m, and which we expect to bid and to be adjudicated within a
rolling 24-month timeframe. The TCV of individual opportunities is
capped at £1bn. The value of re-bid and extension opportunities
is specifically excluded so as to measure only ‘new’ growth
opportunities. Also excluded is the potential value of framework
agreements, prevalent in the Americas in particular where there
are numerous arrangements classed as ‘IDIQ’ – Indefinite Delivery /
Indefinite Quantity. This KPI was established and defined in 2013.
Relevance to strategy
The pipeline provides the key potential for ‘winning good business’
and therefore is a major input to being ‘profitable and sustainable’.
The size of the pipeline and our win-rate conversion of the bids within
it will also ultimately be at the heart of successfully achieving a shift to
the third and final stage of our turnaround plan – the ‘Grow’ stage.
Performance
A further net increase in the value of new growth opportunities reflects
that the reductions from customer decisions made in the period have
been more than offset by adding new opportunities, particularly in
defence in US, justice in Australia, and expanded scope of Middle East
transport opportunities. Our win rate on new bids improved to over
20% on a value basis and to over 50% on a volume basis.
Definition
Major 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.
Following a review of safety indicators and how rates are calculated,
the decision was taken to change from reporting incident rates
normalised by numbers of employees to frequency rates normalised
by one million hours worked. We have therefore recalibrated our
historical data. Data excludes the BPO operations sold in 2015, to
provide meaningful comparison, and joint venture operations.
Relevance to strategy
Delivering excellent service to our customers, and therefore
‘executing brilliantly’, requires us to operate in the safest way
possible. Safety also has a direct bearing on the commitment
and engagement of our people, which is central to achieving
‘a place people are proud to work’.
Performance
34 major incidents were reported in 2016, a 26% reduction against 2015.
This resulted in a frequency rate of 0.27 per 1m hours worked which is
a 20% improvement on 2015 and exceeds our target which was set at
a 5% reduction against our 2015 actual performance. This shows good
performance and reflects each of the Divisions' ongoing focus.
5. Underlying Return on Invested Capital (ROIC), %
7. Employee engagement, %
20
15
10
5
0
17.3%
13.9%
11.3%
11.1%
10.7%
2012
2013
2014
2015
2016
60
40
20
0
45%
42%
51%
53%
54%
2012
2013
2014
2015
2016
Definition
ROIC is calculated as UTP 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. For
2014, invested capital is calculated using the closing balance sheet
position, given the impact of the Contract and Balance Sheet Review
during that year; for all other years it is calculated as a two-point
average of the opening and closing balance sheet positions.
Relevance to strategy
ROIC measures how efficiently the Group uses its capital to generate
returns from its assets. To be a sufficiently ‘profitable and sustainable’
business, a return must be achieved that is appropriately above a
cost of capital hurdle reflective of the typical returns required by our
weighting of the use of equity and debt capital.
Performance
The reduction in UTP was only partially offset by a reduction in
average invested capital, resulting in a modest reduction in ROIC. We
expect an improvement in ROIC to be driven by the development in
profit margin when we successfully complete the ‘Transform’ stage of
the turnaround and make progress with the ‘Grow’ phase.
Definition
We partner with Aon Hewitt to run Viewpoint, 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
Employee engagement reflects ‘a place people are proud to work’,
which is crucial to delivering outstanding customer service and
achieving our strategic aims.
Performance
2016’s Viewpoint survey, which is based on the response of over 30,000
employees, showed a further improvement in our global score. The
score also increased for all categories – employees, managers and
leaders – and is now at the highest level since we started measuring
it in 2011. The Viewpoint results were cascaded to the organisation
in Q4 2016 and we have a global plan of activity in place for 2017
to sustain and drive further employee engagement, led by our
Executive Committee.
15
Financial StatementsDirectors’ ReportStrategic Report Principal Risks and Uncertainties
Risk management approach
Serco faces many risks and uncertainties which we
mitigate and manage through our risk management
policy, standard, and risk management lifecycle
processes; these align to the guidance contained within
the UK Corporate Governance Code and form part
of the Serco Management System (SMS). They seek
to 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 six key
processes that aim to manage the key risks of our
operations. They ensure we have a consistent approach
to identifying, analysing, monitoring and reporting risks
and a mechanism for providing assurance that the risk
mitigation in place is effective.
Risk Management Lifecycle Processes
Risks are reported both 'bottom-up', whereby business
and operational risks are communicated upwards to
the Divisional CEOs and the Executive Committee, and
‘top down’, whereby an assessment of the principal risks
by the Executive Committee is cascaded downward
via the Divisional Risk Directors to ensure Divisional
risk registers are focusing on key risk drivers that are
considered most important to the organisation from
a strategic perspective.
The Group Risk Register sets out the principal risks
facing the Group and is reported to the Board on a
quarterly basis via the newly formed Risk Committee.
This focuses on risk related matters across the Group,
reflecting the maturity and changing focus of the Board
Committees to embed policies and procedures put in
place as part of the Corporate Renewal Programme
(see page 80).
RISK PLANNING
• Assigning responsibility for
risk management implementation,
planning the approach and
capturing this information in a Risk
Management Plan (RMP)
RISK IDENTIFICATION
• Identifying risks associated
with achievement of our business
objectives. Includes potential risks
from external factors arising from
the environment within which we
operate, and internal risks arising
from the nature of our business
Risk
Management
Lifecycle
Processes
RISK ANALYSIS
• Assessing the level
of inherent and residual 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, taking into account
effectiveness of current
controls
RISK MITIGATION
• Identifying controls that
will reduce material risks to a
target risk rating aligned with our
risk appetite, and implementing
cost-effective mitigation and
contingency actions that improve
the effectiveness of controls
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 controls in place are
effective
RISK
MONITORING
• Monitoring mitigation
actions and their impact (so as to
improve the effectiveness of controls
and improve the residual risk rating)
• Monitoring changes to our
business and the external
environment, to ensure we
have sight of and respond
appropriately to
emerging risks
16
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Principal risks
On an annual basis the Executive Committee reviews
the principal risks facing the Group to ensure they
remain current, taking into consideration the various
Divisional risk registers and any emerging risks that
would threaten the execution of Serco’s strategy,
business model, future performance, solvency
and liquidity.
The resulting principal risks are reviewed and
endorsed by the Risk Committee, and each risk is
classified as strategic, financial, operational, people,
hazard, legal and compliance. They are described
on the following pages, together with the relevant
strategic business objectives, key risk drivers, the
Group-wide material controls which have been put in
place to mitigate the principal risks, and the mitigation
and contingency 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 24). The Viability
Statement takes into account the principal risks
in its assessment.
Risk appetite
In 2016, the Executive Committee undertook 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 were developed which were
reviewed and endorsed by the Risk Committee. During
2017, 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.
Winning good business
Executing brilliantly
A place people
are proud to work
Profitable and sustainable
STRATEGIC RISKS
Failure to grow profitably
Failure to win material bids or renew material contracts profitably, or a lack of opportunities in our chosen markets, will restrict
growth and may have an adverse impact on Serco’s long-term financial viability.
Our business is linked to changes in the economy, fiscal and monetary policy, political stability and leadership, budget priorities,
and the perception and attitude of governments and the wider public to outsourcing, which could result in decisions not to outsource
services or lead to delays in placing work.
Key risk drivers:
Lack of opportunities in chosen markets –
market sectors do not have a favourable policy of
private sector provision of public services, reducing
pipeline opportunities.
External factors reducing the pipeline of
opportunities – changes such as the Brexit
decision may make it more difficult for us to
win EU government contracts.
Not accessing opportunities due to inability to
qualify – lack of critical skills and references, and
a value proposition for the markets in which we
compete, may put Serco at a disadvantage with
our competitors.
Inability to meet customer and solution
requirements during design, implementation
and delivery – executing our bids in an unsatisfactory
manner by not understanding the strategic needs
of the customer, mispricing bids, developing
unworkable solutions, and misunderstanding risks,
may prevent us from achieving our growth ambitions.
Mitigation:
Material controls:
• Serco Group Strategy
• Serco Management System (SMS)
• Business Lifecycle Review Team
(BLRT) Process
• Sector-specific Centres of Excellence
(CoEs) and Value Propositions
• Serco Operating Model
• Annual Talent Review and
Succession Planning process
• Standardised Divisional Performance
Reporting (DPR) process
Current mitigation actions:
• Ongoing Group Strategy reviews by
Executive Committee and Board
• Ongoing delivery of Group
and Divisional transformation
programmes
• Embedding of DPR process with
Divisional monthly reviews of KPIs
Future actions:
• Additional changes to Group and
Divisional overhead and shared
service structures implemented as
part of transformation programmes
• Review of BLRT process to ensure
lessons learned and price-to-win
competitive analysis are formally
embedded
• Review of CoE business model
to assess requirement for cross-
divisional bid teams
17
Financial StatementsDirectors’ ReportStrategic Report Principal Risks and Uncertainties continued
STRATEGIC RISKS CONTINUED
Failure to build our reputation or act with integrity
Failure to build our reputation or act with integrity will mean that customers will be less likely to give us new business or renew
existing business. It will also impact our ability to attract and retain high-quality people.
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 are key to building our reputation.
Key risk drivers:
Stakeholders’ perception of Serco – a poor
perception of Serco may result in an inability
to build relationships.
Stakeholders' expectations are not understood
– an inability to identify changes in stakeholder
expectations may result in the failure of key
relationships.
Our ways of working do not align with our Values
– staff or third parties being unaware of and/or not
reflecting our Values may result in unacceptable
business conduct, and unethical or illegal behaviour.
Deliberate breach of law and / or regulations
– staff and third parties inappropriately incentivised
to behave in a certain manner may result in a breach
of laws and regulations.
Direct or indirect contribution to human rights
abuse – staff either directly or indirectly contributing
to human rights abuses may result in a breach of
laws/regulations.
Inappropriate response to an incident – if we
do not respond in an honest and collaborative way
with key stakeholders, then we may fail to protect
our reputation.
Mitigation:
Material controls:
• Our Values and Code of Conduct
• External stakeholder engagement
• Serco Management System (SMS)
• Business conduct and ethics tools
• Serco Essentials training
• Development of Gifts and
Hospitality tool and Conflict
of Interest tool
• Values Gate in Personal
Development Review (PDR)
• Update of 3rd party ethical due
diligence procedure
• Due diligence checks on customers
• Third party ethical due diligence
and suppliers
procedure
• Speak Up process
• Performance/incentive schemes
• Development of Anti-Bribery and
Corruption (ABC) Framework and
ABC risk checklist tool
Current mitigation actions:
Future actions:
• Refresh of Our Values
• Embedding of Serco Values
• Refresh of Incident Management
• Embedding of ABC Framework
Procedure
• Review of Crisis Communication
Manual
• Media training for key spokespeople
• Development of Human Rights
policy, standard and procedures
and checklist tool
• Development of stakeholder
relationships in key markets
Failure to transform and deliver the Group strategy
We aim to transform the business so as to become the best-managed business in each of our chosen sectors. If due to a number of internal
and external factors, we fail to successfully implement the Group-wide transformation programmes, we may fail to deliver our strategy to
become a sufficiently profitable and growing business.
We have put in place transformation programmes to achieve lasting change in the way Serco operates across Finance, IT, and the
Corporate Shared Services (CSS).
Key risk drivers:
Failure to implement on time – either as a
result of financial pressures or poor programme
management, we do not implement the Group
transformation programmes on time.
Non-delivery of required benefits – we fail
to achieve the expected benefits due to poor
programme management and/or solution design.
Severe disruption to the business – we fail to
coordinate and prioritise the various programme
activities due to poor integration across activities
and inadequate programme management, and we
negatively impact on Business As Usual activities.
Lack of staff engagement – due to ineffective
communication or the setting of unrealistic or unclear
expectations, we fail to gain staff buy-in.
Failure to effect merger and acquisition activities
and disposals – we do not identify and effect M&A
activities or effect the intended disposals, and fail to
achieve the anticipated portfolio and capital position.
Mitigation:
Material controls:
• Group Transformation Programme
Management Office (PMO) and
Programme Governance Boards
• Group and Programme
Workstream and Communication
Plans developed
Future actions:
• Ongoing review and updates
• Standardised Divisional Performance
to Group Strategy
Reporting (DPR) process
• Review/benchmark cost of CSS
• Business Planning Cycle Reviews
services
• Group and Programme Workstream
Communication Plans
Current mitigation actions:
• Group Programme Management
Office (PMO) and Programme
Governance Boards in place
• Business cases developed and
signed off, and benefits tracking
monitored by Group Finance and
Group Transformation PMO, and
reported through the DPR process
18
Strategic ReportSerco Group plc Annual Report and Accounts 2016
FINANCIAL RISKS
Financial control failure and Finance IT system failure
Financial control failure or prolonged loss of financial IT systems may result in the failure to create a suitable capital structure, an inability
to make critical financial transactions, accurately report timely financial results and meet contractual financial reporting obligations and a
heightened risk of error and fraud.
In addition, poor quality data will lead to an inability to forecast accurately and may lead to poor business decisions; therefore, leading to
financial instability, potential business losses and negative reputational impact.
Key risk drivers:
Not setting the right tone from the top – if we
do not set the right tone from the top, we may fail to
embed the finance policy, processes and controls.
Poor financial processes – if processes are poorly
designed, then inaccuracies and fraud may occur.
Inadequate financial controls within the business
– if controls are inadequate we may fail to provide
adequate protection from sabotage of systems,
fraud and error.
Inadequate financial controls within Treasury –
a lack of a control framework for treasury-related
activities may result in insufficient liquidity.
Loss of finance IT systems and critical financial
roles – if finance IT systems and roles become
unavailable, we will not make financial transactions,
and meet contractual and reporting obligations.
Impact of Transformation Programme activities
– programme activities may lead to an unstable
financial control environment due to an increased
workload on the finance community.
Failure of Finance Transformation Programme
– we do not transform the finance processes and
controls, and fail to deliver expected benefits.
Mitigation:
Material controls:
• Group Finance Strategy
• Serco Management System (SMS) –
finance processes and controls
• Shared Service Centre (SSC)
Customer Boards
• Process Improvement Forums
• Financial Assurance Programme
• Finance Academy
• Standardised financial platform
(i.e. SAP)
• Testing of Business Continuity
Plans (BCPs) and back-up systems
• Global Finance Transformation
Programme Management Office
(PMO) and Programme Governance
Boards
Current mitigation actions:
• Embedding of Group Finance
strategy, policy and standards
• Global Finance Transformation
Programme workstreams
• Cyber Defence and Cyber Hardening
Programme delivering enhanced
core IT security infrastructure,
processes and controls
• Group IT Transformation Programme
• Business impact assessments for
finance function and systems and
updates to BCPs and Disaster
Recovery (DR) plans
• Creation of Corporate Shared
Service (CSS) Crisis Management
Team
Future actions:
• Review of BCP contractual
compliance, and customer approval
of updated BCPs and testing
schedules
• Global Finance Transformation
Programme continues to improve
effectiveness of CSS
• Backfill/resourcing pool to be
established to cover finance
transformational activity
OPERATIONAL RISKS
Major information security breach
A major information security breach resulting in the loss or compromise of sensitive information (including personal or customer) or wilful
damage resulting in the loss of service, causing significant reputational damage, financial penalties and loss of customer confidence.
Due to the nature of the services we provide, our technology and operational systems will be subject to threats from both internal and
external breaches. We implement effective controls proportionate to the level of sensitivity of the information we are protecting, and where
'things go wrong', we act swiftly to minimise the impact of any breach and carry out remedial actions to prevent further breaches immediately.
Key risk drivers:
Non-compliant systems – if our systems are non-
compliant with regulatory requirements for sensitive
information, we are susceptible to breaches and
penalties.
Non-compliance with policies and standards
– if staff do not comply with Serco policies and
standards, then they may accidentally release sensitive
information to third parties.
Inadequate protection of sensitive information –
if we do not identify sensitive information and protect
and test the vulnerability of the systems, then we are
potentially exposed to a breach.
Inadequate incident monitoring and response –
if we do not monitor our systems and remediate and
repel attacks, then we may fail to minimise the impact
of any breach.
Unauthorised use of systems – if we do not
implement effective personnel vetting and access
restriction processes and controls, then unauthorised
use of our systems may occur.
Poor perception of Serco's capabilities – if we are
perceived to be vulnerable to cyber attack, we may
lose customer confidence.
Mitigation:
Material controls:
• Serco Management System (SMS)
• Global Information Assurance Board
and Enterprise Architecture Boards
• Enhanced IT security infrastructure,
process and controls
• Global Security Operations Centre
and Computer Security Incident
Response Teams
• Serco Essentials training
• Cyber security awareness training
• My HR – standardised HR processes
Current mitigation actions:
• Embedding of Information
Security policies and standards
• Cyber Defence and Hardening
Programme delivering enhanced
core IT security infrastructure
processes and controls and Global
Security Operations Centre
• Roll out of PUM process in Americas
• Enhancement of the information
security on-boarding process for
new IT suppliers as part of refreshed
supplier risk management
and corporate HR system
Future actions:
• Third party due diligence checks
• Improvements to IT asset registers
• Privilege User Management (PUM)
• Feedback and monitoring of
process
• Cyber Essentials Plus (CES+)
certificate successfully renewed
January 2017
activities to drive user awareness
and behaviour
19
Financial StatementsDirectors’ ReportStrategic Report
Principal Risks and Uncertainties continued
OPERATIONAL RISKS CONTINUED
Misreporting of performance
Misreporting operational, regulatory and financial performance, both internally and externally – particularly deliberate misreporting –
will result in loss of confidence from our stakeholders and put at risk our long-term viability.
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, sanctions, variation or revocation of permissions and authorisations,
suspension or debarment from doing business with government customers.
Key risk drivers:
Poor culture – if staff do not align with our Values,
and are inappropriately incentivised due to
operational targets and/or performance incentives,
then deliberate misreporting may occur.
Lack of compliance with processes and controls
– if staff do not comply with finance processes and
financial controls, then deliberate or unintentional
misreporting may occur.
Lack of clarity on contract performance
obligations – if there is lack of clarity between
Serco and the customer on contract performance
obligations, then accidental misreporting may occur.
Misunderstanding of performance reporting
requirements – if staff are not aware of reporting
requirements and are not trained to use systems,
then accidental misreporting may occur.
Poor oversight of Joint Venture (JV) systems – if
we have insufficient oversight of JV partner systems,
and insufficient assurance provided to the JV Board,
then we may be unaware of deliberate or accidental
misreporting of performance.
PEOPLE RISKS
Mitigation:
Material controls:
• Our Values and Code of Conduct
• Serco Management System (SMS)
• Serco Essentials training
• Leadership Development
Programme
• Contract Manager training
• Business Lifecycle Review Team
(BLRT) process
• Contract Management Application
(CMA)
• Speak Up process
Current mitigation actions:
• Refresh of Serco Values and
communication to business
• Roll out of Contract Management
Application (CMA) across material
contracts
• Reinforce messaging around use of
the Speak Up process
• Widespread adoption and training
of financial processes and controls
as part of the Global Finance
Transformation Programme
• Values Gate included In Personal
Development Review (PDR)
• Governance of JVs and minority
consortiums
Future actions:
• Embedding of Serco Values
• Further roll out of CMA globally
• Analyse, review and benchmarking
of Speak Up results
Failure to attract and retain key resources and skills fit for the future
If our current leaders are not able to meet the needs of the business either due to lack of capability or skills, or there are not enough
qualified leaders, this may result in the business not being able to deliver the strategy and impacts on the long-term viability of the business.
A robust framework of people, processes, systems and controls to enable attraction, selection, recruitment and retention of leaders
is required in order to meet our business objectives.
Key risk drivers:
Ineffective planning – inadequate planning for
management succession may result in a failure to
provide sufficient leaders.
Inability to attract people – uncompetitive
reward packages may result in failure to attract
suitable leaders.
Inability to select people – inadequate selection
processes may result in failure to select the right
candidate.
Ineffective on-boarding – inadequate on-boarding,
in a timely fashion may result in failure to recruit the
right candidate.
Inability to retain leaders – inadequate reward
reviews and incentives structure may result in failure
to motivate our leaders.
Insufficient talent pipeline – if we do not identify
skillsets and potential successors, then we may fail
to build a talent pipeline.
Lack of leadership capability – if we do not develop
leadership capability, then our leaders may not be fit
for the future.
Lack of leadership engagement – if we do not
effectively engage with our leaders, then we may
not retain them.
Mitigation:
Material controls:
• Serco Management System (SMS)
• Centres of Excellence (CoEs) and
Functional Talent Boards
• Annual Talent Review and Succession
Planning process
• My HR system – standardised HR
processes and corporate HR system
• Serco Leadership Model
Functional Talent Boards
• Implementation of resourcing/talent
partnerships in Sector CoEs
to support annual Talent Reviews
and Succession Planning
• Delivery of UK HR Shared Service
Centre on-boarding transformation
workstream
• Implementation of Global
On-boarding Virtual Team
• Personal Development Review (PDR)
Future actions:
process
• Performance/incentive schemes
• Viewpoint – Serco's employee
engagement survey
Current mitigation actions:
• Embedding of Serco Leadership
Model including library of
Success Profiles and Leadership
Development Programme
• Piloting of Employee Profile tool
to support delivery of CoE and
• Leadership Levelling Review to
determine the right size and shape
of the leadership population
• Market competitiveness review
of reward packages
• Embedding of refreshed
Serco Values
• Continuous improvement and
quality control for Divisional and
functional Executive Management
Team succession plans
20
Strategic ReportSerco Group plc Annual Report and Accounts 2016
HAZARD RISKS
Catastrophic event
An event as a result of Serco’s actions or Serco’s failure to effectively respond to an event that results in loss of life and/or significant serious
injuries and/or material property or asset damage and/or Serco not being able to bid or operate in a strategic market and/or geography.
This may also result in reputation damage, financial impact (fines by regulators, suspension of operating licences, compensation etc.), and
criminal and civil action against the Company or individuals.
Key risk drivers:
Lack of capability and experience – if our chosen
market sectors are not aligned to our capability and
experience, then a failure to operate optimally may
result in an event.
Lack of safety cultural alignment – a safety culture
which does not reflect our Values and fails to engage
our staff may result in an event.
Inadequate policies, standards and procedures –
if procedures/systems are not aligned with industry
standard or customer expectations, an unacceptable
level of safety management may occur.
Insufficient safety management oversight –
devolved compliance of regulations to sector-specific
SMEs without appropriate safety management
oversight may result in safety management systems
which are not fit for purpose.
External factors resulting in changes in the
contract operational environment – a lack of
identification and assessment of external risks
may result in poor mitigation of and/or response
to an event.
Inadequate response to a catastrophic event – if
our contingency plans do not provide an adequate
response to an event then escalation of an event or
prolonged disruption may occur.
Mitigation:
Material controls:
• Serco Group Strategy
• Serco HSE Strategy
• Serco Management System (SMS)
• Business Lifecycle Review Team
(BLRT) process
• Third party ethical due diligence
procedure
• Serco Essentials training
• Assure – Serco's incident and
compliance reporting system
• Standardised Divisional Performance
Reporting (DPR) process
• Adequate insurance policies
Current mitigation actions:
• Review definition and scope of
catastrophic event and implement
continuous improvement of
mitigating controls within the SMS
• Ethical due diligence checks on our
existing customers and suppliers
• Improvements to compliance checks
for third parties
• Update to the Serco Incident
Reporting Scale (SIRS)
• Review of business continuity and
crisis management plans to establish
consistent approach
Future actions:
• Validation and alignment of
understanding of catastrophic
event risks across the business
• Assess current adequacy of
insurance cover for identified
catastrophic event risks
21
Financial StatementsDirectors’ ReportStrategic Report
Principal Risks and Uncertainties continued
LEGAL AND COMPLIANCE RISKS
Contract non-compliance and contract non-performance
Not meeting our contractual obligations through either non-compliance with contractual requirements and/or failure to meet agreed
service levels due to non-performance may result in significant performance penalties, onerous contract provisions, loss of potential new
bids/re-bids and early termination of contracts.
If we fail to negotiate contracts that can be delivered at the right price, or we do not put in place solutions that deliver our contractual
obligations, we are more likely to suffer from poor performance and compliance challenges and potential loss-making contracts.
Future actions:
• Review and update of BLRT
process to address gaps identified
in lessons learned
• Continued roll-out of CMA and
online documentation storage
across contracts globally
• Review of processes in place for
targeted contract reviews and
management interventions
• Review and update of Contract
Manager Training
Key risk drivers:
Ineffective and inconsistent bid and contract
governance – may result in a lack of understanding
of accountabilities and responsibilities.
Non-compliance with Policies and Standards –
staff failing to follow required processes, controls
and governance may result in contract non-
compliance and non-performance.
Lack of visibility of contract compliance and
performance – may result in an inability to predict
contract non-performance and make timely
interventions.
Poor understanding of contract obligations –
may result in staff failing to acknowledge and act
on obligations.
Lack of service definition and capability to
deliver – may result in an inability to deliver
contractual obligations.
Contract requirements and pricing too onerous /
severe to perform – may result in an inability to
meet our contractual obligations.
Set up for failure as contract assets not as
expected – lack of due diligence of assets may
result in higher than anticipated ongoing costs.
Not learning from prior contract issues – may
result in an inability to learn from our failures and
successes.
Unforeseen changes in contract assumptions –
may result in a misunderstanding/misalignment of
our contractual obligations with the customer.
Changes in law/regulations – see
Material Legal and Regulatory Failure risk
on following page.
Mitigation:
Material controls:
• Serco Management System (SMS)
• Investment Committee
• Business Lifecycle Review Team
(BLRT) process
• Contract Manager training
• Sector-specific Centres of
Excellence (CoEs)
• Contract Management
Application (CMA)
• Contract Performance
Measurement Tool
• Standardised Divisional Performance
Reporting (DPR) process
• Targeted contract reviews and
management interventions
Current mitigation actions:
• Embedding of new SMS standards
and procedures within contracts
• Setting up of process for CoEs to
collate lessons learned and establish
knowledge bank
• Transfer of Contract Performance
Measurement Tool into CMA
• Roll-out of CMA across all material
contracts
22
Strategic ReportSerco Group plc Annual Report and Accounts 2016
LEGAL AND COMPLIANCE RISKS
Material legal and regulatory compliance failure
The complexity and constantly changing legal and regulatory environment we operate in across our sectors and geographies creates
challenges to ensuring that we are compliant at all times to all laws and regulations. Failure to comply materially with these laws
and regulations may cause significant loss and damage to the Group including reputational damage, potential loss of licences and
authorisations, as well as prejudicing future bids.
Legal proceedings may be costly and if they are not determined in the Group’s favour may divert management attention away from the
running of the business for a prolonged period. Uninsured losses or financial penalties resulting from any current or threatened legal
actions may have a material adverse effect on the Group.
Key risk drivers:
Lack of policy and guidance – may result in
a failure to manage Group-wide material legal
and regulatory requirements.
Staff non-compliance with policies and
standards – may result in compliance failures
for Group-wide material legal and regulatory
requirements.
Failure to identify and keep up to date
with all material legal and regulatory
requirements – may result in key subject
matter experts within the business not
remaining up to date and we then fail to
comply with material legal and regulatory
obligations.
Inadequate assurance processes – may result
in an inability to confirm compliance with legal
and regulatory requirements.
Lack of legal and regulatory expertise
within the business – may result in lack
of identification and support of legal and
regulatory risks.
Inadequate provision for material legal and
regulatory risks in contracts – may result in
the failure to provide adequate legal support
for material legal and regulatory risks.
Contract exit legal/regulatory
requirements not being met – may result
in possible legal action and diversion of
management attention.
SFO investigation – we remain under
investigation by the UK Serious Fraud Office
(SFO). In November 2013, the SFO opened
an investigation into our Group’s Electronic
Monitoring Contract. We are cooperating
fully with the SFO's investigation but it is not
possible to predict the outcome. However, in
the event that the SFO decides to prosecute,
the range of possible adverse outcomes is any
one or a combination of the following:
(i)
that the SFO prosecutes the individuals
and / or the Serco Group companies
involved, who may defend the action
successfully or be convicted. This may
result in significant financial penalties, an
impact on existing contracts and Serco
being subject to a period of discretionary
debarment from future contracts with UK
Government entities; or
(ii) that the SFO and the relevant Serco
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 re-bid, or that Serco has provided
sufficient evidence that it has addressed any
issues identified in a DPA, or 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 may
be reduced, and the Group may be subject
to enhanced scrutiny with respect to its other
contracts and further actions beyond those
being implemented under the Corporate
Renewal Programme may need to be taken.
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 on its reputation,
which would, in turn, materially adversely
affect its business, financial condition,
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
and paid in 2013 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 SFO's
investigation.
Mitigation:
Material controls:
• Serco Management System (SMS)
• Serco Essentials training
• Third party ethical due diligence
procedure
• External monitoring – automatic
alerts on material enterprise-wide
legal and regulatory requirements
• Legal case tracker
• Compliance Assurance Programme
(CAP) reviews
• Business Lifecycle Review Team
(BLRT) process
Current mitigation actions:
• Updates to SMS including: Human
Rights Policy, Modern Slavery Act
2015, Use of Force and Firearms,
Market Abuse Regulations (MAR),
and third party ethical due diligence,
and BLRT process
• Development of Global Data
Protection Regulations Programme
• Identification of SMS policy owners
and subject matter experts
• Due diligence checks on our existing
customers and suppliers
• Development of new Anti-Bribery
and Corruption (ABC) Frameworks
• Development of Dawn Raid procedure
Future actions:
• Development of master list of
material legal and regulatory
requirements by SMS policy owners
• Gap analysis of subject matter
expert capability within the Divisions
for contract-specific legal and
regulatory requirements
• Process to ensure dissemination of
automated alerts to the business
23
Financial StatementsDirectors’ ReportStrategic Report
Viability Statement
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 2019.
The Directors believe that a 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, which could be
exacerbated by the recent political changes in the
United Kingdom and the United States, and that
approximately 40% of current year revenue relates to
contracts where the contract term potentially comes to
an end within three years. Furthermore, the Group is
in the early stages of implementing a new strategy to
improve its performance.
Assessing the longer term viability of any company
at this early stage of a new strategy implementation
is inevitably a challenge, particularly given the
recent history of the Group, as explained in previous
shareholder communications, and the onerous
contracts which exist.
The Board and the Group Risk Committee continue to
monitor 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
23, 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 2017
and 2018 which has been approved by the Board, and
a more top down view aligned to the Group’s strategic
objectives for 2019.
The Group continues to deliver on the strategic
priorities it set out at the time of the Rights Issue
and is continuing to embed these into the business.
It is expected that revenue growth and margin
improvements will be seen in the latter years of the
five-year plan, although this is dependent in part on
the external market as well as our ability to win new
contracts whilst reducing the cost base. The Group’s
Balance Sheet has been strengthened significantly
following the Rights Issue and sale of the private sector
offshore BPO business, and net debt as at December
2016 was at £109.3m. The sales pipeline is improving
although net revenue attrition is still possible which
could impact on profit and cash generation. The
Group is also bidding on some significant contract
opportunities where the ability to deliver good-quality
services whilst maintaining reasonable pricing and
commercial terms are key to ensuring their long-term
profitability. The Group’s base projections indicate that
debt facilities and projected headroom are adequate
to support the Group over the next three years. In
testing the headroom available under the key sensitives
modelled, the Directors have assumed that the Group
refinances the portion of the revolving credit facility
(RCF) maturing in April 2019 under similar terms.
The Group’s financial plan has been stress-tested
against key sensitivities which could materialise as
a result of the crystallisation of one or many of the
Group’s principal risks, the objective being that the
future viability of the Group is tested against severe but
plausible scenarios. 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 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 the financial 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.
24
Serco Group plc Annual Report and Accounts 2016
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Subject to these risks 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 further
out in 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
of existing work that becomes due for extension or
re-bid over the next three years;
• There is no significant reduction in scale of
existing contract operations as a result of policy
or other changes;
• There is no significant deterioration in new bid
win rates from those anticipated;
• The Group is able to complete the execution of its
strategy, including further transformation in 2017
and making progress to revenue growth and margin
improvement from 2018 onwards; and
• The Group is not subject to any material penalties or
direct and indirect costs and / or losses arising from
the current SFO investigation.
25
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review
The results for 2016 show that the execution of
our five-year plan remains on track. Trading in
2016 was better than we expected at the start of
the year, although this was in large part due to
the resolution of a number of commercial matters
in the first half, which will not recur; trading in the
second half was in line with the guidance we gave
at the time of our half-year results.
Operationally, we have had a busy year:
across key contracts our service delivery
has improved; we have reduced operating
costs by some £450m whilst improving
employee engagement; at year-end, the
value of our pipeline of new opportunities
was up 30%, notwithstanding a 40%
increase in order intake; and we have
cleanly exited the private sector BPO
business. These are the first fruits of the
'transformation' phase of our plan, which
we are now about half-way through.
Our view of likely performance in
2017 remains unchanged from previous
guidance. The road back to prosperity
was always going to be long and winding,
with many potholes and boulders, but we
are making good progress.
• Revenue(2), including discontinued operations,
declined 13% to £3,048m, comprising an 11%
organic decline from net contract attrition and an
8% reduction from disposals, partially offset by a 6%
currency benefit.
• Underlying Trading Profit(3) declined by £14m to £82m;
discontinued operations (the exit of private sector
BPO) reduced profits by £19m; net currency benefits
were £9m; allowing for these, the reduction was £4m.
• Trading Profit(3) was £18m higher than Underlying
Trading Profit due principally to £14m net reduction
in future liabilities and losses on onerous contracts.
• Underlying EPS(4) increased 20% to 4.13p, benefitting
from reduced finance costs and a lower effective
tax rate.
• Reported Operating Profit up £46m, and EPS up
15.36p; operating exceptional charges on continuing
operations were £56m (2015: £110m); including
discontinued operations, total exceptional charges
net of tax were £68m (2015: £217m).
• Free Cash Flow(5) was negative £33m, similar to 2015
outflow of £36m.
• Closing Net Debt increased by £46m to £109m;
however, Net Debt : EBITDA leverage of 0.7x, was
similar to last year and below our medium term target
of 1–2x.
• Continued progress reducing burden of loss-making
contracts: OCP utilisation of £84m in 2016, £30m
lower than 2015.
• Order intake increased by 40% with £2.5bn total value
of signed contracts; including Serco’s share of the
value of the AWE updated contract, order intake was
£3.2bn, an increase of some 80% on the prior year;
35 contract awards were worth more than £10m each.
• Pipeline of larger new bid opportunities ended
the year at £8.4bn, a year-on-year increase of £1.9bn
or 30%.
• Operating costs reduced by more than £450m, and
in proportion to the scale of revenue reduction; this
includes overheads and shared services savings of
over £50m.
• Guidance for 2017 unchanged – at current
foreign exchange rates, we anticipate Revenue of
approximately £3.1bn and Underlying Trading Profit
of between £65m and £70m.
26
Strategic ReportSerco Group plc Annual Report and Accounts 2016 How we performed
Year ended 31 December
Revenue – continuing and discontinued operations(2)
Reported Revenue (continuing operations only)
Underlying Trading Profit(3)
Reported Operating Profit / (Loss) (after exceptional items;
continuing operations only)(3)
Underlying EPS, basic(4)
Reported EPS, basic (after exceptional items; continuing
and discontinued operations)
Free Cash Flow(5)
Net Debt (including that for assets and liabilities held for sale)
Notes to summary table of financial results:
2016
2015(1)
£3,047.8m
£3,514.6m
£3,011.0m
£3,177.0m
£82.1m
£42.2m
4.13p
(0.11p)
(£33.0m)
£109.3m
£95.9m
(£3.8m)
3.44p
(15.47p)
(£35.5m)
£62.9m
(1)
(2)
(3)
(4)
(5)
The results for year ended 31 December 2015 have been restated for a change in accounting policy related to foreign exchange movements on investment
and financing arrangements. This provides more relevant information about the impact of underlying transactions and, within net debt, now takes account
of the currency hedging in place. This is particularly relevant at a time when we have had significant currency volatility, and, helpfully, more closely aligns
our reported net debt with our debt covenant definitions. This change in accounting policy has the following effects: reduces Trading and Operating Profit
measures by £0.1m, with an equal and opposite impact recognised within Net Finance Costs; reduces Free Cash Flow (FCF) by £19.3m, with an equal and
opposite impact recognised below FCF; and reduces closing net debt at 31 December 2015 by £14.6m, to reflect the hedging effect of derivative financial
instruments designed to mitigate the effect of foreign exchange movements on our net debt. Further detail on the restatement is included in the Finance
Review on page 43.
Revenue is as defined under IFRS, which excludes Serco’s share of revenue of its joint ventures and associates. Revenue including that from discontinued
operations is shown for consistency with previous guidance. Reported Revenue excludes revenue from discontinued operations of £36.8m (2015: £337.6m).
Organic revenue growth is the change at constant currency in Revenue after adjusting to exclude the impact of acquisitions or disposals. Change at constant
currency is calculated by translating non-Sterling values for the year to 31 December 2016 into Sterling at the average exchange rate for the year ended 31
December 2015.
Trading Profit is defined as IFRS Operating Profit adjusted for (i) amortisation and impairment of intangibles arising on acquisition and (ii) exceptional items;
it includes the impact of discontinued operations. Consistent with IFRS, it includes Serco’s share of profit after interest and tax of its joint ventures and
associates. Underlying Trading Profit additionally excludes Contract and Balance Sheet Review adjustments (principally Onerous Contract Provision (OCP)
releases or charges), as well as the beneficial treatment of depreciation and amortisation of assets held for sale, and other material one-time items such as
the pension scheme settlement in the first half of 2016 and the profit on early exit from a UK local authority contract that occurred in the second half of 2015.
A reconciliation of Underlying Trading Profit to Reported Operating Profit is as follows:
Year ended 31 December £m
Underlying Trading Profit
Include: non-underlying items
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
Amortisation and impairment of intangibles arising on acquisition
Operating Profit Before Exceptional Items (continuing and discontinued operations)
Exclude: Operating Loss/(Profit) Before Exceptional Items from discontinued operations
Reported Operating Profit Before Exceptional Items (continuing operations only)
Operating Exceptional Items (continuing operations only)
Reported Operating Profit (after exceptional items; continuing operations only)
2016
82.1
14.2
0.5
3.5
100.3
(5.1)
95.2
3.3
98.5
(56.3)
42.2
2015
95.9
20.9
11.7
9.0
137.5
(4.9)
132.6
(26.5)
106.1
(109.9)
(3.8)
Underlying EPS reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs (including those for discontinued
operations) and related tax effects.
Free Cash Flow is the net cash flow from operating activities before exceptional items as shown on the face of the Group’s Consolidated Cash Flow Statement,
adding dividends we receive from joint ventures and associates, and deducting net interest paid and net capital expenditure on tangible and intangible
asset purchases.
Reconciliations and further detail of financial performance are included in the Finance Review on pages 42 to 63. This includes full definitions and explanations
of the purpose and usefulness of each non-IFRS Alternative Performance Measure (APM) used by the Group. The consolidated financial statements and
accompanying notes are on pages 139 to 207.
27
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review continued
Revenue and Trading Profit
Reported Revenue was £3,011m (2015: £3,177m); this
measure excludes Serco’s share of revenue from joint
ventures and associates of £481m (2015: £737m) and
from discontinued operations (our private sector BPO
division) of £37m (2015: £338m). Revenue including
discontinued operations was £3,048m (2015: £3,515m).
Net currency movements provided a £189m benefit.
At constant currency and adjusting for disposals, the
organic revenue decline was 11%, driven by the phased
transfer of contracts such as that for the Defence
Science and Technology Laboratory (DSTL), and the
end of contracts for Suffolk Community Healthcare,
the National Citizen Service, Thurrock Council BPO
services, US National Benefits Centre and the Virginia
Department of Transportation (VDOT). There was
limited growth elsewhere to offset these declines.
Trading Profit was £100.3m (2015: £137.5m) and
Underlying Trading Profit was £82.1m (2015: £95.9m),
resulting in an Underlying Trading Profit margin of 2.7%
(2015: 2.7%). The £18.2m difference between Trading
Profit and Underlying Trading Profit is accounted for by
three items. First, we have excluded from Underlying
Trading Profit the net release of £14.2m (2015: £20.9m)
of future cost provisions identified in our regular review
of Onerous Contract Provisions (OCPs) and other
Contract and Balance Sheet Review items. This reflects
the net effect of numerous charges and releases against
individual contracts and provisions; the only significant
individual movements were an increased charge on
the Ontario Driver Examination Services contract and
a net release on the COMPASS contract for UK asylum
seeker support services. While the net £14.2m release
is excluded from our underlying measures, it reflects
continued good progress in reducing future liabilities,
with a net £9.6m related to OCPs and a net £4.6m
related to other Contract and Balance Sheet Review
items. The second item of difference is that we have
excluded from Underlying Trading Profit the benefit of
a one-time pension settlement of £3.5m negotiated
as part of the early exit from the Thurrock contract.
Third, and in accordance with the statutory accounting
treatment of assets held for sale, depreciation and
amortisation charges related to assets held for sale are
excluded from the Group accounts; the positive impact
of this accounting treatment of £0.5m (2015: £11.7m)
has therefore been excluded from our measure of
Underlying Trading Profit.
As with the comparable year, Underlying Trading Profit
benefited from the utilisation of OCPs, which have the
effect of neutralising losses on previously identified
onerous contracts; the £84m utilised in the year was
slightly lower than our expectations of around £90m at
the start of the year, and was materially lower than the
£114m utilised in 2015; again, this reflects progress at
an operational level in reducing the level of losses on
onerous contracts. The closing balance of OCPs now
stands at £220m, versus the initial £447m charge two
years ago.
The £14m reduction in Underlying Trading Profit reflects
the £19m reduction in profits related to the exit of our
private sector BPO operations, partially offset by a
favourable £9m currency movement. Allowing for these
items, Underlying Trading Profit was similar to the prior
year, decreasing by approximately £4m. The profit
performance was stronger than we initially anticipated,
in large part due to the successful resolution of a
number of commercial matters in the first half of the
year that will not repeat.
Reported Operating Profit, including discontinued
operations, and before exceptional items, was
£95.2m (2015: £132.6m), which reflects Trading Profit
as described above, after additionally charging
amortisation and impairment of intangibles arising
on acquisition of £5.1m (2015: £4.9m).
Finance, tax and exceptional costs
Pre-exceptional net finance costs, including
discontinued operations, were £12.6m (2015: £31.9m).
The reduction in cost arises from average net debt
being some £300m lower in 2016 than in 2015, as a result
of the Rights Issue in April 2015 and the BPO disposal
proceeds received at the end of December 2015. As
a consequence of these two fund-raising activities,
we were able to redeem early £225m of US Private
Placement debt in 2015 and a further £117m in February
2016. Cash net interest paid was £19.0m (2015: £32.7m).
Within net finance costs is a net credit of £4.7m (2015:
£4.9m) related to the strong funding position of Serco’s
pension schemes; the pension scheme net balance
sheet asset, before tax, increased to £133m (2015:
£116m); on an estimated actuarial basis, the main
Group scheme has a deficit of £34m (2015: £28m).
Pre-exceptional tax costs, including discontinued
operations, were materially lower in the year at £15.9m
(2015: £36.6m). Excluding the tax credit on non-
underlying items of £8.5m (2015: cost of £6.1m), the
underlying effective tax cost was £24.4m (2015: £30.5m)
implying an underlying effective rate of 35% (2015: 48%)
based upon £69.5m of Underlying Trading Profit less
pre-exceptional net finance costs. The rate reflects the
tax charges at locally prevailing rates in the international
divisions (which tend to be higher than the UK’s rate),
while in the UK there was no deferred tax credit taken
against losses made in the year; the resulting effective
28
Strategic ReportSerco Group plc Annual Report and Accounts 2016 rate was significantly lower than expectations at the
start of the year given the increased proportion of
Serco’s profit before tax generated by consolidating
our share of joint venture and associate earnings which
have already been taxed. Net cash tax paid was £5.6m
(2015: £2.7m).
Whilst we expect our cash tax rate to be reasonably
predictable in future periods, our underlying effective
tax rate is likely to be volatile until we are able to show
sufficient profitability in our UK business to be able to
recognise on our balance sheet the very significant UK
tax asset arising from losses in 2014 and 2015 principally
as a result of the Contract and Balance Sheet Review.
For 2017, an underlying effective tax rate potentially
reverting to approximately 50% is anticipated, reflecting
predominantly the smaller proportion of joint venture
and associate earnings and relatively higher UK losses.
We expect future years’ effective tax rate will be high
until UK tax losses can be recognised.
Including discontinued operations, the Group incurred
operating exceptional costs of £70.5m, exceptional
finance costs of £0.4m and tax credits on exceptional
items of £3.1m; in aggregate, net exceptional costs
were therefore £67.8m (2015: £217.2m). The principal
exceptional items were goodwill impairment of £17.8m
reflecting the liabilities taken on with the purchase of a
subcontractor to the COMPASS operations, a £13.9m
impairment to the carrying value of a joint venture
investment, restructuring costs of £18.3m and a charge
of £10.7m related to the transfer of employees from the
Serco defined pension scheme back to the Principal
Civil Service Pension Scheme (PCSPS). The balance
of operating exceptional costs reflected losses on
disposals, together with the movement in the carrying
value of assets held for sale and for indemnities provided
on prior business disposals. The £217.2m of charges in
2015 included £168.3m impairment of goodwill and other
assets, and £32.8m of exceptional finance costs relating
to the Rights Issue and debt refinancing.
Reported Loss for the year
The Reported Loss for the year, as presented at the
bottom of the Group’s Consolidated Income Statement
on page 37, was £1.1m (2015: loss of £153.1m). This
reflects the measures described above: Reported
Operating Profit, including discontinued operations,
and before exceptional items, of £95.2m (2015:
£132.6m); pre-exceptional net finance costs, including
discontinued operations, of £12.6m (2015: £31.9m);
pre-exceptional tax costs, including discontinued
operations, of £15.9m (2015: £36.6m); and exceptional
costs, net of tax, of £67.8m (2015: £217.2m).
Earnings Per Share (EPS)
Underlying EPS, which reflects the Underlying Trading
Profit measure after deducting pre-exceptional finance
costs (including those for discontinued operations)
and related tax effects, was 4.13p (2015: 3.44p). The
increase reflects the reduction in Underlying Trading
Profit being more than offset by the lower finance costs
and tax charge. There is a partial offset to these factors
from the movement in the weighted average number of
shares in issue which increased to 1,088.3m shares (2015:
986.5m shares) as a consequence of the 2015 Rights
Issue. EPS before exceptional items, including those
for discontinued operations, were 6.12p (2015: 6.55p);
including the impact of exceptional items, Reported
EPS was loss per share of 0.11p (2015: loss per share
of 15.47p).
Cash Flow and Net Debt
Free Cash Flow was negative £33.0m (2015: negative
£35.5m). Cash generated from Underlying Trading Profit
was largely offset by the outflows related to loss-making
contracts subject to Onerous Contract Provisions.
These cash outflows lessened year-on-year, as reflected
in the lower rate of OCP utilisation. There was a working
capital outflow of £24m, largely due to a £22m reduction
in the utilisation of the Group’s receivables financing
facility; at the end of 2015 the £30m facility was fully
utilised, compared to £8m utilisation at the end of 2016.
Capital expenditure was substantially lower at £32m
(2015: £73m), reflecting the benefit of the disposal of the
private sector BPO business, which was a substantial
consumer of capital investment.
Closing net debt at 31 December 2016 increased to
£109.3m, having been £62.9m at the start of the year; the
increase includes the Free Cash outflow, together with a
£40m cash outflow related to exceptional items, partially
offset by £19m of net receipts from disposals. There
was an adverse gross currency translation effect on net
debt of £42m, predominantly reflecting the Group’s US
Private Placement debt, however this was offset by a
£47m favourable movement on hedging instruments.
The closing net debt of £109m compares to a daily
average of £119m (2015: £444m) and a peak net debt
of £183m (2015: £859m).
At the closing balance sheet date, our leverage for
covenant purposes was 0.7x EBITDA, which compares
with the requirement in our debt covenants to be less
than 3.5x. Excluding from EBITDA non-underlying items,
predominantly the benefit of the net movement on
OCPs and other Contract and Balance Sheet Review
items, the underlying leverage ratio was 0.8x EBITDA.
This is below our medium term target range of 1–2x,
but at this stage in our strategy implementation, we are
content for it to be so.
29
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review continued
Dividends
The Board is not recommending the payment of a
dividend in respect of the 2016 financial year. The
Board’s appraisal of the appropriateness of dividend
payments takes 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 prevailing market outlook.
Although the Board is committed to resuming dividend
payments as soon as it believes it prudent to do so,
in assessing whether we should resume dividend
payments in respect of 2016, we have been mindful
of the fact that our forecasts for 2017 anticipate a
reduction in earnings, a free cash outflow and an
increase in net debt; furthermore, we are only part-
way through our recovery. In these circumstances, the
Board believes that it would not be prudent to resume
dividend payments in respect of 2016.
The Revenue and Trading Profit performances are
described further in the Divisional Reviews. More
detailed analysis of earnings, cash flow, financing
and related matters are described further in the
Finance Review.
Summary of operating performance and
strategy implementation
The better than anticipated financial performance in
2016 has been accompanied by improving operational
delivery and good progress on implementing our
strategy and transformation.
With over 500 contracts worldwide, there are always
going to be some with operational issues; however,
there are many fewer now than there were two years
ago, and relationships with customers, particularly in
the UK, have strengthened notably. Good progress
has been made on our loss-making contracts, with
improved operational delivery and reduced losses on
several important contracts, reflected both in lower
in-year OCP utilisation (£30m lower in 2016 than in
2015) and a net reduction in anticipated future losses of
£9.6m. We regard our OCPs as a portfolio of exposures,
and at each period end each contract and provision
is carefully assessed; some contracts need additional
provisions, others see releases if our assessment of
future losses reduces. In 2016 there were a number of
movements, both positive and negative, across the
contract base. No new contracts have been judged
to be materially onerous. The only two significant
movements on pre-existing OCPs were on COMPASS
(UK asylum seeker support services) and DES (Driver
Examination Services, Ontario Canada); on COMPASS,
a £33.9m OCP release resulted from the latest estimates
of efficiencies, forecasts and contract terms, although
this was partially offset by a £14.0m OCP recognised
on acquisition of a subcontractor; on DES, there was
a £29.5m increase in estimates of the future costs
associated with the IT system implementation and
ongoing management of this contract. Our contract
supporting Lincolnshire County Council is running
broadly in line with our expectations set when we took
a large additional provision in 2015, and the major
elements of this IT implementation are now in service.
Within the other smaller movements, although the
in-year losses of the Prisoner Escort and Custody
Services (PECS) contract in the UK were reduced, we
have changed our view of the likely contract duration,
and the future-years OCP balance has been increased;
OCPs with an improved view of future losses include the
Armidale Class Patrol Boats (ACPB) contract in Australia,
and the contracts for HMP Ashfield and the Future
Provision of Marine Services (FPMS) in the UK.
Our joint venture with Abellio as operator of Northern
Rail ended smoothly with the transfer of the franchise
to a new provider on 31 March 2016, and the winding
up of the joint venture produced a favourable financial
outcome. There were also several contracts that we had
expected to end early in the year but ran on longer;
these included the VDOT and US Army transition
assistance contracts.
We were delighted to announce that the UK
Government’s review of the arrangements for operating
the Atomic Weapons Establishment (AWE) concluded
successfully during the year, and led to an updated
contract being agreed with the Ministry of Defence. The
stronger performance outcome for the contract year to
31 March 2016 and later-than-expected timing of the
change in joint venture shareholding arrangements also
improved the profit contribution received by Serco in
the year.
We achieved our target for cost savings of over
£50m in 2016 from central support functions and
other overheads. The programme delivered savings
from reducing the number of management layers,
implementing better procurement and driving greater
efficiency in the operation of shared services. Within our
guidance for 2017 is the expectation that we can deliver
around £20m of additional savings from the next set of
transformation actions.
30
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Contract awards, order book, rebids and pipeline
Contract awards
As anticipated, the market was relatively quiet with few
major bidding outcomes announced. Notwithstanding
this, the Group signed contracts with a total value of
£2.5bn during the year, an increase of 40% on 2015; as
we do not consolidate our share of joint venture and
associate revenue, this excludes the estimated £0.7bn
value of Serco’s share of the AWE updated contract for
the next three years. There were 35 contract awards
worth more than £10m each. The value of new business
won was approximately 40% of the total value signed,
with the balance represented by securing extensions or
successfully rebidding existing work.
The largest new contract signed in 2016 was with Barts
Health NHS Trust for facilities management services to
their hospitals. Whilst the value over the maximum 10-
year term is approximately £600m, we have recognised
within Serco’s wins and order book figures only the
estimated £450m value of our initial seven-year period.
The second largest new contract was for the new
‘icebreaker’ Antarctic Supply and Research Vessel for
the Australian Department of the Environment, where
Serco will project manage the four-year design and
build phase and then operate and maintain the vessel
for an initial ten-year period; within our order book, and
future revenues, we will not include the value of the ship
itself. The third largest new contract was to upgrade the
High Altitude Electromagnetic Pulse (HEMP) Protection
of Ballistic Missile Early Warnings Systems supporting
the US Air Force at Thule Air Base in Greenland. Of
the other major new bids decided during the year, we
were unsuccessful in the tender to operate the Clyde
and Hebrides Ferry Services on behalf of Transport
Scotland, in two bids to operate UK local authority
environmental services and to provide processing
services to two US Departments of State. Smaller new
bids won included two for the European Space Agency,
transport operations support for the State of Louisiana,
numerous US Navy ship and shore defence equipment
modernisation task orders, and contracts for airport
facilities management and defence base operational
support in the Middle East.
Following the various disposals and transfers related
to Serco’s exit of the private sector BPO market, there
were losses and stranded costs related to the residual
UK onshore private sector BPO contracts. As a result
of good work to mitigate the financial impact of these
exits, the loss from discontinued operations at £4.6m
was approximately half our original expectations, and
we anticipate no material residual effect in 2017.
At the same time as we have been reducing operating
costs, we have been investing in building the
capability of the business. As previously reported,
we are using Centres of Excellence (CoEs) to develop
Group-wide propositions and capabilities in our core
markets, with an initial launch of CoEs in the Health,
Justice & Immigration and Transport sectors which
are improving the sharing of skills, best practice and
intellectual property across our businesses. The
teams working directly and as part of the CoE virtual
network are reporting good early progress, particularly
in strengthening our proposition development and
bidding, and the largest contract award during the
year – Barts Health NHS Trust – drew heavily on CoE
capability and support.
We have continued to invest in IT systems
enhancements and improvements. During the year,
we rolled out our Success Factors recruitment system
which delivers world-class recruitment capability for
the organisation; enhanced Finance management tools
to improve balance sheet reconciliations and Treasury
management; implemented new Cyber Security
management systems to harden our IT networks;
launched a ‘guided buying’ system that delivers best
pricing through a standardised catalogue; and we
introduced internal collaboration tools which help our
newly formed CoEs share data and information globally.
Our next developments include further investments in
IT security, payroll and workforce management systems.
Serco employs 47,000 people, the vast majority
delivering services to customers. It is often said that the
customer experience will never exceed the employees’
and attracting, motivating and engaging employees will
be central to our success. We were therefore delighted
to see the latest results of our global employee
engagement survey, managed independently by Aon
Hewitt, and which received over 30,000 responses.
Engagement scores increased for all categories –
employees, managers and leaders – and stood at the
highest level since we started to measure it in 2011 and
is dramatically improved from the low in 2014. It was
particularly pleasing to note that the engagement score
of the leadership population improved 17 percentage
points year-on-year to over 70%.
31
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review continued
Of rebids and extensions secured, the largest was for
Acacia prison in Western Australia for a further five
years, and the second largest was for two further years
to continue providing defence base support services
at Goose Bay, Canada. Others included: the COMPASS
extension for an additional 21 months; extending
our support to the UK military satellite network, the
Anglia Support Partnership healthcare shared services
and several environmental services contracts; and
in the Middle East for our operations for Australian
Defence Force logistics and base support, healthcare
facilities management in Saudi Arabia and Baghdad Air
Navigation Services.
Win rates by volume were over 50% for new bids and
over 90% for rebids and extensions. Win rates by value
saw some modest improvement to over 20% for new
work given the balance of outcomes on larger bids,
and approximately 80% for securing existing work.
Order book
The Group’s order book, excluding the discontinued
Global Services division, now stands at an estimated
£9.9bn, very similar to the £10.0bn reported at the end
of 2015. There is £2.5bn of revenue in the order book
for 2017, equivalent to over 80% visibility of our £3.1bn
revenue guidance. The secured order book is £1.7bn
for 2018 and £1.3bn for 2019.
Rebids
Through to the end of 2019, across the Group there
are around 50 contracts in our order book with annual
revenue of over £5m where an extension or rebid will
be required, representing current annual revenue of
over £1.3bn in aggregate or around 40% of the Group’s
forecast revenue for 2017 of £3.1bn. Contracts that
could potentially end at some point by the end of 2017
have aggregate annual revenue of around £200m. In
2018, this increases to around £400m, with the greater
amount driven in particular by the US Affordable
Care Act contract becoming due for full rebid in that
year, and with the next largest being Northern Isles
Ferries. In 2019, it is around £700m, with Australian
immigration services, COMPASS, PECS and the Dubai
Metro also all expected to become due for rebid or
potential extension.
Pipeline
Our pipeline is defined as new bid opportunities with
estimated Annual Contract Value (ACV) of at least £10m
or a Total Contract Value (TCV) of at least £100m, and
which we expect to bid and to be adjudicated within
a rolling 24-month timeframe. The TCV of individual
opportunities is capped at £1bn. The definition does
not include rebids and extension opportunities. It
is therefore a relatively small proportion of the total
universe of opportunities, 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 arrangements
which are classed as ‘IDIQ’ – Indefinite Delivery /
Indefinite Quantity – which are essentially framework
agreements 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 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 individually
less than £10m and contracted on short lead times.
Following several years of decline in the value of the
bid pipeline, in 2015 it began to grow again from its
nadir of around £5bn, increasing to £6.5bn at the end
of 2015, and stood at £8.4bn at the end of 2016. During
2016, £3bn came out of the pipeline reflecting wins
and losses during the year, but this has been more
than offset by adding new opportunities, particularly in
defence in the US and justice in Australia. There are now
around 30 bids in the pipeline, with the ACV averaging
approximately £30m and a contract length averaging
close to 10 years. Key opportunities in the pipeline are
described further in the Divisional Reviews.
While our pipeline definition reflects bid decisions
due over the next 24 months, it is important to note
that over 80% of the current pipeline is expected to
have bids adjudicated within the next 12 months. This
is an unusually high degree of “front loading”, and, if
customers stick to their timescales, it is unlikely that we
will be able to replace the around £7bn of bids that are
likely to drop out of the pipeline during the year. We
therefore think it likely that the value of the reported
pipeline will drop in 2017; provided we win some of the
bids that are to be decided this year, this is not a matter
of concern: progress on growing our pipeline should
not be expected to be a smooth progression given the
effects of individual timings and scales of major bids.
32
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Risks associated with the outcome of the
UK’s referendum on EU membership
Serco reported a year ago on the potential risk to its
business if Britain left the EU. Following the outcome
of the referendum we have further considered the risks
and opportunities presented by Brexit.
The third area of possible impact would be in terms
of our labour costs. Only 3% of our employees in the
UK are Continental EU nationals, so the direct impact
should be minimal. However, if there are severe
restrictions on EU citizens working in the UK, this may
have a wider impact on labour availability and cost.
First, we currently have contracts worth over £100m a
year with European public bodies such as the European
Commission, the European Space Agency and the
European Central Bank; many of these contracts are
executed by our subsidiaries based in continental
Europe, and tenders are subject to strict European
competition and bidding rules which should give us
protection against unfair discrimination. So we think
that these risks are likely to be capable of mitigation.
Overall, we think that Brexit offers both risks and
opportunities for Serco. However, the picture is unlikely
to become clear in the short-term. In the meantime,
our long-term contracts and our role in providing
critical public services should give us some protection
from short-term vicissitudes. Most importantly, our
strong presence in North America, the Middle East
and Australia diversify our risk and give us choices as
to where we invest our resources.
Secondly, we must consider how Brexit might affect
our business with the British Central Government,
which accounts for about a quarter of our revenue.
Here, the picture is hard to discern. The senior Civil
Service were, even before the Brexit vote, facing a major
challenge implementing an agenda of reform designed
to deliver the future efficiencies required to achieve
the Government’s plans to balance expenditure with
income by the end of the decade. In addition to these
tasks, the Civil Service is facing what is probably the
most significant and wide-ranging changes in policy
and delivery that it has seen since the post-war Atlee
government, which created the NHS and nationalised
swathes of UK industry. At the moment, the focus is on
supporting the Government in its Brexit negotiations,
but very quickly attention will have to turn to designing
and then implementing new policy across swathes
of British administration: Immigration, Customs,
Agriculture, Fisheries, Food, Research, Education,
Energy, Environment, to name a few. In addition,
equivalent European regulatory bodies will have to be
created and staffed in the UK. This is going to be a huge
test for the Civil Service, and it is currently unclear how
it will be delivered, or how much support they will want
from the private sector in this task.
Guidance and outlook
In 2016, better trading performance and currency
movements in the first half of the year led us to
increase full-year guidance in both our May and
August updates. This reflected primarily the successful
resolution of a number of commercial matters and
other factors not expected to repeat in subsequent
periods, together with the benefit of foreign
exchange movements. In December 2016, having
completed our budget review process, we updated
that our expectations for 2017 were unchanged on
an underlying basis from those previously described,
though an adjustment was required for the potential
benefit of foreign exchange movements.
At current foreign exchange rates, our 2017 budget
implies revenue of approximately £3.1bn and Underlying
Trading Profit of between £65m and £70m, and with a
weighting to the second half. Given that the first half
of 2016 benefitted from a number of non-recurring
items, Underlying Trading Profit in the first half of
2017 is expected to be significantly lower than the
comparator period.
33
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review continued
In regard to our budget and guidance, we reiterate that
the range of potential outcomes for 2017 is significantly
wider, both to the upside and downside, given Serco’s
low margins and the sensitivity of our profits to even
small changes in revenues or costs. Furthermore, and as
described in more detail in the Divisional Reviews, the
outcome of major bids in our pipeline, and the timing
and nature of arrangements made for the replacement
of the Affordable Care Act in the US, could have a
material impact on our business both in the immediate
and longer term.
The trading outlook for 2018 will clearly come more
into focus as we progress through 2017 in terms of
bid activity and our other transformation actions.
Our guidance is for margins to reduce in 2017, but we
would expect to show some modest improvement
year-on-year in 2018. Our path of margin improvement
reflects the lag effect of delivering the net benefit of
transformation efficiencies and the time it takes for new
work to begin and deliver operational leverage of the
cost base.
Although our cash tax rates are reasonably predictable,
our accounting effective tax rates are likely to remain
volatile; in 2015 the accounting underlying effective tax
rate was 48%, in 2016 35%, and we expect it could revert
back to around 50% in 2017. This will depend on the
precise mix of profits and losses we see by jurisdiction.
Any increase in our accounting tax rates will of course
have an amplifying effect on the reduction in EPS
caused by the lower Underlying Trading Profit
expected in 2017.
Regarding cash flows for 2017, we expect our Underlying
Trading Profit forecast will be broadly offset by the cash
outflow on onerous contracts, given OCP utilisation
budgeted of approximately £80m. With cash outflows
for interest and tax forecast to be broadly similar to
2016, this would result in a Free Cash outflow at similar
levels to the £33m seen in 2016, assuming all other cash
effects are neutral such as the effect of joint ventures,
capital expenditure versus depreciation, and of course
working capital. The outcomes of new bids and rebids,
and the associated timing of any change in operations,
would impact these assumptions, particularly working
capital. There will also continue to be a level of cash
outflow on exceptional costs, potentially at a similar
level to 2016, given further restructuring to support our
transformation. In all, we therefore estimate that closing
net debt at the end of 2017 could increase to between
£150m and £200m, equivalent to leverage for covenant
purposes of between 1.2x and 1.7x EBITDA.
Concluding thoughts
We continue to make good progress implementing
our strategy through the three stages of our plan to
‘Stabilise – Transform – Grow’ which we set out in detail
in early 2015. Our overarching objective is to make
Serco a world-class international supplier of services to
Government in our chosen sectors of Defence, Justice
& Immigration, Transport, Health and Citizen Services.
We completed the stabilisation of the business in 2014
and 2015. Since then, we have been transforming the
business: reducing our operating costs, investing in
systems, processes and people, building compelling
service propositions and improving the quality of our
operational delivery to customers. We start 2017 with a
very healthy pipeline of new opportunities, but also with
a lot of work yet to be done to successfully complete
the ‘Transform’ stage of our plan. Armed with a strong
balance sheet, skilled and committed colleagues, and
a good track record of delivery against our objectives
over the last two years, I remain confident that we are
heading in the right direction.
Rupert Soames
Group Chief Executive
Serco – and proud of it.
34
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Divisional Reviews
Serco’s continuing operations are reported as five divisions: UK Central Government (CG); UK & Europe Local &
Regional Government (LRG); the Asia Pacific region (AsPac); the Middle East; and the Americas. The Global Services
division consists of Serco’s residual private sector BPO operations, which for statutory reporting purposes are
classified as discontinued operations following the previously announced strategic exit from this market and the
subsequent disposal in December 2015 of the Intelenet business. Serco presents alternative measures to include
the Revenue and Trading Profit of these discontinued operations for consistency with previous guidance. Reflecting
statutory reporting, Serco’s share of revenue from its joint ventures and associates is not included in revenue, while
Serco’s share of joint ventures and associates’ profit after interest and tax is included in 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 benefit from not depreciating
and amortising assets held for sale, and other one-time items such as those related to the early exit from the
Thurrock contract.
Year ended 31 December 2016
£m
CG
LRG AsPac
East Americas
Middle
Corporate
costs
Sub-total
continuing
Global
Services
Total
Revenue including discontinued operations
678.6
696.5
Change
Change at constant currency
Organic change at constant currency
(9%)
(9%)
(9%)
(23%)
(25%)
(25%)
619.7
+14%
+2%
+4%
Discontinued operations adjustment*
–
–
–
324.8
+11%
(1%)
(1%)
–
691.4
0%
(11%)
(11%)
–
Revenue
678.6
696.5
619.7
324.8
691.4
Underlying Trading Profit/(Loss)
Change
Change at constant currency
Margin
52.2
(2%)
(2%)
(6.5)
n/a
n/a
24.9
+110%
+85%
7.7%
(0.9%)
4.0%
Contract and Balance Sheet Review adjustments
42.7
Benefit from not depreciating and amortising
assets held for sale
Other one-time items
Trading Profit/(Loss)
Amortisation of intangibles arising on acquisition
Discontinued operations adjustment*
–
–
94.9
(0.3)
–
(7.4)
–
3.5
(10.4)
–
–
9.3
–
–
34.2
(2.0)
–
16.6
(12%)
(20%)
5.1%
43.0
(3%)
(13%)
6.2%
2.2
(36.6)
–
–
18.8
–
–
–
–
6.4
(2.8)
–
3.6
Operating profit/(loss) before exceptionals
94.6
(10.4)
32.2
18.8
–
–
–
–
–
–
(43.5)
(15%)
(15%)
n/a
3.2
–
–
(40.3)
–
–
(40.3)
3,011.0
36.8
3,047.8
(5%)
(11%)
(11%)
(89%)
(89%)
n/a
(13%)
(19%)
n/a
–
(36.8)
(36.8)
3,011.0
–
3,011.0
86.7
+6%
(4%)
2.9%
13.4
–
3.5
103.6
(5.1)
–
98.5
(4.6)
n/a
n/a
(12.5%)
0.8
0.5
82.1
(14%)
(23%)
2.7%
14.2
0.5
–
3.5
(3.3)
100.3
–
3.3
–
(5.1)
3.3
98.5
* Statutory reporting only includes the post-tax result of discontinued operations as a single line in the Consolidated Income Statement.
Year ended 31 December 2015
£m
CG
LRG AsPac
East Americas
Middle
Corporate
costs
Sub-total
continuing
Global
Services
Total
Revenue including discontinued operations
742.1
905.8
544.7
291.4
693.0
Discontinued operations adjustment*
–
–
–
–
–
Revenue
742.1
905.8
544.7
291.4
693.0
Underlying Trading Profit/(Loss)
Margin
53.1
7.2%
4.7
0.5%
11.9
2.2%
18.9
6.5%
44.3
6.4%
Contract and Balance Sheet Review adjustments
7.1
(28.2)
46.9
8.5
(17.3)
Benefit from not depreciating and amortising
assets held for sale
Other one-time items
Trading Profit/(Loss)
Amortisation of intangibles arising on acquisition
Discontinued operations adjustment*
–
–
60.2
–
–
–
9.0
(14.5)
(1.1)
–
–
–
58.8
(1.2)
–
–
–
27.4
–
–
Operating profit/(loss) before exceptionals
60.2
(15.6)
57.6
27.4
–
–
27.0
(2.5)
–
24.5
–
–
–
(51.3)
n/a
3.3
–
–
(48.0)
–
–
3,177.0
337.6
3,514.6
–
(337.6)
(337.6)
3,177.0
–
3,177.0
81.6
2.6%
20.3
–
9.0
110.9
(4.8)
–
14.3
4.2%
0.6
11.7
–
26.6
(0.1)
95.9
2.7%
20.9
11.7
9.0
137.5
(4.9)
(26.5)
(26.5)
(48.0)
106.1
–
106.1
* Statutory reporting only includes the post-tax result of discontinued operations as a single line in the Consolidated Income Statement.
The trading performances and outlook are described for each division on the following pages. Reconciliations
and further detail of financial performance are included in the Finance Review on pages 42 to 63. This includes full
definitions and explanations of the purpose of each non-IFRS Alternative Performance Measure (APM) used by the
Group. The consolidated financial statements and accompanying notes are on pages 139 to 207.
35
Financial StatementsDirectors’ ReportStrategic Report Divisional Reviews continued
UK Central Government
The UK Central Government division includes our
UK operations in Defence, Justice & Immigration
and Transport.
Revenue for 2016 was £678.6m (2015: £742.1m), a decline
of 9%; reported revenue excludes that from our joint
venture and associate holdings at AWE, Merseyrail and
previously Northern Rail, with these representing the
vast majority of the Group’s activity in joint ventures and
associates. The principal driver of the revenue reduction
was the phased transfer back of services that Serco had
previously been providing to the Defence Science and
Technology Laboratory (DSTL), together with the end
of the Defence Business Services arrangement, the loss
of two small defence support contracts, and the ending
of transitional support provided in 2015 regarding the
supply of Electronic Monitoring equipment. There was
limited growth elsewhere to offset contract attrition,
with the largest being higher revenue on the COMPASS
programme relating to increased numbers of asylum
seekers under our care and the full-year impact of
the Caledonian Sleeper contract which Serco began
operating on 31 March 2015.
Underlying Trading Profit was £52.2m (2015: £53.1m),
representing an implied margin of 7.7% (2015: 7.2%).
Trading Profit includes the profit contribution (from
which tax and interest have already been deducted) of
joint ventures and associates; if the £439m proportional
share of revenue from joint ventures and associates
was also included and if the £7.3m share of interest and
tax cost was excluded, the overall divisional margin
would have been 5.3% (2015: 4.1%). The joint venture
and associate profit contribution of £31.3m was £2.5m
lower than 2015, reflecting the end of the Northern Rail
franchise in March 2016 and the lower shareholding
of AWE from the second half of the year. Outside of
joint ventures and associates, Underlying Trading
Profit increased by 8% to £20.9m, with the profit impact
from contract attrition more than offset by increased
profitability on continuing contracts and reductions in
overheads. Within Underlying Trading Profit there was
£37m of OCP utilisation (2015: £57m), which served to
offset the Division’s loss-making contracts principally
COMPASS, Caledonian Sleeper and PECS. The
reduced level of OCP utilisation reflects improving
operational and financial performance on each of
these loss-making contracts.
Contract and Balance Sheet Review adjustments
resulted in a £42.7m net release, arising from reductions
in our estimates of future liabilities. This was driven by
a release of £34m for COMPASS, reflecting updated
forecasts and the terms of the contract extension; this
was partially offset by the OCP arising on the acquisition
of sub-contractor operations. Other releases included
those related to further improvements on the FPMS
contract, the transfer of the secure escorting services
contract for the Youth Justice Board which removed
future losses, and the outcome of the re-pricing of the
HMP Ashfield contract. Partially offsetting these was a
charge to increase the PECS OCP to reflect an updated
assumption that the customer will exercise one of three
extension years, and some increased cost assumptions
on the Caledonian Sleeper contract. After the Contract
and Balance Sheet Review adjustments, Trading Profit
was £94.9m (2015: £60.2m).
UK Central Government represented around £300m
of the Group’s aggregate total value of signed
contracts during the year, which was driven by rebids
and extensions including the 21-month COMPASS
extension, the successful rebid to continue operating
the London Cycle Hire scheme for at least a further five
years, and smaller awards such as the Skynet 5 secure
military satellite communications network contract and
our testing support for the German Air Force fleet of
Eurofighters. The only major new bid pipeline decision
during the year was the tender to operate the Clyde and
Hebrides Ferries Services; Serco was unsuccessful in
this competition, with the operations remaining with
the incumbent CalMac Ferries Limited.
An updated contract was also agreed in March 2016
between the Ministry of Defence and the joint venture
partners of AWE Management Limited (AWE ML),
setting out a framework through to 2025 and the
programme of activity and pricing through to 2019. This
followed the conclusion of the UK Government’s review
of the efficiency, effectiveness and value for money
of the operations and contracting model for AWE. As
part of the arrangements, the joint venture partners
agreed that Lockheed Martin would take a majority
shareholding in the joint venture, and the shareholdings
of both Jacobs and Serco reduced accordingly from
33.3% to 24.5% from the beginning of September
2016. If Serco’s new share of associate revenue were
consolidated, the agreement for the next three year’s
pricing would be equivalent to an additional signed
contract value for Serco of approximately £700m.
36
Strategic ReportSerco Group plc Annual Report and Accounts 2016 For 2017, we expect a low-to-mid single digit
revenue decline based upon the net effect of known
contract wins and losses and other assumed revenue
movements. There will be a significantly greater
reduction in profitability, reflecting the end of the
Northern Rail joint venture and the commercial
settlement benefits that arose from this in 2016,
and the reduction in the contributions from AWE.
Of existing work where an extension or rebid will be
required at some point before the end of 2019, there are
ten contracts with annual revenue of over £5m within
the UK Central Government division; in aggregate,
these represent approximately 30% of the current level
of annual revenue for the division. The largest of these
are the Northern Isles Ferries operations that would
become due for potential extension or rebid in 2018,
PECS which is now assumed to be rebid in 2019 if further
extension options are not exercised by the customer,
and COMPASS also in 2019.
Our pipeline of major new bid opportunities due for
decision within the next 24 months includes the Defence
Fire & Risk Management Organisation, the operation of
an immigration removal centre, immigration escorting
for the Home Office, and the Hades Programme to
provide various support services to the Ministry of
Defence. Over the longer term, we continue to expect
reform and improvement to the prison system, and for
further opportunities in Defence and other areas to
emerge as the UK Government continues its efforts to
save cost and improve public services.
UK & Europe Local & Regional Government
The UK & Europe Local & Regional Government division
(LRG) includes our UK Health and UK and European
Citizen Services sectors. The Health business provides
primarily non-clinical support services to hospitals; the
Citizen Services business provides environmental and
leisure services, as well as a wide range of other front,
middle and back-office services to Local Authorities,
and IT services to European institutions.
Revenue for 2016 was £696.5m (2015: £905.8m), a decline
of 23%. At constant currency, the organic decline was
25%. The principal drivers of the revenue reduction
were: the end of the Suffolk Community Healthcare
and National Citizen Services contracts which had
previously been heavily loss-making and were not
rebid; changes to two health procurement contracts
which are continuing but where we no longer recognise
as revenue the cost of goods purchased on behalf of
our customers; the full-year impact of the early exit
from the Thurrock BPO services contract; the ending
of certain infrastructure support services to private
sector customers; and the reducing scale of the Child
Maintenance Group operations. There was limited in-
year revenue growth elsewhere to offset the effect of
these planned contract ends and reductions.
There was an Underlying Trading Loss of £6.5m (2015:
profit of £4.7m), representing a margin of -0.9% (2015:
+0.5%). There was a reduction in profit contribution
from contract attrition, and certain areas of cost
investment to deliver longer term efficiencies more than
offset other contract profitability improvements and
cost savings during the year. In addition, there were
£3m of impairments and write-downs on a European
agency contract. Within Underlying Trading Profit
there was £23m of OCP utilisation (2015: £11m non-
exceptional), with the increase reflecting the losses on
the Lincolnshire County Council operations as costs
peaked with the implementation of the new ERP system;
the contract is running broadly in line with expectations
and the major elements of the IT implementation are
now in service.
Contract and Balance Sheet Review adjustments
resulted in a £7.4m net charge, reflecting a number of
small adjustments in assumptions on OCP contracts.
Separately, there was a one-time profit of £3.5m arising
from a pension scheme settlement relating to the early
exit from the Thurrock Council services in the previous
year. After these adjustments and one-time profit, the
Trading Loss was £10.4m (2015: Trading Loss of £14.5m).
LRG represented around £750m of the Group’s
aggregate total value of signed contracts during the year.
The largest award reflects the initial seven-year value,
estimated at £450m, for new services to Barts Health NHS
Trust to deliver facilities management services across
their hospitals. Of other major new bid pipeline decisions
during the year, Serco was unsuccessful on a smaller
health facilities management opportunity and two bids
for environmental services. Other new but smaller wins
included contact centre services for the Department
of Work & Pensions. Successful rebids or extensions
included: the Anglia Support Partnership healthcare
shared services operations; environmental services for
Woking Borough, Charnwood Borough and Canterbury
City councils; regional employment support services for
the Skills Funding Agency; contact centre and digital
services support for Public Health England; and our
support to institutions such as the European Space
Agency and CERN.
37
Financial StatementsDirectors’ ReportStrategic Report Divisional Reviews continued
For 2017, we expect a low-to-mid single digit revenue
decline based upon the net effect of known contract
wins and losses and other revenue movements including
the change to the two health procurement contracts.
Growth from the start of the major new contract for
Barts is expected to be offset by other reductions. We
expect that the division should though make progress
on its profitability in 2017, as we see more benefits start
to come through from actions to secure sustainable
longer term improvements in efficiencies.
Of existing work where an extension or rebid will be
required at some point before the end of 2019, there
are 12 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; this excludes Glasgow
ACCESS which is an assumed expiry in March 2018.
Our pipeline of major new bid opportunities due for
decision within the next 24 months includes further
tenders for environmental services and hospital
facilities management bids. We continue to evaluate
developments in the other sectors of operation within
LRG, including other Citizen Services work and to
expand our European business providing various
operational support to government agencies.
AsPac
Operations in the Asia Pacific division include Justice,
Immigration, Defence, Health, Transport and Citizen
Services in Australia, New Zealand and Hong Kong.
Serco’s operations in Australia are by far the largest
element of the division; the country represents
approximately 20% of total Revenue for the Group.
Revenue for 2016 was £619.7m (2015: £544.7m), an
increase of 14%. In Australian dollars, the main currency
for operations of the division, revenue for the year was
equivalent to approximately A$1,140m (2015: A$1,106m).
The movements in local currencies against Sterling
increased revenue by £64m or 12%, while the impact of
disposals (the Great Southern Rail business disposed
in May 2015) reduced revenue by £10m or 2%; the
organic growth at constant currency was therefore 4%.
There were some increases in revenue in relation to the
renegotiation of the Armidale Class Patrol Boat (ACPB)
contract as well as scope increases to existing services
such as Citizen Services contact centre operations and
the expansion of Acacia prison. Revenue from Australian
immigration services was broadly flat.
Underlying Trading Profit was £24.9m (2015: £11.9m),
representing a margin of 4.0% (2015: 2.2%). The
improvement in profitability included: a favourable
currency movement of £3m; a loss on the Mount Eden
Correctional Facility contract in 2015 that was offset
in 2016 by the subsequent OCP; and progress on cost
efficiencies that more than offset other cost and margin
pressures. Within Underlying Trading Profit there was
£12m of OCP utilisation (2015: £20m), with significantly
lower losses on the ACPB contract partially offset by
increased utilisation on the Mount Eden contract.
Contract and Balance Sheet Review adjustments
resulted in a £9.3m net release, driven by revised
assumptions on the residual period of operation of the
ACPB contract, which concludes in 2017. After these
adjustments, Trading Profit was £34.2m (2015: £58.8m).
AsPac represented around £600m of the Group’s
aggregate total value of signed contracts during the
year. The largest new order, valued at approximately
£160m, was to project manage the design and build
phase, and subsequently operate, the new ‘icebreaker’
Antarctic Supply and Research Vessel for the Australian
Department of the Environment. There was also
the extension of two corrections contracts with the
Queensland and Western Australian governments,
valued in total at approximately £200m, and the
successful rebid of hospital facilities management
services in Hong Kong.
For 2017, our expectations are an approximate 10%
revenue decline on an organic basis, based upon the
net effect of known contract wins and losses and other
assumed revenue movements. This is driven by the
loss of the ACPB, Mount Eden and Western Australia
Court Security and Custodial Services contracts. The
estimated currency benefit based on current exchange
rates would largely offset the forecast organic decline.
Of existing work where an extension or rebid will be
required at some point before the end of 2019, there
are seven contracts with annual revenue of over £5m
within the AsPac division; in aggregate, these represent
approximately 50% of the current level of annual
revenue for the division; this high proportion reflects
that the Australia onshore immigration services contract
requires rebid or extension at the end of 2019, with this
accounting for over 30% of current divisional revenue.
38
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Our pipeline of major new bid opportunities due
for decision within the next 24 months now includes
three prison bids and additional opportunities in
case management and defence support services.
Looking beyond, further potential opportunities in
Justice, Citizen Services, Defence, Transport and non-
clinical health services are expected to be developed
over time.
Middle East
Operations in the Middle East division include
Transport, Defence, Health and Citizen Services.
Revenue for 2016 was £324.8m (2015: £291.4m), an
increase of 11%. The strengthening of local currencies
against Sterling provided growth of £36m or 12%; the
organic decline at constant currency was 1%. There was
revenue growth from increased volumes on a defence
logistics contract, expanded healthcare support
services and at the Dubai Metro; these were broadly
offset by reduced revenue on the Dubai Air Navigation
Services contract and a small number of other
operations reducing in scope or ending.
Underlying Trading Profit was £16.6m (2015: £18.9m),
representing a margin of 5.1% (2015: 6.5%). There was
some improvement in profitability from higher defence
logistics volumes and the £1.4m favourable currency
movement; these were more than offset by the impact
of other contract scope reductions and attrition,
together with significant investment in business
development and bidding the major rail opportunities
in the region. Within Underlying Trading Profit, OCP
utilisation was immaterial.
Contract and Balance Sheet Review adjustments
resulted in a £2.2m net release. After these adjustments,
Trading Profit was £18.8m (2015: £27.4m).
The Middle East represented over £200m of the
Group’s aggregate total value of signed contracts
during the year. Although no major new bid pipeline
decisions were due, smaller awards included a new
contract to maintain and support a large part of Dubai
Airport buildings and infrastructure, and further
contracts for defence base support and healthcare
facilities management in the region. Amongst rebids
and extensions secured were further extensions for
Middle East Logistics and Base Support (MELABS) to
the Australian Defence Force in the region, healthcare
facilities management in Saudi Arabia and Abu Dhabi,
and Baghdad Air Navigation Services.
For 2017, there is a relatively modest net effect
expected from already known contract wins and losses.
However, progress on retaining existing work, and
particularly the cost to progress and the outcomes
of the major new bid opportunities in the region, will
ultimately determine financial performance in the
coming year.
Of existing work where an extension or rebid will be
required at some point before the end of 2019, there are
ten contracts with annual revenue of over £5m within
the Middle East division; in aggregate, these represent
more than half of the current level of annual revenue
for the division. There is a high proportion of work to
secure in 2019, when the Dubai Metro, MELABS and
Cleveland Clinic Abu Dhabi contracts each require
extending or rebidding.
Our pipeline of major new bid opportunities due for
decision within the next 24 months includes three
major light rail and tram operations in the region; in
aggregate, these represent approximately 30% of the
value of the Group’s pipeline. There are other smaller
opportunities in defence training and support services
and in non-clinical health facilities management support
in the current pipeline, and the Transport, Defence,
Health and other Citizen Services including integrated
facilities management continue to be potentially high
growth markets in the region.
Americas
Our Americas division provides professional,
technology and management services focused on
Defence, Transport, and Citizen Services. 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 2016 at £691.4m was broadly flat (2015:
£693.0m). In US dollars, the main currency for operations
of the division, revenue for the year was equivalent
to approximately US$944m (2015: US$1,061m). The
strengthening of local currencies against Sterling
increased revenue by £74m or 11%, with the organic
decline at constant currency also being 11%. The
principal drivers of the revenue reduction were the
loss of the rebid for record processing at the National
Benefits Centre and the transition back to the customer
of the VDOT operations, together with a number of
other smaller contract ends, or reductions in the volume
of workload or task orders. There was limited growth
elsewhere to offset these reductions.
39
Financial StatementsDirectors’ ReportStrategic Report Divisional Reviews continued
Underlying Trading Profit was £43.0m (2015: £44.3m),
representing a margin of 6.2% (2015: 6.4%). The
decline was driven by contract attrition and areas of
cost investment, which was only partially offset by a
£4.6m favourable currency movement and other cost
efficiencies. Within Underlying Trading Profit there was
£9m (2015: £10m) of OCP utilisation on the completed
VDOT contract and the Ontario Driver Examination
Services contract.
Contract and Balance Sheet Review adjustments
resulted in a £36.6m net charge. This was driven by
the £29.5m revision to estimates of future costs and
foreign exchange impacts associated with the existing
OCP for the IT systems implementation and ongoing
management of the Ontario Driver Examination
Services contract; in addition to the increase in the
OCP there was an £8.8m charge reflecting a reduction
in the accrued revenue balance for the contract. After
the Contract and Balance Sheet Review adjustments,
Trading Profit was £6.4m (2015: £27.0m).
Americas represented over £600m of the Group’s
aggregate total value of signed contracts during
the year. Awards for new work included a US Air
Force High Altitude Electromagnetic Pulse (HEMP)
Protection of Ballistic Missile Early Warnings Systems
radar facility upgrade contract at Thule Air Base in
Greenland, and a support contract for the US State
of Louisiana Department of Transportation (LADOT)
Motorist Assistance Program. Defence task orders
awarded during the year, driven by our ship and shore/
base modernisation services, totalled over US$260m,
which includes expanding our recently awarded
support services to the US Naval Facilities Engineering
Command (NAVFAC). Our bids to support passport
processing for the Department of State and data
reporting for the Department of Health and Human
Services were unsuccessful. Amongst rebids, Serco
secured its operations to continue providing site
support services at the 5 Wing Canadian Forces Base
in Goose Bay, Canada, valued at C$115m for the initial
two-year period.
For 2017, our expectations are low-to-mid single digit
revenue growth on an organic basis, based upon
the net effect of known contract wins and losses and
other assumed revenue movements. The estimated
currency benefit based on current exchange rates
would increase this to potentially 10-15% growth. The
outcome for 2017 could however materially change
depending on developments affecting our contract
supporting the US Affordable Care Act (ACA);
these operations accounted for approaching 30% of
divisional revenue in 2016, and we currently forecast
them to be broadly flat in 2017; whilst margins on this
contract are lower than the average for the Division,
the contract recovers a material amount of overhead
costs and large reductions in chargeable direct labour
could create challenges to reduce overheads in line
with revenues. At the time of reporting, apart from
knowing that under the new Administration changes
will be made, there is no consensus in either Congress
or the Administration as to what form these changes
will take, and what provision will be made for the
more than 24 million people who have received health
insurance coverage through the ACA.
Of existing work where an extension or rebid will be
required at some point before the end of 2019, there
are eight contracts with annual revenue of over £5m
within the Americas division; in aggregate, these
represent around 50% of the current level of annual
revenue for the division; this high proportion reflects
that our contract supporting the ACA requires the final
option year to be exercised though to 30 June 2018
and then would be required to be rebid; the Global
Installation Contract covering areas of our defence ship
modernisation work also requires securing in 2019.
Our pipeline of major new bid opportunities due for
decision within the next 24 months includes important
opportunities to provide various support functions
to the US Navy, as well as other bids in transport
operational support, Citizen Services processing and
immigration services that have been added over the
year. Whilst particular uncertainty exists with regard
to the future of the ACA potentially in 2017 and more
so beyond, under the new US administration other
areas of public service support may generate further
improvement in market conditions over time.
40
Strategic ReportSerco Group plc Annual Report and Accounts 2016 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.
Revenue was £36.8m (2015: £337.6m), with the decline
reflecting the disposals and exits in 2015 and 2016.
The Underlying Trading Loss for 2016 was £4.6m (2015:
Underlying Trading Profit of £14.3m). The loss in 2016
reflects the residual 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. Within Underlying
Trading Profit, there was £3m of OCP utilisation.
Contract and Balance Sheet Review adjustments
resulted in a £0.8m net release. As the division included
assets designated as held for sale, there is a benefit
of not charging depreciation and amortisation of
£0.5m. After these Contract and Balance Sheet Review
adjustments and held for sale benefits, the Trading Loss
was £3.3m.
Over the course of 2016, we ran ahead of our plans to
mitigate the losses and stranded costs, which were
initially anticipated to be approximately £10m in 2016.
The Freeman Grattan Holdings and BrightHouse
contracts together with the associated Sheffield
facilities were transferred to a new provider during the
first half of the year; the Aegon contract together the
associated Lytham St Annes facilities were transferred in
the second half. Our only remaining contract is that for
direct home shopping company JD Williams. For 2017,
no material residual financial effect is therefore forecast.
Dan Allen, Chief Executive Officer of the Americas
division, has informed the business of his intention
to retire from work in mid-2017. Dan joined Serco in
2013 and we thank him for the successful leadership
and direction he has provided, and wish him well for
the future.
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.
Corporate costs in 2016, before Contract and Balance
Sheet Review adjustments, were £43.5m (2015: £51.3m),
with the 15% reduction including the benefit of actions
taken to deliver savings and improve the efficiency of
our overall operating model.
Contract and Balance Sheet Review adjustments
resulted in a £3.2m net release. After these adjustments,
Corporate Costs within Trading Profit were £40.3m
(2015: £48.0m).
Global Services (discontinued operations)
The Global Services division consists of Serco’s private
sector BPO business, performing middle and back
office functions across customer contact, transaction
and financial processing. As part of Serco’s previously
announced strategy to exit non-core markets and
to focus on the provision of public services, Serco
has been exiting these operations. On 31 December
2015, the transaction to dispose of the majority of the
offshore private sector BPO operations was completed;
the businesses sold contributed over £300m of revenue
and £23m of Underlying Trading Profit in 2015, and
were sold for a gross consideration of approximately
£250m. There were two smaller associated transactions
relating to operations in the Middle East, both of which
were completed in 2016. The remaining private sector
operations, which are predominantly UK onshore
operations, are being exited either by further disposals,
transfers, early termination or running-off the contracts
over their remaining contractual period.
41
Financial StatementsDirectors’ ReportStrategic Report Finance Review
Underlying Trading Profit at £82m was £14m lower
than 2015, driven by a £19m reduction in the results
generated from discontinued operations. Closing
Net Debt of £109m was lower than expected and
represented a year-on-year increase of £46m,
reflecting the impact of loss making contracts.
Revenue from continuing and discontinued
operations was £467m lower at £3.0bn.
For the year ended 31 December
Revenue from continuing and discontinued operations
Exclude revenue from discontinued operations
Reported Revenue (continuing activities only)
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 on continuing and discontinued operations*
Other expenses – amortisation and impairment of intangibles
arising on acquisition
Operating profit before exceptional items on continuing
and discontinued operations*
Exclude operating loss / (profit) before exceptional items arising on
discontinued operations
Operating profit before exceptional items*
Exceptional profit / (loss) on disposal of subsidiaries and operations
Other exceptional operating items
Exceptional operating items
Reported operating profit / (loss)*
Investment revenue
Finance costs*
Exceptional finance costs
Total net finance costs*
Profit / (loss) before tax
Tax on profit before exceptional items
Tax on exceptional items
Tax charge
Profit / (loss) for the year from continuing operations
Loss for the year from discontinued operations
Loss for the year
2016
£m
3,047.8
(36.8)
3,011.0
82.1
14.2
0.5
3.5
100.3
(5.1)
95.2
3.3
98.5
2.9
(59.2)
(56.3)
42.2
9.3
(21.9)
–
(12.6)
29.6
(15.8)
3.1
(12.7)
16.9
(18.0)
(1.1)
2015
(restated*)
£m
3,514.6
(337.6)
3,177.0
95.9
20.9
11.7
9.0
137.5
(4.9)
132.6
(26.5)
106.1
(2.6)
(107.3)
(109.9)
(3.8)
6.1
(38.9)
(32.8)
(65.6)
(69.4)
(17.9)
0.4
(17.5)
(86.9)
(66.2)
(153.1)
*
As explained below, profit measures down to reported operating profit have been restated following the change in accounting policy to exclude foreign
exchange movements on investment and financing arrangements, including them instead in net finance costs.
42
Strategic ReportSerco Group plc Annual Report and Accounts 2016 For the year ended 31 December
Underlying trading margin from continuing and discontinued operations
Underlying earnings per share from continuing and discontinued operations
Earnings per share before exceptional items from continuing and
discontinued operations
2016
2.7%
4.13p
6.12p
2015
2.7%
3.44p
6.55p
Loss per share from continuing and discontinued operations
(0.11p)
(15.47p)
Change in accounting policy for foreign exchange
movements on investment and financing activities
In order to provide more relevant information about
the impact of the underlying transactions of trading
operations, the accounting policy regarding the
classification of foreign exchange movements on
investment and financing arrangements has been
changed. These movements are now excluded from
Trading Profit and included instead within net finance
costs. As a result of this change in accounting policy, the
prior year income statement and cash flow statement
have been restated, together with the definition of Net
Debt which now includes derivatives relating to Net
Debt components. The impact of this restatement has
been to decrease Trading Profit in the year by £1.2m
(2015: decrease by £0.1m), with an equal and opposite
impact recognised within net finance costs, decrease
Free Cash Flow by £47.0m (2015: decrease by £19.3m),
with an equal and opposite impact recognised below
Free Cash Flow, and decrease Net Debt by £18.1m
(2015: decrease by £14.6m). No restatements have been
made to the comparative periods for 2014 and prior in
the Key Performance Indicators section of the Strategy
Report and the five year record included as an appendix
to the Consolidated Financial Statements. Further
details are provided in note 2 to the Consolidated
Financial Statements.
Alternative Performance Measures (APMs)
and other related definitions
APMs used by the Group are reviewed below to provide
a definition and reconciliation from each non-IFRS APM
to its IFRS equivalent, and to explain the purpose and
usefulness of each APM.
In general, APMs are presented externally to meet
investors’ requirements for further clarity and
transparency of the Group’s financial performance.
The APMs are also used internally in the management
of our business performance, budgeting and
forecasting, and for determining Directors’
remuneration and that of other management
throughout the business.
APMs are non-IFRS measures. Where additional revenue
is being included in an APM, this reflects revenues
presented elsewhere within the reported financial
information, except where amounts are recalculated
to reflect constant currency. Where items of profits or
costs are being excluded in an APM, these are included
elsewhere in our reported financial information as they
represent actual profits or costs of the Group. As a
result, APMs allow investors and other readers to review
different kinds of revenue, profits and costs and should
not be used in isolation. Other commentary within the
Strategic Report, including the other sections of this
Finance Review, as well as the Consolidated Financial
Statements and their accompanying notes, should be
referred to in order to fully appreciate all the factors that
affect our business. We strongly encourage readers not
to rely on any single financial measure, but to carefully
review our reporting in its entirety.
The methodology applied to calculating the APMs has
not changed during the year for any measure, but the
APMs do reflect the impact of the prior year restatement.
Reported Revenue at constant currency
Reported Revenue, as shown on the Group’s
Consolidated Income Statement on page 139,
reflects revenue translated at the average exchange
rates. In order to provide a comparable movement
on the previous year’s results, Reported Revenue is
recalculated by translating non-Sterling values for the
year to 31 December 2016 into Sterling at the average
exchange rate for the year ended 31 December 2015.
For the year ended 31 December
Reported Revenue at constant
currency (continuing activities only)
Foreign exchange differences
Reported Revenue at reported
currency (continuing activities only)
2016
£m
2,823.0
188.0
3,011.0
43
Financial StatementsDirectors’ ReportStrategic Report Organic Revenue at reported currency
3,166.6
For the year ended 31 December
Finance Review continued
Organic Revenue at constant currency
Reported Revenue may include revenue generated
by businesses acquired during a particular year and/
or generated by businesses sold during a particular
year up to the date of disposal. In order to provide a
comparable movement which ignores the effect of
both acquisitions and disposals on the previous year’s
results, Reported Revenue is recalculated by excluding
the impact of any acquisitions or disposals. For 2016,
no adjustment is required as no acquisitions generated
third party revenues and all disposals are included in
discontinued operations. Therefore organic revenue
growth is calculated by comparing Reported Revenue
at constant currency with Prior Year Organic Revenue
at reported currency.
Prior Year Organic Revenue at reported currency is
calculated as follows:
For the year ended 31 December
2015
£m
Impact of any acquisitions or disposals on
Reported Revenue at reported currency
Reported Revenue at reported
currency (continuing activities only)
10.4
3,177.0
Revenue from continuing and
discontinued operations
Reported Revenue, as shown on the Group’s
Consolidated Income Statement on page 139, reflects
only that from continuing operations, with the post
tax result of discontinued operations consolidated
as a single line at the bottom of the Consolidated
Income Statement. Discontinued operations reflect
the former Global Services division which consisted
of our private sector BPO operations. The alternative
measure includes discontinued operations for the
benefit of consistency with previously reported
results and to reflect the overall change in scale of the
Group’s operations. The alternative measure allows
the performance of the discontinued operations
themselves, and their impact on the Group as a whole,
to be evaluated on measures other than just the post
tax result.
For the year ended 31 December
Revenue from continuing and
discontinued operations
Exclude revenue from
discontinued operations
Reported Revenue
(continuing activities only)
2016
£m
2015
£m
3,047.8
3,514.6
(36.8)
(337.6)
3,011.0
3,177.0
44
Revenue from continuing operations, including
share of joint ventures and associates
Reported Revenue, as shown on the Group’s
Consolidated Income Statement on page 139, excludes
the Group’s share of revenue from joint ventures
and associates, with Serco’s share of profits in joint
ventures and associates (net of interest and tax)
consolidated within Reported Operating Profit as a
single line further down the Consolidated Income
Statement. The alternative measure includes the share
of joint ventures and associates for the benefit of
reflecting the overall change in scale of the Group’s
ongoing operations, which is particularly relevant for
evaluating Serco’s presence in market sectors such as
Defence and Transport. The alternative measure allows
the performance of the joint venture and associate
operations themselves, and their impact on the Group
as a whole, to be evaluated on measures other than
just the post tax result.
Revenue from continuing
operations, including share of
joint ventures and associates
Exclude share of revenue from
joint ventures and associates
Reported Revenue
(continuing activities only)
2016
£m
2015
£m
3,491.8
3,914.2
(480.8)
(737.2)
3,011.0
3,177.0
Trading Profit
The Group uses Trading Profit as an alternative measure
to Reported Operating Profit, as shown on the Group’s
Consolidated Income Statement on page 139, by
making three adjustments. Trading Profit is a metric
used to determine the performance and remuneration
of the Executive Directors.
Firstly, Trading Profit excludes exceptional items,
being those considered material, non-recurring
and outside of the normal operating practice of the
Company to be suitable of separate presentation
and detailed explanation.
Secondly, amortisation and impairment of intangibles
arising on acquisitions are excluded, because these
charges are based on judgements about the value and
economic life of assets that, in the case of items such
as customer relationships, would not be capitalised in
normal operating practice.
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Thirdly, the Trading Profit of discontinued operations is included, since as with our alternative measure of revenue,
this benefits from consistency with previously reported results, reflects the overall change in scale of the Group’s
operations and takes account of the performance of the discontinued operations themselves. This allows their
impact on the Group as a whole to be evaluated on measures other than just the post tax result.
For the year ended 31 December
Underlying Trading Profit*
Include OCP charges and releases
Include Contract and Balance Sheet Review adjustments
Include benefit from non-depreciation and amortisation of assets held for sale
Include other one-time items
Trading Profit*
Include operating exceptional items (continuing operations only)
Include amortisation and impairment of intangibles arising on acquisition
Exclude Trading Loss / (Profit) from discontinued operations
Reported Operating Profit / (Loss) (continuing activities only)*
2016
£m
82.1
9.6
4.6
0.5
3.5
100.3
(56.3)
(5.1)
3.3
42.2
2015
(restated*)
£m
95.9
(3.0)
23.9
11.7
9.0
137.5
(109.9)
(4.9)
(26.5)
(3.8)
*
Profit measures down to Reported Operating Profit have been restated following the change in accounting policy to exclude foreign exchange movements
on investment and financing arrangements, including them instead in net finance costs.
Underlying Trading Profit (UTP)
The Group uses a further alternative measure,
Underlying Trading Profit, to make adjustments for
unusual items that occur within Trading Profit and
remove the impact of historical issues. UTP therefore
provides a measure of the underlying performance of
the business in the current year. For 2016 and 2015 there
were four items excluded from UTP.
Firstly, the releases and charges on all OCPs are
excluded. OCP charges and releases reflect the future
multiple year cost of delivering onerous contracts and
do not relate to the current year cost of operating
the contract. It should be noted that, as for Reported
Operating Profit, UTP benefits from OCP utilisation (of
£84.2m in 2016 and £114.1m in 2015) which neutralises
the in year losses on previously identified onerous
contracts, therefore it is only the initial or subsequent
charges or releases of OCPs that are adjusted for.
Secondly, those items relating to Contract and Balance
Sheet Review are excluded as they arise from changing
estimates on the outcome of historical issues which
were originally identified during the 2014 review. Both
OCP adjustments and Contract and Balance Sheet
Review adjustments are identified and separated
from the APM in order to give clarity of the underlying
performance of the Group and to separately disclose
the progress made on these items. Contract and
Balance Sheet Review adjustments are expected to
be insignificant in future periods and will no longer be
reported separately in 2017 and beyond unless they are
individually material.
Thirdly, the benefit of depreciation and amortisation
charges not being taken in the Group accounts in
relation to assets held for sale are excluded. Such
charges are still being taken in the subsidiary accounts
to reflect the reduction in value of the underlying assets,
and we consider it relevant to show the effect this would
have on the Group performance measure.
Finally, any other significant items that have a one-
time financial impact are excluded, which for the
periods under review are the benefit of a profit on
early exit of a UK local authority contract in 2015 and
the associated one-time pension settlement in 2016.
These one-time items are distinct from exceptional
items in that they have arisen from normal contract exit
conditions. However, consistent with the treatment
of the gain from early contract exit recorded in 2015,
these items are adjusted through UTP to provide a
comparable measure.
Underling trading margin is calculated as UTP divided by
revenue from continuing and discontinued operations.
45
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
UTP at constant currency
UTP disclosed above has been translated at the in year
average foreign exchange rates. In order to provide
a comparable movement on the previous year’s
results, UTP is recalculated by translating non-Sterling
values for the year to 31 December 2016 into Sterling
at the average exchange rate for the year ended
31 December 2015.
Earnings Per Share (EPS) from continuing and
discontinued operations before exceptional items
EPS from continuing and discontinued operations, as
shown on the Group’s Consolidated Income Statement
on page 139, includes exceptional items charged or
credited to the income statement in the year. EPS before
exceptional items aids consistency with historical results
and is a metric used in assessing the performance and
remuneration of the Executive Directors.
For the year ended 31 December
Underlying Trading Profit
at constant currency
Foreign exchange differences
Underlying Trading Profit
at reported currency
2016
£m
73.4
8.7
82.1
For the year ended 31 December
EPS from continuing and
discontinued operations
before exceptional items
Impact of exceptional items
Reported EPS from
continuing and discontinued
operations, basic
2016
pence
6.12
2015
pence
6.55
(6.23)
(0.11)
(22.02)
(15.47)
Underlying EPS from continuing and discontinued operations
Reflecting the same adjustments made to Reported Operating Profit to calculate UTP as described above, and
including the related tax effects of each adjustment, an alternative measure of EPS is presented below. This aids
consistency with historical results, and enables performance to be evaluated before the unusual or one-time effects
described above.
For the year ended 31 December
Underlying Trading Profit*
Investment revenue, continuing and discontinued operations
Finance costs, continuing and discontinued operations*
Tax on underlying profit after finance costs
Non-controlling interests
Underlying EPS, basic
Include OCP charges and releases
Include Contract and Balance Sheet Review adjustments
Include benefit from non-depreciation and amortisation
of assets held for sale
Include other one-time items
Include amortisation and impairment of intangibles
arising on acquisition
Include tax impact of non-underlying items
Remove impact of exceptional items, net of tax
Reported loss per share from continuing
and discontinued operations, basic
2016
earnings
£m
2016
per share
2015
earnings
(restated*)
£m
2015
per share
(restated*)
82.1
9.3
(21.9)
(24.4)
(0.1)
45.0
9.6
4.6
0.5
3.5
(5.1)
8.5
(67.8)
(1.2)
7.54p
0.85p
(2.01p)
(2.24p)
(0.01p)
4.13p
0.88p
0.42p
0.05p
0.32p
(0.47p)
0.78p
(6.23p)
(0.11p)
95.9
8.2
(40.1)
(30.5)
0.5
34.0
(3.0)
23.9
11.7
9.0
(4.9)
9.72p
0.83p
(4.07p)
(3.09p)
0.05p
3.44p
(0.30p)
2.42p
1.19p
0.92p
(0.50p)
(6.1)
(0.62p)
(217.2)
(152.6)
(22.02p)
(15.47p)
*
Profit measures down to Reported Operating Profit have been restated following the change in accounting policy to exclude foreign exchange movements
on investment and financing arrangements, including them instead in net finance costs.
46
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Free Cash Flow (FCF)
We present an alternative measure for cash flow to
reflect net cash inflow from operating activities before
exceptional items, which is the measure shown on
the Consolidated Cash Flow Statement on page 143,
but adjusting this IFRS measure to include dividends
we receive from joint ventures and associates and
deducting net interest paid and net capital expenditure
on tangible and intangible asset purchases. FCF is
considered relevant to reflect the cash performance of
business operations after meeting usual obligations of
financing and tax. It is therefore a measure that is before
all other remaining cash flows, being those related to
exceptional items, acquisitions and disposals, other
equity-related and debt-related funding movements,
and foreign exchange impacts on financing and
investing activities. FCF is therefore a measure to
assess the cash flow generated by the business and
aids consistency for comparison to historical results.
FCF is a metric used to determine the performance
and remuneration of the Executive Directors.
2015
(restated*)
£m
(35.5)
(32.5)
31.3
1.4
2016
£m
(33.0)
(40.0)
18.7
0.3
31.6
72.5
(22.4)
37.2
For the year ended 31 December
Free Cash Flow*
Exclude dividends from joint
ventures and associates
Exclude net interest paid
Exclude capitalised finance
costs paid
Exclude purchase of intangible
and tangible assets net of
proceeds from disposal
Cash flow from
operating activities
before exceptional items*
Exceptional operating
cash flows
Cash flow from
operating activities*
*
Free Cash Flow has been restated following the change in accounting
policy to exclude foreign exchange movements on investment and
financing arrangements.
UTP cash conversion
FCF as defined above includes interest and tax
cash flows. In order to calculate an appropriate cash
conversion metric equivalent to UTP, Trading Cash
Flow is derived from the FCF by excluding tax and
interest items. UTP cash conversion therefore provides
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.
For the year ended 31 December
Free Cash Flow*
Add back:
Tax paid
Non-cash R&D expenditure
Interest received
Interest paid
Capitalised finance costs paid
Trading Cash Flow*
Underlying Trading Profit*
Underlying Trading Profit
cash conversion* **
2015
(restated*)
£m
(35.5)
2016
£m
(33.0)
5.6
0.4
(1.4)
20.1
0.3
(8.0)
82.1
N/A
2.7
0.7
(3.4)
34.7
1.4
0.6
95.9
0.6%
*
As explained above, FCF and UTP have been restated, resulting in a
restatement of Trading Cash Flow and the Underlying Trading Profit
cash conversion.
**
No Underlying Trading Profit cash conversion is given in 2016 as a
negative Trading Cash Flow has arisen.
Net Debt including assets held for sale
We present an alternative measure to bring together
the various funding sources that are included on the
Group’s Consolidated Balance Sheet on page 142 and
the accompanying notes regarding loans receivable and
funding sources within assets held for sale. Net Debt is
a measure to reflect the net indebtedness of the Group
and includes all cash and cash equivalents and any debt
or debt like items, including any derivatives entered into
in order to manage risk exposures on these items.
For the year ended 31 December
Cash and cash equivalents
Loans receivable
Obligations under finance leases
Derivatives relating to Net Debt
Net Debt (excluding assets
and liabilities held for sale)*
Net Debt balances within assets
held for sale
Net Debt (including that
for assets and liabilities
held for sale)*
2015
(restated*)
£m
323.6
19.9
2016
£m
177.8
22.9
(299.9)
(381.9)
(28.2)
18.1
(109.3)
(43.8)
14.6
(67.6)
–
4.7
(109.3)
(62.9)
(39.9)
(56.6)
Loans payable
(62.3)
(19.4)
*
Net Debt has been restated to include derivative financial instruments
that relate to other components of Net Debt.
47
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
Pre-tax Return on Invested Capital (ROIC)
ROIC for the year ended 31 December 2016 is a measure used to assess the efficiency of the resources used by the
Group and is a metric used to determine the performance and remuneration of the Executive Directors. ROIC is
calculated based on UTP and Trading Profit using the Income Statement for the year and a two point average of the
opening and closing balance sheets. The composition of Invested Capital and calculation of ROIC are summarised
in the table below.
For the year ended 31 December
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interest in joint ventures and associates
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
Two point average of opening and closing Invested Capital
Trading Profit*
ROIC%*
Underlying Trading Profit*
Underlying ROIC%*
2016
£m
2015
(restated*)
£m
577.9
509.9
83.6
69.3
14.4
44.4
22.4
543.5
–
89.8
73.2
13.8
50.2
26.4
519.7
39.8
2014
£m
541.5
118.8
38.4
1.6
38.1
31.2
498.8
564.7
1,355.5
1,322.8
1,833.1
(581.9)
(219.9)
(29.7)
(831.5)
1,001.6
(524.5)
–
(16.8)
(541.3)
814.2
768.7
100.3
13.0%
82.1
10.7%
(548.8)
(32.5)
(18.3)
(599.6)
723.2
862.4
137.5
15.9%
95.9
11.1%
*
Profit measures have been restated following the change in accounting policy to include foreign exchange movements on investment and financing
arrangements in net finance costs. As a result, TP, ROIC, UTP and Underlying ROIC have been restated.
48
Strategic ReportSerco Group plc Annual Report and Accounts 2016
Overview of Financial Performance
Revenue
Reported Revenue declined by 5% in the year to
£3,011.0m (2015: £3,177.0m), an 11% reduction in
constant currency.
Revenue including that arising from operations
classified as discontinued declined by 13% in the
year to £3,047.8m (2015: £3,514.6m). Commentary on
the revenue performance of the Group is provided
in the Chief Executive’s Review and the Divisional
Reviews sections.
Trading Profit
Trading Profit for the year was £100.3m (2015 restated:
£137.5m), a 27% reduction year-on-year which includes
the Trading Loss arising on discontinued operations
of £3.3m (2015: profit of £26.6m). Commentary on
the trading performance of the Group is provided
in the Chief Executive’s Review and the Divisional
Reviews sections.
Underlying Trading Profit
UTP was £82.1m (2015 restated: £95.9m), down 14%.
At constant currency UTP was £22.5m lower than 2015
at £73.4m, with a movement of £18.9m relating to the
results of discontinued operations. Commentary on
the underlying performance of the Group is provided
in the Chief Executive’s Review and the Divisional
Reviews sections.
Excluded from UTP were net releases from OCPs of
£9.6m (2015: net charges of £3.0m) following the annual
reassessment undertaken as part of the budgeting
process. Also excluded from UTP were net releases of
£4.6m (2015: net releases of £23.9m) relating to other
provisions and accruals for items identified during the
2014 Contract and Balance Sheet Review. UTP also
excludes the benefit arising from the non-depreciation
of assets classified as held for sale. In 2016, depreciation
and amortisation of £0.4m and £0.1m respectively
(2015: £10.0m and £1.7m) was not charged to Reported
Operating Profit on assets held for sale.
Other one-time items excluded from UTP relate to the
early exit of a UK local authority contract in 2015 in lieu
of anticipated profits in future years, net of direct costs,
impairments and other charges. During 2016 the other
one-time profit recorded relates to a pension scheme
settlement in respect of the same contract that was
agreed in the year.
Discontinued operations
The Global Services division, representing private
sector BPO operations, was classified as a discontinued
operation in 2015. The completion of the sale of the
majority of the offshore private sector BPO business
occurred in December 2015. Disposal of one of the
two remaining elements of the offshore business
was completed in March 2016 and the final element
completed in December 2016. The residual UK onshore
private sector BPO operations have been sold, or
have been exited early with the exception of one
business where completion is expected within the
next twelve months.
49
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
The results of discontinued operations were as follows:
For the year ended 31 December
Revenue
Underlying Trading (Loss) / Profit
Onerous contract and Balance Sheet Review adjustments
Benefit from non-depreciation and non-amortisation of assets held for sale
Trading (Loss) / Profit
Amortisation and impairment of intangibles arising on acquisition
Operating (loss) / profit before exceptional items
Exceptional (loss) / gain on disposal of subsidiaries and operations
Other exceptional operating items
Exceptional operating items
Operating loss
Investment revenue
Finance costs
Exceptional finance costs
Total net finance costs
Loss before tax
Tax on (loss) / profit before exceptional items
Tax on exceptional items
Tax charge
Net loss on discontinued operations (attributable to equity
owners of the Company) as presented in the income statement
2016
£m
36.8
(4.6)
0.8
0.5
(3.3)
–
(3.3)
(2.8)
(11.4)
(14.2)
(17.5)
–
–
(0.4)
(0.4)
(17.9)
(0.1)
–
(0.1)
(18.0)
2015
£m
337.6
14.3
0.6
11.7
26.6
(0.1)
26.5
5.4
(83.0)
(77.6)
(51.1)
2.1
(1.2)
–
0.9
(50.2)
(18.7)
2.7
(16.0)
(66.2)
Joint ventures and associates – share of results
In 2016 the most significant joint ventures and
associates in terms of scale of operations were AWE
Management Limited, Merseyrail Services Holding
Company Limited and Northern Rail Holdings Limited,
with dividends of £19.6m (2015: £17.8m), £7.3m (2015:
£7.2m) and £10.0m (2015: £5.9m) respectively received
from these companies. Total revenues generated by
these three businesses were £968.1m (2015: £978.3m),
£150.3m (2015: £155.1m) and £132.7m (2015: £585.3m)
respectively. The Northern Rail franchise ended on
31 March 2016. From September 2016 there was a
change in the AWE Management Limited shareholding
structure, with the Group's shareholding reducing from
33.3% to 24.5% by way of a return of shares, for which
the Group was paid an amount equal to the reduction
in the net investment held of £1.6m and therefore no
profit or loss on disposal was made.
While the revenues and individual line items are not
consolidated in the Group Consolidated Income
Statement, summary financial performance measures for
our proportion of the aggregate of all joint ventures and
associates are set out below for information purposes.
For the year ended 31 December
Revenue
Operating profit
Net finance costs
Income tax expense
Profit after tax
Dividends received from joint
ventures and associates
2016
£m
480.8
40.7
(0.6)
(6.7)
33.4
40.0
2015
£m
737.2
42.6
(0.4)
(5.2)
37.0
32.5
50
Strategic ReportSerco Group plc Annual Report and Accounts 2016 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 performance of the Group. A
number of small items also arose in 2016 following changes in estimates to items historically treated as exceptional.
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 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.
For the year ended 31 December
Exceptional items arising on continuing operations
2016
£m
2015
£m
Exceptional profit / (loss) on disposal of subsidiaries and operations
2.9
(2.6)
Other exceptional operating items on continuing operations
Impairment of goodwill
Restructuring costs
Aborted transaction costs
Costs associated with UK Government review
Release of UK frontline clinical health contract provisions
Settlement of defined benefit pension obligations
Impairment of interest in joint venture and related loan balances
Other exceptional operating items
Exceptional operating items arising on continuing operations
Exceptional items arising on discontinued operations
(17.8)
(17.2)
(0.1)
(0.1)
0.6
(10.7)
(13.9)
(59.2)
(56.3)
(87.5)
(19.7)
(1.7)
(1.2)
2.8
–
–
(107.3)
(109.9)
Exceptional (loss) / gain on disposal of subsidiaries and operations
(2.8)
5.4
Other exceptional operating items on discontinued operations
Restructuring costs
Impairment of goodwill
Movements in indemnities provided on business disposals
Movement in the fair value of assets transferred to held for sale
Other exceptional operating items
Exceptional operating items arising on discontinued operations
Exceptional operating items arising on continuing and discontinued operations
Exceptional finance costs – continuing
Exceptional finance costs – discontinued
Total exceptional finance costs in continuing and discontinued operations
Tax credit on exceptional items – continuing
Tax credit on exceptional items – discontinued
Total tax impact of exceptional items in continuing and discontinued operations
(1.1)
–
(13.7)
3.4
(11.4)
(14.2)
(70.5)
–
(0.4)
(0.4)
3.1
–
3.1
(2.2)
(65.9)
–
(14.9)
(83.0)
(77.6)
(187.5)
(32.8)
–
(32.8)
0.4
2.7
3.1
Total operating and financing exceptional items in continuing
and discontinued operations
(67.8)
(217.2)
51
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
Exceptional loss on disposals of continuing operations
There were no material disposals of continuing
operations in the year. The profit on disposal of £2.9m
mainly relates to a net credit of £2.5m on transactions
completed in prior years, which includes cash of £4.5m
as a result of deferred consideration payments received
which had previously been provided for.
Other exceptional operating items arising
on continuing operations
In 2016, goodwill of £17.8m arose following the
acquisition of Orchard & Shipman (Glasgow) Limited,
the Group’s subcontractor on the COMPASS contract,
providing accommodation to asylum seekers in Scotland
and Northern Ireland on behalf of the Home Office. This
goodwill was then immediately impaired as the CGU is
forecast to be loss making and therefore the asset cannot
be supported. The annual impairment testing of CGUs
has identified no other impairment of goodwill. In 2015,
the Americas CGU was impaired by £87.5m, due primarily
to a higher level of contract attrition than previously
forecast and the associated impact on future cash flows.
Given the significant size of the impairment charge and
that it is not part of the normal trading performance of
the business it was considered appropriate to treat as
exceptional in the year.
In 2016, a charge of £17.2m (2015: £19.7m) arose in
relation to the restructuring programme resulting
from the Strategy Review. This included redundancy
payments, provisions, external advisory fees and other
incremental costs. Due to the nature and scale of the
impact of the transformation stage of our Strategy
Review, the incremental costs associated with this
programme were considered to be exceptional in the
prior year and have been treated consistently in 2016.
Non-exceptional restructuring charges are incurred
by the business as part of normal operational activity,
which in the year totalled £6.7m (2015: £13.8m).
The disposal of the Environmental and Leisure
businesses was aborted in 2015 and during 2016 costs
related to the aborted transaction were finalised,
resulting in a charge of £0.1m (2015: £1.7m).
In 2016 there were exceptional costs totalling £0.1m
(2015: £1.2m) associated with the UK Government
reviews and the programme of Corporate Renewal,
reflecting the related external costs. These costs were
treated as exceptional when the matter first arose and
consistent treatment is applied in the current year.
In 2016 there were releases of provisions of £0.6m
(2015: £2.8m) which were previously charged through
exceptional items in relation to the exit of the UK
Frontline Clinical Health contracts.
Following the finalisation of the Revised Fair Deal, a
number of employees are being transferred from the
Serco Pension and Life Assurance Scheme (SPLAS)
back to the Principal Civil Service Pension Scheme.
This transfer was finalised in December 2016 at which
point all obligations of SPLAS to pay retirement benefits
for these individuals were eliminated and as a result
a settlement charge of £10.7m arose. This has been
treated as an exceptional item in the year as a result of
the transaction being material in size and nature and
being outside of the normal course of business. The
charge of £10.7m is an accounting charge only, the cash
impact of the settlement which will be paid in future
periods, is estimated at £3.0m and is offset by future
savings in contributions resulting from the transfer.
A review of a joint venture’s cash flow projections has
led to the impairment of certain equity interests and
associated receivables balances, totalling £13.9m. The
impairment is outside of the normal course of business
and of a significant value, and is therefore considered to
be an exceptional item.
Exceptional profit or loss on disposal of
discontinued operations
The loss on disposal of discontinued operations of
£2.8m (2015: profit of £5.4m) relates to the sale of
offshore and UK onshore private sector BPO operations.
The majority of the offshore BPO operations were sold
in 2015 with the separate disposal of operations in
the Middle East completing in 2016. The UK onshore
business has been sold or transferred to various
different purchasers with a final element remaining at
the year end which is expected to be sold in 2017.
Other exceptional operating items arising on
discontinued operations
In 2016 a charge of £1.1m (2015: £2.2m) 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.
52
Strategic ReportSerco Group plc Annual Report and Accounts 2016 During 2015, an impairment test of the Global Services
business was conducted based on the 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.
A charge of £13.7m has arisen in 2016 in relation to
the movement in the value of indemnities provided
on business disposals made in previous years. This
relates to changes in exchange rates where indemnities
were provided in foreign currencies, and increases to
provisions for interest and penalties on any indemnities.
The original disposal of the business was treated as
exceptional and these revisions have been treated on
a consistent basis.
The value of assets held for sale increased by £3.4m
in 2016, reflecting the changing estimate of the likely
proceeds and movements of the assets held for sale
since the prior balance sheet date. In 2015 the held
for sale assets were impaired by £14.9m through
exceptional items.
Exceptional finance costs
A charge of £0.4m was incurred as a result of early
payments to the US Private Placement (USPP)
Noteholders following the disposal of the offshore
private sector BPO business. These charges are treated
as exceptional finance costs as they are directly linked
to the restructuring resulting from the Strategy Review.
Similar charges arose in 2015 which, together with the
costs related to the preservation of the Group’s existing
finance facilities, totalled £32.8m.
Tax impact of exceptional items
The tax impact of exceptional items in continuing
and discontinued operations was a tax credit of £3.1m
(2015: £3.1m).
Pre exceptional finance costs and investment
revenue on continuing and discontinued operations
Investment revenue of £9.3m (2015: £8.2m) includes
interest accruing on net retirement benefit assets
of £4.7m (2015: £4.9m), interest earned on deposits
and other receivables of £3.6m (2015: £3.2m) and the
movement in discounting of other receivables of £1.0m
(2015: £0.1m).
Finance costs of £21.9m (2015 restated: £40.1m) includes
interest incurred on the USPP loans and the Revolving
Credit Facility of £15.6m (2015: £24.7m), facility fees and
other charges of £3.5m (2015: £7.2m), interest payable
on finance leases of £1.6m (2015: £2.5m), the movement
in discount on provisions of £2.4m (2015: £5.6m) and
a credit for foreign exchange on financing activities
of £1.2m (2015: £0.1m). The last of these items was
previously included in Reported Operating Profit and
therefore represents a restatement on the previously
reported results.
Tax charge
In 2016, we recognised a total tax charge of £12.8m
(2015: £33.5m), being £12.7m (2015: £17.5m) on
continuing operations profit of £29.6m (2015: loss of
£69.4m) and £0.1m (2015: £16.0m) on discontinued
operations losses of £17.9m (2015: £50.2m). Of this
amount, a £3.1m credit (2015: £0.4m credit) arises on
exceptional items on continuing operations.
In respect of the results of our continuing operations,
the profit on pre-exceptional items of £98.5m (2015:
£106.1m) less pre-exceptional finance costs of £12.6m
(2015: £32.8m) is £85.9m (2015: £73.3m), which suffers a
tax charged of £15.8m (2015: £17.9m), giving a tax rate of
18.4% (2015: 24.4%).
The principal reasons why the tax rate on profit before
exceptional items and tax from continuing operations at
18.4% is lower than the UK standard corporation tax rate
of 20% 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 and the
majority of corporate costs) offset by the impact of our
joint ventures whose post-tax results are included in our
pre-tax profit.
The tax charge on discontinued operations’ losses and
the tax credit on exceptional losses of £70.8m have only
attracted small amounts of tax because these costs and
losses are largely generated in the UK, where deferred
tax assets are not being recognised due to insufficient
UK taxable profits in the foreseeable future.
53
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
For the year ended 31 December
Underlying Trading Profit
Net finance costs from continuing operations
Net finance costs from discontinued operations
Total net finance costs from continuing and discontinued operations
Underlying Trading Profit less net finance costs from continuing
and discontinued operations
Tax charge on Underlying Trading Profit less net finance costs
from continuing and discontinued operations
Pre exceptional
2016
£m
Pre exceptional
2015
£m
82.1
(12.6)
–
(12.6)
69.5
(24.4)
95.9
(32.8)
0.9
(31.9)
64.0
(30.5)
Underlying effective tax rate
35.2%
47.7%
The tax charge on an underlying basis, reflecting
Underlying Trading Profit of £82.1m net of finance costs
of £12.6m, was £24.4m, representing an underlying
effective tax rate of 35.2% (2015: 47.7%).
The effective tax rate in 2016 (35.2%) is lower than
2015 (47.7%) at an Underlying Trading Profit less finance
costs level. This is primarily due to reduced UK finance
expenses during this period which have not given rise to
a tax credit as no UK deferred tax asset was recognised
on them.
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
incurred and 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. When our UK business returns to
sustainable profitability our existing UK tax losses will
be recognised or utilised, and the effective rate will
be reduced.
Taxes paid
Net corporate income tax of £10.5m was paid during
the year, relating primarily to our operations in AsPac
(£5.8m), Europe (£2.3m), Middle East (£1.5m) and
Americas (£0.9m). The Group's UK operations have
transferred tax losses to its profitable joint ventures
and associates in return for cash payments from the
joint ventures and associates giving a cash tax inflow in
the UK of £4.8m. In addition there were small cash tax
refunds where we have overpaid tax in previous periods.
This results in an overall tax paid figure in our cash flow
statement of £5.6m.
The amount of tax paid (£5.6m) differs from the tax
charge in the period (£12.8m) mainly due to the effect
of future expected cash tax outflows for which a charge
has been taken in the current period and the impact of
the time lag on receipts of cash from joint ventures and
associates for losses transferred to them.
Further detail is shown below of taxes that have been
paid during the year.
Contingent tax assets
Total tax contribution
At 31 December 2016, the Group has gross estimated
unrecognised deferred tax assets of £1.04bn (£187m
net), which are potentially available to offset against
future taxable profits. These principally relate to tax
losses of £824m. Of these tax losses, £697m have
arisen in the UK business (net £118m).
Our tax strategy of paying the appropriate amount of
tax in the countries in which we operate means that
we pay a variety of taxes across the globe. In order to
increase the transparency of our tax profile, we have
shown below the cash taxes that we have paid across
our regional markets.
A £10.0m UK tax asset has been recognised at
31 December 2016 (2015: £10.5m) on the basis of
forecast utilisation against future taxable profits.
In total during 2016, Serco globally contributed
£586.6m of tax to governments in the jurisdictions
in which we operate.
54
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Taxes by category
For the year ended 31 December 2016
Total of corporate income tax
Total of VAT and similar
Total of people taxes
Total other taxes
Total
Taxes by region
For the year ended 31 December 2016
UK & Europe
AsPac
North Americas
Middle East
Total
Taxes borne
£m
Taxes collected
£m
10.5
8.1
109.6
1.9
130.1
0.1
161.7
294.6
0.1
456.5
Taxes borne
£m
Taxes collected
£m
76.1
24.2
27.2
2.6
130.1
252.8
122.2
79.4
2.1
456.5
Total
£m
10.6
169.8
404.2
2.0
586.6
Total
£m
328.9
146.4
106.6
4.7
586.6
Corporation tax, which has historically been the only cost to be separately disclosed in our Financial Statements, is
only one element of our tax contribution. For every £1 of corporate tax paid directly by the group (tax borne), we
bear £11.35 in other business taxes. The largest proportion of these is in connection with employing our people.
In addition, for every £1 of tax that we bear, we collect a further £3.50 on behalf of national governments (taxes
collected). This amount is directly impacted by the people that we employ and the sales that we make.
55
Financial StatementsDirectors’ ReportStrategic Report
Finance Review continued
Dividends
Cash flows
The Board is not recommending the payment of a
dividend in respect of the 2016 financial year. The
Board’s appraisal of the appropriateness of dividend
payments takes 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 prevailing market outlook.
Although the Board is committed to resuming dividend
payments as soon as it believes it prudent to do so,
in assessing whether we should resume dividend
payments in respect of 2016, we have been mindful
of the fact that our forecasts for 2017 anticipate a
reduction in earnings, a free cash outflow and an
increase in net debt; furthermore, we are only part-
way through our recovery. In these circumstances, the
Board believes that it would not be prudent to resume
dividend payments in respect of 2016.
Share count and earnings per share
The weighted average number of shares for EPS
purposes was 1,088.3m at 31 December 2016 (2015:
986.5m). EPS before exceptional items from both
continuing and discontinued operations was 6.12p per
share (2015: 6.55p), including the impact of exceptional
items EPS was a loss of 0.11p (2015: loss of 15.47p).
Underlying EPS was 4.13p per share (2015: 3.44p).
The UTP of £82.1m (2015: £95.9m) converts into a trading
cash outflow of £8.0m (2015: inflow of £0.6m). UTP
reduced by £13.8m and led to an £8.6m reduction in
Trading Cash Flows. The low conversion was primarily
due to the cash outflows arising on the utilisation of
contract provisions of £84.2m which is excluded from
UTP but included in Trading Cash Flows.
The table below shows the operating profit and FCF
reconciled to movements in Net Debt. FCF for the year
was an outflow of £33.0m compared to an outflow of
£35.5m in 2015 (restated). Commentary on the FCF
performance of the Group is provided in the Chief
Executive’s Review and the Divisional Reviews sections.
The movement in Net Debt including assets and
liabilities held for sale is an increase of £46.4m in 2016
compared to a decrease of £608.6m for 2015, arising
from three key areas:
• The proceeds from the Rights Issue of £530.3m
in 2015.
• A reduction of the net cash inflows from acquisitions
and disposals of subsidiaries of £165.7m to £19.2m
due to a significant portion of the private sector
business disposal completing in 2015.
• An offsetting reduction in the cash outflows on
exceptional items of £48.2m to £40.2m in 2016, due
primarily to the payment of exceptional finance costs
of £31.8m in 2015. The majority of the exceptional
cash payments in 2016 relate to the break and exit
costs of the residual UK private sector BPO operations
and restructuring claims and costs arising on the
implementation of the outcome of the Strategy Review.
56
Strategic ReportSerco Group plc Annual Report and Accounts 2016 For the year ended 31 December
Operating profit / (loss) on continuing operations*
Operating loss on discontinued operations
Remove exceptional items
Operating profit before exceptional items on continuing
and discontinued operations*
Less: profit from joint ventures and associates
Movement in provisions
Other non-cash movements*
Operating cash inflow before movements in working capital,
exceptional items and tax*
Working capital movements
Tax paid
Non-cash R&D expenditure
Cash flow from operating activities before exceptional items*
Dividends from joint ventures and associates
Interest received
Interest paid
Capitalised finance costs paid
Purchase of intangible and tangible assets net of proceeds from disposals
Free Cash Flow*
Net cash inflow on acquisition and disposal of subsidiaries
Proceeds from Rights Issue
Purchase of own shares net of share option proceeds
Other movements on investment balances
Capitalisation and amortisation of loan costs
Unwind of discounting and capitalisation of interest on loans receivable
Non-recourse loan disposals, repayments and advances
New, acquired and disposed finance leases
Exceptional items
Cash movements on hedging instruments*
Foreign exchange loss on Net Debt*
Movement in Net Debt including assets and liabilities held for sale*
Assets 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*
2016
£m
42.2
(17.5)
70.5
95.2
(33.4)
(118.4)
63.9
7.3
(23.7)
(5.6)
(0.4)
(22.4)
40.0
1.4
(20.1)
(0.3)
(31.6)
(33.0)
19.2
–
–
0.7
(0.7)
2.9
–
(0.5)
(40.2)
47.0
(41.8)
(46.4)
4.7
(67.6)
(109.3)
(62.9)
(109.3)
2015
(restated*)
£m
(3.8)
(51.1)
187.5
132.6
(37.0)
(116.0)
83.6
63.2
(22.6)
(2.7)
(0.7)
37.2
32.5
3.4
(34.7)
(1.4)
(72.5)
(35.5)
184.9
530.3
4.4
(1.3)
(0.6)
–
24.0
0.5
(88.4)
19.3
(29.0)
608.6
(44.2)
(632.0)
(67.6)
(671.5)
(62.9)
*
Operating profit, other non-cash movements, cash movements on hedging instruments, foreign exchange loss on Net Debt and Net Debt have been
restated following the change in accounting policy regarding foreign exchange movements on investment and financing arrangements and the change in
definition of Net Debt to include derivative financial instruments that relate to other components of Net Debt. The sub totals including Free Cash Flow have
changed as a result. See note 2 to the Consolidated Financial Statements for further details.
57
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
Net Debt
As at 31 December
Cash and cash equivalents
Loans receivable
Other loans
Obligations under finance leases
Derivatives relating to Net Debt components*
Net Debt
Including assets
and liabilities
held for sale
2016
£m
Including assets
and liabilities
held for sale
(restated*)
2015
£m
177.8
22.9
(299.9)
(28.2)
18.1
(109.3)
328.8
19.9
(381.9)
(44.3)
14.6
(62.9)
* As explained above, Net Debt has been restated to include derivative financial instruments that relate to other components of Net Debt.
Average Net Debt as calculated on a daily basis for
the year ended 31 December 2016 was £119.4m (2015
restated: £444.1m, pre Rights Issue impact), compared
with the opening and closing positions of £62.9m and
£109.3m respectively. Peak Net Debt was £182.9m
(2015 restated: £858.6m, pre rights issue impact).
Following the disposal of the majority of the private
sector BPO business, the Group was required to offer
the net disposal proceeds to the debt holders in
prepayment. As a result of this process, £117m ($167m)
of private placement notes were repaid at par on
16 February 2016.
Treasury operations and risk management
Interest rate risk
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 audit review.
Liquidity and funding
As at 31 December 2016, the Group had committed
funding of £770m, comprising £290m of private
placement notes and a £480m revolving credit facility
with a syndicate of banks which was undrawn. In
addition, the Group had a receivables financing facility
of £30.0m of which £7.7m was utilised at the year end
(2015: £30.0m).
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 2016, 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 Sterling 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 Sterling and US Dollar. 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.
58
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Debt covenants
The principal financial covenant ratios are consistent across the private placement loan notes, receivables financing
facility and the Group’s £480m revolving credit facility, with a maximum Consolidated Total Net Borrowings (CTNB)
to covenant EBITDA of 3.5 times and minimum covenant EBITDA to net finance costs of 3.0 times, tested semi-
annually. A reconciliation of the basis of calculation is set out in the table below.
For the year ended 31 December
Operating profit before exceptional items on
continuing and discontinued operations*
Remove:
Joint venture and associate post-tax profits
Foreign exchange credit on investing and financing arrangements*
Add:
Dividends from joint ventures and associates
Amortisation and impairment of other intangible assets
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Share based payment expense
Covenant EBITDA
Net finance costs on continuing and discontinued operations*
Add: Foreign exchange credit on investing and financing arrangements*
Other adjustments
Covenant net finance costs
Recourse Net Debt (including assets and liabilities held for sale)*
Loans receivable, foreign exchange adjustments and other items
CTNB
CTNB / covenant EBITDA (not to exceed 3.5x)
Covenant EBITDA / covenant net finance costs (at least 3.0x)
2016
£m
95.2
(33.4)
1.2
40.0
26.9
24.8
0.7
9.7
165.1
12.6
1.2
3.3
17.1
109.3
5.5
114.8
0.7x
9.7x
2015
(restated*)
£m
132.6
(37.0)
0.1
32.5
40.5
28.9
2.1
9.8
209.5
31.9
0.1
(0.6)
31.4
62.9
28.8
91.7
0.4x
6.7x
*
As explained above, operating profit and net finance costs have been restated following the change in accounting policy regarding foreign exchange
movements on investment and financing arrangements. These adjustments have been reversed in order to maintain the definition of EBITDA and net finance
costs per the covenant. CTNB is consistent with the new definition of Net Debt and is unaffected by the change in accounting policy.
59
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
Net assets summary
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
2016
£m
2015
£m
Including
assets held
Adjustment
for assets
As reported*
for sale
held for sale
As reported
577.9
517.7
83.6
69.3
73.0
50.8
150.4
1,005.0
22.4
548.4
11.0
177.8
759.6
–
759.6
1,764.6
(525.1)
(25.9)
(172.3)
(12.3)
(9.7)
(745.3)
–
(745.3)
(16.8)
(30.5)
(249.4)
(15.9)
(290.2)
(17.7)
(620.5)
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)
–
(912.6)
(18.3)
(22.3)
(315.0)
(28.0)
(249.7)
(11.5)
(644.8)
(7.8)
(0.4)
(0.9)
(0.2)
–
–
(9.3)
–
(20.6)
(4.7)
(5.2)
(30.5)
39.8
9.3
–
7.4
0.1
22.6
0.5
–
30.6
(32.5)
(1.9)
–
–
1.9
–
–
–
1.9
–
–
509.9
89.8
73.2
71.8
42.2
127.1
914.0
26.4
529.1
6.6
323.6
885.7
39.8
925.5
1,839.5
(551.2)
(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
Total liabilities
Net assets
(1,365.8)
(1,557.4)
398.8
282.1
* No amounts were included in held for sale as at 31 December 2016.
60
Strategic ReportSerco Group plc Annual Report and Accounts 2016
The breakdown of the Group’s net assets is summarised above, showing the impact of the assets and liabilities
held for sale for each line item in the prior year.
At 31 December 2016 the balance sheet had net assets of £398.8m, a movement of £116.7m from the closing net asset
position of £282.1m as at 31 December 2015. The increase in net assets is mainly due to the following movements:
• An increase in goodwill by £68.0m caused by movements in foreign exchange rates. Total goodwill of £401.2m
relates to non-UK cash generating units.
• A decrease in provisions of £60.0m. Further details on the provision balance is provided below.
• An increase in trade and other current assets and liabilities of £45.4m due in part to the unwinding of the
forfeiting facility of £22.3m and other working capital movements, including foreign exchange movements in
non-UK businesses.
• An increase in Net Debt of £46.4m due to the working capital movements noted above offset by cash generated
from operations.
• An increase in the assets reflecting the Group’s retirement benefit obligations of £17.1m, due to the performance
of liability driven investments.
Provisions
The total of current and non-current provisions, excluding provisions related to businesses held for sale, has
decreased by £60.0m since 31 December 2015. The movement is due to a decrease in contract provisions of £81.9m
offset by an increase in non-contract provisions of £21.9m. The increase in non-contract provisions is primarily due
to the provision for the exceptional defined benefit scheme settlement cost of £10.7m and an £8.7m increase in
employee provisions due to the ongoing Strategic Review restructuring programme.
Movements in contract provisions, including those related to businesses held for sale since the 31 December 2015
balance sheet date, are as follows:
At 1 January 2016
Arising on acquisition
Charged to income statement – trading
Charged to income statement – exceptional
Released to income statement – trading
Released to income statement – exceptional
Utilised during the year
Unwinding of discount
FX
Transfer to trade payables
Reclassifications
At 31 December 2016
Onerous
Contract
Provisions
£m
(299.9)
(14.0)
(56.1)
(0.6)
65.7
0.6
84.2
(2.4)
(11.6)
11.5
2.4
(220.2)
Other
contract
provisions
£m
Total contract
provisions
including assets
held for sale
£m
Total
contract
provisions as
reported
£m
Held for sale
adjustment
£m
(13.2)
–
(0.5)
–
7.6
–
0.9
–
0.3
–
4.9
–
(313.1)
11.0
(302.1)
(14.0)
(56.6)
(0.6)
73.3
0.6
85.1
(2.4)
(11.3)
11.5
7.3
(220.2)
–
–
0.6
(8.4)
–
(3.1)
–
(0.1)
–
–
–
(14.0)
(56.6)
–
64.9
0.6
82.0
(2.4)
(11.4)
11.5
7.3
(220.2)
61
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
The balance of OCPs at 31 December 2016 was
£220.2m (2015: £299.9m). Our OCP balances are subject
to ongoing review and a full bottom-up assessment
of the forecasts that form the basis of the OCPs is
conducted as part of the annual budgeting process.
The overall net release of OCPs was £9.6m in 2016 and
utilisation was £84.2m.
In 2016, additional charges have been made in respect
of future losses on a number of onerous contracts
totalling £56.7m. This increase related to revisions to
existing OCPs of £53.2m and new provisions raised on
two contracts totalling £3.5m, with the new provisions
relating to contracts which have been operating for
a number of years. Of the total charge, £0.6m relates
to contracts included in the held for sale businesses
and are included within exceptional items, consistent
with previous treatment. No further exceptional OCP
charges or releases are expected in the future.
Included within additional charges made to existing
OCPs was £29.5m relating to our Ontario Driver
Examination Services contract. This contract is to
provide multiple services, including administering driver
examinations and the implementation and roll out of
an IT system across multiple locations. The contract
was initially identified as onerous during the 2014
Contract and Balance Sheet Review. In 2016 delays and
cost overruns relating to the IT system implementation
have resulted in higher forecast implementation
costs. Furthermore, the future performance of the
system has also been reassessed and this has resulted
in a reduction to the expected future operational
efficiencies and savings forecast to be achieved
following the system implementation. These factors
combined have increased the expected total future
losses of the contact, resulting in both the increase to
the OCP of £29.5m and an additional in year charge of
£8.8m arising from the cost overruns and programme
delays experienced during the year.
An additional £7.1m in respect of the Prisoner Escort
and Custody Services (PECS) contract has been
charged. It was previously anticipated that the contract,
which has up to three extension years, would not be
extended in its current form but our expectation now
is that it will be extended for one of the potential three
extension years.
There was also an additional £6.8m charge in the year
in respect of updating the assumptions regarding the
operational and maintenance costs of running the
Caledonian Sleepers contract.
In 2016, releases to the income statement from OCPs
totalling £66.3m were made, including £0.6m in respect
of provisions previously charged to exceptional items.
Included within the releases in the year was £33.9m in
respect of the COMPASS contract that reflected the
updated forecast assumptions around service user
volumes and accommodation costs, and the impact
from the terms agreed with the customer as part of
the contract extension. We had previously included
assumptions for the impact of the extension in the
COMPASS OCP and the updated view of reduced losses
on this contract reflect the improved terms under which
we will operate under the extension. On 1 December
2016 Serco acquired Orchard & Shipman (Glasgow)
Limited, a subcontractor on the COMPASS contract
that provided services to the Scotland and Northern
Ireland regions. On acquisition an OCP of £14.0m was
recognised as part of the opening balance sheet of
Orchard & Shipman, which following the acquisition is
included in the provision for future losses to be incurred
by the Group.
In the year, a £11.9m release was recorded in respect
of the contract to operate and maintain the fleet
of Armidale Class Patrol Boats (ACPB) for the Royal
Australian Navy. This release arose following both
better than forecast trading under the contract as
re-negotiated in November 2015, and the latest
assessment of any post contract costs after the
operations are transferred to the new contractor
on 30 June 2017.
There were also a number of other smaller releases,
notably in respect of HMP Ashfield and the Future
Provision of Marine Services contract.
During the year a settlement was reached with
the customer in respect of HMAS Bundaberg, the
vessel operating under the ACPB contract which was
destroyed by fire in 2014. The provision relating to this
claim was transferred to creditor and debtor balances
within working capital, given that the amounts owed to
the customer and the associated insurance receivable
are more certain and therefore did not meet the criteria
to be included within the provisions balance.
62
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Contract and Balance Sheet Review items
There were adjustments arising in 2016 on items
identified during the Contract and Balance Sheet
Review in 2014. These adjustments relate to a number
of items including:
• The releases of other provisions and accruals of
£13.4m where liabilities have either been settled for
less than the amount provided or accrued, or have
lapsed due to the passage of time.
• A charge of £8.8m reflecting a reduction in the
accrued revenue for the Ontario Driver Examination
Services contract resulting from the impact of long-
term contract accounting.
The overall net improvement to Trading Profit from
OCPs and Contract and Balance Sheet Review
adjustments was £14.2m in 2016. The cumulative net
improvement to Trading Profit from OCPs and Contract
and Balance Sheet Review items from 2015 and 2016 is
£35.1m which represents 5% of the original total taken
through Trading Profit.
Angus Cockburn
Group Chief Financial Officer
22 February 2017
63
Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility
We strive to constantly fulfil these
expectations, recognising our
responsibilities and seeking to earn
the trust and respect of all public
service stakeholders.
For a business founded and focused on the delivery of
public services – contributing to the lives of thousands
of citizens every year – corporate responsibility is not
an initiative. It is, and must always be, inextricably
embedded in all that we do.
We believe that true success in providing public
services around the world – for us, for our customers
and for society – requires commitment to a social as
well as commercial contract. We can only achieve a
sustainable business model by doing the very best for
governments and society, not just within our contracts,
but beyond them.
To better reflect our commitment to corporate
responsibility, in 2016 we refreshed our strategy and
clarified our ambition, “to be a trusted partner of
governments, delivering superb public services that
transform outcomes and make a positive difference
for our fellow citizens”.
To be successful, we must operate in a
responsible manner.
We deliver public services. Taxpayers expect
them to be effective; governments expect them
to be efficient and improved; society expects
them to be delivered ethically, safely and with
respect for people and the environment.
Underpinning this ambition are three key principles,
which frame and shape our approach and our activities:
1) A public service ethos is inherent, and essential,
to our work;
2) How we deliver within our contracts is as important
as what we deliver; and
3) Our public service ethos is not limited to the
perimeter of our contracts.
During 2016, we have built on these foundations,
reviewing and refreshing our Values; strengthening
our governance and risk management processes; and
introducing new areas of focus.
We have also continued to make progress against
the long-term objectives we have set for sustainable
development, but we are never complacent. We
recognise that there is still work to be done to ensure
that as a business we always uphold our public service
ethos and meet our responsibilities to our stakeholders
and the wider community.
Here, we share a summary of our approach to managing
corporate responsibility, along with our initiatives and
performance for 2016. We measure how we perform
on four key areas of focus for the business: Our People,
including how we support the communities we work in;
Compliance with Ethical Standards; Health and Safety;
and Our Environmental Impacts.
A more detailed corporate responsibility report for the
year is available on our website: www.serco.com
64
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Our Values
Trust, Care, Innovation, Pride.
First and foremost, we live by our Values.
They are at the heart of the behaviours we expect in our business. While our Code of Conduct defines
‘what’ we expect, our Values define the ‘how.’
Pride
We want to be proud of what we do.
We know that the work we do is important, and we take
pride in doing it well.
We value energy and enthusiasm, skill and experience,
and an ability to make hard work fun.
We contribute both as individuals and as part of a team.
Being Proud of what we do acknowledges that we are
doing things well and making a real difference.
Embedding our Values
Our Values were launched globally at the start of
2016 and rolled out across the business in all regions,
supported by a comprehensive suite of communication
and education tools. The Divisions have worked hard to
embed the Values, designing and launching campaigns
and initiatives which aim to integrate the Values into
existing ways of working and bring the Values to life.
The Values have also been incorporated across
the Serco Management System (SMS), our Code of
Conduct and other existing channels, publications and
resources. We have also updated our annual employee
engagement survey with the Values, which has enabled
us to measure how successfully they have been
embedded across the organisation.
We have worked with our employees to review our Values
alongside the review of our strategy, refreshing and
simplifying them to ensure they remain current, relevant,
and easily and consistently understood. We have also put
systems and processes in place to ensure that they are
consistently applied across our organisation.
Trust
We work hard to earn trust and respect.
We deliver on our promises; are open, straightforward
and honest; do the right thing; and take personal
responsibility for getting things done.
Building Trust will sustain the business we have and
build the business we want in the future.
Care
We care deeply about the services we provide and the
communities we serve, and we look after each other.
We work together to deliver high-quality public
services, often of great importance to the nation and
the communities we serve.
We take care of each other, and those we serve, and we
aim to make a positive difference to people's lives.
Demonstrating Care will make a positive difference to
people's lives and ensure we look after each other.
Innovation
We aspire to be better than anyone else at what we do.
We continuously improve our ways of working, and try
new ideas, big and small.
We share our knowledge and experience and embrace
change, knowing that if we don't provide innovation and
value for money to our customers, our competitors will.
Driving Innovation will differentiate us from our
competitors and add value to our customers.
65
Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Our approach
To us, 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;
• understand and minimise business risk and achieve appropriate financial returns;
• act swiftly to rectify error, learn from our mistakes and strive for improvement.
By being responsible, we will support the communities we serve, earn trust and respect, strengthen our
reputation and brand, enhance our financial performance and create sustainable value for our shareholders.
Managing corporate responsibility
The Serco plc Board has ultimate responsibility for
the Group's business strategy, including Corporate
Responsibility (CR), and for setting the Group’s culture,
values and ethical standards. Mike Clasper, a Non-
Executive Director, takes responsibility at Board level
for CR and chairs Serco’s Corporate Responsibility
Committee (CRC) which has oversight of our approach
to CR, its governance and the standards and policies in
place. More information on the CRC can be found in the
Corporate Governance Report on page 92.
Ed Casey, Group COO, is a member of the CRC, and is
responsible for promoting the Group’s approach to CR
and its effective implementation, as agreed with the
Executive Committee.
Each CR element has a designated Group Lead,
responsible for engaging with Divisional Chief
Executives to develop CR strategy, objectives and
performance indicators relevant to their business
operations and strategy, and monitor and report
on performance.
Serco Management System
The Serco Management System (SMS) is the Group's
management framework, describing how we do
business. It defines the rules which govern the way
we operate and deliver our strategy and the way
we behave.
The elements that make up the SMS are regularly
reviewed to ensure they are up-to-date and meet
our needs as well as relevant laws and regulatory
requirements in the countries where we operate.
All our employees complete appropriate SMS training
when they join Serco and are required to comply with
these standards at all times. Failure to comply with the
SMS can have significant consequences for individuals,
managers or the Company as a whole.
You can find out more about the SMS at:
www.serco.com/about/sms
Our Code of Conduct
Our Code of Conduct sets out in a concise way the
rules, standards and behaviours that are expected
from everyone who works for and on behalf of Serco,
irrespective of their role and location. Together with our
Values and our policies and standards, it is an integral
component in the SMS.
All Serco employees are expected to know, use and
live our Code.
To support them, we make sure everyone who works
for or with us understands our Code and knows how to
apply it. We provide confidential resources and support
for everyone to get advice or report Code violations.
We deal effectively with any concerns about conduct
and put improvements in place quickly after we have
identified them.
In 2017 we will look to incorporate the work on defining
behaviours, which forms part of the roll-out of our
refreshed Values, into the Code.
You can find out more about our Code of Conduct at:
https://codeofconduct.serco.com
Ensuring ethical standards
Ethical issues remain a business risk in certain regions
and industry sectors where we operate or may operate
in the future.
We therefore have a framework of Divisional and
regional managers, who are responsible for the
governance and development of our ethics and
compliance programmes, on issues including business
integrity and values, anti-bribery and corruption and
human rights.
66
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Human rights and slavery
Third party due diligence
We seek to respect and uphold the human rights of
individuals in all aspects of our operations wherever
we operate. Our Human Rights Group Standard
demonstrates this commitment and sets out
expectations for individual and corporate behaviour
across our business in regards to human rights.
We recognise our responsibility to understand the human
rights risks in our business – including those relating
to slavery and human trafficking – and any potential
impacts associated with the services we provide, the
customers we work with and the suppliers we use. We are
committed to the fair and appropriate treatment of our
employees and those who are in the facilities we manage
or benefit from the services we provide.
We use International Human Rights Standards such
as the United Nations Guiding Principles on Business
and Human Rights (2011) (UN Guiding Principles)
as frameworks to assist our decision-making and
constructive engagement.
In view of the introduction of the Modern Slavery Act
in the UK and in recognition of our responsibility to
understand potential human rights impacts associated
with the services we provide, we have completed a
Company-wide ethics, compliance and human rights
risk assessment, including the risk of slavery and human
trafficking taking place in our business and across our
direct supply chain.
The findings show a low risk of slavery and human
trafficking taking place in our direct business
operations. However, we recognise the need to
continue to review performance, particularly in our
direct supply chain.
During the year we have also reviewed our training on
protecting human rights, and the prevention of slavery
and human trafficking in particular.
All employees are made aware of our commitment
to human rights. In recognised high-risk areas,
specific training on slavery and human trafficking
is also undertaken.
In 2017 we will build on our existing slavery and human
trafficking training and look to share best practice whilst
putting more effective guidance in place regarding risk
assessments for slavery and human trafficking.
You can review our 2016 Slavery and Human Trafficking
Statement on our website: www.serco.com
Our Business Conduct and Ethics Group Standard
sets the global requirement for due diligence in the
engagement of third parties. This includes, but is not
limited to, customers, suppliers, agents and other third
parties. It details the process that must be followed
to seek to ensure that the values and practices of
anyone working with us are aligned to our own, and
to proactively identify and seek to mitigate any risks
inherent in a potential partnership or agreement before
proceeding into any arrangement. For suppliers where
a potential issue has been raised or they operate in high
risk areas, we assess the issues and where appropriate
undertake enhanced due diligence.
Once we have made an agreement, we seek to monitor
for changes or misconduct so that we remediate any
incidents that may occur.
In 2016, we introduced a consistent global approach to
due diligence. In 2017 we will continue to build on this to
seek greater assurance from those selected suppliers in
specific risk areas of their commitment to ensuring that
slavery and human trafficking is not within their supply
chain. We will also update our procedure for taking on
new suppliers.
Suppliers and partners
Our suppliers play a key role in achieving our business
performance and we recognise the importance of
selecting suppliers who are committed to ethical
standards and business practices compatible with ours.
We have a Procurement and Supply Chain function
to deliver consistent procurement processes in the
selection and management of 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
participating suppliers; and to ensure compliance with
laws and regulations, our ethical standards, Code of
Conduct and human rights throughout our supply chain.
Our Supplier Code of Conduct, which supplements our
employee Code, applies to all our suppliers, including
their facilities. It formalises our practices and makes
clear that we expect all our suppliers to behave in a
manner compatible with our own standards.
As with our suppliers, we seek to ensure that our joint
venture partners meet the standards we have set
ourselves and continue to enhance our systems and
processes to this end.
67
Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Our People
Our services are delivered through people: we are entirely dependent on their skills and commitment to
deliver the services our customers expect. They are the single greatest contributor to our reputation.
People flourish when they are engaged, inspired and motivated to give their best.
We value diversity and work to create an inclusive and fair environment for all.
To support our colleagues and ensure they are able to
achieve their potential and work to the best of their ability,
we have policies, systems and processes for recruiting,
developing, rewarding, reviewing and managing them.
These reflect our Values, comply with labour and
employment laws and regulations wherever we work,
are aligned appropriately with local tradition and culture,
and help to build trust in our working relationships.
Leadership and development
We run a series of programmes aimed at developing
the skills and capabilities our business needs and talent
programmes which help to identify, select and develop
high-potential talent across our operations for future
leadership roles, including work to encourage female
application and selection.
In 2016 we introduced a five-day residential course at
Oxford University, Saïd Business School, which over the
next four years will see some 400 people pass through
a course, developed by and exclusively for Serco,
to help build a cadre of managers who are aligned,
and have developed specific insights into issues such
as strategy, leadership, operational excellence and
account management.
In 2017 we will continue to identify opportunities to
expand the scope of our leadership pipeline and
associated development programmes.
Engagement
We know that engaged employees deliver a better
service for our customers, and are more productive
and fulfilled in their roles, driving higher levels of
business performance.
We measure employee engagement annually through
our Viewpoint employee survey and use the survey
results to set an annual engagement roadmap which
aims to drive improvements in engagement.
In 2016 we focused on the key drivers of engagement as
per our 2015 results (Connection to Serco, Learning and
Development, Taking Action on Employee Feedback,
and Recognition) and targeted improvements in these
areas across our Divisions.
Our 2016 Viewpoint survey showed a 1% improvement
in employee engagement, continuing a positive trend
that our employees’ experience of working for Serco is
improving, as they are seeing positive changes in the
way we manage our business and serve our customers.
Leadership engagement has increased by 17% to the
highest level in five years. Our leaders are feeling more
confident about the future direction of Serco. They also
feel recognised and supported in their development.
Diversity and inclusion
We want to be a place people are proud to work.
Creating a diverse and inclusive workplace to attract and
retain talented people from all backgrounds and cultures
plays an important part in how we will achieve this.
We are proud of our approach to diversity to date, and
our Viewpoint findings confirm that our employees
believe we value diversity as an organisation. However,
in recognition of the increased focus on gender and
equal pay legislation in some of the regions where we
operate, we have refreshed our approach and updated
our goals as follows: to attract, develop and retain
employees from the broadest possible talent pool;
create an inclusive environment with zero tolerance
to any form of discrimination; promote equality of
opportunity and diversity within the communities where
we operate; and develop service delivery innovation
through a culture of inclusion, enhancing collaboration
and encouraging employees with a broad range of
perspectives, experiences and styles to share ideas.
Each Division has developed their own three-year
diversity and inclusion strategy and plan aligned to
these goals.
Our focus moving into 2017 is to ensure appropriate
measurement and monitoring of Divisional delivery,
with clear and robust data.
Gender diversity data
At 31 December 2016, the numbers of men and women
employed by Serco were as follows:
Number
Percentage
Male
Female
Male
Female
Directors
Senior managers
7
58
2
12
Employees
25,989
18,784
Total
26,054
18,798
78%
83%
58%
58%
22%
17%
42%
42%
At 31 December 2016, we had gender information on 94% of employees.
(Source: Serco global HR systems, figures provided on a total headcount
basis; excludes joint ventures.)
68
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Recognition
We believe it is important to highlight and celebrate
the people who bring our Values to life, who enable our
organisation to succeed and encourage us all to follow
the example they set.
In 2016, our focus has been on strengthening our Anti-
Bribery and Corruption (ABC) governance, controls
and business compliance, working to ensure that the
procedures already in place are adequate, and seeking
to improve and enhance them.
Our global employee recognition programme is the
Serco Pulse Awards, which showcases behaviours that
exemplify our Values. Employees are nominated by
their colleagues for Divisional Awards and these award
winners are put forward for Global Pulse Awards. In 2016
105 people were selected for Divisional Pulse Awards, of
whom approximately one quarter will go on to receive
Global Pulse Awards, to be announced in 2017.
Our Divisions also develop and implement local
recognition schemes.
Further details of our performance against our People
Key Performance Indicators can be found in the table
on page 72.
Our performance
This section provides an overview of our performance
in key areas during the year. More detailed information
is available in our CR report at www.serco.com
Compliance with ethical standards
To enable compliance with our Code of Conduct,
policies and standards, and to ensure behaviours
meet our expectations, every employee is required
to participate in our 'Serco Essentials' compliance
training programme when joining Serco and complete
a training refresh annually. Managers are also required
to complete a more detailed 'Serco Essentials plus'
training programme.
In addition, to help employees to take the correct
course of action in a given situation, we have a suite
of ethics tools to enhance our existing systems and
processes. This currently includes:
• SayNo Toolkit.
• Gifts and Hospitality Register.
• Speak Up.
• Anti-Bribery and Corruption (ABC) Toolkit.
In 2017 we will review all our ethics training courses to
ensure they remain up-to-date and expand our suite
of ethics tools.
Anti-bribery and corruption
No matter what ‘local custom’ may be, all forms
of bribery and corruption, and even the smallest
facilitation payment, are forbidden. Our policy is
one of zero tolerance.
In 2017 we will continue to build on and strengthen
our procedures.
Speak Up
Where our people believe they have information which
demonstrates malpractice, wrongdoing or a violation
of our Code of Conduct or Values, they are required to
raise the issue and bring it to management attention.
Our whistleblowing service ‘Speak Up’ is available to all
Serco employees, enabling them to raise concerns in
confidence and without fear of reprisal.
64% of our employees feel confident that appropriate
action would be taken if they raised an issue or reported
unethical behaviour and 70% of employees currently
feel they can report unethical conduct without fear.
Of the Speak Up cases closed in 2016, 97% were
investigated (representing 100% of all cases
appropriately and sufficiently informed to enable
investigation). 53% of cases resulted in some corrective
action being taken, 16% resulted in disciplinary action
being taken, and a further 6% resulted in one or more
employees being dismissed. 64% of the cases were
closed within three months of the issue being raised.
Recognising the need to continually improve, in 2017
we will upgrade our case management system and
ensure consistent standards of investigation across
all Divisions.
Community
We are privileged to be able to make a positive
difference to the lives of thousands of people, every
day. For us, our care for our communities is indistinct
from the services we deliver to our customers. At the
same time, our community engagement and investment
helps us to better understand community needs, and
operate existing contracts more effectively, particularly
where we are delivering services directly to the public.
Our community activity is as diverse as our business,
and managed locally. Our Divisions and individual
contracts are best placed to understand the needs
of the communities in which they operate, how these
align with the aims of customers and how they relate to
our employees.
For details of our community engagement initiatives,
see our CR report, available on our website at
www.serco.com
69
Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Health and Safety
Our aspiration is zero harm.
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.
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 our controls framework for managing our
Health, Safety and Environment (HSE) responsibilities.
Our HSE strategy
Our global strategic objectives are:
• to drive improvement and focus on safety culture to
increase leader and employee engagement, which
we will measure through our 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 learned and the sharing
of these across the organisation; and
• to drive improvement and focus on environmental
issues and management to support delivery of the
Group’s environmental target.
In 2016 we have pursued these objectives in all regions,
undertaking a range of initiatives to raise awareness
and understanding of HSE issues and introducing new
reporting processes, tools and capabilities to improve
our performance.
Our areas of focus in 2017 will include: the ongoing
deployment of the new safety climate tool; embedding
our new reporting process; reviewing our online incident
management reporting tool; and building on our work in
2016 to improve the capture of near-miss events.
Our HSE Performance
During 2016 we continued the work started in 2015 to
better define the key indicators we use and how rates
are calculated. This has resulted in publication of a
revised Incident Management and Reporting Group
Standard Operating Procedure. We also replaced
reporting incident rates normalised by numbers of
employees with frequency rates normalised by one
million hours worked. As a result, our historical data
and 2016 targets have been recalibrated.
In 2015 we sold the majority of our private sector
offshore BPO business which operated in a low safety
risk environment, resulting in lower safety rates across
all key indicators. To provide data that is meaningful
and comparable, we have restated our historical data
to exclude the disposed operations. The data also
excludes joint venture operations.
Safety performance in 2016 has improved consistently
across all Divisions and indicators, with the exception of
serious physical assaults.
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.
In 2016 the number of LTIs reduced by 21%, compared
to 2015, to 459, the lowest number of incidents reported
in the last five years. This positive performance is
reflected in the Lost Time Incident Frequency Rate
(LTIFR), which fell 14% and exceeded our target which
was set at a 5% reduction against a 2015 baseline. When
physical assault events are removed, manual handling
and slips, trips and falls continue to be the main cause
of incidents.
In regard to LTIs which are classified as major incidents,
the overall number fell by 26% during the year. This
is reflected in the frequency rate (Major Incident
Frequency Rate (MIFR) per one million hours worked)
at 0.27, a 20% improvement on 2015 and ahead of our
target of a 5% reduction against a 2015 baseline.
Divisions will continue to drive a range of initiatives
appropriate to the safety risks of their operations to
drive continuous safety improvement. To monitor this
we have set the following targets for 2017 based on
our actual 2016 performance:
• To reduce our Lost Time Incident Frequency
Rate per one million hours worked by 10%.
• To reduce our Major Incident Frequency
Rate per one million hours worked by 15%.
Physical assaults
We recognise the risks of the different environments
in which we operate, some of which can result in
our staff being assaulted. In particular custodial and
immigration operations in the UK and Asia Pacific are
challenging environments. Here they complete detailed
risk assessments, regularly review controls and drive
initiatives to better understand and manage this risk.
70
Strategic ReportSerco Group plc Annual Report and Accounts 2016 A number of initiatives have been implemented,
including: review of location-specific violence and anti-
social behaviour strategies; increased communications;
shared learnings; strategic threat assessments;
improved security to intercept illicit items; improved
staff-prisoner relationships; review of intervention
and de-escalation techniques.
Overall the number of physical assaults reported in
2016 has decreased by 14% to 625 compared to 2015,
resulting in a 5.7% improvement in the physical assault
frequency rate. Whilst the overall number of assaults has
reduced, the percentage that are classified as serious
has significantly increased in 2016. This may partly be
due to better definition but also reflects that when
interventions are happening they appear to be more
violent. The serious physical assault frequency rate has
nearly doubled, compared to 2015, to 0.93 and fails to
meet the target improvement set at 5%.
We will continue to develop a range of initiatives to
drive reductions in assaults and particularly serious
physical assaults. To monitor this we have set the
following targets for 2017 based on our actual
2016 performance:
• To reduce our Physical Assault Frequency Rate per
one million hours worked by 6%.
• To reduce our Serious Physical Assault Frequency
Rate per one million hours worked by 10%.
Our environmental impact
We recognise our 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.
The SMS sets out how we will deliver our environmental
commitment, aligned to the ISO14001:2015 standard on
environmental management.
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.
Our activities are typically managed locally, and we
undertake a wide range of initiatives focused on
reducing our carbon emissions intensity, improving
energy and fuel efficiency, improving our waste
management processes and promoting biodiversity.
Carbon disclosure
Greenhouse gas emissions
Our reporting year for greenhouse gas emissions (scope
1 and 2 covering direct emission sources such as fuel
combustion, company vehicles, fugitive emissions,
purchased electricity, heat and steam) is one quarter
behind our financial year, namely 1 October 2015 to
30 September 2016. We quantify and report to ISO
14064-1 2012, using an operational control approach to
defining our organisational boundary. The classification
of reporting boundaries is set out in detail in our Basis
of Reporting 2016 document, 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%.
Our Environmental Performance
2014 and 2015 restatement
When our 2015 data was verified it identified a number
of factors which are significant enough to require the
restatement of our 2014 and 2015 GHG emissions (see
2016 Corporate Responsibility Report).
To address these factors in 2016 we have invested
significantly in our data collection processes and
systems to ensure independent ISO 14064-3
verification prior to data publication.
2016 performance
Our corporate target for 2016 was to reduce our carbon
emissions intensity (which we calculate as tonnes
of CO2e per FTE) by 3% for the frontline operations
against our 2015 performance. Our actual intensity rate
at 5.98 showed an increase against 2015 which meant
we fell short of our target by 18%. Contributing factors
to our 2016 performance have been increased marine
oil CO2e (15%) and energy-intensive contracts (eg
leisure centres), a reduction in FTE count and further
improvements to data capture and reporting.
Whilst our intensity rate has shown an increase overall,
our actual carbon emissions have improved year-on-
year with a reduction of 2.4% over the last 12 months.
When a longer view is taken we have reduced our actual
carbon emissions by 27% against our emissions in 2013.
See table on page 72 for further details.
Recognising the evolving profile of our business and
sale of the private sector offshore BPO business at the
end of 2015, we will use 2017 to review our approach
to target setting in terms of absolute / intensity based
and target longevity. We have not set a specific target
reduction for 2017 whilst the review is completed.
In 2016, we responded again to the Carbon Disclosure
Project FTSE350 (CDP) request for information,
achieving a score of ‘B ’.
In addition we propose to look at increasing the scope
of our reporting on scope 3 (indirect emissions due to
Serco's activities) emissions in future.
71
Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Corporate Responsibility Key Performance Indicators
Ethics and compliance
Upheld cases of anti-competitive behaviour
Number
Upheld cases of corrupt behaviour
Number
Upheld cases of human rights violations
Number
Our people
Female employees in total workforce
Proportion of days lost to sickness
Staff turnover2
Health and safety
%
%
%
Lost Time Incident Frequency Rate
Per 1m hours worked
Major Incident Frequency Rate
Per 1m hours worked
Physical Assault Frequency Rate
Per 1m hours worked
Serious physical assaults
Per 1m hours worked
2012
2013
2014
2015
2016
Var %
0
0
0
44.5
2.25
26.9
5.97
0.53
6.31
0
0
0
40.91
2.83
31.5
5.12
0.25
5.11
0
0
0
44.4
3.25
31.0
4.81
0.33
7.04
0.38
1
0
0
0
42.6
3.17
32.8
5.79
0.34
7.19
0.49
0
0
0
0
41.9
3.2
33.8
4.98
0.27
6.78
0.93
0
–
–
–
–
–
–
14.04
19.58
5.72
-91.96
–
Number
0
0
tonnes
tCO2e/1,000 FTE
tCO2e
tCO2e
Number
n/a
n/a
n/a
n/a
0
398,519
343,717
298,986
291,883
2.4
7.27
6.32
5.16
5.98
-15.89
187,217
173,441
162,198
182,819
-12.71
211,302
170,276
136,789
109,064
20.27
0
0
0
0
–
Prosecutions3
Environment
CO2 emissions
Headcount intensity
Scope 1 emissions
Scope 2 emissions
Prosecutions, fines or notices
Notes:
The performance analysis is based on reported data as at 17 February 2017. Additional data may arise after this date. Where this occurs, numbers will
be corrected in the following year’s table. There have been some adjustments to reflect late reporting of data in regards to 2015 data.
All data excludes JVs and historical BPO data to enable a like-for-like comparison. Our private sector offshore BPO business was sold in December 2015.
The People figures shown above are representative only of employees for whom the relevant data is available. Current levels are in line with
benchmark targets for the geographies and markets in which we operate, however we continue to try to improve them. Annual targets are managed
at local and regional levels.
1.
Gender data in 2013 excludes Serco Asia Pacific.
2. The current trend in turnover is driven by the planned reconfiguration and reduction of our global workforce, in line with Group strategy.
3. 2014 health and safety prosecution relates to an incident in 2011.
Approved by the Board and signed on its behalf by:
David Eveleigh
Secretary
22 February 2017
72
Strategic ReportSerco Group plc Annual Report and Accounts 2016 Strategic Report
Directors’ Report
Financial Statements
Directors’
Report
74 Corporate Governance Report
74 Board of Directors
76 Chairman's Governance Overview
78 Board and Governance
80 Group Risk Committee Report
82 Audit Committee Report
90 Nomination Committee Report
92 Corporate Responsibility Committee Report
94 Compliance with the UK Corporate
Governance Code
96 Remuneration Report
126 Directors' Report
132 Directors' Responsibility Statement
73
Corporate Governance Report
Board of Directors
Sir Roy Gardner (71)
Chairman
Rupert Soames (57)
Group Chief Executive
Angus Cockburn (53)
Group Chief Financial Officer
Edward J. Casey, Jr (58)
Group Chief Operating Officer
A
N
R
C
E
GR
A
N
R
C
E
GR
A
N
R
C
E
GR
A
N
R
C
E
GR
Appointed to the Board:
June 2015 (Chair since July 2015)
Appointed to the Board:
May 2014
Appointed to the Board:
October 2014
Key skills and experience:
Previously Chief Executive at
Aggreko plc, and Chief Executive
of Misys plc Banking and Securities
Division
Senior Independent Director
of Electrocomponents plc until
July 2016 and a member of their
Remuneration, Nomination and
Audit Committees
Studied Politics, Philosophy
and Economics at Oxford University
and was President of the Oxford
Union
Visiting Fellow at Oxford University
Current External
Commitments:
None
Key skills and experience:
Previously Chief Financial Officer and
Interim Chief Executive at Aggreko
plc, Managing Director at Pringle of
Scotland, senior finance positions
at PepsiCo Inc. including Regional
Finance Director for Central Europe
Honorary Professor at the
University of Edinburgh
Current External
Commitments:
Non-Executive Director at
GKN plc and a member of
their Audit, Remuneration
and Nomination Committees
Key skills and experience:
Previously Chairman of Compass
Group PLC, Chief Executive of
Centrica plc, Managing Director of
GEC-Marconi Limited and a Director
of GEC plc, Non-Executive Director
of Willis Group Holdings Limited
and Laporte plc, Non-Executive
Chairman of Manchester United,
Plymouth Argyle Football Club and
Connaught plc
Fellow of the Chartered Association
of Certified Accountants, the Royal
Aeronautical Society, the Royal
Society of Arts and the City and
Guilds Institute
Previously Chairman of the Advisory
Board of the Energy Futures Lab
at Imperial College, London and
Chairman of the Apprenticeship
Ambassadors Network
Current External
Commitments:
Chairman at Mainstream Renewable
Power Limited
Senior Independent Director
at William Hill plc
Senior Adviser to Credit Suisse
Appointed to the Board:
October 2013 as Acting Chief
Executive Officer. Group Chief
Operating Officer from May 2014
Key skills and experience:
Joined Serco in 2005 as
Chief Executive Officer of
the Americas Division
Prior to Serco, worked for nine years
in the energy business and over ten
years in investment banking and
private equity
Until December 2016 a Director at
Talen Energy Corporation and a
member of their Audit Committee
and the Compensation, Governance
and Nominating Committee
Current External
Commitments:
None
Key (Red highlight denotes Chairman)
Member of the Audit Committee
Member of the Nomination Committee
C
E
Member of the Corporate Responsibility Committee
Member of the Executive Committee
Member of the Remuneration Committee
GR
Member of the Group Risk Committee
A
N
R
74
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Mike Clasper CBE (63)
Non-Executive Director
and Senior Independent
Director
Ralph D. Crosby, Jr (69)
Non-Executive Director
Rachel Lomax (71)
Non-Executive Director
Angie Risley (58)
Non-Executive Director
John Rishton (58)
Non-Executive Director
A
N
R
C
E
GR
A
N
R
C
E
GR
A
N
R
C
E
GR
A
N
R
C
E
GR
A
N
R
C
E
GR
Appointed to the Board:
March 2014
Appointed to the Board:
June 2011
Appointed to the Board:
March 2014
Appointed to the Board:
April 2011
Appointed to the Board:
September 2016
Key skills and experience:
Previously Group HR
Director at Lloyds Banking
Group, an Executive Director
of Whitbread plc, a member
of the Low Pay Commission
and a Non-Executive
Director of Biffa plc and
Arriva plc
Current External
Commitments:
Group Human Resources
Director of J Sainsbury plc
and a member of the
Sainsbury’s Operating Board
Non-Executive Director of
Sainsburys Bank
Key skills and experience:
Previous roles have included
Chief Executive of Rolls
Royce Group plc, Chief
Executive and President
of the Dutch international
retailer, Royal Ahold NV
(and prior to that, its Chief
Financial Officer) and Chief
Financial Officer of British
Airways plc
Fellow of the Chartered
Institute of Management
Accountants
Current External
Commitments:
Non-Executive Director
at Unilever plc
Non-Executive Director
at Informa plc
Non-Executive Director
at Associated British Ports
Key skills and experience:
Previous roles have included
Group Chief Executive of
BAA plc, Chairman of HMRC
and Senior Independent
Director of ITV plc
MA in Engineering from
Cambridge University
Honorary Doctorate from
Sunderland University
Current External
Commitments:
Chairman of Coats Group
and Which? Limited
President of the Chartered
Management Institute
Governor of the Royal
Shakespeare Company
Key skills and experience:
Previously Chairman
and Chief Executive of
EADS North America and
President of Northrop
Gruman Corporation's
Integrated Systems Sector
Served as an officer in the
US Army
MA in Public Administration
from Harvard, MA in
International Relations from
the Graduate Institute of
International Studies in
Switzerland, and a BSc
from the United States
Military Academy at West
Point, New York
Current External
Commitments:
Non-Executive Director
at American Electric
Power Co Inc.
Non-Executive Director
at Airbus Group S.E.
Member of the Board of
Directors and Executive
Committee of the Atlantic
Council of the United States
Key skills and experience:
Deep experience of
government and economic
policy
Deputy Governor, Monetary
Stability, Bank of England
and a member of the
Monetary Policy Committee
Permanent Secretary,
departments for Transport,
Work and Pensions and the
Welsh Office
Senior posts at the Cabinet
Office, HM Treasury and
World Bank, Washington
Current External
Commitments:
Senior Independent Director
at HSBC Holdings plc and
Chair of the Conduct and
Values Committee
Non-Executive Director of
Heathrow Airport Holdings
Limited
Director at SETL
Development Limited
Member of the Supervisory
Board of Arcus European
Infrastructure Fund
Trustee/Board Member of
Imperial College, London,
Ditchley Foundation, and
Breugel
75
Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Chairman’s Governance Overview
This report sets out how Serco is governed and
the key activities of the Board of Directors in
promoting effective governance during 2016.
Further information on how the Company
complied with the UK Corporate Governance
Code during 2016 is set out on pages 94 and 95.
Dear Shareholder
Contract visits
On behalf of the Board, I am pleased to present the
Corporate Governance Report for the year ended
31 December 2016. As in previous years, we report
against the UK Corporate Governance Code (the
Code) issued by the Financial Reporting Council (FRC)
and I am pleased to report that our high standards of
compliance with the Code remain. The Board believes
that good governance is key to the long-term success
of the Company and we shall continue to pursue the
‘comply or explain’ approach.
Corporate governance overview
As a public services company, strong governance and
integrity, underpinned by strong values, are key. The
Board’s role is to demonstrate leadership in those
areas. This year we have refreshed our Values, helped
determine and update the strategic objectives and
policies of the Company and set these changes within
an enhanced risk framework which establishes clear
parameters and controls. We have given necessary
focus to corporate responsibility with further actions
and achievements in areas including corporate renewal,
health and safety and human rights. As we move
through the Transformation stage of the Company's
strategy, the various key decisions and matters that
are reserved for approval by the Board have been
reviewed – be it Board roles or major bids, financial
results or governance issues – all included within a clear
governance framework that I have sought to enhance
this year.
Focus on new business pipeline and key bids
During the year, the Board and I have spent time actively
supporting the Executive management team in their
detailed review of the Company’s bidding activity.
The Board has remained focused on ensuring that the
Group’s risk management and internal control systems
are effective in underpinning robust decision-making on
major bids. At the same time, the Board has continued to
evaluate the performance of existing contracts and has
focused with management on the lessons to be learned
from existing Onerous Contract Provisions.
I and many of my fellow Board members have enjoyed
the opportunity to visit many of Serco’s contracts and
to see, first hand, the excellent day-to-day service
provision offered by our contract teams. The visits have
given the Board a deeper level of understanding of the
risks and opportunities faced by our contract teams on a
daily basis, together with the Company-wide challenges
regarding the scale and variety of our operations.
Changes in the Board
In July 2016, Tamara Ingram stepped down from the
Board following her appointment as Chief Executive
Officer of J. Walter Thompson Company LLC and her
relocation to the US. I would like to thank Tamara for
her valued contribution during her time on the Board. A
considered selection process to appoint a successor to
Tamara remains underway and further details regarding
this process are set out in the Nomination Committee
report on page 90.
During the year, Malcolm Wyman notified the Board of
his intention to step down with effect from 31 October
2016. Malcolm joined the Board in January 2013 and
in May 2013 became Chair of the Audit Committee.
The Board is extremely appreciative of the significant
contribution that Malcolm has made to the Company
during a crucial time, securing a good foundation upon
which to build a successful future, and more recently
during the process of appointing a new External Auditor
for the Group. The Board is greatly indebted to the time
and energy Malcolm put into this role.
John Rishton joined the Board as Non-Executive
Director in September 2016 to enable a handover
with Malcolm before John became Chair of the Audit
Committee on 1 November 2016. John has extensive
executive and non-executive experience and the
Board is already feeling the benefit of his considerable
knowledge and track record in a range of industries.
John is proving to be a valuable addition to the Board
in the areas that are key to further strengthening Serco.
More detail regarding the selection process that led to
John's appointment is set out on page 90.
76
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Continuity and diversity
The appointment of John Rishton and the continuing
process to appoint a successor to Tamara Ingram are
part of a well-managed and progressive process of
non-executive succession planning, with the aim that the
Board as a whole will continue to be diverse and secure
deeper knowledge across the geographies and sectors
in which Serco operates. I am also conscious that, as the
Company continues to implement its new strategy, we
must ensure sufficient continuity, institutional expertise
and corporate memory within the Board. The Board notes
the recommendations of the recent Hampton-Alexander
Review of Women in Leadership Positions and the Parker
Report into Ethnic Diversity on Boards, and notes that we
continue to value all types of diversity as a vital component
of a balanced, dynamic and effective Board. As such,
over time, when we recruit new members to the Board
we expect to address the issue of diversity in general and
particularly to increase the percentage of women on the
Board (currently 22%).
Effectiveness
In view of the changes to the Board, it was determined
that the 2016 evaluation of the Board’s effectiveness
would be best served by being conducted internally,
taking into account the principal themes raised in the
2015 externally facilitated evaluation. The 2016 review
concluded positively that members of the Board were
committed to spending more time on Board discussions,
as well as becoming more involved in the development
of the strategy and greater focus on risk. The induction
process was praised and it was acknowledged that,
together with ongoing training, this was considered
important in understanding the Company’s key strategic
priorities and emerging issues. It is the intention of the
Board to carry out an external evaluation in 2017, in line
with the Code requirements and corporate governance
best practice. Further detail is set out on page 79.
Shareholder engagement
The Board welcomes open, meaningful discussion with
all of our shareholders. I have met with several of our
largest shareholders during the year and Angie Risley,
Chair of the Remuneration Committee, has separately
met with a number of advisory bodies and institutional
shareholders to discuss our approach to remuneration.
I hope shareholders will also take the opportunity to
meet with Board members at the 2017 AGM.
Sir Roy Gardner
Chairman
What the Board has achieved in 2016
Board priorities for 2017
• Supported Rupert Soames and the other Executive
Directors in the Company’s strategy update
• Focused on ongoing performance of the Group
• Reviewed and challenged management on
the progress of the Company’s business
development pipeline
• Focused on and reviewed a number of key
individual material bids
• Appointed a new Non-Executive Director
and Audit Committee Chair
• Spent time with the Divisional management
teams and met regularly with senior management
responsible for the delivery of the Company’s key
opportunities and existing contracts, including a
number of contract visits in the UK, Australia, New
Zealand, Hong Kong and the US
• Oversaw the introduction of a new Group Risk
Committee and the strengthening of the Company’s
risk management processes to ensure this was given
appropriate attention at Board level
• Refocused the scope and composition of the
Board Oversight Committee as the Corporate
Responsibility Committee, chaired by the Senior
Independent Director, Mike Clasper
• Effectively re-tendered, transitioned and replaced
the Group’s External Auditor
• Continue to support and challenge improvements
in contract execution and cost efficiency, together
with seeking to ensure the utilisation of capabilities
across the wider Group
• Ongoing review and challenge of the bid pipeline
and new business opportunities, together with the
development of the Centres of Excellence
• Continued focus on enhancing risk management
• Focus on Board and Senior Management succession
planning, including a further Board appointment
• Support an effective external Board evaluation
process
• Further embedding of the Serco Values within the
culture of the Company
• Continue to drive improvements in Health and
Safety and, specifically, to challenge measures put in
place to support the reduction in physical assaults
in prisons
• Further review of Divisional operations as the Board
continues to focus its time on ensuring the ongoing
transformation and strengthening of the Group
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Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Board and Governance
Board and Governance structure
Board of Directors
Audit
Committee
Nomination
Committee
Remuneration
Committee
Group Risk
Committee
Corporate
Responsibility
Committee
Approvals and
Allotment Committee
Executive
Committee
Investment
Committee
Board of Directors
Committee comprised
solely of Board members
Committee comprised of Executive Board members
and senior management
Board attendance
Board
Audit Remuneration Nomination
Corporate
Responsibility
and Risk(1)
Board
Oversight(1)
Number held(2)
9
6
Edward J. Casey, Jr
Mike Clasper
Angus Cockburn
Ralph D. Crosby, Jr
Sir Roy Gardner
Tamara Ingram(3)
Rachel Lomax
John Rishton(4)
Angie Risley
Rupert Soames
Malcolm Wyman(5)
9
9
9
9
9
1(4)
8
4(4)
8
9
4(6)
–
6
–
–
–
–
5(6)
1(1)
–
–
5(5)
6
–
3(3)
–
–
6
1(3)
–
2(2)
6
–
4(4)
2
–
2
–
–
2
–
–
–
2
–
–
2
–
2
–
–
2
1(2)
2
–
–
2
–
2
2
–
–
2
2
–
–
–
–
–
2 (2)
Risk(1)
2
–
2
–
–
–
–
2
–
–
–
1(1)
Corporate
Responsibility(1)
2
2
2
–
–
2
–
–
–
2
–
–
Numbers in brackets denote the maximum number of meetings which could have been attended.
Notes
(1)
(2)
(3)
(4)
In February 2016, the Board approved the retirement of the Board Oversight Committee and the Corporate Responsibility and Risk Committee, and
the establishment in their place of the Group Risk Committee and the Corporate Responsibility Committee. Further details on the revised remit and
membership of these committees is set out on pages 80 and 92.
Of the meetings detailed within the table, the following were convened on an ad hoc basis: one Board meeting; two Audit Committee meetings; and
one Remuneration Committee meeting. Given the inherent short notice of these meetings some Directors were, on occasion, unable to attend but
were fully briefed on all matters discussed.
Tamara Ingram stood down from the Board on 31 July 2016.
John Rishton was appointed to the Board and the Audit and Remuneration Committees on 13 September 2016. John joined the Group Risk Committee
on 6 January 2017.
(5) Malcolm Wyman stood down from the Board on 31 October 2016.
In addition to the above, Rupert Soames, Angus Cockburn and Ed Casey attended all Executive Committee meetings held during 2016 and formed the
quorum of Investment Committee and Approvals and Allotment Committee meetings as required.
78
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Board evaluation
It is the Board’s policy to invite external evaluation of the Board and its Committees and the roles of individual
Directors at least every three years.
The 2016 Board evaluation process was conducted internally, led by the Chairman and facilitated by the Company
Secretary. The evaluation covered a numbers of areas including: Board structure, Committees and their operation;
induction and development; interaction with the business; and risk management and internal control.
All Board members provided their thoughts to the Company Secretary as part of a questionnaire format and a
detailed discussion was then held at the September Board meeting to consider the matters raised.
The results of the evaluation concluded that, overall, the Board operates effectively within a collegiate and challenging
environment. In addition, the Board welcomed the revised Committee structures and, in particular, the establishment of
the Group Risk Committee.
A review of the progress of the 2015 objectives arising out of the external evaluation process conducted by
Coletta Tumelty, together with a summary of findings and proposed initiatives relating to the recent evaluation,
is set out below:
2015 Evaluation Recommendations
2016 Actions Taken
Consideration be given to the composition and remit
of the Board Oversight Committee and the Corporate
Responsibility and Risk Committee following the work
undertaken to embed the policies and procedures put in
place as part of the Corporate Renewal Programme and the
Board’s recognition of the need for an enhanced focus on
risk-related matters across the Company.
Ensure adequate Board time is scheduled to consider
strategy for growth and differentiation.
That the Board receive a presentation of the talent strategy,
a risk assessment and succession plan for all Board roles and
executive roles in the top two tiers below CEO.
That Board materials be standardised to ensure they
consistently and adequately cover matters of operational
and performance significance to the Board.
In February 2016, the Board approved the retirement of
the Corporate Responsibility and Risk Committee and the
Board Oversight Committee, and the establishment of the
Group Risk Committee and the Corporate Responsibility
Committee.
Following the appointment of Kate Steadman, Group
Strategy Director, in February 2016, the Board met on several
occasions to review the direction of the Group strategy
update which was undertaken by Executive Management
throughout 2016 and formed part of the Capital Markets Day
presentation made in December 2016.
In March, 2016 the Nomination Committee and then the
Board as a whole reviewed a detailed talent and succession
strategy for the Board and key Executive Committee roles.
It was agreed that this process be extended to further
Executive-level roles and become an annual exercise.
Materials for Board meetings were reviewed to seek to
ensure information was delivered in an accurate, consistent,
and more standard manner throughout 2016. Further
work is now being undertaken to ensure the same level of
consistency at Committee level.
Recommendations for 2017
• Management will facilitate further Board and Committee focus on strategy and growth to build upon the strategy
work undertaken to date.
• Further discussion on succession planning, particularly at an Executive Committee level, will be built into the
forward agenda for the Nomination Committee and the Board.
• A continued focus will be placed on the timely delivery of relevant, good-quality, Board papers.
• Further direct engagement between Board members and the business will be facilitated through contract visits
and smaller group engagements.
• The Board will be given more visibility of Divisional and Functional management below Board and Executive
Committee level.
• Further focus and enhancement of the Group Risk Committee and Corporate Responsibility Commitee.
In advance of the scheduled external evaluation of the Board in 2017, a number of options and priorities will be
looked at to support continued transparency and best practice.
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Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Group Risk Committee Report
In February 2016, the Board approved the
establishment of a new Group Risk Committee.
as part of a broader reorganisation of Board
Committees. This change reflected the importance
that the Board attaches to improving its oversight
of risk-related matters across the Company and
to strengthening the Company’s capabilities for
assessing and managing risk.
During the course of the year the Company appointed
a new Group Risk and Compliance Director. The
Committee has spent some time in considering his
first assessment of the maturity of the Company’s
risk management and agreeing a forward work
programme. This focuses on systematically reviewing
the Group’s top risks and overseeing progress in
Committee’s responsibilities
The Committee advises the Board on the Company’s
overall risk appetite, tolerance and strategy, taking
account of the current and prospective macroeconomic
and financial environments. The key responsibilities of
the Committee are:
• Overseeing the effectiveness of the Company's risk
management framework, including the assessment of
the principal risks facing the Company and the action
being taken by management to mitigate risks that are
outside the Company's risk appetite;
• Challenging and advising the Board on the current
risk exposures of the Company and future risk
strategy, and reviewing regular risk management
reports from management which enable the
Committee to consider the process for risk
identification and management;
• Assessing how key Group risks are controlled and
monitored by management;
• In conjunction with the Audit Committee, reviewing
the Company’s overall risk assessment processes that
inform the Board’s decision-making, ensuring both
qualitative and quantitative metrics are used; and
• Reviewing the Company’s capability to identify and
manage emerging risks, in conjunction with the other
Board Committees as appropriate.
Detailed terms of reference for the Committee
can be found at www.serco.com/about/the-board-
and-governance
Membership and attendees
The Committee was comprised solely of Non-Executive
Directors during the year and as at the date of this
report the members of the Committee were Rachel
Lomax (Chair), Mike Clasper and John Rishton. Meetings
embedding the risk management framework across
the Company. The Committee has made a good start
in tackling this demanding agenda, beginning with
detailed work clarifying risk definitions, appetites
and tolerances. The Committee regularly reviews
the Company's top risks, changing risk profiles and
emerging trends and the effectiveness of existing
controls and risk mitigants. In addition, a regular
series of technical and regional deep dives has
commenced with a review of Catastrophic Risk and
the approach to risk management in the Americas.
Rachel Lomax
Chair of the Group Risk Committee
of the Committee are attended by the Chairman, Chief
Executive, the Chief Operating Officer, the Group
General Counsel and Company Secretary and the
Group Risk and Compliance Director.
Activities of the Committee during 2016
During the year the Committee’s key activities included:
• Receiving detailed updates regarding the Company’s
principal risks, detailing key changes and trends, and
emerging risks;
• Challenging and supporting the new Group Risk
and Compliance Director in his work plan for
improving enhancing and embedding the risk
management framework;
• Agreeing the focus and scope of the quarterly
Committee meetings and a detailed forward
agenda for the Committee;
• Undertaking an in-depth review of Catastrophic Risk,
one of the Company’s principal risks, and reviewing
how the risk is currently managed and the activities
being undertaken to better define, understand and
mitigate this risk; and
• Receiving a presentation from members of the
Serco Americas Executive Team charged with risk
management to better understand the Division’s
risk management processes and, as a part of this
presentation, undertaking a detailed review on one
of the Division’s principal risks – Major Information
Security Breach.
2017 priorities and focus
During 2017, the Committee will focus on undertaking
detailed deep-dive reviews into other Group principal
risks and will meet with each Divisional team to better
understand their approach to risk management.
80
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Serco’s approach to managing business risks and internal control
Serco has an internal control framework which
includes financial, operational, compliance and
risk management controls. These are designed to
manage and minimise risks that would adversely
affect services to our customers and to safeguard
shareholders’ investments, our assets, our people
and our reputation (collectively ‘business risks’).
completed SMS self-assessments to be validated. The
quality and robustness of the Compliance Assurance
Programme is currently under further development in
order to improve its effectiveness.
Internal controls and key processes are defined within
the Serco Management System (SMS) together with
clear definitions of those individuals responsible
for ensuring compliance. To provide management
assurance that these controls are effective, a 'three
lines of defence' compliance model has been
implemented to test business compliance. The
Group's Compliance Assurance Programme defines
and reports on second line of defence compliance
activity and the Internal Audit Programme defines and
reports on third line of defence compliance activity.
First line of defence – We seek to minimise the
probability and impact of business risks through
the consistent implementation of the SMS, seeking
to ensure that appropriate processes and controls
are in place, and that appropriately trained staff
seek to ensure that customer, legal and regulatory
requirements are being adhered to, and if not that
adequate plans are in place to mitigate. In 2016, we
repeated the SMS self-assessment process to enable
Contract Managers and other Leaders to self-assess
their compliance with the SMS and increase awareness
of SMS requirements. In doing so, self-assessment
recipients have developed action plans to address any
gaps. 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 mis-
statement or loss, this cannot be absolute.
Roles and responsibilities – Functions and Divisions
within the Company are responsible for identifying
and managing risks in line with SMS Policy and
Standards and implementing associated controls.
Second line of defence – A Group Compliance
Assurance Programme has been implemented which
seeks to ensure that a consistent approach is applied
across the Company in assuring compliance with
key controls. Serco Group have mandated minimum
requirements for each Division to include in their
Compliance Assurance Plans in order to address
principal risks which include a minimum sample of
Roles and responsibilities – 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 Compliance Assurance. The
Function is the custodian of the Group's Risk Register
and provides risk management oversight, assurance
and challenge. It is also custodian of the Group
Compliance Assurance Programme, ensuring it is risk
based and that material controls, mitigating the Group
principal risks, are being effectively implemented.
Third line of defence – Together with external
audits undertaken across the Company, Internal
Audit provides an independent assessment of the
design and operating effectiveness of the Company's
governance, risk management and control frameworks
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. The
in-house Internal Audit team uses PwC as a co-sourced
resource where appropriate.
Roles and responsibilities – The Group Head of
Internal Audit reports functionally to the Chair of the
Audit Committee and is responsible for the delivery
of the Internal Audit programme, ensuring that it is
risk-based and aligned with the overall strategy of
the Company.
These three lines of defence are overseen and
challenged by the Executive Committee (and the
Board), which undertake a quarterly review of the
Group Risk Register and review individual risks as
required. The Board has overall responsibility for risk
management and internal control (and is supported
in these duties by the Group Risk Committee) and
formally reviews the findings of the overall Internal
Audit programme.
The Board confirms that there has been a focus
on the three lines of defence for the year under
review and up to the date of approval of the 2016
Annual Report and Accounts.
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Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Audit Committee Report
Following my appointment as Chairman of the Audit
Committee in November 2016, I am pleased to
present the Committee’s report for the year ended
31 December 2016. I would firstly like to echo the
comments of Sir Roy Gardner within this Annual
Report and thank Malcolm Wyman for the significant
commitment and energy he demonstrated during
his tenure as Chairman of the Committee and to
personally thank him for the time he gave to me in
ensuring an orderly handover before he stepped
down from the Board.
The Code invites the Committee to report on the
significant issues considered during the year. Full
details are contained on the opposite page. I would
also highlight that my initial focus as Committee
Chairman has been on:
• Financial Reporting Controls; and
• Meeting with the Finance Leadership team
and understanding the risks and opportunities
surrounding the current Finance Transformation
Programme.
During 2017, the Committee will focus on supporting
management in the continued delivery of the
finance transformation project and will challenge
the continued use of APMs as the Company begins
to move away through the Transform phase of the
Company’s strategy.
John Rishton
Chair of the Audit Committee
The Audit Committee has a fundamental role to
play in reviewing, monitoring and challenging the
effectiveness of the Company’s financial reporting and
internal control processes. The Committee is made
up solely of Non-Executive Directors to allow it to
fulfil this role and in 2016 has focused on supporting
and challenging management to reach balanced
judgements on Onerous Contract Provisions (OCPs),
the financial reporting control environment and the
use of Alternative Performance Measures (APMs) in the
Company’s published financial statements.
This review and challenge has taken several forms.
The Committee considered whether the Company had
robust systems and procedures in place for monitoring
OCPs. To support this, the Committee also reviewed the
Group’s accounting systems, policies and procedures.
Taking these into consideration, the Committee
reviewed the judgements made by management to
confirm that the financial statements produced during
the year were reliable and provided the ‘true and fair
view’ expected. The Committee also reviewed the
Group’s financial risk management processes and
associated internal controls supported by Internal
Audit and the External Auditor.
82
Directors' ReportSerco Group plc Annual Report and Accounts 2016
Key areas of focus
Issue and Significance
How the Committee addressed this
Comments and Conclusion
Contract performance, including Onerous Contract Provisions (OCPs)
As part of the 2014 Strategy Review,
the Contract and Balance Sheet
Review led to the establishment of
material OCPs.
The Committee has regularly reviewed and
challenged Management’s assumptions and main
areas of judgement in relation to the performance
of the Company’s key contracts, with particular
focus on material OCP positions and, with the
support of the External Auditor, agreed that,
while accounting for OCPs remained an area of
judgement, the view formed by Management
regarding each individual material OCP and the
aggregate view was considered reasonable.
As part of their review, the Committee also
considered how the assessment of OCPs reflected
other key judgements made by Management in
respect of asset impairments, deferred tax asset
recognition and future liquidity and viability.
The Committee agreed with Management
and the External Auditor that the overall
level of provision was appropriate when
taking into account the range of possible
outcomes.
The Committee also concluded that the
assumptions and judgements made by
Management in the calculation of OCPs
were consistent with those prepared
by Management for forecasting future
profitability and cash flows.
Use of Alternative Performance Measures (APMs)
The Company’s performance
measures continue to include
some measures which are not
defined or specified under IFRS. In
particular, following its introduction
in 2015, Management continued
to use Underlying Trading Profit,
as a key measure to review current
performance against the prior
year by removing the impact of
adjustments to OCPs, charges and
releases of other items identified
during the 2014 Contract and
Balance Sheet Review and other
significant non-trading items.
The Committee noted the guidance issued by
the Financial Reporting Council in relation to the
use of APMs and, supported by the challenge
of the External Auditor, considered whether the
performance measures used by Management
provided a meaningful insight into the results of
the Company for its shareholders.
The Committee then also reviewed the treatment
of items considered as being exceptional and
requiring separate disclosure.
With the support of the External Auditor, the
Committee reviewed the proposed disclosure
of APMs in both the 2016 Half and Full Year
results and the 2016 Annual Report ahead of
their approval by the Board.
Accounting for Foreign Exchange on Non-Trading Items
The Committee reviewed in detail with
Management and the External Auditor the
proposed changes to the accounting definition
of Operating Profit.
The Committee challenged the basis for the
change in accounting policy and the timing of this
change, together with the long-term applicability
of the change. A detailed review of the impact of
the changes on the draft 2016 financial statements
was then undertaken by the Committee with the
support of Management and the External Auditor.
During the year, Management
recommended changes to the
Company's accounting policy for
foreign exchange gains and losses
on investing and financing activities,
including movements on derivatives
that have been taken out to hedge
foreign exchange movements on
the Group's external debt and inter-
company debt. Such transactions
are no longer included in Operating
Profit, they are instead included in
Net Finance Costs. The proposed
changes impacted the Company's
Operating Profit by £1.2m and
reduced Free Cash Flow by £47m and
required a restatement of the results
for 2015 to ensure comparability.
The Committee agreed with Management
and the External Auditor that Underlying
Trading Profit continued to be a reasonable
basis for the comparison of the performance
of the business.
The Committee also continued to support the
judgements made by management regarding
the items considered as being exceptional
and requiring separate disclosure.
The Committee concluded that, in relation
to the Half and Full Year 2016 results and the
2016 Annual Report, clear and meaningful
descriptions had been provided for the
APMs used. It was also concluded that the
relationship between these measures and
the statutory IFRS measures was clearly
explained and supported the considered
understanding of the financial statements.
Following their considered review, the
Committee supported the proposal by
Management to change the Company’s
accounting policy to exclude foreign
exchange gains and losses on investing and
financing items from Operating Profit and
include instead within Net Finance Costs.
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Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Audit Committee Report continued
Key areas of focus continued
Issue and Significance
How the Committee addressed this
Comments and Conclusion
Goodwill Impairment
A key area of judgement made
by Management in recent years
has been in the assessment of the
holding value of goodwill. In 2014
and 2015 significant impairments
of goodwill were recorded but
no such charges arose in 2016 in
respect of pre-existing business
purchases. However, an impairment
charge of £17.8m did arise following
the acquisition of a business in the
year. Core to the assessment of the
value of goodwill is Management’s
estimate of future cash flows, which
is dependent on circumstances
both within and outside of their
control, and discount rates that are
adjusted to reflect the risks specific
to individual assets.
Defined Benefit Pension Schemes
The Group’s defined benefit
pension scheme obligations
are an area of Management
focus, in particular regarding the
identification of obligations arising
from customer contracts and the
calculation of financial impact of
any such liabilities.
The methodology and the results of the
impairment testing were presented to the
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 Committee also reviewed the disclosures
included in the financial statements to ensure
that they provide an appropriate level of
information to users.
The Committee were satisfied that the
assumptions underlying the impairments
made in the year were appropriate.
Following review of the disclosures in
the financial statements, the Committee
concluded that the disclosures were
transparent, appropriate and in compliance
with financial reporting requirements.
Following review, the Committee concluded
that the process followed was appropriate
and the resulting conclusions reached and
calculations performed were appropriately
balanced.
The Committee considered both the process
undertaken by Management 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.
During the year, Management have undertaken
a review of the Group’s obligations with regards
to the Local Government Pension Scheme based
on a detailed contract-by-contract assessment
and the findings of this review were presented to
the Committee.
84
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Committee governance
Role of the Committee
The Committee supports the Board in fulfilling
its responsibilities in respect of: overseeing the
Company’s financial reporting processes; reviewing,
challenging and approving significant accounting
judgements proposed by management; the way in
which management ensures and monitors the adequacy
of financial and compliance controls; the appointment,
remuneration, independence and performance of the
Group’s External Auditor and the independence and
performance of Internal Audit.
Details of the work carried out by the Committee
in accordance with its terms of reference and in
addressing significant issues are reported to the Board
as a matter of course by the Chairman of the Committee
and are described in this report. The terms of reference
for the Committee can be found at www.serco.com/
about/the-board-and-governance
Committee membership
The Committee is comprised solely of independent
Non-Executive Directors. Mike Clasper and Rachel
Lomax were members of the Committee throughout
2016. Malcolm Wyman was Chairman of the Committee
until his retirement from the Board on 31 October
2016 and John Rishton joined the Committee on his
appointment to the Board in September 2016 and
became Chairman of the Committee on 1 November
2016. During his tenure, Malcolm Wyman, a Chartered
Accountant, was determined by the Committee to have
'recent and relevant financial experience' as required
by the Code and on his appointment, John Rishton,
a Fellow of the Chartered Institute of Management
Accountants, was also considered to have recent and
relevant financial experience.
Meetings are normally attended by the Chairman, the
Chief Financial Officer, the Group Financial Controller,
the Head of Internal Audit, the General Counsel and
Company Secretary and representatives of the External
Auditors. The Committee retain time at the end of
each meeting to meet separately without management
present and invite the Head of Internal Audit and the
External Auditor to attend for part of this session.
Performance review
The Audit Committee’s performance was assessed as
part of the Board’s annual effectiveness review. It was
concluded that the Committee operated effectively.
Activities of the Committee during the year
The Committee has an annual forward agenda
developed from its terms of reference with standing
items considered at each meeting in addition to any
specific matters arising and topical business or financial
items on which the Committee has chosen to focus. The
work of the Committee in 2016 principally fell into three
main areas:
Accounting, tax and financial reporting
• Reviewing the integrity of the half-year and annual
financial statements and the associated significant
financial reporting judgements and disclosures;
• Considering the liquidity risk and the basis for
preparing the half-year and annual financial
statements on a going concern basis, and reviewing
the related disclosures in the Annual Report
and Accounts;
• Considering the provisions of the Code regarding
going concern and viability statements and reviewing
emerging practice and investor comment as well as
the Group's Viability Statement;
• Reviewing updates on accounting matters and new
accounting standards, including the new accounting
standard on revenue (IFRS15);
• Reviewing the processes to assure the integrity of the
Annual Report and Accounts as well as reviewing:
– the management representation letter to the
External Auditor;
– the findings and opinions of the External Auditor;
– the disclosures in relation to internal controls and
the work of the Committee;
– that the information presented in the Annual
Report and Accounts, when taken as a whole, is
fair, balanced and understandable and contains the
information necessary for shareholders to assess
the Company’s performance, business model
and strategy;
– the effectiveness of the disclosure controls and
procedures designed to ensure that the Annual
Report and Accounts complies with all relevant
legal and regulatory requirements; and
– the process designed to ensure the External
Auditor is aware of all ‘relevant audit information’,
as required by Sections 418 and 419 of the
Companies Act 2006.
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Audit Committee Report continued
Internal controls
• Assessing the effectiveness of the Group’s internal
control environment and making recommendations
to the Board;
• Assessing the findings and directing the work of
the Group’s financial assurance function;
• Considering reports from Internal Audit;
• In conjunction with the Group Risk Committee,
considering the level of alignment between the
Company’s key risks and Internal Audit programme;
• Reviewing the adequacy of resources of the Internal
Audit function and considering and approving the
scope of the Internal Audit programme;
• Considering the effectiveness of Internal Audit;
• Supporting the appointment of an external
co-source partner to Internal Audit; and
• Considering reports from the External Auditor on
their assessment of the control environment.
External Auditor
• Overseeing the external audit tender process and
making a recommendation to the Board on the
appointment of a new External Auditor (Further detail
is set out in page 89).
• Considering and approving the audit approach and
scope of the audit undertaken by KPMG as External
Auditor and the fees for the same;
• Agreeing reporting materiality thresholds;
• Reviewing reports on audit findings;
• Considering and approving letters of representation
Financial control risk is monitored through the Group
Principal Risk, Financial Control and Financial IT Systems
Failure processes. The Committee has reviewed this risk
during 2016 and has focused in particular on:
• The impact of the Company’s ongoing finance
transformation programme, with briefings received
at every Committee meeting on the progress of
the programme;
• The progress of the business continuity work being
undertaken by the Corporate Shared Services
team, which included impact on the Company’s
finance systems;
• Work being undertaken with Deloitte LLP to develop
a set of integrated assurance maps to document key
financial control risks being managed by the Divisions
and Business Units and the assurance activity
undertaken to mitigate those risks;
• Reviews of the controls and judgements on the
Group’s balance sheet; and
• Management’s review of the adequacy of the Group
Finance functions first and second lines of defence.
Following review and challenge, the Committee
believes that, to the best of their knowledge and belief,
the financial control framework and the monitoring of
this framework has worked effectively during the year,
and that in cases of non-compliance, no critical, severe
or significant risk has existed to the Company. The
Committee was also encouraged to note that where
weaknesses in the financial control framework were
identified they continued to be addressed.
issued to KPMG; and
Viability Statement
• Considering the independence of KPMG and their
effectiveness, taking into account:
– non-audit work undertaken by the External Auditor;
– feedback from a survey targeted at various
stakeholders; and
– the Committee’s own assessment.
Financial controls
The Company aims to have a strong and regularly
monitored control environment that minimises financial
risk and, as part of the Committee’s responsibilities, it
reviews the effectiveness of systems for internal financial
control and financial reporting. Where relevant, the
Committee also works with the Group Risk Committee
to consider financial risk management.
During the course of 2016, the Committee, along with
the Board, has received a number of detailed updates
on comments made by the FRC and the Investment
Association regarding the first viability statements
published by companies in 2015 and 2016. The
Committee has reviewed the 2015 Viability Statement
and the draft 2016 Viability Statement in light of
these comments, notably regarding the period, risk
prioritisation and stress testing, and remains of the view
that the statement made regarding the Company’s
viability in 2015 continues to be an accurate assessment
of the Company’s viability as at 31 December 2016.
The Viability Statement is set out on page 24.
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Directors' ReportSerco Group plc Annual Report and Accounts 2016 The Committee has assessed the new External Auditor
with input received from management associated
with audits undertaken in Group finance and in the
Divisions. The feedback received was reviewed by
management and reported to the Committee. In
addition, the Committee reviewed the Financial
Reporting Council’s Audit Quality Review Team report
on the 2015/16 inspection of KPMG. After taking these
reports into consideration, together with the External
Auditor’s report on their approach to audit quality
and transparency, the Committee concluded that the
auditor demonstrated appropriate qualifications and
expertise and remained independent of the Company,
and that the audit process was effective.
The Committee also reviewed the External Auditor’s
engagement letter and determined the remuneration
of the External Auditor in accordance with the authority
given to it by shareholders. The Committee considered
the External Auditor’s remuneration to be appropriate.
It is proposed that KPMG be appointed as External
Auditor of the Company at the next AGM in May 2017
and, if so appointed, that they will hold office until the
conclusion of the next general meeting of the Company
at which accounts are laid. Further details are set out in
the Notice of Annual General Meeting which is available
at www.serco.com/investors
The Company will continue the practice of the rotation
of the audit engagement partner at least every five
years, and all other partners and senior management
will be required to rotate at least every seven years.
The Independent Auditor’s report to shareholders is set
out on pages 134 to 138.
Independent assurance
The Company’s Independent assurance structure is
formed of Internal Audit and External Audit.
Internal Audit
Internal Audit provides assurance to the Board, Audit
Committee and management, and in particular:
• Provides objective, independent assurance and
advice to management and the Audit Committee
on the design and operating effectiveness of the
governance and internal control processes in place
to identify and manage business risks; and
• As part of the Company’s integrated approach to risk,
assurance and audit, acts as a ‘third line of defence’
through its coordinating role in monitoring the
effectiveness of both management controls and other
assurance activities in addressing business risk.
Internal Audit gives particular regard to the ongoing
evaluation of the efficacy of the Company’s financial
controls and reporting processes. During 2016, and
following a tender process, PricewaterhouseCoopers
LLP were appointed as co-source partner to Internal
Audit, replacing KPMG.
External Auditor
The Audit Committee manages the relationship with
the Company’s External Auditor, on behalf of the Board.
The Competition & Markets Authority’s 2014 Order on
mandatory use of competitive tender processes and
audit committee responsibilities requires mandatory
tendering of the external audit contract every ten years
and it has been the practice of the Audit Committee to
keep the assessment of the need to tender the auditor
under ongoing review. In line with this practice, in
2016 the Committee recommended that the Company
undertake a tender for external audit services. As
Deloitte LLP would not have been able to be appointed
as External Auditor to serve beyond 2020 due to the
new legislation, Deloitte agreed that they would not
participate in the tender process and full details of
the process followed are set out below. As a result of
this tender, KPMG were appointed by the Board as
the Group’s External Auditor in May 2016, and will be
subject to appointment by the Company’s shareholders
at the AGM in 2017.
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Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Audit Committee Report continued
Non-audit fees
The Committee believes that non-audit work may
only be undertaken by the External Auditor in limited
circumstances. The Committee monitors the non-audit
fees. In 2016 the non-audit fees paid to KPMG were
£1.3m, £0.5m of which arose prior to appointment.
The majority of the fees related to either tax
advisory, compliance services or other investigation-
related matters.
Focus is given to ensuring that engagement for non-
audit services does not: (i) create a conflict of interest;
(ii) place the auditor in a position to audit their own
work; (iii) result in the auditor acting as a manager or
employee; or (iv) put the auditor in the role of advocate
for the Company.
The Committee regularly reviews the nature of non-
audit work performed by the Extenal Auditor and
the volume of that work. An analysis of fees paid in
respect of audit and non-audit services provided by the
External Auditor for the past two years is disclosed on
page 169. Having undertaken a review of the non-audit
services provided during the year, the Committee is
satisfied that these services were provided efficiently
by the External Auditor as a result of their existing
knowledge of the business and did not prejudice their
independence or objectivity.
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Directors' ReportSerco Group plc Annual Report and Accounts 2016 External Audit Tender
2015 was a challenging year for the Company, having recently undertaken a detailed Contract and Balance
Sheet Review together with a Rights Issue and a debt refinancing, against the background of a significant write
down of over £1.3bn of onerous contract provisions, goodwill and intangibles. Against the backdrop of this
considerable work programme and the appointment of a new executive team, the Board recognised the strong
support required, and received, from Deloitte as External Auditor and agreed with the Committee that it was
appropriate to keep Deloitte in place until the completion of the audit of the 2015 financial year.
It has been the practice of the Audit Committee to keep the assessment of the need to tender the auditor under
ongoing review and in line with new regulations brought into force from the EU and the Competition & Markets
Authority regarding external audit tenders and the mandatory change in external auditors. Therefore, the
Committee recommended, and the Board subsequently approved, the decision to undertake a tender process
for external audit services, shortly after the completion of the 2015 audit.
The tender process and the Committee’s involvement in that process is outlined below:
Tender participants: PricewaterhouseCoopers LLP, KPMG LLP and Ernst & Young LLP were all invited to
participate in the tender process. The tender process was limited to the 'Big 4' due to the considered lack of the
capacity of smaller audit firms to carry out the audit of such a complex international company. It was also agreed
that Deloitte would not be invited to tender in light of the longevity of their current appointment.
Tender documentation: The Committee reviewed and approved Request For Proposal documentation and
a data pack to be issued to all participants which provided detailed information to support the submission of
quality and accurate bids by participants.
Carousel day: Each participant then had the opportunity to spend time with various management
stakeholders to obtain a more detailed understanding of the Company and existing management processes
and challenges to better inform their tender submission. These meetings included time with Group Finance,
Tax and Treasury, Internal Audit, Risk, General Counsel and Company Secretarial, IT, the UK businesses and
the Chief Financial Officer.
Selection Committee: The bids submitted following the Carousel Day were subject to review by a Selection
Committee. This Committee was led by the then Chair of the Audit Committee, Malcolm Wyman, and was
comprised of the remaining members of the Audit Committee, the Chief Financial Officer and the Group Financial
Controller. The firms all then met with the Selection Committee to present their proposals with a question and
answer session then led by the members of the Audit Committee present on the Selection Committee.
Criteria: The Selection Committee reviewed the tender submissions and scored them independently based
upon quality, strength and relevant sector experience of the proposed team, depth of the team and the wider
organisation in the industries and geographies relevant to the Company, cultural fit, the proposed approach to
the transition plan and wider audit and the potential for audit efficiencies and fee savings.
Outcome: The Selection Committee recommended KPMG as the preferred supplier among the final candidates
as they had the appropriate geographic spread and depth and the relevant technical knowledge to best support
the Company as External Auditor. The Board ratified the decision of the Selection Committee and announced
the decision to the London Stock Exchange.
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Nomination Committee Report
The Committee has taken note of the Financial
Reporting Council discussion paper on UK Board
Succession Planning and has challenged itself
during 2016 to ensure that the Committee is
playing an effective role in advising the Board
on succession matters.
The Committee supports the discussion paper’s
recommendation that the Committee should regularly
evaluate the senior management team and have a
broader oversight of talent management within the
Group, and has spent time this year with the Executive
Directors reviewing succession plans for the Group
Executive Management team.
Committee’s responsibilities
The Committee leads the process for Board
appointments and makes recommendations to
the Board in this regard. In fulfilling this role, the
Committee evaluates the balance of skills, experience,
independence and knowledge on the Board and, in the
light of this evaluation, prepares a description of the
role and capabilities required for every appointment.
The Board values diversity and when recruiting new
Board members the issue of diversity is addressed
by the Committee, with particular regard to the
percentage of women on the Board (which currently
stands at 22%).
The key responsibilities of the Committee are:
• Reviewing the size, structure and composition
of the Board;
• Recommending membership of Board Committees;
• Undertaking succession planning for the Chairman,
Group Chief Executive 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.
Following the decision by Malcolm Wyman and
Tamara Ingram to stand down from the Board,
Committee members have devoted considerable
time in and outside of Committee meetings to the
search and selection process for new Non-Executive
Directors and I would like to thank them for the
dedication they have shown to this process.
Sir Roy Gardner
Chair of the Nomination Committee
Detailed terms of reference for the Committee
can be found at www.serco.com/about/the-board-
and-governance
Membership and attendees
As at 31 December 2016, the Committee was comprised
only of Non-Executive Directors and the members
of the Committee were Sir Roy Gardner (Chair), Mike
Clasper and Angie Risley. Meetings of the Committee
are normally attended by the Chief Executive, the
Group HR Director, and the Group General Counsel
and Company Secretary.
Activities of the Committee during 2016
During the year the Committee’s key activities included:
• The appointment of a new Audit Committee Chair
– The Committee focused heavily during the year
on the search for, selection and appointment of a
suitable successor to Malcolm Wyman as Chair of the
Audit Committee following the decision by Malcolm
to retire from the Board. The services of external
search consultant, Korn Ferry, were retained to assist
in identifying potential candidates. Korn Ferry is
independent and a signatory to the Voluntary Code
of Conduct on gender diversity and best practice (the
Voluntary Code). The Committee as a whole agreed
the specification and considered the candidate
shortlist and met separately with candidates before
unanimously recommending the appointment of John
Rishton to the Board.
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Directors' ReportSerco Group plc Annual Report and Accounts 2016 Gender diversity: Board
Male
Female
78%
22%
Gender diversity: senior management
Male
Female
83%
17%
• Initial work on the appointment of a new Non-
Executive Director – Following the resignation of
Tamara Ingram and the consideration of succession
planning for the remaining Non-Executive Directors,
a considered search commenced to appoint an
additional Non-Executive Director to the Board.
In instigating this search, particular consideration
has been given to succession planning for the
Remuneration Committee members. The services
of an external search consultant, Lygon Group,
have been retained to assist in identifying potential
candidates. Lygon Group is independent and is also
a signatory to the Voluntary Code. The Committee
agreed the specification and continues to consider
the candidate shortlist and expects to recommend a
suitable candidate to the Board later this year.
• Reviewing Board succession planning – The
Committee held a meeting during the year to
specifically consider Board succession. With the
support of the Group HR Director, the Committee
reviewed the succession processes put in place by
the HR team and also considered the immediate,
emerging and long-term succession plan for each
key Board role. This took into account discussion
on background, experience, sector knowledge,
functional knowledge and consideration of good
practice guidelines in relation to Board appointments
and diversity.
• Reviewing the process for Executive Committee
succession planning – The Committee received
an overview of the existing processes in place for
Executive Committee succession planning and
received a briefing from the Group HR Director on the
current talent pipeline for each executive role, ahead
of their wider planned review of succession plans for
each key Executive Committee role during 2017.
2017 priorities and performance review
The Committee’s performance was assessed as part
of the Board’s annual effectiveness review. It was
concluded that the Committee operated effectively.
During 2017, the Committee will continue to focus
on succession planning and supporting the diverse
composition of the Board.
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Corporate Responsibility Committee Report
In February 2016, the Board approved the retirement
of the Board Oversight Committee and the
Corporate Responsibility and Risk Committee,
and the establishment in their place of the Group
Risk Committee and the Corporate Responsibility
Committee. This change reflected the maturity and
changing focus of the Board Committees following
the work undertaken to embed the policies and
procedures put in place as part of the Corporate
Renewal Programme. It is clear that there continues
to be significant progress in the delivery and
embedding of the Programme which has been and
remains key to the turnaround of the Group. As part
of the broadening of the Committee and the maturity
of the Corporate Renewal Programme, Lord Gold
stood down from the Committee as the independent
third-party member, having finished a further review
into Serco’s approach to governance and ethics. I
would like to take the opportunity to thank him for his
guidance, oversight and commitment to Serco from
2013 until 2016.
Committee’s responsibilities
The Committee reviews and scrutinises the Company’s
continued approach to Corporate Renewal matters
and also focuses on forward-looking corporate
responsibility matters. It is intended that over time, the
Committee’s focus will shift more fully to corporate
responsibility once the Corporate Renewal Programme
workstreams become fully embedded in the Company’s
culture and can be considered as 'business as usual'.
The Board has agreed that the Committee’s focus on
Corporate Responsibility will have four main aspects:
• Health and Safety – while overall Health and
Safety will remain a matter reserved to the Board,
the Committee is charged with considering the
Company’s approach to Health and Safety in practice
and will review in detail any key trends and patterns
of behaviour that emerge, escalating any matters of
importance to the full Board.
• People – the Committee will consider the Company’s
policies relating to its people and matters of
relevance to its management of people, such as
the Viewpoint survey and the Company’s Human
Rights policy.
I was pleased to be asked by Sir Roy Gardner to
Chair the Corporate Responsibility Committee
because I believe that in all our actions, we must
ensure that our stakeholders are proud to be
associated with Serco and that it is crucial that we
only do business where we can 'do the right things
in the right way' in the eyes of our customers and
also the public. In support of this the Corporate
Responsibility Committee will continue to develop
and consider its remit around the four key areas of
Health and Safety, People, Ethics and the Corporate
Responsibility Framework, and I look forward to
reporting back to shareholders on our progress.
Mike Clasper
Senior Independent Director and Chair of the
Corporate Responsibility Committee
• Ethics – the Committee will consider Speak Up
reports and the approach to its whistleblowing
processes and any relevant metrics or themes arising
in relation to the Group’s whistleblowing, bribery or
fraud processes. Where relevant these matters will
be considered in conjunction with the Group Audit
Committee or the Group Risk Committee.
• Corporate Responsibility Framework – the
Committee will provide oversight, guidance and
challenge on the implementation of the Company’s
Corporate Responsibility Framework and will
consider related policies and strategies on how
the Company conducts its business and guards its
reputation, including on such matters as human
rights and slavery.
Detailed terms of reference for the Committee
can be found at www.serco.com/about/the-board-
and-governance
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Directors' ReportSerco Group plc Annual Report and Accounts 2016 Membership and Attendees
The Committee comprised both Executive and Non-
Executive Directors during the year and as at 31
December 2016 the members of the Committee were
Mike Clasper (Chair), Ed Casey, Sir Roy Gardner and
Angie Risley. Meetings of the Committee are normally
attended by the Group General Counsel and Company
Secretary, the Director Business Compliance and Ethics,
and the Managing Director, Group Operations.
Activities of the Committee during 2016
During the year the Committee’s key activities included:
• Reviewing Lord Gold’s report into the progress made
by the Company in embedding ethical behaviour
as part of the Corporate Renewal Programme and
discussing the findings with Lord Gold;
• Agreeing the proposed remit and focus of
the Committee;
• Considering the Company’s Health and Safety
performance and reviewing regular health, safety
and environment reports including lessons learnt
and action plans from particular incidents;
• Reviewing the continued progress of the Corporate
Renewal Programme including the training
programmes, SMS self-assessment process,
compliance assurance and contract management
performance and reporting;
• Receiving briefings on the Company’s management
of ethical conduct and ethical issues; and
• Receiving a briefing on the Culture Index included
within the annual Viewpoint employee engagement
survey to monitor the ongoing culture of the Company.
2017 priorities and focus
During 2017, the Committee will focus on undertaking
detailed deep-dive reviews into key areas of its remit
to ensure that the appropriate focus, control and
rigour remain in place throughout the Company.
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Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Compliance with the UK Corporate Governance Code
For the year ended 31 December 2016, the Company has complied fully with the UK Corporate Governance
Code which can be found at www.frc.org.uk
The notes below are intended to assist with the evaluation of the Group’s compliance during 2016,
although they should be read in conjunction with the Corporate Governance Report as a whole.
A. Leadership
A.1 The Role of the Board
The Board is responsible to Serco’s
shareholders for promoting the long-term
success of the Company and the operation
of effective governance arrangements. It
oversees and agrees the Group’s strategy and
ensures that necessary resources are available,
and that the appropriate risk management
controls, processes and culture are in place to
deliver it. As well as oversight, responsibility
for financial performance, internal control and
risk management of the Group, there is a clear
schedule of matters reserved to the Board
which is published on our website at www.serco.
com/about/the-board-and-governance
The Board meets formally on a regular basis.
All Directors are expected to attend all Board
and relevant Committee meetings in addition
to general meetings of the Company, including
the AGM. Details of the number of meetings
held during 2016 and the Directors’ attendance
are shown on page 78.
All Directors are covered by the Group’s
Directors’ and Officers’ Insurance policy.
A.2 Division of responsibilities
The roles of the Chairman and Chief Executive
are separate and full descriptions, including key
responsibilities of each, are published at www.
serco.com
Sir Roy Gardner, the Chairman, leads and is
responsible for the balance and composition
of the Board and its Committees, and ensures
its effectiveness in all aspects of its role. Rupert
Soames, the Chief Executive, leads the business
to develop and deliver the Group’s strategy and
business plans as agreed with the Board.
A.3 The Chairman
The Chairman manages the Board and, in
consultation with the Company Secretary, sets
the Board’s agenda for the year. Meetings are
arranged to ensure sufficient time is available
for the discussion of all items. The Chairman
facilitates open and constructive dialogue
during the meetings. The Chairman was
independent on appointment.
A.4 Non-Executive Directors
Non-Executive Directors are urged to challenge
constructively and help develop proposals
on strategy, scrutinise the performance
of management in meeting agreed goals
and objectives, and monitor the reporting
of performance. They are responsible
for determining the remuneration of the
Executive Directors and have a key role in
the appointment and succession planning of
Executive roles.
Mike Clasper was Senior Independent Director
throughout 2016. The responsibilities of the
Senior Independent Director include meeting
major shareholders as an alternative contact
to the Chairman, Group Chief Executive or
Group Chief Financial Officer. The role is
clearly established and a description of the key
responsibilities is published at www.serco.com
The Chairman meets with the Non-Executive
Directors without the Executive Directors
present. At least annually the Non-Executive
Directors, led by the Senior Independent
Director, meet without the Chairman present.
During the year, the Directors had no
unresolved concerns about the running
of the Company or any proposed action.
It is Company policy that any such
unresolved concern must be recorded
in the Board minutes.
B. Effectiveness
B.1 Composition of the Board
There are currently five Non-Executive
Directors, in addition to the Chairman and three
Executive Directors on the Board.
During the year as part of the Board’s internal
evaluation process, the Board reviewed
the overall balance of skills, experience,
independence and knowledge of Board and
Committee members and their diversity,
including gender.
The Board considers all of its Non-Executive
Directors to be independent and free of any
business relationships that could compromise
the exercise of independent and objective
judgement. In accordance with the Code,
the Board undertakes an annual review of the
independence of its Non-Executive Directors.
B.2 Appointments to the Board
John Rishton was appointed as a Non-
Executive Director on 13 September 2016.
The appointment was led by the Nomination
Committee, who recommended John’s
appointment to the Board. Further details
regarding the process for John’s appointment
are available in the report of the Nomination
Committee on page 90.
B.3 Commitment
The time commitment of Non-Executive
Directors is defined on appointment and
regularly evaluated. The Board is satisfied
that the current external commitments of its
Chairman, Senior Independent and other
Non-Executive Directors do not conflict with
their duties and time commitments as Directors
of the Company. It is the Company’s policy to
allow each Executive Director to accept one
non-executive directorship of another company.
B. Effectiveness continued
B.4 Development
A full, formal and tailored induction
programme is provided to all Directors
appointed to the Board, which takes into
account their qualifications and experience.
The Chairman reviews and agrees Directors'
training and development needs.
During 2016, the Board received briefings
from their advisers of relevant topics
designed to update Directors’ skills and
knowledge in particular areas. A number of
the Non-Executive Directors also undertook
a programme of individual contract visits
and Divisional management meetings
to support familiarity with the Group’s
operations, and visit reports were shared
with all Board members.
B.5 Information and support
The Directors have full access to the advice and
services of the Company Secretary and may
obtain independent professional advice at the
Company’s expense if they believe it may be
required in the furtherance of their duties.
The Company Secretary is responsible to the
Board on a number of issues and full details on
the Company Secretary’s responsibilities are
published at www.serco.com/about/the-board-
and-governance. The appointment and removal
of the Company Secretary is a matter for the
Board as a whole.
The Chairman, in conjunction with the
Company Secretary, ensures that all Board
members receive timely, accurate and
effective information.
B.6 Evaluation
In 2016, performance evaluations of the Board,
its Committees and individual Directors were
carried out internally. Further details of the
evaluation can be found on page 79.
Following the evaluation, the Directors
concluded that the Board and its Committees
operated effectively and that each Director
contributes effectively and demonstrates
commitment to their role.
External evaluation last took place in early 2015
and it is the Board’s intention to carry out an
externally facilitated evaluation in 2017.
B.7 Election / Re-election
Each Director is subject to election at the first
AGM following their appointment, and re-
election at each subsequent AGM. Accordingly
John Rishton will stand for election at the 2017
AGM. The Directors unanimously recommend
the election/re-election of all Board members
at the 2017 AGM. Full biographical details for all
Directors can be found on pages 74 and 75.
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Directors' ReportSerco Group plc Annual Report and Accounts 2016 C. Accountability
D. Remuneration
E. Relations with shareholders
C.1 Financial and business reporting
A statement of the Directors’ responsibilities
regarding the financial statements, including
the status of the Company as a going concern,
is set out on pages 129 and 130, with an
explanation of the Group’s strategy and
business model together with the relevant risks
and performance metrics set out on pages 8
to 23.
A further statement is provided on page 132
confirming that the Board considers 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.
The Audit Committee report on pages 82 to
89 sets out the details of the Committee’s
responsibility for ensuring the integrity of the
financial reporting process and the key matters
considered during the year in respect of its
oversight of financial and business reporting.
C.2 Risk management
and internal control
The Board, through the Group Risk
Committee, has carried out a robust
assessment of the principal risks facing the
Company, including those that would threaten
its business model, future performance,
solvency or liquidity. Further details about
these risks and how they are managed and
mitigated can be found on pages 16 to 23. The
Viability Statement on page 24 explains how
the Directors have assessed the prospects of
the Company and concluded that 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.
The Board determines the Company’s risk
appetite and has established risk management
and internal control systems. At least annually,
the Board undertakes a review of their
effectiveness. Further details are set out
on pages 16 to 17 and 80 to 81.
C.3 Audit Committee and Auditors
The Audit Committee report on pages 82
to 89 sets out details of the composition of
the Committee, including the expertise of
members, and outlines how the Committee
discharged its responsibilities during 2016.
The Board has delegated a number of
responsibilities to the Audit Committee,
including oversight of the Group’s financial
reporting processes and management of
the External Auditor. Full details are set out
in the terms of reference for the Committee,
published at www.serco.com
E.1 Dialogue with shareholders
The Board recognises that meaningful
engagement with its institutional and retail
shareholders is integral to the continued
success of the Company. The Executive
Directors and the Investor Relations team
regularly meet with analysts and major
investors to maintain effective dialogue. The
Chairman is available and has met with a
number of major investors. Throughout 2016
the Board has sought actively to engage with
shareholders through meetings, presentations
and roadshows.
E.2 Constructive use of the AGM
The AGM will be held on 11 May 2017 and is an
opportunity for shareholders to vote in person
on certain aspects of Group business. The
Board values the AGM as an opportunity to
meet with those shareholders able to attend
and to take their questions. The Notice of AGM
is made available to all shareholders either
electronically or, where requested, in hard
copy and is available at www.serco.com.
D.1 The level and components
of remuneration
The Remuneration Report on pages 96 to
125 outlines the activities of the Committee
during 2016 and sets out the Company’s
Directors’ Remuneration Policy table,
including relevant remuneration components
and how they support the achievement of
the strategic objectives of the Group. The
Annual Remuneration Report outlines the
implementation of remuneration during 2016
(including salary, bonus and share awards).
The Remuneration Policy will be put to a
binding shareholder vote at the AGM in 2017
in accordance with the requirements of the UK
Companies Act. The Board believes that the
Group’s proposed Remuneration Policy has
a responsible approach to Directors’ pay and
that the Remuneration Policy as proposed is
appropriate and fit for purpose.
D.2 Procedure
The Board has delegated a number of
responsibilities to the Remuneration
Committee, including the setting of the Group’s
overall remuneration policy and strategy, as
well as the remuneration arrangements for
the Executive Directors and the Executive
Committee. Full details are set out in the terms
of reference for the Committee published
at www.serco.com and the activities of the
Committee are set out in the Directors’
Remuneration Report on pages 96 to 125.
No Director is involved in setting his or her
own remuneration.
In April 2016 the FRC published a new UK
Corporate Governance Code (the “New
Code”) following the implementation of
the European Union’s Audit Regulation
and Directive. The Company will report
against the New Code in respect of the
2017 financial year.
95
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report
Dear Shareholder
On behalf of your Board, I am pleased to present our
Directors’ Remuneration Report for the financial year
ended 31 December 2016.
This introduction provides the context for the
Committee’s decision-making during the year, and
summarises the key points from the Report, including
those relating to the future policy, performance and
incentive plan outcomes and the Committee activities.
Context
In 2013 and 2014, the Company went through a
period of crisis, during which many members of the
management team left the business. In 2014 a new
management team was appointed; some £1.3bn of
provisions and write-downs were taken; and in early
2015, as part of a Rights Issue which raised £550m the
new management set out a three-phase strategy to turn
Serco around. The first phase – Stabilisation – involved
rebuilding the core of the business, including the
balance sheet; the second phase – Transformation –
started in 2015 and is set to run to early 2018. The third
phase – Growth – starts in 2018.
Our performance in 2016
As reported in the Chairman’s Statement on page 4
substantial progress has been made in 2016 in the
delivery of the Transformation phase, as set out in our
Strategic Report on page 13. Customer confidence and
trust has been rebuilt, as evidenced by a 30% increase
in our bid pipeline and a 40% increase in our order
intake in 2016; employee engagement has increased;
costs have been reduced by some £450 million, and
trading performance has been stronger than expected
at the beginning of the year. All this has been reflected
in a strong share price performance during the year.
There is more work to do, and 2017 will be a critical year
for the management team as they drive towards the
completion of the Transformation phase.
Shareholder engagement and planned
changes to policy
Included within this Report is our Directors’
Remuneration Policy (the “Policy”). Under the
regulations, our Remuneration Policy is required to
be presented to shareholders for re-approval by
shareholders every three years, and therefore together
with our Annual report on Directors’ Remuneration,
will be voted on by shareholders at our Annual
General Meeting, (“AGM”) on 11 May 2017.
The requirement to put the Policy back for a vote comes
at a time when the business is at a critical stage of its
turnaround, with the Transformation stage just over half-
way through. The Committee has therefore considered
the extent to which the current Policy remains aligned
to the ongoing transformation, and has also looked
ahead to what may be required in 2018 and beyond
to support the next key phase in the delivery of the
business strategy, which will be the Growth phase. The
Committee has also given consideration to how well the
Policy is aligned to wider market practice and to more
recent corporate governance developments.
Our aim is to focus on value creation and share
ownership to align executives with the completion of
the strategic business transformation and delivery of
the outcomes committed to shareholders. The current
Policy focuses management on maximizing earnings
and returns on invested capital in each year. The current
focus on rewarding long-term success for consistently
delivering progress, in line with or above investor
expectations, is key to ensuring Serco retains the high
calibre individuals who were appointed in 2014 to turn
Serco around, and to develop and deliver our five-year
plan. We have consulted with our major shareholders and
the large majority of those who responded supported
the continuation of the current arrangements.
The Committee is therefore asking shareholders to
approve the renewal of the current Policy for a single
year, with a view to doing a further review of Policy
during 2017 and putting a new three year Policy to
shareholders at the AGM in 2018.
The single-year extension to the current Policy allows a
new Policy to be aligned to the strategic requirements
of the third phase of our turnaround, which starts in
2018. The Committee also recognise that since the
Policy was overwhelmingly approved by shareholders
in 2014, certain aspects of the current arrangements
have been overtaken by evolving market practice. In
particular having two long-term incentive vehicles (a
Performance Share Plan and a Deferred Bonus Plan),
with one of these being based on a share matching
arrangement, is not universally supported. The
Committee wishes therefore to conduct a further review
during the course of 2017 to design a new Policy, which,
amongst other considerations, will result in the share
matching element being removed. The timing of this
will also provide the Committee with the opportunity
to give full consideration to the emerging corporate
governance policies and best practice guidelines,
including the Government’s White Paper expected to
be released in late Spring 2017.
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.
96
Directors' ReportSerco Group plc Annual Report and Accounts 2016 The Committee will therefore be asking shareholders
to approve the renewal of the existing Policy at the
AGM in 2017 for a single year, with a further review
to be undertaken and a new three-year Policy to be
developed and put to shareholders ahead of being
tabled for approval at the AGM in May 2018.
decisions being made by the Remuneration 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 and
that the transparency regarding this introduced in the
2015 DRR has continued in respect of 2016.
Remuneration outcomes in respect of the
2016 financial year
Long-term incentives
The long-term incentive awards made under the PSP in
2014 were based on targets set prior to the Rights Issue
and, in line with good practice, were not adjusted. As
a result of the issues identified through the Contract
and Balance Sheet Review in 2014, and the subsequent
impact on Group performance, the element of the long-
term incentives granted to the new Executive Directors
both on joining and in 2014, that are based on the
financial targets being tested as at 31 December 2016,
will lapse as a result of the financial targets attached to
these awards not being achieved.
Short-term incentives
For the 2016 financial year, the Group Bonus Plan
(the Plan) in which Executive Directors participate was
focused on three core measures which comprised
70% of the overall opportunity: Group Revenue,
Group Trading Profit and Group Free Cash Flow.
The remaining 30% of the opportunity is based on
role-specific objectives related to the delivery of the
business transformation.
Financial performance has been strong; on both Trading
Profit and Free Cash Flow the achievements of the
business were in excess of the stretching targets set
by the Committee at the beginning of the year and
therefore these components have been earned in full.
The level of Revenue achieved over the period was
above threshold and as such 33% of this component
of the bonus was awarded.
The financial bonus outcomes have been calculated
after appropriate adjustments were made (agreed at
the beginning of the year as part of the target-setting
process and in line with the approach disclosed in
respect of 2015). The Committee has once again
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 cross-referencing to information
shared with the Audit Committee. This year the external
auditors verified the extraction of the figures for bonus
purposes from the audited information, followed by
a formal sign-off by the Audit Committee prior to
Performance against role-specific objectives has
also been strong. Each of the Executive Directors
has between 8 and 12 objectives aligned to our
4 priorities: Winning Good Business, Executing
Brilliantly, Making Serco a Place People are Proud to
Work, and Making Serco Profitable and Sustainable.
2016 has been a successful year; the Transformation
phase of the strategy is well underway; the pipeline of
new prospects has grown substantially, as has order
intake. The Viewpoint Engagement score amongst the
Leadership population is up 17 percentage points. The
performance of each member of the Executive team
is subject to a detailed review against their objectives
as part of the decision-making on any bonus to be
awarded in respect of non-financial elements.
After thorough consideration, as a result of the
achievement of strong financial and non-financial
performance over the year against the targets set, a
bonus award of 82.3% of maximum (123.5% of salary)
has been determined for Rupert in respect of 2016
performance. The corresponding bonus amounts for
Angus and Ed are 81.6% of maximum (106.0% of salary)
and 80.1% of maximum (120.1% of salary) respectively.
There was unanimous support for the decision to make
these bonus awards to reflect the contribution that
each member of the team has made to strengthen the
business and position it for success.
The Committee is mindful of the importance of open
and timely disclosure of bonus targets and the role
they play in the Committee’s ability to explain to
Shareholders the decisions made. The Committee
has also kept under review the commercial sensitivity
of targets as the Company progresses through
transformation. We are pleased to continue with our
disclosure practice in disclosing targets in the year
to which they relate. The targets, and the assessment
of performance against them, for the 2016 Plan are
therefore disclosed in this year’s Report on page 112.
We intend to consult further with shareholders on
the quality of our disclosure as part of the full review
of remuneration to be undertaken during the course
of 2017.
97
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Committee changes
The Committee was delighted to welcome Mike
Clasper and John Rishton as Non-Executive Directors
(NEDs) to the Committee on 1 August 2016 and
13 September 2016 respectively. Both Mike and John
bring extensive knowledge across a range of industries
and are already proving to be a great addition to the
Remuneration Committee.
Closing remarks
2016 has been a year of significant progress in delivering
the turnaround. I believe that the Remuneration
Committee has rigorously made the necessary decisions
to ensure that reward is clearly linked to performance
and shareholder interests, and that any incentive
payments awarded reflect what has been delivered.
Serco has a highly effective executive management
team and a clear strategy to transform the business
and position it for success in attractive markets. We
will continue to engage with shareholders to ensure
that our leadership team are rewarded appropriately to
incentivise them to complete the Transformation and
move forward to restoring the growth, margins and
returns of the business.
Angie Risley
Chair of the Remuneration Committee
Approach for 2017
Salary reviews – no change
Base salaries, for our Executive Directors were set in
a way which reflected the needs of the business at
the time they were appointed in 2014; shareholders
gave overwhelming support to their appointment and
subsequently to their remuneration. No increases have
been made to base salary since the individuals were
appointed in 2014 and no changes are planned for
2017; for the third consecutive year, with effect from
1 April 2017, the salaries for the Executive Directors
will remain unchanged.
Short-term incentives – no change
The target and maximum bonus opportunity will remain
at 75% target /150% maximum of salary for Rupert
Soames and Ed Casey, and 65% target /130% maximum
of salary for Angus Cockburn. 70% of the bonus will
continue to be based on financial measures, which are
Revenue (20% weighting), Trading Profit (40% weighting)
and Free Cash Flow (40% weighting). The remaining
30% will once again be individually set and based on
key strategic goals related to the delivery of the
business transformation.
Long-term incentives – no change
The Committee intends to make the next set of
Performance Share Plan (PSP) and Deferred Bonus
Plan (DBP) awards in 2017 in accordance with the
current policy approved in May 2014. The performance
measures will remain the same as those used for the
2016 awards with the PSP targets based on aggregate
EPS, relative TSR and average ROIC with an equal
weighting on each. The DBP has served the business
well in reducing the amount of annual bonus paid
as cash, and providing a mechanism by which the
Executive Directors may invest a significant proportion
of their annual bonus earned in respect of past
performance, with the opportunity to earn a matching
award based on future EPS performance. The choice
of performance measure has incentivised executives
to consistently deliver earnings in line with or above
investor expectations during a challenging business
transformation. Our major shareholders confirmed
their continued support for this to ensure the new
Executives appointed to deliver the business turn
around are focused on leading the business back
into sustainable growth.
98
Directors' ReportSerco Group plc Annual Report and Accounts 2016 At a glance: implementation of Remuneration Policy for 2017 and key decisions for 2016
The table below summarises:
• How key elements of the Remuneration Policy presented here, and once approved to apply from the 2017 AGM,
will be implemented in 2017; and
• Key decisions taken by the Remuneration Committee in relation to the remuneration of Directors in respect of
the 2016 financial year.
Implementation of Remuneration Policy for 2017
Element
CEO (Rupert Soames)
CFO (Angus Cockburn)
COO (Ed Casey)
Base salary from 1 April 2017
£850,000
£500,000
$1,061,690
Pension
30% of salary
30% of salary
30% of salary including cost of
participation in US 401k plan
Annual bonus
Max 150% of salary
Max 130% of salary
Max 150% of salary
On-target 75% of salary
On-target 65% of salary
On-target 75% of salary
Annual bonus measures1
• 70% financial targets: 40% Trading Profit, 40% Free Cash Flow and 20% Revenue.
• 30% non-financial targets linked to key strategic goals.
• Annual bonuses are subject to a Trading Profit underpin.
Deferred Bonus Plan (DBP)
Directors are eligible to participate in the 2017 DBP in line with the Policy approved at the
AGM in 2014. A maximum of 50% of the 2016 bonus (paid in 2017) 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 measures2
Vesting of awards made under the DBP will be determined by reference to the Group’s EPS
performance measured over three years.
Performance Share Plan (PSP) Maximum 200% of salary
Maximum 175% of salary
Maximum 175% of salary
PSP measures2
Awards granted under the PSP in 2017 will be subject to Group performance over a three year
period ending 31 December 2019:
• 1/3rd 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.
• 1/3rd Relative TSR – Total Shareholder Return (TSR) when ranked relative to companies in
the FTSE 250 (excluding investment trusts).
• 1/3rd Average 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 must 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
• Malus provisions will apply to the PSP and DBP awards during the three-year performance
Changes to the previously
approved policy
period prior to vesting.
• Clawback provisions will apply to the annual bonus plan.
• 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.
The requirement to put the Policy back for a vote comes at a time when the business is at a
critical stage of its turnaround, with the Transformation stage just over half-way through. The
Committee is asking shareholders to approve the renewal of the current Policy for a single
year, with a view to doing a complete review of the Policy during 2017, and putting a new
three-year Policy to shareholders at the AGM in 2018.
1.
2.
The Committee deems the specific details of the performance measures and targets to be commercially sensitive as they are intrinsically linked to the
forward looking strategy of the business. Full disclosure will be provided in the Annual Report on Remuneration for the year in which final performance is
assessed provided these details are no longer considered sensitive.
The Committee sets the performance targets in respect of the PSP and DBP immediately prior to the grant of the award and therefore these are not yet
determined. Details of the performance targets will be disclosed in the Annual Report on Remuneration for the year in which the awards are made.
99
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Key decisions made in respect of Directors’ remuneration in 2016
Executive Directors
Element
CEO (Rupert Soames)
CFO (Angus Cockburn)
COO (Ed Casey)
1 April 2017 salary review
No change
No change
No change
2016 Bonus outcome:
• Currency value
£1,049,325
• % of salary
• % of maximum
2014 PSP vesting
(EPS performance
condition for the period
ending 31 December 2016)
Non-Executive Directors
Chairman fee effective
1 July 2016
123.5%
82.3%
Nil
£250,000 (no change)
£530,075
106.0%
81.6%
Nil
$1,274,824
120.1%
80.1%
Nil
Illustration of application of Remuneration Policy in 2017
The following charts illustrate the value that may be delivered to Executive Directors under different performance
scenarios for the year ending 31 December 2017. Also shown, for comparison, is the actual value delivered in the
year ended 31 December 2016 (excluding the value received from buy-out awards vesting in the year).
Rupert Soames (£'000s)
Angus Cockburn (£'000s)
Ed Casey (US$'000s)
6000
5000
4000
3000
2000
1000
£5,379
£2,935
40%
22%
£1,129
55%
£2,179
24%
48%
0
100%
Minimum
38%
Target
21%
Maximum
52%
Actual
Single
Figure ('16)
3000
2500
2000
1500
1000
500
0
£2,865
£1,615
37%
20%
£690
53%
£1,220
23%
43%
7000
6000
5000
4000
3000
2000
1000
$6,526
$3,607
38%
23%
54%
25%
$2,753
46%
$1,483
100%
Minimum
43%
Target
24%
Maximum
57%
Actual
Single
Figure ('16)
0
100%
Minimum
39%
Target
21%
Maximum
54%
Actual
Single
Figure ('16)
Fixed elements of remuneration
Annual Variable
Multiple period variable
The scenarios in the above graphs are defined as follows:
• Fixed elements of remuneration
− Base salary as applicable from 1 April 2017
− Estimated value of benefits to be provided in 2017 in line with the Remuneration Policy (based on the value of
actual benefits provided in 2016)
− Pension contribution/cash supplement equal to 30% of salary
• Annual bonus, deferred bonus plan and performance share plan participation as set out in the Policy table. In
all cases, Target performance results in delivery of 50% of maximum opportunity. The Deferred Bonus Plan and
Performance Share Plan values reflect the “face value” at grant of shares that could be received for Target and
Maximum performance.
• The maximum matching award level under the DBP assumes maximum deferral and a 2:1 match against a
maximum bonus.
100
Directors' ReportSerco Group plc Annual Report and Accounts 2016 In this section
Remuneration Policy
Page
Annual Report on Remuneration
Directors Remuneration Policy
Remuneration Policy for Other Employees
Recruitment Policy
Service Contracts and Loss of Office Policy
Non-Executive Director Policy
101
106
107
108
110
Executive Single Figure
Variable Pay Outcomes
Non-Executive Director Single Figure
2016 Share Awards
Directors' Share Interests
Remuneration Committee
Page
111
112
116
119
122
124
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.
Directors’ Remuneration Policy
In this section, the Committee presents the Remuneration Policy report for shareholder vote at the 2017 AGM.
As set out in the Chair’s Letter, given where the Company is with the business transformation, the Committee
deemed it was not appropriate to make changes to the Remuneration Policy at this time. The Company is still in
the process of completing the transformation and delivering on the objectives committed, and communicated, to
shareholders. There is strong agreement that there is a need to ensure stability within our Remuneration Policy,
until such time as the transformation is nearing completion. The Committee will therefore be asking shareholders
to re-approve the existing Policy at the AGM in 2017.
As set out in the Chair’s letter, it is intended that the Policy will be subject to a review with further consultation with
our major shareholders during the latter part of 2017 and a revised Policy tabled at the AGM in May 2018.
In the tables and narrative below, we have set out details of each element that may comprise the remuneration
package of a Director, what the opportunity is under that element, and importantly how each element supports the
business and aligns the interests of the Directors with the wider stakeholders, including shareholders, in the Company.
The approved Directors’ Remuneration Policy as applicable to remuneration for the year ending 31 December 2016
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.
We approach Executive Directors’ remuneration on a total reward basis to provide the Remuneration Committee
with a view of total remuneration rather than just the competitiveness of the individual elements. Analysis
is conducted by looking at each of the different elements of remuneration (including salary, annual bonus,
performance share plan and pension) in this context. This ensures that in applying the Remuneration Policy
executive pay is sufficient to achieve the goals of the Remuneration Policy without paying more than is necessary.
The leverage of fixed:variable pay also ensures that significant reward is only delivered for exceptional performance.
This remuneration framework is echoed throughout the organisation with the approach to pay for the wider
workforce reflecting these core principles where appropriate.
101
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
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, with the relevant performance measures completely aligned to the core
requirements of a successful business transformation.
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 106 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
Unchanged since appointment
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 the
individual’s ability, and experience.
In some circumstances there may
be phased movement to that
market 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.
A range of benefits may be
provided to Executive Directors.
These include, but are not limited
to, company car or car allowance,
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,
education costs for dependents and
tax equalisation.
Benefits are reviewed annually
against market practice and are
designed to be competitive.
102
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Maximum potential
value
and payment at
threshold
Performance metrics
used, weighting and
time period applicable
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.
For maximum
performance, each
investment share is
matched by two matching
shares. 25% of the
matching award vests for
threshold performance.
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.
Performance is measured over the
financial year.
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.
EPS is the sole measure to determine
the vesting of matching shares.
The performance condition is
measured over three years, awards
vest at the end of the three year
period to the extent that the
performance condition is met.
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.
How the element
supports our
strategic objectives
Annual Bonus
Incentivise executives
to achieve specific,
predetermined goals
that are aligned to
the business strategy
during a one-year
period.
Reward ongoing
stewardship and
contribution to
core values.
Operation of the element
The Committee sets objectives at
the start of each performance year.
The annual performance measures
and objectives are determined with
reference to the Group’s overall
strategy and annual business plan
and priorities for the year. At the
end of the performance year the
bonus result is determined by the
Committee based on performance
against the objectives and
targets set.
Annual bonuses are paid after the
end of the financial year to which
they relate. There is an optional
deferral of 50% of the total earned
bonus into Serco shares under the
Deferred Bonus Plan.
On change of control, the
Committee may pay bonuses
on a pro-rata basis measured on
performance up to the date of
change of control.
Deferred Bonus Plan (DBP)
This plan is to
incentivise executives
to achieve superior
longer term returns
for shareholders and
to align executives to
shareholder interests
through an increased
shareholding.
Executive Directors can elect to
defer, for three financial years, up
to 50% of their net annual bonus by
purchasing investment shares.
Each individual investment share
purchased will be matched (on a
gross investment basis) by up to
a maximum of two ‘matching’
shares granted as conditional
share awards.
Dividend equivalents are accrued in
respect of matching shares awarded
and are delivered as additional
shares to the extent that the
matching award vests.
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.
103
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
How the element
supports our
strategic objectives
Operation of the element
Performance Share Plan (PSP)
Maximum potential
value
and payment at
threshold
Performance metrics
used, weighting and
time period applicable
Face value on grant of
200% of base salary for
the CEO and 175% for
the CFO and COO.
25% of the award vests for
threshold performance
rising on a straight-line
basis to full vesting for
maximum performance.
To drive achievement
of longer term
objectives, increase
shareholder value
aligned closely to
creating shareholders’
interests.
Awards of nominal cost options /
conditional shares normally made
annually.
Dividend equivalents are accrued in
respect of PSP shares awarded and
are delivered as additional shares to
the extent that the PSP award vests.
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.
Vesting is dependent on at least
two performance conditions chosen
from:
• EPS
• Relative TSR
• Absolute Share Price or TSR
The measures are independent and
are measured over three years. The
weighting of each is determined
prior to award. The 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 pension
related benefits to
encourage executives
to build savings for
retirement.
None
Executive Directors may participate
in the Group defined contribution
pension plan.
US employees are eligible to join
the Serco 401k plan.
Employer contributions are
reviewed against local market
practices annually.
Executive Directors may choose to
receive some or all of their employer
pension contribution in cash to
invest as they see fit.
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 plan 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.
Shareholding Requirement
To support long-
term commitment
to the Company and
the alignment of
employee interests
with those of
shareholders.
Unvested awards that are subject
to performance conditions
are not taken into account in
determining an Executive Director’s
shareholding for these purposes.
Share price is measured as at the
end of the relevant 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
The shareholding
guidelines are 200% of
salary for the CEO, and
150% of salary for the CFO
and COO.
The Committee has the
discretion to increase
the shareholding
requirements of the
Executive Directors.
104
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Notes to the policy table:
Performance measures and targets
The table below sets out a rationale for the performance conditions applicable to the Annual Bonus, Deferred
Bonus Plan and Performance Share Plans, and how targets are set.
Element
Performance measures and rationale
How targets are set
Annual bonus
• Financial and non-financial performance measures.
• The performance targets are
Deferred Bonus Plan
Performance Share Plan
• The Committee selects the financial measures
based on the Company’s current Key Performance
Indicators (KPIs).
• Non-financial measures are individually set and
based on key strategic goals.
• EPS is the sole measure to determine the vesting
of matching shares and has been selected as the
performance measure for the DBP 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, thus aligning
the Directors’ with the interests of shareholders.
• Performance targets will be based on a combination
of performance conditions including at least two of
the following; EPS, Relative TSR, Absolute share price.
• 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.
• Absolute share price or TSR targets drive the longer
term improvement in our returns to shareholders.
• The rationale for the share price measure is to ensure
that a full award is not delivered unless shareholders
benefit from a significant increase in value over the
three year performance period.
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.
The Committee takes care to ensure
that specific EPS targets are suitably
stretching.
• Relative TSR performance is measured
against the constituents of the FTSE
250 as at the date of grant. As Serco
is a constituent of the FTSE 250 it
is felt that comparisons to the TSR
performance of other companies in this
Index provides a good measure of the
relative performance of Serco.
• Absolute share price and TSR targets
are set to reflect what the Committee
determines as stretch growth, taking
into account recent price performance
as well as growth forecasts and the
economic environment to ensure
targets are consistent with achievable
levels of stretch financial performance.
• The Committee consults with a
selection of the largest shareholders
and the voting guidance services when
determining targets for the Company’s
long-term incentive arrangements.
Malus and clawback
Malus and clawback provisions apply to awards under the PSP and DBP, and clawback provisions also apply to the
annual bonus. Under the Policy, the Committee, at its discretion, may reduce or cancel (malus) or recover some or
all of awards granted to Executive Directors in certain circumstances. Under the malus provisions the Committee
may reduce or prevent vesting of an unvested PSP or DBP award in circumstances including but not limited to:
material misstatement of the Group’s audited financial results; material or misleading results announcement prior to
vesting; or a clear and material contravention of the Company’s ethics and values on the part of the participant or a
team member, team, business area or profit centre for which the participant is responsible.
In the most serious of these circumstances the Committee may also invoke the clawback provisions against vested
awards under the PSP, DBP and annual bonus. The clawback must be implemented within five years of the grant of
the relevant PSP and DBP awards, and within two years in respect of bonus awards paid in cash.
105
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Use of discretion
The Committee will operate the annual bonus plan, DBP and PSP according to their respective rules, as approved
by Shareholders, and in accordance with the Listing Rules, where applicable. The Committee retains discretion,
consistent with market practice, in a number of areas with regard to the operation and administration of these plans.
These include, but are not limited to:
• The participants;
• The timing of grant of an award;
• The vehicle of an award;
• The size of an award;
• The determination of vesting or bonus payment;
• Discretion required when dealing with a change of control or restructuring of the Group;
• Determination of the treatment of leavers based on the rules of the plan and the appropriate treatment chosen;
• Adjustments required in certain circumstances (e.g. rights issues, corporate restructuring events and special
dividends); and
• The annual review of performance measures and weighting, and determining the performance measures for the
awards granted from year to year.
In relation to the PSP, DBP and annual bonus plan, the Committee retains the ability, in exceptional circumstances,
to change performance measures, targets and/or the relative weighting of performance measures part-way through
a performance period if there is a significant event (such as a major transaction or, in the case of the bonus only,
a transition in role) which causes the Committee to believe the original performance conditions are no longer
appropriate. In exercising this discretion the Committee will determine that the original conditions are no longer
appropriate and the amendment is required so that the conditions achieve their original purpose and are not
materially less difficult to satisfy. Any use of the above discretions would, where relevant, be explained in the
Annual Report on Remuneration.
In exceptional circumstances the Committee also 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.
Considerations of employment conditions elsewhere in the Group
The Remuneration Policy described here 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 this philosophy has been cascaded below Executive Directors to achieve alignment
with the remuneration strategy 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 exceed certain pension tax allowances may be offered cash
allowances in lieu of pension benefits.
Annual bonus
• Approximately 370 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)
• Annual awards under the PSP are made to approximately 370 employees in the
Global Leadership Team.
106
Directors' ReportSerco Group plc Annual Report and Accounts 2016 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.
Considerations of shareholder views
We have consulted with our largest shareholders and received support for the continuation of the current
arrangements at least in the short-term whilst the major elements of the Transformation phase are executed during
2017. The Committee believes 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. With the Policy subject to further change, we intend to engage in further
consultation with our major shareholders during the latter part of 2017 and a revised Policy will be tabled at the
AGM in May 2018.
Approach to recruitment remuneration
Our overarching remuneration principles continue to apply in recruiting new hires or promotions to the Board – that
is that we seek to offer a package that is sufficient to attract, retain and motivate while aiming to pay no more than
is necessary. We take into account that, as a global business, Serco operates in diverse markets and geographies
and many of its competitors for talent are outside the UK.
When hiring a new Executive Director, the Committee will typically align the remuneration package with the above
Remuneration Policy incorporating all elements as set out above.
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 either a pension
contribution and/or a pension allowance equal to 30% of base salary.
As summarised below, the Remuneration Policy provides for a maximum combined total incentive under bonus,
PSP and DBP 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).
Element of remuneration
Maximum variable pay:
normally comprising:
• Annual bonus
• Long-term incentives
Maximum percentage of salary
500%
150%
350%
Note: Maximum percentage of salary for annual bonus and long-term incentives excludes compensation for awards forfeited.
This is the maximum level of incentives excluding any to compensate for entitlements forfeited 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).
107
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
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.
Where a new Executive Director is an internal promotion, the Committee has discretion to allow the new Executive
Director to continue to benefit from existing awards granted, or benefit entitlements (such as pension), that were in
place 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 outside
of those in the Remuneration Policy for NEDs, although in exceptional circumstances such remuneration may be
required in currently unforeseen circumstances.
The Committee will include in future Annual Reports on Remuneration details of the implementation of the
recruitment policy in respect of any such recruitment to the Board.
Service contracts and loss of office payments
The policy for service contracts for new Directors is shown in the table below. 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.
Specific provisions are in place for Ed Casey in that the notice period is 12 months from the Company (as is usual
policy), and 4 months from the Director to more closely align with US employment practice.
Copies of the Directors’ service contracts and letters of appointment are available for inspection at the Company’s
registered office. 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.
The date of appointment for each Director is shown in the table on page 110.
108
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Provision for Executive Directors
Detailed terms
Notice period
• 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.
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 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’ 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.
• 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.
• ‘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.
• 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.
• Bonuses may be paid on a pro-rata basis measured on performance up to the date of
change of control.
• PSP awards vest pro-rata for time and performance up to the date of change of control
unless the Committee decides otherwise.
• 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.
Treatment of annual
bonus on termination
Treatment of unvested
performance shares or
options and unvested
matching deferred share
awards on termination
under plan rules1
Change of control
Exercise of discretion
1.
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.
Provision for NEDs
Detailed terms
Letters of appointment
• Appointed for initial three-year term.
Loss of office policy
• No compensation or other benefits are payable on early termination.
• Appointment may be terminated on three months’ written notice.
• All Non-Executive Directors are subject to annual re-election.
109
Directors’ ReportFinancial StatementsStrategic Report
Remuneration Report continued
Remuneration Policy for the Chairman and Non-Executive Directors
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.
How the element
supports our
strategic objectives
Fees
To attract Non-
Executive Directors
with the necessary
experience and
ability to make
a substantial
contribution to the
Group’s affairs.
Benefits
Operation of the element
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:
• Senior Independent Director 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
intercontinental travel.
In addition, reasonable travel and business
related expenses are paid.
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
on page 117.
Performance metrics
used, weighting and
time period applicable
Non-Executive
Director fees are not
performance-related.
N/A
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
Roy Gardner
Angie Risley
Ralph D. Crosby Jnr
Malcolm Wyman1
Mike Clasper
Tamara Ingram2
Rachel Lomax
John Rishton3
Date of appointment to the Board
8 May 2014
27 October 2014
25 October 2013
1 June 2015
1 April 2011
30 June 2011
1 January 2013
3 March 2014
3 March 2014
3 March 2014
13 September 2016
1.
2.
3.
Malcolm Wyman stepped down from the Board and left the Company on 31 October 2016.
Tamara Ingram stepped down from the Board and left the Company on 31 July 2016.
John Rishton was appointed to the Board on 13 September 2016.
All Directors are put forward annually for re-election at the AGM.
110
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Annual report on remuneration
The implementation of the Remuneration Policy for year ended 31 December 2016
The Remuneration Policy for the year ended 31 December 2016 was consistent with the policy approved by
shareholders at the AGM in 2014.
Single Figure – Directors’ remuneration (audited information)
Executive Directors’ single figure
The following table shows a single total figure of remuneration in respect of qualifying services for 2016 for each
Executive Director, together with comparative figures for 2015. Details of NEDs’ fees are set out in the next section.
Salary and fees
Taxable benefits1
Bonus2
Long-Term Incentives3
Pension4
Total
Rupert Soames
Angus Cockburn
Ed Casey5
2016
2015
2016
2015
2016
2015
£
£
£
£
£
£
850,000
850,000
500,000
500,000
771,552
694,324
24,258
18,154
40,310
18,154
102,541
20,836
1,049,325
1,103,130
530,075
562,380
926,440
869,849
37,983
29,209
30,559
N/A
–
–
255,000
255,000
150,000
150,701
228,376
205,517
2,216,566
2,255,493
1,250,944
1,231,235
2,028,909
1,790,526
1.
2.
3.
4.
5.
The value of the UK 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 2016 benefits relate primarily to
his expatriate status, including costs of £80,527 for accommodation while in the UK. Where Serco settles the PAYE and NIC liability in respect of benefits
provided, the value of the benefit has been grossed up at the individual’s marginal tax rate.
Performance bonuses earned in the period under review, but not paid until the following financial year. During the year Rupert Soames and Angus
Cockburn participated in the DBP by deferring 50% of their 2015 bonuses via the purchase of Investment Shares. Any deferral of the 2016 bonuses, payable
in 2017, will take place during 2017 and be reported in the 2017 DRR.
Includes the gain on vesting of recruitment awards (conditional share awards) vesting in 2016 for Rupert Soames and Angus Cockburn. These awards
were granted in compensation for non-performance based awards forfeited by Rupert Soames and Angus Cockburn on joining Serco, therefore no
performance conditions applied to the vesting of these awards however these shares were not included in the single figure value for the year of grant.
Rupert Soames’ award over 29,628 shares vested on 6 August 2016 at a share price of £1.282 (being the share price on the last trading day prior to vest).
Angus Cockburn's award over 23,837 shares vested in full on 5 August 2016 at a share price of £1.282. The 2014 awards granted under the PSP that were
subject to EPS performance in the period to 31 December 2016, did not vest as the performance condition was not met (further details are provided
below). The 2015 LTI value for Rupert Soames relates to a non-performance recruitment award (conditional share award) that vested on 16 April 2015 (19,911
shares with a share price of £1.47 on the date of vest). This was not included in the relevant single figure value for the year of grant.
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. Ed Casey's value includes the Serco contribution to his 401K plan.
Ed Casey's remuneration is paid in US dollars and has been converted into GBP using the average exchange rate over the relevant financial year. For the
purpose of the 2016 single figure USD1 = GBP 0.72672. For the purpose of the 2015 single figure USD1 = GBP 0.65398. The increase in the GBP value of Ed
Casey’s base salary and pension is due to the exchange rate difference between 2015 and 2016. His 2016 base salary and pension were unchanged from
2015 (salary USD 1,061,690, with an employer 401K contribution of USD 7,950 and cash alternative of USD 306,306). His 2016 bonus is USD 1,274,824 (USD
1,330,085 in 2015).
The annual base salaries of the Executive Directors for the year ended 31 December 2016 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
111
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Variable pay outcomes (audited information)
Performance-related annual bonus
For 2016, 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 Trading Profit (40%), Free Cash Flow (40%) and Revenue
(20%) and the non-financial measures were individually set and based on key strategic goals. Payments under the
2016 annual bonus were subject to an Underlying Trading Profit underpin (after adjustment for in-year Onerous
Contract Provisions (OCP) items) of £50.0m.
The Remuneration Committee reviewed the achievements against the targets for the year and the proposed annual
incentive payments for the Executive Directors. The tables below show the achievement against the financial and
non-financial measures.
Financial performance
Performance Measure
Revenue
Free Cash Flow
Trading Profit
Weighting for 2016
(% maximum bonus
opportunity)
Threshold
target
(£m)
Maximum
target
(£m)
Actual
performance
(£m)
Achievement
against measure
(% maximum
opportunity for
this measure)
14%
28%
28%
£2,802
- £54.9
£50.0
£3,004
- £44.5
£59.2
£2,859
- £33.0
£73.7
33%
100%
100%
Non-financial performance
Weighting for 2016 (% maximum opportunity)
30%
Achievement against measure
(% maximum opportunity for this measure)
Overall 2016 bonus outcome
Total bonus payable as % of maximum
Bonus opportunity as % of salary
Bonus amount achieved as % of salary
Bonus amount earned
Rupert
Soames
72.5%
Angus
Cockburn
70.0%
Ed
Casey
65.0%
Rupert
Soames
82.3%
150%
123.5%
Angus
Cockburn
81.6%
130%
106.0%
Ed Casey
80.1%
150%
120.1%
£1,049,325
£530,075
$1,274,824
Note: All Executive Directors are entitled to participate in the Deferred Bonus Plan (the DBP) in 2017, up to a maximum of 50% of the bonus determined in
respect of 2016 performance.
For FY16, the Group Bonus Plan (the Plan) in which Executive Directors participate was focused on three core
measures which comprised 70% of the overall opportunity: Group Revenue, Group Trading Profit and Group Free
Cash Flow. The remaining 30% of the opportunity is based on role-specific objectives related to the delivery of the
business transformation.
Financial performance has been strong; on both Trading Profit and Free Cash Flow the achievements of the
business over the year were in excess of the stretching targets set by the Committee at the beginning of the year
and therefore these components have paid out in full. The level of Revenue achieved over the period was between
threshold and maximum and as such 33% of this component of the bonus was awarded.
112
Directors' ReportSerco Group plc Annual Report and Accounts 2016 The financial bonus outcomes have been calculated after appropriate adjustments were made (agreed at the
beginning of the year as part of the target-setting process and in line with the approach disclosed in respect of
2015). The Committee has once again 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.
This year the process was further strengthened by involving the Company’s external auditors in verifying the
extraction of figures appearing in the accounts and those tabled for bonus purposes, followed by a formal sign-off
by the Audit Committee on the numbers used to determine bonus payments prior to decisions being made by the
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 and that the transparency regarding this introduced in the
2015 DRR has continued in respect of 2016.
Trading Profit of £100.3m is adjusted by the Committee to arrive at a figure for Trading Profit for bonus purposes;
shareholders were consulted on the principles behind these adjustments in 2015, and the bonus outcome for 2015
reflected these principles, the purpose of which is to ensure that management are measured against their in-year
performance and are not given credit for gains for which they have not materially influenced. The first adjustment is
to put Trading Profit into constant currency, so that it is consistent with the targets set at the beginning of the year;
this is a £5.7m reduction. The Committee then considers items to properly reflect management effort and in-year
operational performance. The Committee has concluded that a total of £20.9m should be adjusted out of Trading
Profit in constant currency to arrive at a calculation of Trading Profit for bonus purposes.
The table below sets out the adjustments made by the Committee between Trading Profit and Trading Profit for
bonus purposes in 2016.
Trading profit
Constant currency adjustment
Trading profit at constant currency
Adjustment for bonus purposes
Trading profit for bonus purposes
2016
(£m)
100.3
(5.7)
94.6
(20.9)
73.7
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.
113
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Non-Financial Performance
Rupert Soames
Rupert’s objectives focused on:
• Improving Business Development performance
to rebuild the pipeline, with focus on both new
business wins and total wins including re-competes
and extensions.
• Supporting Divisions in dealing with commercial
issues and managing key customer relationships.
• Leading the delivery of the on-going transformation
plan with agreed in-year savings.
• Demonstrating effective leadership of both the
management team and the Group as a whole,
continuing to improve employee engagement
through embedding a performance culture,
ensuring there is clear understanding of what
leadership means in Serco supported by
appropriate development.
• Lead effective development of the strategic plan
“refresh” with agreement of the Board to its
implementation.
• Support the Chairman to ensure the effective
working of the Board.
Angus Cockburn
Angus’s objectives focused on:
• Managing the tender process for new external
auditors and ensuring the effective handover from
Deloitte; completing the internal audit tender and
successful transition to the new firm, and developing
the strategy for Internal Audit Reviews.
• Completing the returns of cash to private placement
noteholders.
• Improving the effectiveness and efficiency of
the finance function through the Global Finance
Transformation (GFT) with a number of key
milestones agreed at the start of the year.
• Work with the Group Strategy Function to ensure that
there is a five-year plan for each line of business.
The Committee deemed performance to be very strong. Rupert has
continued to show highly effective and visible leadership throughout
2016, and over the course of the last 12 months has delivered essential
elements of the ‘Transform’ stage of our turnaround. This included
completing the rationalisation of our portfolio to achieve a strategic
focus on public services in five sectors and four geographies;
continued progress in reducing the burden of loss-making contracts;
rebuilding our business development capacity, which has supported
an increase in our pipeline of larger new bid opportunities.
Furthermore, significant progress has been made in building
differentiated capabilities and strengthening our sector propositions,
which includes the successful development of our three Centres of
Excellence covering Health, Transport and Justice & Immigration.
Rupert has refreshed Serco’s values to Trust, Care, Innovation and
Pride, which sit at the very core of how the business operates. The
Committee have also been able to monitor that the values have been
embedded successfully though our annual ‘Viewpoint’ employee
engagement survey with further increases in employee engagement,
which is a key determinant of the future success of the business. The
Chairman regards the support Rupert has provided to him in ensuring
the effective operation of the Board to be first class. Based on
Rupert’s achievement the Committee has awarded above target but
below maximum performance for the non-financial element relating
to these objectives.
The Committee deemed Angus’s performance to be very strong
against all objectives. Examples of successes include the tender
process for new auditors, which was deemed to have been very well
executed in a short timeframe; clear plans to transition from Deloitte
to KPMG were executed seamlessly. A new Internal Audit strategy
was developed and a new outsource partner, PWC, were appointed.
The Internal Audit Strategy was approved by Audit Committee.
Cash return to noteholders was executed successfully. Significant
improvements have been made in contract finance reporting and
overall efficiency of the finance function. The creation of a Global
Finance Community has taken real shape this year. In addition, Angus
worked closely with Group Strategy and delivered a five-year financial
plan to support the strategy. This plan was designed in such a way that
it can also be used for impairment reviews and viability assessment.
Further examples of successes include the quality of engagement
with investors and analysts ending with the successful Capital Markets
event. Based on Angus’s achievement the Committee has awarded
above target but below maximum performance for the non-financial
element relating to these objectives.
114
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Ed Casey
Ed’s objectives focused on:
• Improving Business Development performance to
rebuild the pipeline, with focus on both new business
wins and total wins including re-competes and
extensions.
• Continue to refine Risk Management process and
work to embed as part of our operational approach
to running the business.
• Continue to improve our internal governance
compliance to achieve more consistent operational
performance, ensuring each Division has a robust
Compliance & Assurance programme that has been
reviewed and approved by Group.
• Re-dedicate business to “zero harm” HS&E culture
and implement necessary changes to effect change.
Deliver consistent measures across the Group, and a
reduction in accident rates.
• Deliver agreed Transformation Plan to continue to
improve quality and efficiency of internal shared
services and achieve savings targets to ensure
sustained competitiveness of the business.
The Committee deemed Ed’s performance to be very strong against
all objectives. Ed has been a driving force behind the improvement
in pipeline and level of bid activity in 2016; Centres of Excellence
have gained traction and have made a significant positive impact on
Business Development and positioning for future growth. The quality
and consistency of Business Development has improved and win
rates have also shown improvement. The new risk operating model
and training were delivered and the Group Risk Committee reporting
has been significantly refreshed to reflect the Committee’s needs.
The implementation of the Contract Management Application is
a significant achievement and will give the Company a tool to help
improve how we manage our contracts. Much has been accomplished
in 2016 to re-focus the Company on safety and strengthen the culture
of “zero harm”. For example, AsPac have trialled innovative training
for Musculoskeltal Disorder Prevention and Resilience, and Mental
Health First Aid to improve workplace injury prevention. In the UK, a
new HSE call centre service was developed to coordinate reporting
accidents, incidents and near misses. In terms of the Transformation
Plan, savings delivered exceeded targets set at the start of the year;
there is clear evidence of transformation taking place in all Shared
Services (Procurement, HR, IT and Finance). Based on Ed’s achievement
the Committee has awarded above target but below maximum
performance for the non-financial element relating to these objectives.
Performance Share Plan (PSP)
The LTI amount included in the 2016 single total figure of remuneration includes the element of the PSP award
which was awarded in 2014, vesting subject to EPS performance in the period to 31 December 2016. Achievement
against the measure is shown in the table below:
Performance condition
Adjusted EPS. 25% of the award vests for
threshold performance, rising on a straight-
line basis to 100% at maximum performance.
Weighting
Threshold –
25% vesting
Maximum –
100% vesting
1/6
22p
26p
Actual
7.07p
Percentage of
max achieved
0%
The awards made to the Executive Directors subject to this performance condition were as follows:
2014 PSP share awards
Rupert Soames
Ed Casey
Angus Cockburn
Date of grant
27 June 2014
27 June 2014
31 October 2014
96,066
70,558
60,891
Vesting date
27 June 2017
27 June 2017
0
0
0 31 October 2017
No of
shares
awarded
No of
shares
vesting
Value of
vesting £
£0
£0
£0
115
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
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.
Board fee (including
Chairmanship fees) (£)
Allowances1 (£)
Taxable benefits2 (£)
Total (£)
2016
2015
2016
2015
2016
2015
2016
2015
Sir Roy Gardner3
250,000
129,167
Mike Clasper4
90,083
88,000
–
–
5,000
–
5,000
21,600
14,400
271,600
148,567
Ralph D. Crosby Jnr
50,000
50,000
30,000
35,000
8,954
Tamara Ingram5
36,750
63,000
Rachel Lomax6
70,000
70,000
Angie Risley7
60,000
60,000
–
–
–
5,000
5,000
5,000
–
–
–
Malcolm Wyman8
56,250
67,500
5,000
John Rishton9
19,583
–
–
–
6,831
–
–
–
–
–
–
–
–
90,083
93,000
88,954
85,000
36,750
68,000
70,000
75,000
60,000
65,000
68,081
67,500
19,583
–
Total
632,667
527,667
35,000
60,000
37,385
14,400
705,052
602,067
1.
2.
3.
4.
5.
6.
7.
8.
9.
£5,000 is payable for each occasion that requires inter-continental travel outside of the Director’s country of residence.
Taxable benefits in 2016 relate to taxable travel and subsistence expenses reimbursed in connection with attendance at Board meetings
(2015 £nil). Roy Gardner also received secretarial services in 2016 of £21,600 (£14,400 in 2015).
Sir Roy Gardner is Chairman of the Board, Chairman of the Nomination Committee and a Member of the Remuneration and Corporate
Responsibility Committees.
Mike Clasper is Senior Independent Director, Chairman of the Corporate Responsibility Committee and a Member of Audit, Remuneration,
Nomination and Group Risk Committees.
Tamara Ingram was a Member of the Corporate Responsibility and Remuneration Committees. She stepped down from the Board on 31 July 2016.
Rachel Lomax is Chairman of the Group Risk Committee and a Member of Audit Committee.
Angie Risley is Chairman of Remuneration Committee and a Member of Nomination and Corporate Responsibility Committees.
Malcolm Wyman was Chairman of Audit Committee and a Member of the Group Risk, Nomination and Remuneration Committees.
He stepped down from the Board on 31 October 2016.
John Rishton joined the Board on 13 September 2016 and is Chairman of the Audit Committee and a Member of the Remuneration
Committee and Group Risk Committees.
116
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Annual NED fees
Role
Chairman
Senior Independent Director
Board fees
Audit Committee Chairmanship
Audit Committee Membership
Group Risk Committee (previously Corporate
Responsibility & Risk Committee) Chairmanship
Group Risk Committee (previously Corporate
Responsibility & Risk Committee) Membership
Remuneration Committee Chairmanship
Remuneration Committee Membership
Allowance for travel to international meetings
Base fee
1 April 2016
£
Base fee
1 April 2015
£
Percentage
change
250,000
250,000
No change
25,000
50,000
12,500
5,000
15,000
25,000
50,000
12,500
No change
No change
No change
5,000
No change
15,000
No change
8,000
8,000
No change
10,000
5,000
5,000
10,000
No change
5,000
5,000
No change
No change
No additional fee is payable for Chair or Members of the Corporate Responsibility Committee or
Nomination Committee.
Performance graph and table
This graph shows the value as at 31 December 2016, of a £100 investment in Serco on 31 December 2008 compared
with £100 invested in the FTSE 250 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 FTSE 250 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
Dec 2016
Serco
FTSE 250 Index
117
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
CEO’s pay in last eight 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
2016
Christopher Hyman
Christopher Hyman
Christopher Hyman
Christopher Hyman
Christopher Hyman
Ed Casey
Ed Casey
Rupert Soames
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
2,255,493
2,216,566
90%
91%
81%
72%
N/A
74%
71%
0%
87%
82%
295.42%
168.77%
80%
63.60%
0%
0%
0%
N/A
100%1
23.6%
1.
Rupert Soames had a non-performance recruitment award which vested in full in 2015.
Percentage change in CEO’s remuneration
The table below shows the percentage change in the salary, benefits and bonus of the CEO compared to that for
the average UK employee. The UK employee sub-set of the Company’s global employee population has been
chosen as the group which provides the most appropriate comparator; this comprises some 23,000 of the 47,520
employees Serco employs worldwide. Inflation and local pay practices form a key driver in the salary and benefits
provided in each location, and as the CEO is based in the UK we have chosen employees within the same country.
CEO
Average change for all other UK employees
Salary
0%
3.23%1
Benefits2
34%
-3%
Bonus
-5%
44%3
1.
2.
3.
This represents the change in pay for employees employed throughout the period to exclude the impact of changes in the mix of our employee population.
The nature of benefits provided to employees in 2016 compared to 2015 remains the same. The percentage change represents a reduction in the cost to
the Company of the benefits over the period. The increase in CEO’s benefits, although a high percentage, relates to a £6,100 increase in taxable benefits,
representing 0.2% of his total pay.
The bonus element is shown for those employees eligible for such payments. These are calculated each year in March, after the publication of the
Remuneration Report, so the figures shown here for employees are for bonuses paid in 2016, related to the 2015 performance, whereas the figure for the
CEO relates to a calculation of the bonus earned, but not yet paid, related to performance in 2016.
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
2016 vs 2015
0%
-0.5%
2016
nil
2015
nil
1,516.0
1,523.3
Dividend per share, and Overall expenditure on wages and salaries have the same meaning as in the Notes to the
Company Financial Statements.
118
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Pensions (audited information)
As at 31 December 2016, 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 2016.
Payments to Past Directors (audited information)
No payments were made in the year to past Directors.
Awards made in 2016
Deferred Bonus Plan (DBP) (audited information)
The table below summarises the Matching Share Awards granted to Executive Directors’ in 2016 in relation to
their participation in the DBP.
Executive Directors received a Matching Share Award (in the form of a conditional share award) on a 2:1 basis in
respect of their gross bonus deferred (i.e. for every one Investment Share that could have been purchased from
the gross bonus deferred, two Matching Shares are granted). Matching Share Awards granted in 2016 vest subject
to Aggregate EPS over the three year performance period ending 31 December 2018. 25% of the Matching Share
Award will vest for threshold performance (Aggregate EPS of 7.5p), rising on a straight-line basis to 100% vesting
for maximum performance (Aggregate EPS of 9.1p or above).
The definition of EPS is Statutory Earnings Per Share before exceptional items (adjusted to reflect tax paid on a
cash basis).
Basis
of Award
(% salary)
Grant date
Market
price at
award
(p)1
Face
value
(£)2
Percentage
vesting at
threshold
performance
Directors
Number
of shares
Performance
period end date
Rupert Soames
130% 03 May 2016
95.5
1,103,129
25% 1,154,540 31 December 2018
Angus Cockburn
112% 03 May 2016
95.5
562,380
25%
588,589 31 December 2018
1.
2.
Closing share price on 3 May 2016.
Calculated using the closing share price on the date of grant.
Pre-vesting malus and post-vesting clawback is applicable to these awards.
119
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Performance Share Plan (PSP) (audited information)
In 2016 the Executive Directors received awards equivalent to 200% of salary for the CEO and COO and 175% for
the CFO.
The awards will vest at the end of the performance period, if the Executive Directors are still in employment with
Serco and to the extent that the performance conditions have been met.
Performance
measure
Weighting
of measure
Aggregate EPS
1/3rd
Relative TSR
1/3rd
Average ROIC
1/3rd
Performance target
Statutory Earnings Per Share (EPS) before
exceptional items (adjusted to reflect tax paid on
a cash basis) of 7.5p (threshold, 25% vesting) to
9.1p (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 FTSE 250 (excluding investment
trusts), measured from the 30-day period following
the announcement of the Company’s 2015 results
to the 30-day period following announcement of
the Company’s 2018 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 2018
30 days following the
announcement of the
Company’s 2018 results.
31 December 2018
The structure for vesting is the same for all measures and no shares vest where performance is below Threshold.
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
Rupert
Soames
Angus
Cockburn
Ed
Casey
Type of
interest
awarded1
Nominal
Cost Option
Nominal
Cost Option
Conditional
Share Award
Basis of
award
(% salary)
Grant date
Market
price at
award
(p)2
Percentage
vesting at
threshold
performance
Face
value
(£)3
Number
of shares
Performance
period end
date
200% 06 April '16
96.05 1,700,000
25% 1,769,911
See above
175% 06 April '16
96.05
875,000
25%
910,983
See above
175% 06 April '16
96.05 1,314,717
25% 1,368,783
See above
1.
2.
3.
Rupert Soames and Angus Cockburn received grants in the form of nominal cost options with a 2 pence per share exercise price. Due to US tax treatment
of discounted options Ed Casey's award was made in the form of a conditional share award.
Closing share price on 5 April 2016.
Calculated using the closing share price on the day immediately prior to the grant date.
120
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Statement of voting at the general meeting
At the previous AGMs, votes on the Remuneration Report were cast as follows:
2015 Annual Report on Remuneration
2014 Annual Report on Remuneration
2013 Annual Report on Remuneration
2013 Remuneration Policy
2012 Remuneration Report
2011 Remuneration Report
For %
Number
96.68%
Against %
Number
Withheld %
Number
3.32
N/A
814,337,337
27,947,300
610,006
98.87%
1.13%
760,294,709
8,671,241
99.61%
0.39%
N/A
24,080
N/A
367,080,126
1,442,674
2,302,116
98.08%
1.92%
N/A
358,418,242
7,033,412
5,373,262
95.82%
4.18%
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
Note: 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.
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. Rupert Soames stepped down as a Non-Executive Director of Electrocomponents plc on
20 July 2016. Ed Casey served as a Director of Talen Energy Corporation until 6 December 2016 when he stepped
down as a Non-Executive Director of this company. Fees payable in the year were £31,369, £60,000 and USD105,000
plus deferred stock with a face value of USD130,000 respectively.
No other fee-paying external positions were held by the Executive Directors.
121
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
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 143.3p per share at 31 December 2016.
Number of
shares owned
outright (including
connected persons)
at 31 December
2016 (or date of
resignation)2
Share
ownership
requirements
(% of salary)1
Shares
Share options5
Subject to
performance
conditions3
Not
subject to
performance
conditions4
Subject to
performance
conditions6
Total share
interests at 31
December 2016
Not subject to
performance
conditions
200%
150%
150%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1,066,603
1,812,828
58,988
3,972,972
125,840
2,676,619
–
–
336,857
588,589
65,748
2,197,194
45,000
56,000
–
–
40,000
20,508
–
–
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
6,911,391
2,802,459
3,188,388
45,000
56,000
–
–
40,000
20,508
–
–
Name
Rupert Soames
Ed Casey
Angus Cockburn
Roy Gardner
Mike Clasper
Ralph D. Crosby Jnr
Tamara Ingram
Rachel Lomax
Angie Risley
Malcolm Wyman
John Rishton
1.
2.
3.
4.
5.
6.
Rupert Soames has met his contractual shareholding investment of 200% of salary by the second anniversary of appointment. Angus Cockburn has
invested 25% on joining Serco and is on track to have invested 150% of salary by the third anniversary of appointment. Despite this, based on the share
price at 31 December 2016, neither Rupert nor Angus have met their shareholding guidelines as set out above. Ed Casey has not met his shareholding
guideline.
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period 1 January 2017 and the date of this report.
Includes awards made to Ed Casey under the Performance Share Plan and awards made to Rupert Soames and Angus Cockburn under the Deferred Bonus
Plan. All awards are in the form of conditional share awards.
These are the special recruitment awards that were made to Rupert Soames and Angus Cockburn in compensation for non-performance-based awards
that were forfeited in connection with them joining Serco (as disclosed in the 2014 DRR). These awards are in the form of conditional share awards.
All options are in the form of nominal cost options subject to a 2 pence per share exercise price. There are no interests in the form of share options that
are not subject to performance conditions, nor are there any share options that are vested but unexercised and no share options were exercised during
the year.
Includes awards under the Performance Share Plan and the special recruitment awards that were made to Rupert Soames and Angus Cockburn in
compensation for performance-based awards that were forfeited in connection with them joining Serco (as disclosed in the 2014 DRR). These are all
nominal cost options with a 2 pence per share exercise price.
122
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Other shareholding information
Shareholder dilution
Awards granted under the Company 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 2016, our dilution level was
within these limits.
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 10,540,181 and 9,864,986 ordinary shares at 1 January 2016 and 31 December 2016 respectively.
The Remuneration Committee
The Committee determines the overall Remuneration Policy for senior management and the individual
remuneration of the 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 78.
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.
123
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Remuneration Committee members and attendees
The Committee met five times during 2016.
Remuneration
Committee members
during 2016
Position
Angie Risley
Chairman of Remuneration
Committee from 14 May 2012
Roy Gardner
Member from 1 June 2015
Comments
Malcolm Wyman
Member from 1 January 2013
Resigned from the Board on 31 October 2016
Tamara Ingram
Member from 3 March 2014
Resigned from the Board on 31 July 2016
Mike Clasper
Member from 1 August 2016
Joined as an interim member in 2016
John Rishton
Member from 13 September 2016
Joined the Board on 13 September 2016
Remuneration
Committee attendees
during the year
Rupert Soames
Ed Casey
Angus Cockburn
Position
CEO
COO
CFO
Geoff Lloyd
Group HR Director
Tara Gonzalez
Group HR Director, Reward
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
Group General Counsel & Company Secretary
Attends as the secretary to the Committee
Deputy Company Secretary
Attends as the secretary to the Committee
Steve Williams
(until June 2016)
Rebecca Dunn
(from June 2016)
No person is present during any discussion relating to their own remuneration arrangements.
124
Directors' ReportSerco Group plc Annual Report and Accounts 2016 Summary of the Committee’s activities during the financial year
Meeting
Regular items
Ad hoc items
February
March
May
August
December
Considered base pay of Executive Directors and members
of the Executive Committee; considered previous year’s
performance against targets and confirmation of any bonus
payable; review of achievement of performance conditions
for the LTI vesting in respect of awards made in 2013; set
performance targets and objectives for 2016; review the
draft of the 2015 Remuneration Report.
Reviewed and approved the performance measures for the
LTI awards for 2016 awards and agree grant policy.
Considered the feedback from
shareholder consultation.
Considered requirement for review of comparator groups for
benchmarking packages; considered timing of future Policy
Review aligned to current status of business transformation.
Reviewed wider employee
arrangements and conditions
across the Group.
Briefing on market trends and Corporate Governance
update; update on in-flight share awards.
Reviewed performance of the Executive Directors against
bonus objectives; reviewed proposed approach to structure
of the Remuneration Report; reviewed Committee Terms
of Reference; reviewed the Committee’s annual programme
of work.
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:
• Advice on the review of Remuneration Policy.
• Support in reviewing the Directors' Remuneration Report.
• Informing the Committee on market practice and governance issues.
• Assistance with 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 pay and benefits data.
Fees paid to PwC as advisers to the Committee during the year totalled £39,500, 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.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Secretary
22 February 2017
125
Directors’ ReportFinancial StatementsStrategic Report Directors' Report
Annual Report and Accounts
The Directors present the Annual Report and Accounts
of the Group for the year ended 31 December 2016.
Comparative figures used in this report are for the year
ended 31 December 2015 unless otherwise stated.
The Corporate Governance Report, including the
Remuneration Report, set out on pages 74 to 125
forms part of the Statutory Directors’ Report.
The Chairman’s Statement on pages 4 to 5 and the
Chief Executive's Review and Divisional Reviews on
pages 26 to 41 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 34 to the Consolidated Financial Statements.
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 Annual General Meeting in May 2016, 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 authority granted continues
until the earlier of the AGM planned to be held in May
2017 or close of business on 30 June 2017.
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.
Authority for the purchase of shares
As at the date of this report authority granted at the
Company’s AGM in May 2016 remains in force, as set out
in the 2016 Notice of Meeting which is available on the
Company’s website.
Dividends
No interim dividend was paid in respect of the 2016
financial year (2015: nil). The Directors do not recommend
a final dividend to be paid for 2016 (2015: nil).
Directors
The current members of the Board together with
biographical details of each Director are set out on
pages 74 and 75.
On 31 July 2016, Tamara Ingram retired as Non-
Executive Director of the Company. On 6 September
2016, the Company announced that Malcolm Wyman
would also be retiring his position as Non-Executive
Director with effect from 31 October 2016. John
Rishton subsequently joined the Board as Non-
Executive Director with effect from 13 September 2016.
He became a member of the Audit Committee on
appointment and subsequently replaced Malcolm as
Chair of the Audit Committee from 1 November 2016.
John will stand for election at the 2017 AGM.
As in previous years, and in accordance with the UK
Corporate Governance Code, all other Directors will
stand for re-election at the AGM in May 2017.
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 2016 are set out in the Directors’
Remuneration Report on pages 96 to 125. Between
1 January 2017 and the date of this report there were
no changes in Directors' interests in ordinary shares
and options.
126
Directors' ReportSerco Group plc Annual Report and Accounts 2016 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 have
been executed indemnifying each of the Directors and
Company 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 Company Secretary of the Company.
Branch offices
In certain jurisdictions, the Group will operate through
a branch of one of its subsidiary companies.
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:
Material 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
two-year extension options available. 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.
Under the terms of the AWE Contract, any change
in shareholding or the identity of a shareholder in
the AWE JV requires the consent of the Secretary
of State for Defence. In the event that there is a
change of control of Serco Holdings Limited, it is
required to transfer its entrire shareholding in the
AWE JV to the Serco Group or another wholly owned
subsidiary of the Serco Group prior to such change
of control. In the event that there is a change of
control of Serco Holdings Limited without its entire
shareholding in the AWE JV first being transferred to
another member of the Serco Group or if there is a
change of control of the Serco Group then the other
shareholders in the AWE JV are entitled (subject to
the approval of the Secretary of State and applicable
regulatory approvals) to purchase the AWE JV shares
and loans held by Serco Holdings Limited and any
other member of the Serco Group.
• CMS Eligibility Support Services (ESS): On 1 July
2013, Serco Inc. entered into a contract with the
United States of America (acting through the Centers
for Medicare and Medicaid Services (CMS)) for the
provision of support for the Health Care Exchanges
implemented to provide affordable health insurance
and insurance affordability programs. The contract
had an initial base term of one year, with four options
of one year each. In the event of a change in control
or ownership of Serco Inc., which in the reasonable
opinion of the U.S. Government adversely affects
the Company's ability to perform the services, the
contract may be terminated by the U.S. Government.
• 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. The
U.S. Department of Defense may terminate Serco's
SSA in the event of the sale of the Corporation to a
company or person not under Foreign Ownership,
Control or Influence (FOCI).
127
Directors’ ReportFinancial StatementsStrategic Report Directors' Report continued
Financing facilities
Employment policies
• 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 $357,042,884 at 31
December 2016, and their maturity is between 9 May
2018 and 14 May 2024. 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.
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 Clifford Chance LLP, 10 Upper Bank
Street, Canary Wharf, London, E14 5JJ on 11 May 2017
at 11.00am.
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 186 to 192.
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.
Diversity
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 seek to respect and uphold the human
rights of individuals in all aspects of our operations
wherever we operate. Our Human Rights Group Standard
demonstrates this commitment and the significance of
human rights for a diverse global organisation. It also sets
out expectations for individual and corporate behaviour
across our business in regards to human rights. We use
International Human Rights Standards such as the United
Nations Guiding Principles on Business and Human
Rights (2011) (UN Guiding Principles) as frameworks
to assist our decision-making and constructive
engagement; to identify, assess, and manage adverse
human rights impacts; and to integrate and act on
findings, track responses, monitor effectiveness and
communicate how impacts are addressed.
Engagement
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
128
Directors' ReportSerco Group plc Annual Report and Accounts 2016 improvements to be delivered in business performance
as well as in employment terms and conditions. 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.
The Group has been proactive in providing employees
with information on matters of concern to them as
employees. These mechanisms ensure employees'
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 long-term incentive
arrangements for senior management, which effectively
aligns their interests with those of shareholders by
requiring that Company-level financial performance
criteria are achieved as a condition of vesting.
Corporate responsibility
The Group recognises that operating in a responsible
manner helps drive Serco's success. Our commitment
to corporate responsibility is supported by defined
policies embedded in our Serco Management System.
More information on Corporate Responsibility, including
greenhouse gas emission reporting, can be found in the
Strategic Report on pages 64 to 72.
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 2016, we spent £3.6m on R&D on IT-related
projects, compared to £4.3m in 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 AGM in
May 2016 regarding political donations be renewed.
Details will be included in the notice of AGM.
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 Auditor is 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 Auditor is aware of that information.
Auditor
The Company undertook a formal competitive tender
exercise for external audit services during 2016, as
detailed in the 2015 Notice of Annual General Meeting.
As a result of this tender process KPMG LLP (‘KPMG’)
was appointed as the Company’s External Auditor by
the Board on 27 May 2016 and Deloitte LLP resigned as
Auditor on the same date.
The appointment of KPMG for the 2017 financial year
will be subject to shareholder approval at the next AGM
in May 2017. Further details are set out in the Notice of
Meeting sent to shareholders.
Going concern
In assessing the basis of preparation of the financial
statements for the year ended 31 December 2016, 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 principal debt facilities at the
year-end comprised a £480m revolving credit facility,
and £290m of US private placement notes. As at
31 December 2016, the Group had £770m of committed
credit facilities and committed headroom of £647m.
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
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.
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 2018. The Directors have also reviewed the
principal risks considered on pages 16 to 23 of the
Strategic Review and taken account of the results of
sensitivity testing.
129
Directors’ ReportFinancial StatementsStrategic Report Directors' Report continued
Going concern continued
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.
Interests in voting rights
At 31 December 2016 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) at date
of notification
% held at
date of
notification
Notifying person
Azvalor Asset Management S.G.I.I.C., S.A.
Blackrock Inc
Lancaster Investment Management LLP
Majedie Asset Management Limited
Marathon Asset Management LLP
Morgan Stanley (Institutional Securities
Group and Global Wealth Management)
MSD Partners, L.P.
Orbis Group
Tameside MBC re: Greater Manchester Pension Fund
Notes:
33.3
18.4
16.0
20.8
54.7
56.0
68.3
1.2
38.0
19.5
109.9
54.5
34.1
Nature of
holding
Direct
Indirect
Securities Lending
3.04
1.67
1.45
1.89 Contract for Difference
5.01
4.98
5.09
5.31
0.11
3.46
1.76
5.33
10.0
4.96
3.11
Total
Swap
Direct
Indirect
Direct
Right of Recall
Swap
Total
Indirect
Indirect
Direct
Between 1 January 2017 and the date of this report, the Company has been advised of the following changes of interests in shares:
– on 19 January 2017 Azvalor Asset Management S.G.I.I.C, S.A. notified that their interest in voting rights had fallen below 3%;
– on 16 February 2017, Morgan Stanley (Institutional Securities Group and Global Wealth Management) notified that their interest in
voting rights had fallen below 3%. On 17 February 2017 Morgan Stanley notified that their interest in voting rights was 5.10% and on
20 February 2017 that their interest stood at 5.11%
130
Directors' ReportSerco Group plc Annual Report and Accounts 2016 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 (*).
Page 126
Page 90
Pages 74 and 75
Pages 127 and 128
Page 69
Pages 64 to 72
Page 127
Pages 94
Page 132
Page 132
Page 68
Pages 30 and 126
Pages 68 and 128
Page 128
Pages 186 to 192
Pages 8 to 13
Pages 129 and 145
Pages 71 and 72
Pages 134 to 138
Pages 96 to 125
Page 129
Page 126
Page 94
Page 129
Page 126
Page 126
Pages 16 to 23 and 81
Page 126
Pages 127 and 128
Page 204
Page 130
Pages 76 and 77
Pages 4 to 72
Page 24
Page 126
Amendment of the Articles
Appointment and replacement of Directors
Board of Directors
Change of control
Community
Corporate responsibility
Directors’ insurance and indemnities
Directors’ inductions and training
Directors’ responsibilities statement
Disclosure of information to Auditor
Diversity
Dividends
Employee involvement
Employees with disabilities
Financial risk management
Future developments of the business
Going concern
Greenhouse gas emissions
Independent Auditors' Report
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
22 February 2017
131
Directors’ ReportFinancial StatementsStrategic Report
Directors' Responsibility 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.
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.
In preparing the Parent Company financial statements,
the Directors are required to:
Responsibility statement
We confirm that to the best of our knowledge:
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
22 February 2017
Angus Cockburn
Group Chief
Financial Officer
• select suitable accounting policies and then apply
1.
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
2.
• 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:
3.
• 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.
132
Directors' ReportSerco Group plc Annual Report and Accounts 2016
Strategic Report
Directors’ Report
Financial Statements
Financial
Statements
134
Independent Auditor’s Report
139 Consolidated Income Statement
140 Consolidated Statement of Comprehensive Income
141 Consolidated Statement of Changes in Equity
142 Consolidated Balance Sheet
143 Consolidated Cash Flow Statement
144 Notes to the Consolidated Financial Statements
208 Company Balance Sheet
209 Notes to the Company Financial Statements
214 Appendix: List of Subsidiaries
217 Appendix: Supplementary Information
218 Shareholder Information
219 Useful Contacts
133
Independent Auditor’s Report
to the members of Serco Group plc only
Our opinion on the financial
statements is unmodified
We have audited the financial statements of Serco Group Plc for the year ended
31 December 2016 set out on pages 139 to 216. 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 2016 and of the Group’s loss for the year
then ended;
• the Group financial statements have been properly prepared in accordance with
International Financial Reporting Standards as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance
with UK Accounting Standards, 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.
Our assessment of risks
of material misstatement
In arriving at our audit opinion above on the financial statements the risks of
material misstatement that had the greatest effect on our audit, in decreasing
order of audit significance, were as follows:
134
Financial StatementsSerco Group plc Annual Report and Accounts 2016 Revenue £3,011.0m (2015: £3,177.0m), operating profit £42.2m (2015: loss of £3.8m) and Onerous Contract Provisions of £220.2m
(2015: £302.1m)
Refer to page 83 (Audit Committee Report), pages 146 and 147 (accounting policy), page 154 (key judgements) and page 185 (provisions
note in the financial statements)
Why is it a risk?
Our response
The contractual arrangements that
underpin the measurement and
recognition of revenue by the Group
can be complex, with significant
judgements involved in the assessment
of current and future financial
performance. The key judgements
impacting the recognition of revenue
and resulting operating profit include:
• Interpretations of terms and
conditions in relation to the required
service obligations in accordance
with contractual arrangements;
• The allocation of revenue and costs
to performance obligations where
multiple deliverables exist;
• Assessment of stage of completion
and cost to complete, where
percentage completion accounting
is used;
• Consideration of the Group’s
performance against contractual
obligations and the impact on
revenue and costs of delivery;
• The recognition and recoverability
assessments of contract related
assets, including those recognised
as direct incremental costs prior to
service commencement.
Where an onerous contract provision
is required, judgement is required
in assessing the level of provision,
including estimated cost to complete
taking into account contractual
obligations to the end of the contract,
extension periods and customer
negotiations.
Our audit procedures included the following:
We tested the design and implementation of the controls over the Group’s monitoring and
review processes of contract performance and costs. This included attendance at a sample
of monthly Divisional and Business Unit Performance Reviews used to assess operational and
financial performance, and performing walkthroughs on a sample of contracts to identify the
key stages of the Group’s Business Lifecycle Gate process.
We have also inspected accounting papers prepared by the Group to support key contract
judgements and onerous contract provisions, and assessed compliance with relevant
accounting standards.
Contracts were selected for substantive audit procedures based on qualitative factors, such as
commercial complexity, and quantitative factors, such as financial significance and profitability
that we considered to be indicative of risk. Our audit testing for the contracts selected included
the following:
• We inspected the contract agreements to challenge the method of revenue recognition
adopted by the Group including, where relevant, the allocation of revenue across
contractual obligations and compared these to the policy adopted by the Group
• Where percentage of completion is used, we re-calculated the stage of completion to inform
our assessment of the appropriate amount of revenue and profit to recognise and compared
this to the amounts recorded by the Group
• We assessed whether the revenue recognition methodology applied was consistent with
accounting standards
• We inspected a sample of correspondence with customers and third parties, in instances
where contractual variations and claims have arisen, to inform our assessment of the revenue
and costs recorded up to the balance sheet date
• We visited key contract locations to inform our assessment of operational and financial risks.
For onerous and potentially onerous contracts identified through application of quantitative
selection criteria, our procedures also included:
• We compared contract level forecast revenues and costs to Group budgets and forecasts
approved by the directors
• We challenged key assumptions made by the Group in preparing these forecasts, including
those in relation to revenue growth and cost reductions, vouching to external evidence
where possible and obtaining supporting plans where appropriate
• We assessed the contractual terms and conditions to identify the key obligations of the
contract to inform our challenge of completeness of forecast costs and cost accruals
recorded at the balance sheet date
• We compared the contract forecasts to historic and in year performance to assess the
historical accuracy of the forecasts
• We assessed the mathematical accuracy of the models used to forecast contract revenues
and costs
• We compared the forecast margin to the cumulative margin recognised up to the balance
sheet date to assess whether provisions for loss-making contracts had been appropriately
recorded and, in the case of profitable contracts, that margin recognised to date did not
exceed the forecast.
For selected contract related assets, representing capitalised bid and phase in costs, our
procedures included:
• We assessed whether these had been recognised in accordance with the Group’s accounting
policy and relevant accounting standards
• We inspected actual and forecast contractual cash flows and profits to assess whether these
supported the carrying value of the assets
• We inspected the underlying contracts to inform our assessment of the forecast cash flows,
and compared actual cash flows to forecasts to assess reasonableness
• We compared the amortisation period with the duration of the contract and checked that
the amortisation had been calculated correctly.
135
Financial StatementsStrategic ReportDirectors’ Report Independent Auditor’s Report continued
to the members of Serco Group plc only
Goodwill £577.9m (2015: £509.9m)
Refer to page 84 (Audit Committee Report), page 150 (accounting policy), page 154 (key judgements) and pages 175 to 177 (Goodwill note
in the financial statements)
Why is it a risk?
Our response
The Group has recognised a carrying value of
£577.9m allocated across six cash generating
units, as shown in Note 19. There is inherent
uncertainty involved in forecasting the
future cash flows of each CGU, including the
variability in forecast contract income due
to contract attrition and new contract wins
or extensions, the impact of the Group’s
transformation programme to reduce
operating costs and changes in market
conditions. Judgement is also required for
the selection of an appropriate discount rate.
In the year ended 31 December 2015, the
carrying value of goodwill associated with
the Americas division was written down by
£87.5m to its recoverable value based on the
discounted future cash flows. As a result, the
carrying value of goodwill for the Americas
division will be sensitive to a deterioration in
the division’s projections or an increase in the
discount rate applied.
Our procedures included the following:
• We tested the principles and mathematical integrity of the Group’s discounted
cash flow model.
• With the assistance of our valuation specialists, we challenged the growth rate
and discount rate for each CGU used in the impairment calculation by comparing
the Group’s assumptions to external data.
• We compared the forecast cash flows against budgets and historic actual
performance to test for historic accuracy. We challenged forecast assumptions
around new contract wins or extensions, contract attrition, cost reductions and
the allocation of central costs.
• We tested the sensitivity of the impairment calculation to changes in the
underlying assumptions.
• We considered whether the forecast cash flow assumptions used in the
goodwill impairment calculation were consistent with the assumptions used to
calculate the expected loss on onerous contract provisions, the recognition of
deferred tax assets and the Director’s assessment of going concern and viability.
• We also assessed whether the Group’s disclosures about the sensitivity of
outcomes reflected the risks inherent in the valuation of goodwill.
Retirement benefit surplus £150.4m (2015: £127.1m)
Refer to page 84 (Audit Committee Report), page 150 (accounting policy), page 155 (key judgements) and pages 192 to 199 (Retirement
benefit schemes note in the financial statements)
Why is it a risk?
Our response
Significant estimates are made in valuing
the Group’s retirement benefit surplus in
respect of the Serco Pension Life Assurance
Scheme (SPLAS), including mortality, price
inflation, discount rates and future increases
in salary and pension. Small changes in the
assumptions and estimates used to value
the Group’s net pension surplus would
have a significant effect on the Group’s
financial position.
As the Group’s main defined benefit scheme
is in a net surplus of £150.4m at 31 December
2016 (2015: £127.1m), judgement is required
to determine if it is appropriate to recognise
an asset.
Judgement is also required to determine if
pension obligations associated with contract
arrangements meet the definition of defined
benefit or defined contribution schemes,
and whether an associated asset or liability is
required to be accounted for by the Group.
Our procedures in respect of the Group’s main scheme (SPLAS) included the following:
• We performed procedures to test the completeness and accuracy of data provided
by the Group to the scheme actuaries. This involved selecting a sample of scheme
participants to compare data provided to the actuaries to underlying employment
records held by the Group and the Scheme Administrator.
• We challenged the key assumptions used to calculate the valuation of the Group’s net
pension surplus with input from our actuarial specialists, comparing the discount rate,
inflation rate, salary increases, pension increase rates and life expectancy assumptions
used against externally derived data.
• We challenged the basis of the Group’s judgement that it has an unconditional
right of refund based on our assessment of the scheme rules and advice provided
by external actuaries.
• We assessed the Group’s disclosure in respect of the sensitivity of the surplus to
changes in the key assumptions.
In respect of contract related pension obligations, we challenged the judgements made
by the Group in assessing whether defined benefit liabilities have been recognised
in accordance with contractual terms. Our procedures included assessment of the
underlying contract agreements and consideration of legal advice obtained by
the Group.
136
Financial StatementsSerco Group plc Annual Report and Accounts 2016 Our application of materiality
and an overview of the scope
of our audit
Materiality
Materiality for the Consolidated Financial Statements as a whole was set at
£5m, determined with reference to a benchmark of Group Profit Before Tax and
Exceptional Items of £85.9m (of which it represents 5.8%).
We reported to the Audit Committee any corrected or uncorrected identified misstatements
exceeding £0.38m, in addition to other identified misstatements that warranted reporting on
qualitative grounds.
Scope of our audit
The Group operates through a number of legal entities which form reporting components
which are primarily based on geographic regions. Audits for Group reporting purposes were
performed over 7 of the 9 components. These 7 components represent approximately 98.6%
of the Group’s Revenue, 98.7% of Group profit before tax and 99.1% of Group total assets.
The Group audit team instructed component auditors as to the significant areas to be
covered, including the significant risks detailed above and the information to be reported
back. The Group audit team approved component materiality levels, which ranged from
£2.0m to £3.6m having regard to the mix of size and risk profile of the Group across the
components. The work on all components was performed by component auditors. The
Group team visited all 7 component locations, including during the risk assessment phase.
Video and telephone conference meetings were also held with these component auditors
throughout the audit process covering planning and fieldwork. During these visits and
meetings the findings reported to the Group audit team were discussed in more detail with
component auditors, the Group audit team conducted reviews of the component auditors’
work, and any further work required by the Group audit team was then performed by the
component auditor.
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 is consistent with the financial statements.
Based solely on the work required to be undertaken in the course of the audit of the financial
statements and from reading the Strategic report and the Directors’ report:
• we have not identified material misstatements in those reports; and
• in our opinion, those reports have been prepared in accordance with the Companies
Act 2006
Based on the knowledge we acquired during our audit, we have nothing material to add or
draw attention to in relation to:
• the directors’ statement of longer-term viability on pages 24 and 25, concerning the principal
risks, their management, and, based on that, the directors’ assessment and expectations of
the group’s continuing in operation over the 3 years to 31 December 2019; or
• the disclosures in note 2 of the financial statements concerning the use of the going
concern basis of accounting.
Our opinion on other matters
prescribed by the Companies
Act 2006 is unmodified
We have nothing to report
on the disclosures of
principal risks
137
Financial StatementsStrategic ReportDirectors’ Report Independent Auditor’s Report continued
to the members of Serco Group plc only
We have nothing to report in respect
of the matters on which we are
required to report by exception
Under ISAs (UK and Ireland) we are required to report to you if, based on the knowledge
we acquired during our audit, we have identified other information in the annual report that
contains a material inconsistency with either that knowledge or the financial statements, a
material misstatement of fact, or that is otherwise misleading.
In particular, we are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired
during our audit and the directors’ statement that they consider that the annual report
and financial statements taken as a whole is fair, balanced and understandable and
provides the information necessary for shareholders to assess the group’s position and
performance, business model and strategy; or
• the Audit Committee Report does not appropriately address matters communicated by us
to the audit committee.
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns
adequate for our audit have not been received from branches not visited by us; or
• the parent company financial statements and the part of the Directors’ Remuneration
Report to be audited are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review:
• the directors’ statements, set out on pages 129 and 24 to 25, in relation to going concern
and longer-term viability; and
• the part of the Corporate Governance Statement on pages 94 and 95 relating to the
company’s compliance with the eleven provisions of the 2014 UK Corporate Governance
Code specified for our review.
We have nothing to report in respect of the above responsibilities.
As explained more fully in the Directors’ Responsibilities Statement set out on page 132,
the directors are responsible for the preparation of the financial statements and for being
satisfied that they give a true and fair view. A description of the scope of an audit of financial
statements is provided on the Financial Reporting Council’s website at www.frc.org.uk/
auditscopeukprivate. This report is made solely to the company’s members as a body and is
subject to important explanations and disclaimers regarding our responsibilities, published
on our website at www.kpmg.com/uk/auditscopeukco2014a, which are incorporated into this
report as if set out in full and should be read to provide an understanding of the purpose of
this report, the work we have undertaken and the basis of our opinions.
Scope and responsibilities
Stephen Wardell
(Senior Statutory Auditor) for and on behalf of
KPMG LLP, Statutory Auditor Chartered Accountants
15 Canada Square,
London, E14 5GL
22 February 2017
138
Financial StatementsSerco Group plc Annual Report and Accounts 2016
Consolidated Income Statement
For the year ended 31 December
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
General and administrative expenses*
Exceptional profit / (loss) on disposal of subsidiaries and operations
Other exceptional operating items
Other expenses – amortisation and impairment of intangibles arising on acquisition
Total administrative expenses
Share of profits in joint ventures and associates, net of interest and tax
Operating profit / (loss)*
Operating profit before exceptional items*
Investment revenue
Finance costs*
Exceptional finance costs
Total net finance costs*
Profit / (loss) before tax
Tax on profit / (loss) before exceptional items
Tax credit on exceptional items
Tax charge
Profit / (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
7
14
15
11
16
16
4
18
18
18
18
18
18
2016
£m
3,011.0
(2,767.6)
243.4
(173.2)
2.9
(59.2)
(5.1)
(234.6)
33.4
42.2
98.5
9.3
(21.9)
-
(12.6)
29.6
(15.8)
3.1
(12.7)
16.9
(18.0)
(1.1)
(1.2)
0.1
1.55p
1.50p
(1.66p)
(1.66p)
(0.11p)
(0.11p)
2015
(restated*)
£m
3,177.0
(2,849.1)
327.9
(254.0)
(2.6)
(107.3)
(4.8)
(368.7)
37.0
(3.8)
106.1
6.1
(38.9)
(32.8)
(65.6)
(69.4)
(17.9)
0.4
(17.5)
(86.9)
(66.2)
(153.1)
(152.6)
(0.5)
(8.78p)
(8.78p)
(6.69p)
(6.69p)
(15.47p)
(15.47p)
*
General and administrative expenses and net finance costs have been restated following the change in accounting policy regarding foreign exchange
movements on investment and financing arrangements. See note 2.
139
Financial StatementsStrategic ReportDirectors’ Report
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 gain / (loss) on defined benefit pension schemes*
Actuarial gain / (loss) on reimbursable rights*
Tax relating to items not reclassified*
Share of other comprehensive income in joint ventures and associates
Items that may be reclassified subsequently to profit or loss:
Net exchange gain / (loss) on translation of foreign operations**
Fair value gain on cash flow hedges during the year**
Share of other comprehensive income in joint ventures and associates
Total other comprehensive income / (expense) for the year
Total comprehensive income / (expense) for the year
Attributable to:
Equity owners of the Company
Non controlling interest
*
Recorded in retirement benefit obligations reserve in the Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the Consolidated Statement of Changes in Equity.
Note
33
33
16
7
7
2016
£m
(1.1)
9.0
2.9
(1.7)
14.8
80.3
2.3
1.0
108.6
107.5
107.1
0.4
2015
£m
(153.1)
(15.8)
(0.4)
4.1
5.0
(40.9)
2.2
2.6
(43.2)
(196.3)
(195.9)
(0.4)
140
Financial StatementsSerco Group plc Annual Report and Accounts 2016
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 2015
11.0
327.9
0.1
(306.0)
(89.0)
71.4
(64.5)
(18.9)
(68.0)
1.8
(145.0)
(12.1)
(38.8)
(195.9)
(0.4)
Total comprehensive
expense for the year
Issue of share capital*
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
–
11.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
519.3
–
0.2
–
–
–
–
–
–
(0.3)
4.7
–
–
(0.2)
–
–
–
9.8
–
–
–
–
–
–
–
–
–
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
Total comprehensive
income for the year
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
14.6
10.2
–
–
82.3
107.1
0.4
–
–
–
–
–
–
–
–
(7.7)
7.7
–
9.7
–
–
–
–
–
–
–
–
–
–
9.7
–
–
–
–
(0.5)
At 31 December 2016
22.0
327.9
0.1
83.1
(91.1)
82.9
(52.1)
24.6
397.4
1.4
*
During the prior 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.
141
Financial StatementsStrategic ReportDirectors’ Report Consolidated Balance Sheet
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interests in joint ventures and associates
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
Equity
Share capital
Share premium account
Capital redemption reserve
Retained earnings
Retirement benefit obligations reserve
Share based payment reserve
Own shares reserve
Hedging and translation reserve
Equity attributable to owners of the Company
Non controlling interest
Total equity
At
31 December 2016
£m
Note
At
31 December 2015
£m
19
20
21
7
23
32
17
33
22
23
25
32
40
26
32
29
27
28
40
26
17
29
27
28
33
34
35
577.9
83.6
69.3
14.4
44.4
14.2
50.8
150.4
1,005.0
22.4
543.5
11.0
177.8
4.9
759.6
–
759.6
1,764.6
(524.5)
(0.6)
(25.9)
(172.3)
(12.3)
(9.7)
(745.3)
–
(745.3)
(16.8)
(30.5)
(249.4)
(15.9)
(290.2)
(17.7)
(620.5)
(1,365.8)
398.8
22.0
327.9
0.1
83.1
(91.1)
82.9
(52.1)
24.6
397.4
1.4
398.8
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
The financial statements were approved by the Board of Directors on 22 February 2017 and signed on its behalf by:
Rupert Soames
Group Chief Executive
Angus Cockburn
Group Chief Financial Officer
142
Financial StatementsSerco Group plc Annual Report and Accounts 2016
Consolidated Cash Flow Statement
For the year ended 31 December
Net cash (outflow) / inflow from operating activities
before exceptional items*
Exceptional items
Net cash outflow from operating activities*
Investing activities
Interest received
(Decrease) / increase in security deposits
Dividends received from joint ventures and associates
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of intangible assets
Proceeds on disposal of subsidiaries and operations
Acquisition of subsidiaries, net of cash acquired
Purchase of other intangible assets
Purchase of property, plant and equipment
Net cash inflow from investing activities
Financing activities
Interest paid
Exceptional finance costs paid
Capitalised finance costs paid
Repayment of loans
Decrease / (increase) in loans to joint ventures and associates
Capital element of finance lease repayments
Cash gains from hedging instruments*
Rights Issue net proceeds
Proceeds from issue of other share capital and exercise of share options
Net cash (outflow) / inflow from financing activities*
Net (decrease) / increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Net exchange gain / (loss)
Cash reclassified to assets held for sale
Cash and cash equivalents at end of year
Note
39
25
2016
£m
(22.4)
(39.9)
(62.3)
1.4
(0.4)
40.0
0.6
0.1
19.4
(0.2)
(15.1)
(17.2)
28.6
(20.1)
(0.3)
(0.3)
(135.5)
1.1
(17.0)
47.0
–
–
(125.1)
(158.8)
323.6
7.8
5.2
177.8
2015
(restated*)
£m
37.2
(56.6)
(19.4)
3.4
0.3
32.5
0.8
0.9
165.6
(0.2)
(37.5)
(36.7)
129.1
(34.7)
(31.8)
(1.4)
(447.0)
(1.6)
(18.8)
19.3
530.3
4.4
18.7
128.4
180.1
(2.1)
17.2
323.6
*
Net cash outflow from operating activities and net cash (outflow) / inflow from financing activities have been restated following the change in accounting
policy regarding foreign exchange movements on investment and financing arrangements. See note 2.
143
Financial StatementsStrategic ReportDirectors’ Report
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 comprise the Company and its subsidiaries (together referred to as the Group) and are presented
in pounds Sterling because this is the currency of the primary economic environment in which Serco operates. All amounts have been
rounded to the nearest one hundred thousand pounds, foreign operations are included in accordance with the policies set out in note 2.
2. Significant accounting policies
Basis of accounting
These consolidated financial statements on pages 139 to 217 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 except as stated below.
Prior year restatement: Change in accounting policy
In order to provide more relevant information about the impact of the underlying transactions of trading operations, the accounting policy
regarding the classification of foreign exchange movements on investment and financing arrangements has been changed. The new
policy is to include foreign exchange movements on investment and financing arrangements within investment revenue or finance costs
as relevant. Such transactions include foreign exchange movements on non Sterling cash and financing arrangements, related derivative
financial instruments and any income or costs associated with such balances. As a result of this change in accounting policy, the prior
year income statement and cash flow statement have been restated, together with the Net Debt definition applied in note 28 which has
been changed to include derivative financial instruments that relate to other components of Net Debt. No restatement is required to the
balance sheet as a result of the change in policy.
The impact on the relevant line items in the consolidated financial statements and Net Debt for the year ended 31 December 2015 is
as follows:
Consolidated income statement
General and administrative expenses
Finance costs
Consolidated cash flow statement
Net cash outflow from operating activities
Net cash (outflow) / inflow from financing activities
Analysis of Net Debt
Cash and cash equivalents
Loan receivables
Loans payable
Obligations under finance leases
Derivatives relating to Net Debt
2015 as previously
stated
£m
Adjustment
£m
2015 as restated
£m
(253.9)
(39.0)
(0.1)
0.1
(254.0)
(38.9)
2015 as previously
stated
£m
Adjustment
£m
2015 as restated
£m
(0.1)
(0.6)
(19.3)
19.3
(19.4)
18.7
At 31 December
2015 as previously
stated
£m
Adjustment
£m
At 31 December
2015 as restated
£m
323.6
19.9
(381.9)
(43.8)
–
(82.2)
–
–
–
–
14.6
14.6
323.6
19.9
(381.9)
(43.8)
14.6
(67.6)
144
Financial StatementsSerco Group plc Annual Report and Accounts 2016 Going concern
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.
In assessing the basis of preparation of the financial statements for the year ended 31 December 2016, 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 Directors have
undertaken a rigorous assessment of going concern and liquidity, taking into account financial forecasts. In order to satisfy themselves
that they 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. The Group’s current principal debt
facilities at the year end comprised a £480m revolving credit facility, and £290m of US private placement notes. As at 31 December 2016,
the Group had £770m of committed credit facilities and committed headroom of £647m.
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 2018. The Directors have also reviewed the principal risks
considered on pages 16 to 23 of the Strategic Report and taken account of the results of sensitivity testing.
Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company 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
None of the changes to IFRS that became effective in the current reporting have had a significant impact on the Group’s
financial statements.
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:
(i)
IFRS 9 Financial Instruments has been endorsed by the EU and will be effective from 1 January 2018.
This 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.
IFRS 9 will impact both the measurement and disclosure of financial instruments and the total value of financial instruments at
31 December 2016 was £413.9m of assets (2015: £545.9m) and £413.4m of liabilities (2015: £521.7m), further detail of which can be found
in note 32. However, it is not practicable to provide a reasonable estimate of the effect of this standard until a detailed review has
been completed. The quantitative impact of the adoption of IFRS 9 will be disclosed prior to the adoption of this new standard.
145
Financial StatementsStrategic ReportDirectors’ Report 2. Significant accounting policies continued
New standards and interpretations not applied continued
(ii)
IFRS 15 Revenue From Contracts With Customers has been endorsed by the EU and will be effective from 1 January 2018.
This new standard supersedes: 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.
IFRS 15 could result in a delay of revenues and profits over those previously recognised, in particular with respect of percentage to
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. A project to assess the full impact of the new standard is in its final stages but it is not
possible 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.
Under the transition rules IFRS 15 will be applied retrospectively to the prior period in accordance with IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors, subject to the following expedients:
• for contracts that have completed prior to 1 January 2018 and that begin and end within the same annual reporting period have
not been restated;
• for contracts that have completed prior to 1 January 2018 the transaction price at the date the contract was completed has been
applied for contracts that have variable consideration; and
• the amount of the transaction price allocated to the remaining performance obligations and an explanation of when that amount is
expected to be recognised as revenue has not been disclosed for the prior period.
The cumulative effect of initially applying the standard will be shown as an adjustment to brought forward retained earnings as at
1 January 2017.
(iii)
IFRS 16 Leases is pending EU endorsement, which is expected prior to the effective date of 1 January 2019.
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.
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 quantified the likely impact of the new standard, the transition approach to be taken or concluded whether it will be
adopted early, which is allowed from the date IFRS 15 is adopted. The quantitative impact of the adoption of IFRS 16 will be disclosed
prior to the adoption of this new standard.
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 high 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 is in 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 and revenue recognised in this manner is not considered to be significant
to the Group’s results.
• 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 and such payment mechanisms do not represent a significant proportion of annual revenue.
• 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 compared to the estimated whole life contract costs, except where whole life contract costs
exceed the contract value, in which case the excess is expensed immediately.
While each of these areas requires a high level of judgement, only long-term contract accounting could have a significant impact on the
Group’s financial results or position. However, the only revenues associated with these contracts are earned on loss making contracts
with onerous loss provisions and as a result we do not identify this as a separate item for disclosure in note 3.
146
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 Revenue recognition: Repeat service based contracts
Revenue on repeat service based contracts is recognised as services are provided in line with the transfer of control to the customer.
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 limited 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.
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 in line with the associated 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 23.
Operating profit
Operating profit is not a measure defined by IFRS and the Group considers this to include the profits and losses from continuing
operations prior to corporation tax, interest revenue and finance costs.
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.
147
Financial StatementsStrategic ReportDirectors’ Report 2. Significant accounting policies continued
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.
Investments in joint ventures and associates
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.
An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint
control. The results and assets and liabilities of associates are also incorporated in these financial statements using the equity method
of accounting.
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.
148
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 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.
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
Short leasehold assets
Machinery
Motor vehicles
Furniture
Office equipment
Leased equipment
2.5%
The higher of 10% or the rate produced by the lease term
15% – 20%
10% – 50%
10%
20% – 33%
The higher of the rate produced by the lease term or useful life
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the
carrying amount of the asset and is recognised in the income statement. 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.
149
Financial StatementsStrategic ReportDirectors’ Report 2. Significant accounting policies continued
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.
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 within Other
Comprehensive Income.
150
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 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 32.
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 32.
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.
151
Financial StatementsStrategic ReportDirectors’ Report 2. Significant accounting policies continued
Tax
The tax expense represents the sum of current tax expense and deferred tax expense.
Current tax expense is based on taxable 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.
Share based payment
Where the fair value of share options requires the use of a valuation model, fair value is measured by use of Binomial Lattice, Black
Scholes or Monte Carlo Simulation models depending on the type of scheme, as set out in note 37. 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.
152
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 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.
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 net cost 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, the expected net cost arising 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.
153
Financial StatementsStrategic ReportDirectors’ Report 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.
Prior year restatement: Change in accounting policy
The accounting policy regarding the classification of foreign exchange movements in relation to investment and financing arrangements
was changed in the year. Judgement was applied in reaching the conclusion that it provides more relevant financial results to exclude
these amounts from the underlying transactions of trading operations. Further details are provided in note 2.
Use of Alternative Performance Measures: Operating profit before exceptional items
IAS 1 requires material items to be disclosed separately in a way that enables users to assess the quality of a company’s profitability. In
practice, these are commonly referred to as ‘exceptional’ items, but this is not a concept defined by IFRS and therefore there is a level of
judgement involved in arriving at an Alternative Performance Measure which excludes such exceptional items. We consider items which
are material, non-recurring and outside of the normal operating practice of the company to be suitable for separate presentation. Further
details can be seen in note 11.
The segmental analysis of continuing operations in note 5 includes the additional performance measure of Trading Profit on continuing
operations which is reconciled to reported operating profit in that note. The Group uses Trading Profit as an alternative measure to
reported operating profit by making several adjustments. Firstly, Trading Profit excludes exceptional items, being those we consider
material, non-recurring and outside of the normal operating practice of the company to be suitable of separate presentation and
detailed explanation. Secondly, amortisation and impairment of intangibles arising on acquisitions are excluded, because these
charges are based on judgments about the value and economic life of assets that, in the case of items such as customer relationships,
would not be capitalised in normal operating practice. The CODM reviews the segmental analysis for continuing operations together
with discontinued operations.
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 £56.6m
and releases of £65.5m. 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 in 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.
The individual provisions are discounted where the impact is assessed to be material. Discount rates used are calculated based on the
estimated risk free rate of interest for the region in which the provision is located and matched against the ageing profile of the provision.
Rates applied are in the range of 1.16% and 3.30%.
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 £1,340.9m, 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.
A key area of focus in recent years has been in the impairment testing of goodwill as a result of the pressure on the results of the Group.
While no further impairment of pre existing goodwill was noted in 2016, an impairment charge of £17.8m did arise following the acquisition
of a business in the year. Further details are provided in note 19.
154
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 Deferred tax
Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against
which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that
can be recognised, based upon the likely timing and the level of future taxable profits.
As at the balance sheet date, the Group has unused tax losses of £893.5m (2015: £890.1m) available for offset against future profits. A deferred
tax asset has been recognised in respect of £69.1m (2015: £59.9m) of such losses of which £58.8m (net £10.0m) relates to losses incurred in the
UK and £10.3m (net £0.3m) which 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 £147.0m) as it is not probable that there will be future taxable profits available.
Further details on taxes are disclosed in note 17.
Current tax
Liabilities for tax contingencies require management judgement and estimates in respect of tax audits and also tax exposures in each
of the jurisdictions in which we operate. Management is also required to make an estimate of the current tax liability together with an
assessment of the temporary differences that arise as a consequence of different accounting and tax treatments. Key judgement areas
include the correct allocation of profits and losses between the countries in which we operate and the pricing of intercompany services.
Where management conclude that a tax position is uncertain, a current tax liability is held for anticipated taxes that are considered
probable based on the current information available.
These liabilities can be built up over a long period of time but the ultimate resolution of tax exposures usually occurs at a point in time, and
given the inherent uncertainties in assessing the outcomes of these exposures, these estimates are prone to change in future periods. It is
not currently possible to estimate the timing of potential cash outflows, but on resolution, to the extent this differs from the liability held,
this will be reflected through the tax charge/(credit) for that year. Each potential liability and contingency is revisited on an annual basis
and adjusted to reflect any changes in positions taken by the company, local tax audits, the expiry of the statute of limitations following the
passage of time and any change in the broader tax environment. The total current tax liability at December 2016 was £25.9m (2015: £14.2m).
On the basis of the currently available information, the Group does not anticipate a material change to the estimated liability in the
coming year.
Retirement benefit obligations
Identifying whether the Group has a retirement benefit obligation as a result of contractual arrangements entered into requires a level
of judgement, largely driven by the legal position held between the Group, the customer and the relevant pension scheme. The Group’s
retirement benefit obligations and other pension scheme arrangements are covered in note 33.
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 33). The value of net retirement benefit obligations at the balance sheet date is an
asset of £132.7m (2015: £115.6m). Details of the impact of changes in assumptions relating to retirement benefit obligations are disclosed in
note 33.
In accounting for the defined benefit schemes, the Group has applied the following principles:
• Asset recognised for Serco Pension and Life Assurance Scheme (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.
155
Financial StatementsStrategic ReportDirectors’ Report 4. Discontinued operations
The Global Services division, representing UK onshore and offshore private sector BPO operations, was classified as a discontinued
operation in 2015. The completion of the sale of the majority of the offshore private sector BPO business occurred on 31 December 2015.
Disposal of one of the two remaining elements of the offshore business was completed in March 2016 and the final element completed
in December 2016. The UK onshore private sector BPO businesses have been sold, or have been exited early with the exception of one
business where the sale process is ongoing and completion is expected within the next twelve months.
The results of the discontinued operations were as follows:
For the year ended 31 December
Revenue
Expenses
Operating (loss) / profit before exceptional items
Exceptional (loss) / profit on disposal of subsidiaries and operations
Other exceptional operating items
Operating loss
Investment revenue
Finance costs
Exceptional finance costs
Loss before tax
Tax charge on 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
2016
£m
36.8
(40.1)
(3.3)
(2.8)
(11.4)
(17.5)
–
–
(0.4)
(17.9)
(0.1)
–
2015
£m
337.6
(311.1)
26.5
5.4
(83.0)
(51.1)
2.1
(1.2)
–
(50.2)
(18.7)
2.7
(18.0)
(66.2)
(18.1)
0.1
(66.0)
(0.2)
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
Exceptional (loss) / profit on disposal
Other exceptional operating items
Restructuring costs
Impairment of goodwill
Movements in indemnities provided on business disposals
Movement in the fair value of assets transferred to held for sale
Other exceptional operating items
Exceptional operating items arising on discontinued operations
2016
£m
(2.8)
(1.1)
–
(13.7)
3.4
(11.4)
(14.2)
2015
£m
5.4
(2.2)
(65.9)
–
(14.9)
(83.0)
(77.6)
156
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 In 2016 a charge of £1.1m (2015: £2.2m) 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.
A charge of £13.7m has arisen in 2016 in relation to the movement in the value of indemnities provided on business disposals made
in previous years. This relates to changes in exchange rates where indemnities were provided in foreign currencies and increases to
provisions for interest and penalties on any indemnities.
The value of assets held for sale increased by £3.4m in 2016, reflecting the changing estimate of the likely proceeds and movements of the
assets held for sale since the prior balance sheet date. In 2015 the held for sale assets were impaired by £14.9m.
A charge of £0.4m was incurred as a result of early payments to the US Private Placement (USPP) Noteholders following the disposal of the
offshore private sector BPO business. These charges are treated as exceptional finance costs as they are directly linked to the restructuring
resulting from the Strategy Review. Similar charges arose in 2015 which, together with the costs related to the preservation of the Group’s
existing finance facilities, totalled £32.8m.
The net assets at the date of disposal of discontinued operations were:
Goodwill
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Minority interest disposed
Net assets disposed
The loss on disposal of discontinued operations is calculated as follows:
Consideration
Less:
Net assets disposed
Disposal related costs
Loss on disposal of discontinued operations prior to reserve recycling
Recycling of gains on translation of foreign operations
Exceptional loss on disposal
Offshore
£m
UK onshore
£m
8.0
1.0
3.8
5.6
(4.2)
(0.5)
13.7
Offshore
£m
UK onshore
£m
15.2
3.5
(13.7)
(0.5)
1.0
(2.2)
(1.2)
(3.7)
(1.4)
(1.6)
–
(1.6)
–
–
2.5
–
1.2
–
3.7
Total
£m
18.7
(17.4)
(1.9)
(0.6)
(2.2)
(2.8)
157
Financial StatementsStrategic ReportDirectors’ Report
4. Discontinued operations continued
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
Disposal related costs
Net cash flow on disposal and movement in Net Debt
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 from investing activities
Net cash outflow from financing activities
Net increase in cash and cash equivalents attributable to discontinued operations
Offshore
£m
UK onshore
£m
15.2
2.0
(5.6)
(0.5)
9.1
–
(1.4)
0.6
2016
£m
5.5
–
5.5
12.5
(11.4)
6.6
Total
£m
17.2
(5.6)
(1.9)
9.7
2015
£m
67.7
(1.5)
66.2
93.5
(26.5)
133.2
5. Segmental information
The Group’s operating segments reflecting the information reported to the Board in 2016 under IFRS 8 Operating Segments are as set
out below.
Reportable segments
Operating segments
UK Central Government
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 and Citizen Services delivered to UK & European
public sector customers;
AsPac
Services for sectors including Defence, Justice & Immigration, Transport, Health
and Citizen Services in the Asia Pacific region including Australia, New Zealand
and Hong Kong;
Middle East
Services for sectors including Defence, Transport and Health in the Middle East region;
Americas
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; and
Corporate
Central and head office costs.
Each operating segment is focused on a narrow group of customers in a specific geographic region and is run by a local management
team which report directly to the CODM on a regular basis. As a result of this focus, the sectors in each region have similar economic
characteristics and are aggregated at the operating segment level in these financial statements. The accounting policies of the reportable
segments are the same as the Group’s accounting policies described in note 2.
158
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 Geographic information
Year ended 31 December
United Kingdom
United States
Australia
Middle East
Other countries
Total
Revenue
2016
£m
1,244.9
632.9
593.1
324.8
215.3
3,011.0
Non-current
assets*
2016
£m
444.7
309.1
146.0
19.7
20.4
939.9
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
*
Non-current assets exclude financial instruments, deferred tax assets and loans to joint ventures and associates and include held for sale assets.
There are no held for sale items in 2016. 2015 includes held for sale assets of £1.2m
Revenues from external customers are attributed to individual countries on the basis of the location of the customer.
Information about major customers
The Group has three major governmental customers which each represent more than 10% of Group revenues. The customers’ revenues
were £1,233.7m for the UK Government across the UK Central Government and UK & Europe Local & Regional Government segments,
£623.1m for the US Government within the Americas segment, and £581.4m for the Australian Government within the AsPac segment.
In 2015 the Group had two major governmental customers which each represented more than 10% of Group revenues. The customers’
revenues were £1,480.9m for the UK Government across the UK Central Government and UK & Europe Local & Regional Government
segments, and £558.5m 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 2016
Revenue
Result
Trading profit / (loss) from
continuing operations
Amortisation and impairment of
intangibles arising on acquisition
Operating profit / (loss) before
exceptional items
CG
£m
LRG
£m
AsPac
£m
678.6
696.5
619.7
Middle East
£m
324.8
Americas
£m
Corporate
£m
Total
£m
691.4
–
3,011.0
94.9
(10.4)
34.2
18.8
6.4
(40.3)
103.6
(0.3)
–
(2.0)
–
(2.8)
–
(5.1)
94.6
(10.4)
32.2
18.8
3.6
(40.3)
98.5
Exceptional profit / (loss) on disposal
of subsidiaries and operations
(0.1)
4.5
0.4
(11.1)
83.4
(14.8)
(20.7)
(0.9)
31.7
Other exceptional
operating items
Operating profit / (loss)
Investment revenue
Finance costs
Profit before tax
Tax charge
Tax on exceptional items
Profit for the year from continuing operations
–
–
18.8
–
–
3.6
(1.9)
2.9
(32.4)
(74.6)
(59.2)
42.2
9.3
(21.9)
29.6
(15.8)
3.1
16.9
159
Financial StatementsStrategic ReportDirectors’ Report 5. Segmental information continued
Year ended 31 December 2016
Supplementary information
Share of profits in joint ventures and
associates, 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 and write down
of intangible assets arising
on acquisition
Amortisation of other
intangible assets
Total amortisation and impairment of
intangible assets
Segment assets
Interests in joint ventures
and associates
Other segment assets
Total segment assets
Unallocated assets
Consolidated total assets
Segment liabilities
Segment liabilities
Unallocated liabilities
Consolidated total liabilities
CG
£m
LRG
£m
AsPac
£m
Middle East
£m
Americas
£m
Corporate
£m
Total
£m
31.3
–
(2.1)
(12.9)
(0.3)
–
(2.4)
(12.9)
(0.3)
–
(0.1)
(0.4)
–
–
(0.5)
(0.5)
2.0
(4.5)
(0.4)
(4.9)
(1.3)
(0.7)
(3.3)
(5.3)
–
–
0.1
33.4
(0.9)
(3.1)
(1.3)
(24.8)
–
(0.9)
–
–
(0.7)
(0.7)
–
(3.1)
(2.8)
–
–
(0.7)
(1.3)
(25.5)
–
–
(4.4)
(0.7)
(1.5)
(15.7)
(21.8)
(4.3)
(15.7)
(26.9)
12.3
168.7
181.0
–
298.3
298.3
1.7
252.1
253.8
0.4
108.7
109.1
–
428.8
428.8
–
228.6
228.6
(279.1)
(163.8)
(182.8)
(79.3)
(140.7)
(139.7)
14.4
1,485.2
1,499.6
265.0
1,764.6
(985.4)
(380.4)
(1,365.8)
160
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 CG
£m
LRG
£m
742.1
905.8
AsPac
£m
544.7
Middle East
Americas
£m
291.4
£m
693.0
Corporate
£m
Total
£m
–
3,177.0
60.2
(14.5)
58.8
27.4
27.0
(48.0)
110.9
–
(1.1)
(1.2)
–
(2.5)
–
(4.8)
60.2
(15.6)
57.6
27.4
24.5
(48.0)
106.1
0.5
0.3
(2.6)
–
–
(0.8)
(2.6)
(0.2)
60.5
(1.7)
(17.0)
(1.3)
53.7
(1.8)
25.6
(87.5)
(63.0)
(14.8)
(63.6)
Year ended 31 December 2015
(restated*)
Revenue
Result
Trading profit / (loss) from continuing
operations* **
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 profit / (loss)*
Investment revenue
Finance costs*
Loss before tax
Tax charge
Tax on exceptional items
Loss for the year from continuing operations
*
Administrative expenses included within Trading Profit and operating profit has been restated following the change in accounting policy regarding
foreign exchange movements on investment and financing arrangements which has also resulted in a restatement of finance costs. See note 2.
** Trading profit / (loss) is defined as operating (loss) / profit before exceptional items and amortisation and impairment of intangible assets arising
on acquisition.
(107.3)
(3.8)
6.1
(71.7)
(69.4)
(17.9)
0.4
(86.9)
161
Financial StatementsStrategic ReportDirectors’ Report 5. Segmental information continued
CG
£m
Year ended 31 December 2015
LRG
£m
AsPac
£m
Middle East
£m Americas £m
Corporate
£m
Total
£m
Supplementary information
Share of profits in joint ventures and
associates, 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
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
and associates
Other segment assets
Total segment assets
Unallocated assets,
including assets held for sale
Consolidated total assets
Segment liabilities*
Segment liabilities
Unallocated liabilities,
including liabilities held for sale
Consolidated total liabilities
33.8
1.5
(1.9)
(1.6)
(13.3)
–
(3.5)
(13.3)
–
(0.4)
–
(1.1)
(2.0)
(9.0)
0.8
(5.4)
–
(5.4)
(1.2)
(1.5)
–
–
(1.1)
–
(1.1)
–
0.1
(3.0)
(0.4)
(3.4)
(2.5)
0.8
(1.4)
37.0
(26.1)
–
(2.0)
(1.4)
(28.1)
–
(4.8)
(0.7)
(1.1)
(18.0)
(23.7)
–
–
–
(9.0)
(0.4)
(12.1)
(2.7)
(0.7)
(3.6)
(18.0)
(37.5)
4.4
173.5
177.9
6.5
306.1
312.6
0.4
232.5
232.9
0.2
100.3
100.5
2.3
379.3
381.6
–
13.8
196.6
196.6
1,388.3
1,402.1
437.4
1,839.5
(340.0)
(188.9)
(194.1)
(74.7)
(108.6)
(154.0)
(1,060.3)
* Segment assets and liabilities have been restated to reflect a consistent presentation of usage.
6. List of principal undertakings
The following are considered to be the principal undertakings of the Group as at the year end:
Principal subsidiaries
United Kingdom
Australia
USA
Serco Limited
Serco Australia Pty Limited
Serco Inc.
Principal joint ventures and associates
United Kingdom
United Kingdom
United Kingdom
AWE Management Limited
Merseyrail Services Holding Company Limited
Northern Rail Holdings Limited
(497.1)
(1,557.4)
2015
100%
100%
100%
2015
33.3%
50%
50%
2016
100%
100%
100%
2016
24.5%
50%
50%
A full list of subsidiaries and related undertakings is included in the Appendix on pages 214 to 216 which form part of the
financial statements.
162
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 7. Joint ventures and associates
The Group has certain arrangements where control is shared equally with one or more parties and accounts for these arrangements as
joint ventures. AWE Management Limited (AWEML) was formerly a joint venture but in August 2016 there was a change in the AWEML
shareholding structure, with the Group's shareholding reducing from 33.3% to 24.5% by way of a return of shares and Lockheed Martin
taking a majority holding. The Group was compensated for the reduction in share ownership of 8.8% through receipt of a dividend of the
same amount which existed at the date of reduction. Subsequent to the change in share ownership AWEML has been accounted for as an
associate as we continue to have significant influence, and therefore continue to account for the investment through equity accounting.
The remainder of the arrangements are each a separate legal entity and legal ownership and control are equal with all other parties, there
are no significant judgements required.
AWEML, Merseyrail Services Holding Company Limited (MSHCL) and Northern Rail Holdings Limited (NRHL) were the only equity
accounted entities which were material to the Group during the year. Dividends of £19.6m (2015: £17.8m), £7.3m (2015: £7.2m) and £10.0m
(2015: £5.9m) respectively were received from these companies in the year. The Northern Rail franchise ended on 31 March 2016.
Summarised financial information of AWEML, MSHCL, NRHL and an aggregation of the other equity accounted entities in which the Group
has an interest is as follows:
31 December 2016
Summarised financial
information
Revenue
Operating profit
Net investment revenue /
(finance costs)
Income tax (charge) / credit
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
AWEML
(100% of results)
MSHCL
(100% of results)
NRHL
(100% of results)
£m
968.1
72.9
0.2
(11.3)
61.8
–
61.8
1,097.0
149.3
(133.9)
(1,095.2)
17.2
33% / 24.5%
4.2
£m
150.3
18.9
(1.3)
(3.7)
13.9
34.0
47.9
12.5
32.8
(31.9)
(0.9)
12.5
50%
6.3
£m
132.7
13.2
0.1
(3.4)
9.9
0.8
10.7
–
14.2
(10.7)
–
3.5
50%
1.8
Group portion
of material joint
ventures and
associates*
£m
437.5
37.4
(0.5)
(6.8)
30.1
17.4
47.5
275.1
60.1
(54.2)
(268.7)
12.3
–
12.3
Group portion
of other
joint venture
arrangements
and associates*
£m
43.3
3.3
(0.1)
0.1
3.3
(1.6)
1.7
3.2
16.0
(14.0)
(3.1)
2.1
–
2.1
*
Total results of the entity multiplied by the respective proportion of Group ownership.
Total
£m
480.8
40.7
(0.6)
(6.7)
33.4
15.8
49.2
278.3
76.1
(68.2)
(271.8)
14.4
–
14.4
163
Financial StatementsStrategic ReportDirectors’ Report 7. Joint ventures and associates continued
AWEML
(100% of results)
MSHCL
(100% of results)
NRHL
(100% of results)
£m
72.4
£m
21.1
£m
14.5
Group portion
of material joint
ventures and
associates*
£m
35.4
Group portion of
other joint
venture
arrangements
and associates*
£m
4.7
Total
£m
40.1
(7.0)
(2.3)
(0.5)
(3.1)
(0.9)
(4.0)
–
–
0.2
–
(0.6)
(2.3)
–
(1.3)
–
(1.7)
0.1
–
(0.3)
(2.1)
0.2
(0.6)
(3.0)
(1.0)
–
(0.1)
(3.3)
(3.1)
0.2
(0.7)
Supplementary material
Cash and cash equivalents
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
*
Total results of the entity multiplied by the respective proportion of Group ownership.
The financial statements of MSHCL are for a period which is different from that of the Group, being for the 52 week period ended 7 January 2017.
The 52 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. The results of NRHL reflect the period of trading to the end of the franchise on 31 March 2016, together with the results from the
ongoing post contract negotiations.
Excluded from the amounts disclosed in this note is an exceptional impairment of £13.9m of the equity interest and associated receivables
balances of a joint venture.
Certain employees of the groups headed by AWEML and MSHCL are members of sponsored defined benefit pension schemes. Given the
significance of the schemes to understanding the position of the entities the following key disclosures are made:
Main assumptions: 2016
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 adjustment*
Related asset, right to reimbursement
Net retirement benefit obligation
AWEML
MSHCL
2.3%
2.3%
2.7%
22.8
24.9
2.3%
2.3%
2.7%
N/A
N/A
£m
£m
(2,556.0)
(275.7)
1,460.9
171.1
(1,095.1)
(104.6)
–
–
1,095.1
–
62.8
41.8
–
–
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
AWEML is not liable for any deficiency in the defined benefit pension scheme under current contractual arrangements. The deficit
reflected in the financial statements of MSHCL 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.
164
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016
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
AWEML
(100% of results)
NRHL
(100% of results)
Group portion
of material joint
ventures and
associates*
Group portion of
other joint
venture
arrangements
and associates*
£m
978.3
61.2
0.4
(5.9)
55.7
–
55.7
464.2
358.8
(342.6)
(461.7)
18.7
33%
6.2
£m
585.3
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
£m
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
£m
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 results of the entity multiplied by the respective proportion of Group ownership.
AWEML
(100% of results)
NRHL
(100% of results)
Group portion
of material joint
ventures and
associates*
Group portion of
other joint
venture
arrangements
and associates*
Supplementary material
Cash and cash equivalents
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
£m
111.4
(5.6)
(0.1)
–
0.4
–
£m
44.9
(4.3)
(1.3)
(4.6)
0.5
(0.1)
*
Total results of the entity multiplied by the respective proportion of Group ownership.
The financial statements of NRHL are for the 52 week period ended 9 January 2016.
£m
59.6
(4.0)
(0.7)
(2.2)
0.4
(0.1)
£m
21.1
(2.2)
(3.3)
(2.3)
0.1
(0.8)
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
Total
£m
80.7
(6.2)
(4.0)
(4.5)
0.5
(0.9)
165
Financial StatementsStrategic ReportDirectors’ Report 7. Joint ventures and associates continued
Key disclosures with respect of the defined benefit pension schemes of material joint ventures and associates:
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
AWEML
NRHL
2.2%
2.2%
4.0%
22.7
25.4
AWEML
£m
(1,649.6)
1,188.0
(461.6)
–
–
461.6
–
3.0%
2.1%
3.9%
N/A
N/A
NRHL
£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 used a mortality rate multiplier of 98% based on the S1 normal males (heavy) table,
adjusted for the geographic location of members.
8. Acquisitions
On 1 December 2016 the Group acquired 100% of the issued share capital of Orchard & Shipman (Glasgow) Limited for £1, obtaining full
control. Orchard & Shipman (Glasgow) Limited was a financially distressed subcontractor on our COMPASS contract and the business was
acquired with the sole purpose of ensuring the continued delivery of this essential service to asylum seekers in Scotland and Northern Ireland.
The amounts recognised in respect of the identifiable assets acquired and the liabilities assumed are as set out in the table below:
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Onerous contract provisions
Property provisions
Total identifiable assets
Goodwill
Acquisition date fair value of consideration transferred
Book value
£m
0.2
0.8
0.1
(4.2)
(1.4)
(0.5)
(5.0)
Fair value
adjustments £m
(0.2)
–
–
–
(12.6)
–
(12.8)
Provisional
fair value
£m
–
0.8
0.1
(4.2)
(14.0)
(0.5)
(17.8)
17.8
–
Goodwill represents the premium associated with preventing a disruption to our service users and the financial impact of penalties
associated with that disruption, taking into account the pre-existing onerous contract held by O&S for services provided to Serco, which
will now be performed by Serco up to the expected contract end date. All of the service users in the region are housed in properties
leased by Orchard & Shipman (Glasgow) Limited and the only way of guaranteeing control of those leases was by means of the acquisition
of the legal entity. As the contract is loss making no value is ascribed to these lease arrangements and all goodwill arising on acquisition
is immediately impaired. The onerous contract provision (OCP) of £14.0m included in the fair value of the acquisition net assets represents
the best estimate of Orchard & Shipman (Glasgow) Limited’s contractual obligations up to the expected contract end date. An element of
this provision was previously included in the Group’s existing OCP and an amount of £3.6m is included in amounts released in note 29.
No acquisition related costs were incurred.
166
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016
Orchard & Shipman (Glasgow) Limited contributed no external income to the Group’s revenue for the year between the date of acquisition
and the balance sheet date as the prime contract with the customer exists in another Group company, and therefore Group revenue would
have been no higher if the acquisition had been completed on the first day of the financial year. As the business relates entirely to a loss
making contract, the existence of the onerous contract provision results in no profit or loss in the period since acquisition and no profit or
loss would have arisen had the acquisition taken place on 1 January 2016.
9. Disposals
There were no material disposals of continuing operations in the year. Disposals relating to discontinued operations are included in note
4. As explained in note 7 during the year the Group surrendered 8.8% of the share capital of AWE Management Limited, resulting in a
reduction in interests in joint ventures and associates of £1.6m in return for consideration of an equal amount.
The profit on disposal of £2.9m arose from a profit of £0.4m on the disposal of a 10% investment as it was no longer required to be held
under the terms of the relevant contract, and a profit of £2.5m relating to transactions completing in prior years, including cash of £4.5m as
a result of deferred consideration payments received which had previously been impaired.
10. Revenue
An analysis of the Group’s revenue is as follows:
Year ended 31 December
Revenue as disclosed in the consolidated income statement
Investment revenue (note 14)
Operating lease income
Total revenue as defined in IAS 18
2016
£m
2015
£m
3,011.0
3,177.0
9.3
0.8
6.1
0.8
3,021.1
3,183.9
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.
Exceptional gain / (loss) on disposal of subsidiaries and operations
The exceptional net gain / (loss) on disposals 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
Release of UK frontline clinical health contract provisions
Settlement of defined benefit pension obligations
Impairment of interest in joint ventures and associates, and related loan balances
Other exceptional operating items
2016
£m
(17.8)
(17.2)
(0.1)
(0.1)
0.6
(10.7)
(13.9)
(59.2)
2015
£m
(87.5)
(19.7)
(1.7)
(1.2)
2.8
–
–
(107.3)
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.
167
Financial StatementsStrategic ReportDirectors’ Report 11. Exceptional items continued
In 2016, goodwill of £17.8m arose following the acquisition of Orchard & Shipman (Glasgow) Limited, the Group’s subcontractor on the
COMPASS contract providing accommodation to asylum seekers in Scotland and Northern Ireland on behalf of the Home Office. This
goodwill was immediately impaired as the CGU is forecast to be loss making and therefore the asset cannot be supported. The annual
impairment testing of CGUs has identified no other impairment of goodwill. In 2015 the Americas CGU was impaired by £87.5m, due
primarily to a higher level of contract attrition than previously forecast and the associated impact on future cash flows. Given the significant
size of the impairment charge and that it is not part of the normal trading performance of the business it was considered appropriate to
treat as exceptional in the year.
In 2016, a charge of £17.2m (2015: £19.7m) arose in relation to the restructuring programme resulting from the Strategy Review. This
included redundancy payments, provisions, external advisory fees and other incremental costs. Due to the nature and scale of the
impact of the transformation phase of the Strategy Review the incremental costs associated with this programme were considered to be
exceptional in the prior year and have been treated consistently in 2016. Non exceptional restructuring charges incurred by the business as
part of normal operational activity totalled £6.7m in the year (2015: £13.8m).
The disposal of the Environmental and Leisure businesses was aborted in December 2015 and during the current period costs related to
the aborted transaction were finalised, resulting in a charge of £0.1m (2015: £1.7m).
In 2016 there were exceptional costs totalling £0.1m (2015: £1.2m) associated with the UK Government review and the programme of
Corporate Renewal, reflecting the related external costs. This reflected external costs related to this review and the Corporate Renewal
Programme, which were treated as exceptional when the matter first arose and consistent treatment has been applied in the current year.
In 2016 there were releases of provisions of £0.6m (2015: £2.8m) which were previously charged through exceptional items in relation to the
exit of the UK Frontline Clinical Health contracts.
Following the finalisation of the Revised Fair Deal, a number of employees are being transferred from SPLAS back to the Principal Civil
Service Pension Scheme. This transfer was finalised in December 2016 at which point all obligations of SPLAS to pay retirement benefits
for these individuals were eliminated and as a result a settlement charge of £10.7m arose. This has been treated as an exceptional item in
the year as a result of the transaction being material in size and nature and being outside of the normal course of business. The charge of
£10.7m is an accounting charge only, the cash impact of the settlement which will be paid in future periods, is estimated as £3.0m and is
offset by future savings in contributions resulting from the transfer.
A review of a joint venture’s cash flow projections has led to the impairment of £13.9m of the equity interest and associated receivables
balances. The impairment is outside of the normal course of business and of a significant value, and is therefore considered to be an
exceptional item.
Exceptional finance costs
The exceptional finance costs charged in 2015 of £32.8m arose as a result of costs being incurred in 2015 to preserve the existing finance
facilities, after an agreement was reached in December 2014 for the Group to defer its December 2014 covenant test until May 2015.
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 had been treated as exceptional items as they were outside of the normal financing arrangement of
the Group and were significant in size.
Tax impact of above items
The tax impact of these exceptional items was a tax credit of £3.1m (2015: £0.4m). Further details are provided in note 16.
168
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 12. Operating profit
Operating profit is stated after charging / (crediting):
Year ended 31 December
Research and development costs
Exceptional goodwill impairment (note 11)
Loss 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 (gain) / loss on disposal of subsidiaries and operations (note 9)
Staff costs (note 13)
Allowance for doubtful debts credited to income statement
Net foreign exchange charge*
Movement on non-designated hedges and reclassified cash flow hedges*
Lease payments recognised through operating profit
Operating lease income from sub-leases (note 10)
2016
£m
2015
(restated*)
£m
3.6
17.8
0.4
0.8
25.5
5.1
21.8
(2.9)
4.3
87.5
1.5
1.7
28.1
4.8
32.7
2.6
1,526.8
1,532.2
(0.1)
0.7
(0.6)
99.5
(0.8)
(6.8)
0.1
0.3
104.4
(0.8)
*
Net foreign exchange charges have been restated as a result of the change in treatment of foreign exchange items on investing and financing items as
explained in note 2.
Amounts payable to by the Company and its subsidiary undertakings in respect of audit and non-audit services to the Company’s Auditor
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
– Tax compliance services
– Tax advisory services
– Other services
Total non-audit fees
2016
£m
0.8
2015
£m
0.9
0.5
1.3
0.2
0.1
0.2
0.3
0.8
0.6
1.5
0.2
–
0.2
2.6
3.0
The 2016 fees represent those paid to the current Auditor since appointment in May 2016. The 2015 fees represent fees paid to the
previous Auditor.
During 2016, prior to appointment, non audit fees of £0.5m (tax advisory services £0.2m, internal audit services £0.1m and other services
£0.2m), were paid to KPMG LLP, bringing the total non audit fees paid to KPMG LLP during the year to £1.3m.
Fees payable to the Company’s Auditor 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 88. No services were provided pursuant to contingent fee arrangements.
169
Financial StatementsStrategic ReportDirectors’ Report 13. Staff costs
The average monthly number of full time equivalent employees (including Executive Directors) for continuing operations comprised:
Year ended 31 December
UK Central Government
UK & Europe Local & Regional Government
Americas
AsPac
Middle East
Unallocated
Aggregate remuneration on continuing operations comprised:
Year ended 31 December
Wages and salaries
Social security costs
Other pension costs (note 33)
Share based payment expense (note 37)
14. Investment revenue
Year ended 31 December
Interest receivable on other loans and deposits
Net interest receivable on retirement benefit obligations (note 33)
Movement in discount on other debtors
15. Finance costs
Year ended 31 December
Interest payable on obligations under finance leases
Interest payable on other loans
Facility fees and other charges
Movement in discount on provisions
Foreign exchange on financing activities*
2016
number
2015
number
10,081
10,791
8,115
8,929
4,347
913
10,182
11,357
9,727
8,885
3,996
1,094
43,176
45,241
2016
£m
2015
£m
1,332.3
1,337.5
100.3
84.6
100.7
85.1
1,517.2
1,523.3
9.6
8.9
1,526.8
1,532.2
2016
£m
2015
£m
3.6
4.7
1.0
9.3
1.1
4.9
0.1
6.1
2016
£m
2015
(restated*)
£m
1.6
15.6
3.5
2.4
23.1
(1.2)
21.9
2.5
24.7
6.2
5.6
39.0
(0.1)
38.9
*
Finance costs have been restated as a result of the change in treatment of foreign exchange items on investing and financing items as explained in note 2.
170
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 Total
2015
£m
4.1
6.0
12.7
(5.3)
17.5
Total
2015
£m
(69.4)
16. Tax
16 (a) Income tax recognised in the income statement
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
2016
£m
Exceptional
items
2016
£m
12.1
3.6
1.2
(1.1)
15.8
(1.3)
–
(1.8)
–
(3.1)
Before
exceptional
items
2015
£m
Exceptional
items
2015
£m
4.5
6.0
12.7
(5.3)
17.9
(0.4)
–
–
–
(0.4)
Total
2016
£m
10.8
3.6
(0.6)
(1.1)
12.7
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 20.00% (2015: 20.25%)
Expenses not deductible for
tax purposes*
UK unprovided deferred tax**
Other unprovided deferred tax
Effect of the use of
unrecognised tax losses
Overseas rate differences
Other non taxable income
Adjustments in respect
of prior years
Adjustments in respect of
equity accounted investments
Tax charge / (credit)
Before
exceptional
items
2016
£m
85.9
17.1
5.1
(3.9)
0.3
(3.1)
4.6
(0.1)
2.5
(6.7)
15.8
Exceptional
items
2016
£m
(56.3)
(11.2)
9.2
–
(0.7)
–
–
(0.4)
–
–
(3.1)
Before
exceptional
items
2015
£m
73.3
14.9
3.8
17.8
(14.9)
(0.3)
3.2
–
0.7
(7.3)
17.9
Total
2016
£m
29.6
5.9
14.3
(3.9)
(0.4)
(3.1)
4.6
(0.5)
2.5
(6.7)
12.7
Exceptional
items
2015
£m
(142.7)
(28.9)
(14.0)
(0.2)
8.3
25.1
(4.9)
0.2
–
–
–
(0.4)
3.6
26.1
10.2
(5.2)
3.4
–
0.7
(7.3)
17.5
*
**
Relates to costs that are not allowable for tax deduction under local tax law. Non deductible expenses in relation to exceptional items relate mainly to capital
expenses, such as the impairments that are not deductible for tax.
Arises due to timing differences between when an amount is recognised in the income statement and when the amount is subject to UK tax. In the current
year, the Group has received tax deductions for amounts which have been charged to the income statement in previous periods in connection with items
such as fixed assets.
The income tax charge / (credit) for the year is based on the blended UK statutory rate of corporation tax for the period of 20.00% (2015:
20.25%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
171
Financial StatementsStrategic ReportDirectors’ Report 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
Taken to retirement benefit obligations reserve
2016
£m
2015
£m
–
(1.7)
(1.7)
0.1
4.0
4.1
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
Items recognised in equity and in other comprehensive income
Eliminated on disposal of subsidiary
Exchange differences
Reclassified to assets held for sale
At 31 December – asset
The movement in deferred tax assets and liabilities during the year was as follows:
2016
£m
(19.9)
(2.0)
1.7
–
(0.1)
–
2015
£m
(28.2)
3.7
(4.2)
5.5
3.3
–
(20.3)
(19.9)
Temporary
differences
on assets /
intangibles
Share based
payment and
employee
benefits
Retirement
benefit
schemes
£m
26.8
£m
(9.7)
£m
17.8
OCPs
£m
(28.3)
Tax losses
£m
(10.8)
Other
temporary
differences
£m
(15.7)
Total
£m
(19.9)
0.9
(0.5)
(1.5)
14.7
0.6
(16.2)
(2.0)
–
8.8
36.5
–
(1.8)
(12.0)
1.7
(0.4)
17.6
–
(4.2)
(17.8)
–
(0.1)
–
(2.4)
1.7
(0.1)
(10.3)
(34.3)
(20.3)
At 1 January 2016
(Credited) / charged
to income statement
(note 16a)
Items recognised in equity and
in other comprehensive income
(note 16b&c)
Exchange differences
At 31 December 2016
Of the amount credited to the income statement, £0.3m (2015: £0.3m) has been taken to costs of sales in respect of the R&D Expenditure
credit. Other temporary differences include a deferred tax asset of £0.1m in respect of derivative financial instruments (2015: £nil).
172
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 The movement in deferred tax assets and liabilities during the previous year was as follows:
Temporary
differences
on assets /
intangibles
Share based
payment and
employee
benefits
Retirement
benefit
schemes
£m
7.5
£m
(9.5)
£m
21.7
OCPs
£m
(30.5)
Tax losses
£m
(10.7)
Other
temporary
differences
£m
(6.7)
Total
£m
(28.2)
17.3
(0.5)
0.3
1.1
(0.1)
(14.4)
3.7
–
–
2.0
26.8
–
–
0.3
(9.7)
(4.2)
–
–
17.8
–
–
1.1
(28.3)
–
–
–
(10.8)
–
(4.2)
5.5
(0.1)
(15.7)
5.5
3.3
(19.9)
At 1 January 2015
(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
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
2016
£m
30.5
(50.8)
(20.3)
2015
£m
22.3
(42.2)
(19.9)
The total deferred tax asset held by the Group at 31 December 2016 amounts to £50.8m (2015: £42.2m). The total deferred tax liability held
by the Group at 31 December 2016 amounts to £30.5m (2015: £22.3m). Amounts held for sale on the balance sheet include £nil in respect of
deferred tax assets (2015: £nil) and £nil in respect of deferred tax liabilities (2015: £nil).
As at the balance sheet date, the group (excluding assets held for sale) has unused tax losses of £893.5m (2015: £890.1m) available for
offset against future profits. A deferred tax asset has been recognised in respect of £69.1m (2015: £59.9m) of such losses of which £58.8m
(net £10.0m) relates to losses incurred in the UK and £10.3m (net £0.3m) which 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 £147.0m)
as it is not probable that there will be future taxable profits available. In the summer of 2016, UK Government announced a reduction
in the UK corporation tax rate from 20% to 19% effective from April 2017 and a reduction down to 18% from April 2020. Measures
enacted during 2016 cut the rate further from April 2020 to 17%. These decreases do not affect the amount of current income tax
recognised at 31 December 2016 although it will reduce the Group's future current tax charge accordingly. The deferred tax balance at
31 December 2016 has been calculated reflecting these rates. An expected change in the UK loss utilisation laws in 2017 is estimated to
reduce the value of the recognised deferred tax asset by £3.7m.
Losses of £0.1m (2015: £105.5m) expire within 5 years, losses of £0.2m (2015 £0.2m) expire within 6–10 years, losses of £8.6m (2015 £nil)
expire within 20 years and losses of £884.6m (2015 £784.4m) may be carried forward indefinitely.
At the balance sheet date, the Group has no held for sale assets. At 2015 there were £7.3m of unused tax losses that were available for
offset against future profits in held for sale assets. No deferred tax asset was recognised in respect of these losses as it was not probable
that there will be future taxable profits available.
173
Financial StatementsStrategic ReportDirectors’ Report 18. 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
2016
millions
2015
millions
1,088.3
986.5
37.3
–
1,125.6
986.5
At 31 December 2016 options over 246,818 (2015: 560,060) 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.
The dilutive shares of 37.3m (2015: 26.5m) are applied in the continuing only EPS calculation. Due to the loss making position of continuing
and discontinued combined, and discontinued only, the dilutive impact has not been calculated in 2016 and 2015, nor for 2015 continuing.
Earnings per share continuing and discontinued
Basic 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 items
Add back tax on exceptional items
Earnings excluding exceptional operating items
for the purpose of basic EPS
Earnings per share continuing
Basic 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 items
Add back tax on exceptional items
Earnings excluding exceptional operating
items for the purpose of basic EPS
Earnings
2016
£m
(1.2)
–
(1.2)
(1.2)
70.9
(3.1)
66.6
Earnings
2016
£m
16.9
–
16.9
16.9
56.3
(3.1)
70.1
Per share
amount
2016
pence
(0.11)
–
(0.11)
Earnings
2015
£m
(152.6)
–
(152.6)
Per share
amount
2015
pence
(15.47)
–
(15.47)
(0.11)
6.51
(0.28)
(152.6)
220.3
(3.1)
(15.47)
22.33
(0.31)
6.12
64.6
6.55
Per share
amount
2016
pence
1.55
(0.05)
1.50
1.55
5.17
(0.28)
6.44
Earnings
2015
£m
(86.6)
–
(86.6)
(86.6)
142.7
(0.4)
Per share
amount
2015
pence
(8.78)
–
(8.78)
(8.78)
14.47
(0.04)
55.7
5.65
174
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 Earnings per share discontinued
Basic 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 items
Add back tax on exceptional items
Earnings excluding exceptional operating
items for the purpose of basic EPS
19. Goodwill
At 1 January 2015
Exchange differences
Impairment (exceptional)
Transfer to held for sale
At 1 January 2016
Exchange differences
Acquisitions
Impairment (exceptional)
At 31 December 2016
Further details of the exceptional impairment can be seen in note 11.
Earnings
2016
£m
Per share
amount
2016
pence
Earnings
2015
£m
Per share
amount
2015
pence
(18.1)
–
(18.1)
(18.1)
14.6
–
(3.5)
(1.66)
–
(1.66)
(1.66)
1.34
–
(0.32)
Cost
£m
673.2
17.6
–
108.3
799.1
109.6
17.8
–
926.5
(66.0)
–
(66.0)
(66.0)
77.6
(2.7)
8.9
Accumulated
impairment
losses
£m
(131.7)
(7.8)
(87.5)
(62.2)
(289.2)
(41.6)
–
(17.8)
(348.6)
(6.69)
–
(6.69)
(6.69)
7.87
(0.28)
0.90
Carrying amount
£m
541.5
9.8
(87.5)
46.1
509.9
68.0
17.8
(17.8)
577.9
175
Financial StatementsStrategic ReportDirectors’ Report 19. Goodwill continued
Movements in the balance since the prior year end can be seen as follows:
Goodwill
balance
31 December
2015
£m
Additions
2016
£m
Exchange
differences
2016
£m
Impairment
2016
£m
Goodwill
balance
31 December
2016
£m
Headroom on
impairment
analysis
2016
£m
Headroom on
impairment
analysis
2015
£m
UK Central Government
Justice & Immigration
49.6
–
–
–
49.6
126.3
59.3
Orchard & Shipman
(Glasgow) Limited
UK & Europe Local & Regional Government
UK Health
Direct Services & Europe
Americas
AsPac
Middle East
–
17.8
(17.8)
–
60.6
63.7
232.0
94.7
9.3
–
–
–
–
–
509.9
17.8
–
2.8
45.9
17.7
1.6
68.0
–
–
–
–
–
(17.8)
60.6
66.5
277.9
112.4
10.9
577.9
3.2
99.0
66.5
203.2
114.7
612.9
–
2.3
83.5
–
161.6
134.2
440.9
Included above is the detail of the headroom on the CGUs existing at the year end which 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 addition and impairment arises on acquisition of Orchard & Shipman (Glasgow) Limited. See note 8.
The key assumptions applied in the impairment review are set out below:
UK Central Government
Justice & Immigration
UK & Europe Local & Regional Government
UK Health
Direct Services & Europe
Americas
AsPac
Middle East
Discount
rate
2016
%
Discount
rate
2015*
%
Terminal
growth
rates
2016
%
Terminal
growth
rates
2015
%
10.0
10.3
10.1
11.6
10.7
10.9
10.6
10.1
10.1
10.3
10.7
9.7
2.0
2.0
2.0
2.4
2.4
2.2
2.0
2.0
2.0
2.4
2.4
2.1
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.
176
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 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, a 1% movement in discount rates and a 1% movement in terminal growth
rates are considered to be reasonably possible. The only CGU impacted by a reasonably possible change in a key assumption is Health.
The breakeven point of Health goodwill impairment is a 0.2% increase in discount rate or a 0.3% decrease in terminal growth rate.
Serco operates a contract supporting the US Affordable Care Act (ACA) with eligibility processing services to those seeking health
insurance. These operations accounted for nearly 30% of the Americas divisional revenue in 2016, and we currently forecast them to be
broadly flat in 2017. The contract requires the final option year to be exercised in H1 of 2017 in order to extend through to 30 June 2018 at
which point we would be required to rebid the contract. Particular uncertainty exists with regard to the future of the ACA. At the time of
reporting, apart from knowing that under the new US President’s Administration changes will be made to the ACA, there is no consensus
in neither Congress nor the Administration as to what form these changes will take, and what provision will be made for the more than
24 million people who have received their health insurance coverage through the ACA. Whilst margins on this contract are lower than
the average for the Americas division, the contract recovers a material amount of overhead costs and large reductions in chargeable
direct labour could create challenges to reduce overheads in line with revenues. The timing and nature of arrangements made for the
replacement of the Affordable Care Act in the US could therefore have a material impact on the business both in the immediate and
longer term. However, at present, the impact on future revenues and profitability cannot be reliably estimated.
20. Other intangible assets
Cost
At 1 January 2016
Additions from internal development
Disposals
Reclassification from held for sale assets
Reclassification from / (to) other intangible
asset categories
Research and Development expenditure credit
Exchange differences
At 31 December 2016
Accumulated amortisation and impairment
At 1 January 2016
Impairment charge
Amortisation charge – internal development
Amortisation charge – external
Disposals
Reclassification from held for sale assets
Exchange differences
At 31 December 2016
Net book value
At 31 December 2016
Acquisition related
Customer
relationships
£m
Licences and
franchises
£m
Software
and IT
£m
Other
Internally
generated
development
expenditure
£m
Total
£m
51.9
–
–
6.2
0.3
–
9.2
67.6
33.1
0.7
–
4.4
–
6.2
6.0
50.4
1.0
–
(0.7)
0.1
(0.1)
–
–
0.3
0.9
–
–
–
(0.7)
0.1
–
0.3
110.2
59.1
222.2
14.0
(12.9)
–
3.3
–
6.0
120.6
62.9
–
17.0
–
(12.0)
–
3.7
71.6
1.1
(2.6)
–
(3.5)
(0.2)
1.8
55.7
15.1
(16.2)
6.3
–
(0.2)
17.0
244.2
35.5
132.4
–
4.8
–
(2.6)
–
0.6
38.3
0.7
21.8
4.4
(15.3)
6.3
10.3
160.6
17.2
–
49.0
17.4
83.6
177
Financial StatementsStrategic ReportDirectors’ Report 20. Other intangible assets continued
Acquisition related
Other
Customer
relationships
£m
Licences and
franchises
£m
Software
and IT
£m
Internally
generated
development
expenditure
£m
Pension
related
intangibles
£m
Total
£m
116.8
1.6
146.9
–
–
–
(26.8)
(38.5)
–
–
–
0.4
51.9
–
–
–
–
(0.6)
–
–
–
–
(0.2)
10.2
7.8
(51.9)
(3.8)
1.3
(0.3)
–
0.2
1.0
110.2
76.3
1.4
100.5
–
–
–
4.8
(26.1)
(22.2)
–
0.3
33.1
–
–
–
0.1
–
(0.6)
–
–
0.9
(0.2)
–
12.7
3.6
(51.0)
(2.6)
(0.3)
0.2
62.9
67.3
(2.7)
14.0
–
(14.7)
(2.8)
(1.3)
–
(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
Cost
At 1 January 2015
Eliminated on disposal
Additions from internal development
Additions from external acquisition
Disposals
Reclassification from / (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 from / (to) held for sale assets
Reclassification to property, plant and equipment
Exchange differences
At 31 December 2015
Net book value
At 31 December 2015
Included in Software and IT and other internally generated development expenditure is an amount of £8.7m (2015: £11.8m) in respect of
leased intangibles.
Customer relationships are amortised over the average length of contracts acquired. The Group is carrying £17.2m (2015: £18.8m) in
relation to Customer relationships. Amortisation of intangibles arising on acquisition consists of amortisation in relation to Customer
relationships and Licences and franchises and totals £4.4m (2015: £4.9m).
The net book value of internally generated intangible assets as at 31 December 2016 was approximately £17.4m (2015: £23.6m) in
development expenditure and £36.9m (2015: £36.5m) in software and IT, of which £nil (2015: £0.2m) is classified as held for sale.
178
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 21. Property, plant and equipment
Cost
At 1 January 2016
Additions
Reclassification from held for sale assets
Disposals
Exchange differences
At 31 December 2016
Accumulated depreciation and impairment
At 1 January 2016
Charge for the year – impairment
Charge for the year – depreciation
Reclassification from held for sale assets
Disposals
Exchange differences
At 31 December 2016
Net book value
At 31 December 2016
Freehold
land and
buildings
£m
Short-
leasehold
assets
£m
Machinery,
motor vehicles,
furniture and
equipment
£m
29.8
1.8
0.9
(3.2)
3.1
32.4
20.7
–
3.0
(0.2)
(2.9)
2.2
22.8
209.7
15.6
0.2
(31.8)
15.5
209.2
147.3
0.7
21.6
(0.2)
(30.9)
12.5
151.0
Total
£m
243.5
17.4
1.1
(35.0)
18.6
245.6
170.3
0.7
24.8
(0.4)
(33.8)
14.7
176.3
4.0
–
–
–
–
4.0
2.3
–
0.2
–
–
–
2.5
1.5
9.6
58.2
69.3
179
Financial StatementsStrategic ReportDirectors’ Report 21. Property, plant and equipment continued
Freehold
land and
buildings
£m
Short-
leasehold
assets
£m
Machinery,
motor vehicles,
furniture and
equipment
£m
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
5.7
–
(0.9)
–
–
(0.1)
(0.7)
–
4.0
3.1
–
0.2
(0.2)
–
–
(0.1)
(0.7)
–
2.3
1.7
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
9.1
62.4
73.2
The carrying amount of the Group’s Machinery, motor vehicles, furniture and equipment includes an amount of £27.9m (2015: £36.5m) in respect
of assets held under finance leases, of which £nil (2015: £nil) is classified as held for sale.
The carrying amount of the Group’s short-leasehold assets includes an amount of £0.2m (2015: £0.3m) in respect of assets held under
finance leases.
22. Inventories
Service spares
Parts awaiting installation
Work in progress
2016
£m
17.0
1.0
4.4
22.4
2015
£m
15.7
5.8
4.9
26.4
Total inventories held by the Group at 31 December 2016 amount to £22.4m (2015: £26.4m) and include £22.4m (2015: £26.4m) shown above
and £nil (2015: £nil) included within amounts held for sale on the balance sheet.
180
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 23. Trade and other receivables
Trade and other receivables: Non-current
Amounts owed by joint ventures and associates
Loans receivable (note 28)
Other investments
Other receivables
Trade and other receivables: Current
Trade receivables
Accrued income and other unbilled receivables
Prepayments
Amounts recoverable on long-term contracts (note 24)
Amounts owed by joint ventures and associates
Loans receivable (note 28)
Security deposits
Other receivables
2016
£m
–
22.4
0.6
21.4
44.4
2016
£m
192.8
228.4
56.3
2.7
0.6
0.5
0.1
62.1
543.5
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
Total trade and other receivables held by the Group at 31 December 2016 amount to £587.9m (2015: £590.7m) and include £587.9m
(2015: £569.9m) shown above and £nil (2015: £20.8m) included within amounts held for sale on the balance sheet.
The Group has a receivables financing facility of £30.0m (2015: £30.0m), of which £7.7m had been utilised at 31 December 2016
(31 December 2015: £30.0m utilised).
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 23 days (2015: 20 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 have
a sovereign credit rating as a result of being government organisations. Of the trade receivables balance at the end of the year, £71.4m
is due from agencies of the UK Government, the Group’s largest customer, £48.6m from the Australian Government, £37.6m from the
Government of the United Arab Emirates, and £16.5m from the US Government. There are no other customers who represent more
than 5% of the total balance of trade receivables. Of the trade receivables balance at the end of 2015, £39.6m was due from agencies of
the UK Government. 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 2016, a total of £2.8m (2015: £1.4m) of trade receivables held by the Group were considered to be impaired and include
£2.8m (2015: £1.4m) shown below and £nil (2015: £nil) 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 £3.6m as of 31 December 2016 (2015: £11.3m) and included
£3.6m (2015: £11.3m) as shown below and £nil (2015: £nil) of provision for trade receivables held for sale.
181
Financial StatementsStrategic ReportDirectors’ Report 23. Trade and other receivables continued
Ageing of trade receivables
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
2016
£m
143.0
34.2
4.0
12.4
2.8
(3.6)
192.8
2015
£m
99.0
56.3
7.8
20.4
1.4
(11.3)
173.6
Of the total overdue trade receivable balance, 53.2% (2015: 35.5%) relates to the UK, US or Australian governments, and a further 15.7%
(2015: 34.4%) 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
At 1 January
Net charges and releases to income statement
Utilised
Exchange differences
Reclassified to held for sale
At 31 December
2016
£m
11.3
(0.1)
(8.2)
0.6
–
3.6
2015
£m
23.5
(6.8)
(2.8)
0.8
(3.4)
11.3
Included in the other receivables balance at the end of the year is a further £19.2m (2015: £72.1m) due from agencies of the UK Government.
Included within current other receivables are capitalised bid costs of £7.8m (2015: £9.0m) and phase in costs of £13.8m (2015: £19.6m)
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. Movements in the period were as follows:
At 1 January
Additions
Amortisation
Exchange differences
At 31 December
Capitalised bid costs of £nil (2015: £nil) and phase in costs of £nil (2015: £0.3m) are held within assets held for sale.
24. 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
Amounts due to long-term project-based contract customers included in provisions
Long-term project based contract costs incurred plus recognised profits less recognised losses to date
Less: progress payments
As at 31 December 2016, the Group had £nil (2015: £nil) of contract retentions held by customers.
182
2016
£m
28.6
4.7
(13.8)
2.1
21.6
2015
£m
2.3
–
2.3
109.9
(107.6)
2.3
2016
£m
2.7
(10.0)
(7.3)
226.3
(233.6)
(7.3)
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 25. Cash and cash equivalents
Customer advance payments*
Other cash and short-term deposits
Total cash and cash equivalents
Sterling
2016
£m
Other
currencies
2016
£m
–
149.4
149.4
1.0
27.4
28.4
Total
2016
£m
1.0
176.8
177.8
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
* Customer advance payments totalling £1.0m (2015: £3.1m) are encumbered cash balances. A further £nil (2015: £nil) 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 2016 amount to £177.8m (2015: £328.8m) and include £177.8m (2015: £323.6m)
shown above and £nil (2015: £5.2m) included within amounts held for sale on the balance sheet.
26. 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 32 days (2015: 28 days).
Trade and other payables: Non-current
Other payables
2016
£m
84.7
92.9
292.2
54.7
524.5
2016
£m
16.8
2015
£m
93.6
96.4
303.1
55.7
548.8
2015
£m
18.3
Total trade and other payables held by the Group at 31 December 2016 amount to £541.3m (2015: £574.5m) and include £541.3m (2015: £567.1m)
shown above and £nil (2015: £7.4m) included within amounts held for sale on the balance sheet.
27. 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
Minimum lease
payments
2016
£m
Present value of
minimum lease
payments
2016
£m
Minimum lease
payments
2015
£m
Present value of
minimum lease
payments
2015
£m
13.1
16.8
–
29.9
(1.7)
28.2
(12.3)
15.9
12.3
15.9
–
28.2
–
28.2
(12.3)
15.9
17.0
28.7
0.6
46.3
(2.5)
43.8
(15.8)
28.0
15.8
27.4
0.6
43.8
–
43.8
(15.8)
28.0
Total obligations under finance leases held by the Group at 31 December 2016 amount to £28.2m (2015: £44.3m) and include £28.2m (2015:
£43.8m) shown above and £nil (2015: £0.5m) 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.
183
Financial StatementsStrategic ReportDirectors’ Report 28. 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 23)
Amount due for settlement after one year
*
Included in loans repayable on demand or within one year are loan receivable amounts of £0.5m (2015: £0.4m).
Total
2016
£m
9.2
34.2
137.5
96.1
277.0
–
(9.7)
22.9
290.2
Total
2015
£m
131.9
–
62.5
167.6
362.0
–
(132.2)
19.9
249.7
Other loans
Loan receivables
Carrying amount
2016
£m
Fair value
2016
£m
Carrying amount
2015
£m
299.9
(22.9)
277.0
289.7
(22.9)
266.8
381.9
(19.9)
362.0
Fair value
2015
£m
379.0
(19.9)
359.1
The fair values are based on cash flows discounted using a market rate appropriate to the loan. All loans are held at amortised cost.
Analysis of Net Debt
At 1
January
2016
£m
Cash
flow
£m
Reclassified
as held for
sale
£m
Acquisitions**
£m
Disposals
£m
Exchange
differences
£m
Non cash
movements
£m
At 31
December
2016
£m
Cash and cash equivalents
323.6
(153.7)
Loan receivables
19.9
–
Loans payable
(381.9)
135.8
Obligations under finance
leases
Derivatives relating
to Net Debt
(43.8)
16.7
14.6
(67.6)
–
(1.2)
–
–
–
(0.2)
–
(0.2)
0.1
–
–
–
–
0.1
–
–
–
–
–
–
7.8
0.1
–
2.9
177.8
22.9
(52.8)
(1.0)
(299.9)
(0.4)
(0.5)
(28.2)
3.5
(41.8)
–
1.4
18.1
(109.3)
At 1
January
2015
(restated*)
£m
Cash
flow
£m
Reclassified
as held for
sale
£m
Acquisitions**
£m
Disposals
£m
Exchange
differences
(restated*)
£m
Non cash
movements
£m
At 31
December
2015
(restated*)
£m
Cash and cash equivalents
180.1
128.8
Loan receivables
1.0
(0.6)
Loans payable
(797.3)
449.0
Obligations under finance
leases
Derivatives relating
to Net Debt*
(26.5)
10.7
9.3
–
(632.0)
586.5
17.2
–
(0.8)
(26.7)
–
(10.3)
–
–
–
–
–
–
(0.4)
–
–
–
–
(2.1)
–
(30.8)
–
3.9
(0.4)
(29.0)
–
19.5
(2.0)
323.6
19.9
(381.9)
0.1
(43.8)
–
17.6
14.6
(67.6)
* Net Debt has been restated to include derivative financial instruments that relate to other components of Net Debt. See note 2.
** Acquisitions represent the net cash / (debt) acquired on acquisition.
Total net debt held amounts to £109.3m (2015: £62.9m) of which £109.3m (2015: £67.6m) is shown above and £nil (2015: £4.7m (asset)) is
included within amounts held for sale on the balance sheet.
184
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 29. Provisions
At 1 January 2016
Acquisitions
Reclassified to 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 from assets held for sale
Eliminated on disposal of subsidiary
Unwinding of discount
Exchange differences
At 31 December 2016
Analysed as:
Current
Non-current
Employee
related
£m
Property
£m
Contract
£m
36.4
–
–
0.4
25.6
(0.2)
(5.3)
(17.5)
–
–
–
–
5.7
45.1
13.7
31.4
18.3
0.6
–
–
4.4
–
(0.3)
(6.2)
(2.9)
–
–
0.1
1.2
15.2
4.3
10.9
Other
£m
124.9
–
(8.3)
22.7
23.7
–
(17.2)
(17.7)
4.9
3.3
(1.7)
–
6.6
Total
£m
481.7
14.6
(19.8)
23.1
110.3
(0.8)
(87.7)
(123.4)
(5.3)
3.3
(1.7)
2.5
24.9
302.1
14.0
(11.5)
–
56.6
(0.6)
(64.9)
(82.0)
(7.3)
–
–
2.4
11.4
220.2
141.2
421.7
79.2
141.0
75.1
66.1
172.3
249.4
Total provisions held by the Group at 31 December 2016 amount to £421.7m (2015: £506.2m) and include £421.7m (2015: £481.7m) shown
above and £nil (2015: £24.5m) 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. Discount rates used are calculated based on the estimated risk free rate of interest for the region in which the
provision is located and matched against the ageing profile of the provision. Rates applied are in the range of 1.16% and 3.30%.
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.
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, in respect of past events. 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.
185
Financial StatementsStrategic ReportDirectors’ Report 30. Capital and other commitments
Capital expenditure contracted but not provided
Property, plant and equipment
Intangible assets
2016
£m
10.4
5.6
2015
£m
9.3
6.9
Of the above, £nil (2015: £nil) 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
2016
£m
66.9
127.6
126.1
320.6
2015
£m
36.9
64.1
12.3
113.3
Of the above, £nil (2015: £0.5m) is associated with assets which have been reclassified as held for sale. Of this £nil (2015: £0.3m) is due within
one year, £nil (2015: £0.2m) is due between one and five years, and £nil (2015: £nil) is due after five years.
31. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures and associates up to a maximum value
of £20.4m (2015: £21.1m). The actual commitment outstanding at 31 December 2016 was £17.9m (2015: £20.8m).
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 2016 was £252.1m
(2015: £211.8m).
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.
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.
32. Financial risk management
32 (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 2016 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.
186
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 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 23)
Loan receivables (note 23)
Security deposits (note 23)
Amounts owed by joint ventures and associates
(note 23)
Financial assets – non-current
Derivative instruments in designated
hedge accounting relationships
Cross currency swaps
Loans and receivables
Loan receivables (note 23)
Other investments (note 23)
Amounts owed by joint ventures and associates
(note 23)
Financial liabilities – current
Derivatives designated as FVTPL
Forward foreign exchange contracts
Financial liabilities at amortised cost
Trade payables (note 26)
Loans (note 28)
Obligations under finance leases (note 27)
Financial liabilities – non-current
Financial liabilities at amortised cost
Loans (note 28)
Obligations under finance leases (note 27)
Carrying amount
(measurement basis)
Comparison
fair value
Carrying amount
(measurement basis)
Comparison
fair value
Amortised
cost
2016
£m
Fair value –
Level 2
2016
£m
Level 2
2016
£m
Amortised
cost
2015
£m
Fair value –
Level 2
2015
£m
Level 2
2015
£m
177.8
–
177.8
323.6
–
323.6
4.5
–
0.4
–
–
–
–
–
–
192.8
0.5
0.1
0.6
–
14.2
22.4
0.6
–
–
(84.7)
(9.7)
(12.3)
(290.2)
(15.9)
–
–
–
(0.6)
–
–
–
–
–
0.5
0.1
–
–
22.4
0.6
–
–
–
–
–
–
–
–
192.8
173.6
0.4
0.2
0.8
6.6
2.6
0.2
–
–
–
–
–
–
–
173.6
0.4
0.2
0.8
–
7.8
–
19.5
3.4
7.2
–
–
–
19.5
3.4
7.2
–
(2.4)
–
(84.7)
(9.7)
(12.3)
(93.6)
(132.2)
(15.8)
(280.1)
(15.9)
(249.7)
(28.0)
–
–
–
–
–
(93.6)
(132.2)
(15.8)
(246.8)
(28.0)
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.
187
Financial StatementsStrategic ReportDirectors’ Report 32. Financial risk management continued
32 (a) Fair value of financial instruments continued
i) Hierarchy of fair value continued
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 £18.5m (2015: net assets of £14.8m) comprising non-current
assets of £14.2m (2015: £7.8m), current assets of £4.9m (2015: £9.4m), current liabilities of £0.6m (2015: £2.4m) and non-current liabilities of
£nil (2015: £nil).
Currency swaps
Forward foreign exchange contracts
Currency swaps
Forward foreign exchange contracts
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
3.8
0.2
4.0
–
(0.3)
(0.3)
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 2016
£m
10.4
4.4
14.8
1 January 2015
£m
6.8
(11.6)
(4.8)
31 December 2016
£m
14.2
4.3
18.5
31 December 2015
£m
10.4
4.4
14.8
The fair value of financial liabilities at fair value through profit and loss is £0.6m (2015: £2.4m) 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.
32 (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.
32 (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
Sterling
Currency
Sterling
Amount
2016
£m
480.0
Amount
2015
£m
480.0
Drawn
2016
£m
–
Drawn
2015
£m
–
Utilised for
bonding facility
2016
£m
Total facility
available
2016
£m
–
480.0
Utilised for
bonding facility
2015
£m
Total facility
available
2015
£m
9.0
471.0
188
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 On 31 March 2016, £368m of the Group’s £480m revolving credit facility was extended to April 2020. The remaining £112m matures in April 2019.
In addition to the banking facility the Group has outstanding US private placements of £290.2m which will be repaid as bullet repayments
between 2018 and 2024.
In addition to the bank and private placement facilities the Group has a £30.0m receivables financing facility (2015: £30.0m) of which £7.7m
(2015: £30.0m) 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 2016
Trade payables (note 26)
Obligations under finance leases (note 27)
Loans* (note 28)
Future loan interest
Derivatives settled on gross basis:
Outflow
Inflow
*
Loans are stated gross of capitalised finance costs.
At 31 December 2015
Trade payables (note 26)
Obligations under finance leases (note 27)
Loans* (note 28)
Future loan interest
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
84.7
13.1
9.7
15.0
392.0
(396.9)
117.6
–
8.9
34.2
14.2
25.8
(34.3)
48.8
–
7.9
139.5
35.9
17.8
(23.1)
178.0
–
–
118.7
12.4
–
–
131.1
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
84.7
29.9
302.1
77.5
435.6
(454.3)
475.5
Total
£m
93.6
46.3
384.7
79.4
362.6
(377.7)
588.9
Gross cash flows in the table above relating to forward foreign exchange contracts total £394.6m (inflows) and £390.1m (outflows) on
demand or within one year and £nil (inflows) and £nil (outflows) between one and two years (2015: £274.0m (inflow) and £269.7m (outflow) on
demand or within one year and £0.7m (inflows) and £0.7m (outflows) between one and two years).
Total loans on demand or within one year for the Group amount to £9.7m (2015: £132.2m) at December 2016 of which £9.7m (2015: £132.2m)
is included above and £nil (2015: £nil) is classified as held for sale.
189
Financial StatementsStrategic ReportDirectors’ Report 32. Financial risk management continued
32 (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 2016, 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. Page 151 details the Group’s accounting policies in relation to derivatives qualifying for hedge accounting under IAS 39.
At 31 December 2016, the Group held cross currency swaps designated as cash flow hedges against $69.5m 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
May 2016
May 2018
October 2019
2016 Receivable
2015 Receivable
Notional
amount
US Dollar m
US Dollar
interest rate
%
Payable Sterling
interest rate
%
Notional
amount
US Dollar m
US Dollar interest
rate
%
Payable Sterling
interest rate
%
–
41.0
28.5
–
4.4
3.8
–
4.9
4.1
31.5
63.0
44.1
3.6
4.4
3.8
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
2016
£m
(7.0)
3.2
4.2
2015
£m
(10.8)
–
11.0
All derivatives designated as cash flow hedges are highly effective and as at 31 December 2016 a net fair value loss of £0.5m (2015: £2.7m)
has been deferred in the hedging reserve. During the course of the year to 31 December 2016, £3.4m (2015: £0.6m) of fair value gains were
transferred to the hedging reserve and £1.1m (2015: £2.8m) reclassified to the consolidated income statement.
iv) Currency sensitivity
The Group’s currency exposures in respect of monetary items at 31 December 2016 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 of a 10% movement is
summarised below:
Pre-tax profits
gain / (loss)
Equity
gain / (loss)
2016
£m
(0.1)
–
(0.1)
2016
£m
–
(0.5)
(0.5)
Pre-tax profits
gain / (loss)
2015
£m
0.3
–
0.3
Equity
gain / (loss)
2015
£m
(0.7)
1.0
0.3
US Dollar
Euro
190
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016
32 (e) Interest rate risk
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
2016
£m
177.8
0.5
178.3
Floating
rate
2016
£m
–
–
–
11.8
11.8
Weighted
average
interest rate
2016
%
–
7.0
Fixed
rate
2016
£m
–
22.4
22.4
Fixed
rate
2016
£m
Weighted
average
interest rate
2016
%
–
–
290.2
–
290.2
–
–
5.2
–
Floating
rate
2015
£m
323.6
0.4
324.0
Floating
rate
2015
£m
–
–
–
10.1
10.1
Weighted
average
interest rate
2015
%
–
7.0
Fixed
rate
2015
£m
–
19.5
19.5
Fixed
rate
2015
£m
Weighted
average
interest rate
2015
%
–
–
374.6
–
374.6
–
–
5.10
–
Total cash and cash equivalents held by the Group at 31 December 2016 amount to £177.8m (2015: £328.8m) and include £177.8m (2015:
£323.6m) shown above and £nil (2015: £5.2m) included within amounts held for sale on the balance sheet.
Total floating rate and fixed rate loans held by the Group at 31 December 2016 amount to £11.8m (2015: £10.1m) and £290.2m (2015:
£374.6m) respectively and include £11.8m (2015: £10.1m) and £290.2m (2015: £374.6m) shown above and £nil (2015: £nil) and £nil (2015: £nil)
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 £28.2m (2015: £43.8m) 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 profit for the year to 31 December 2016 of £1.7m (2015: decrease
in pre-tax loss of £3.2m).
32 (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 principal 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.
The Group’s policy is to provide guarantees for joint ventures and associates only to the relevant proportion of support provided by the
partners. At 31 December 2016, the Company has issued guarantees in respect of certain joint ventures and associates as per note 31.
191
Financial StatementsStrategic ReportDirectors’ Report 32. Financial risk management continued
32 (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
2016
£m
(177.8)
277.0
28.2
398.8
526.2
2015
£m
(323.6)
362.0
43.8
282.1
364.3
33. Retirement benefit schemes
33 (a) Defined benefit schemes
i) Characteristics and risks
The Group contributes to defined benefit schemes for qualifying employees of its subsidiaries in the UK and Europe. The normal
contributions expected to be paid during the financial year ending 31 December 2017 are £9.7m (2016: £11.9m). Among our non contract
specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The most recent full actuarial valuation of this
scheme was undertaken as at 5 April 2015 and resulted in an actuarially assessed deficit of £4.0m.
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.
The schemes typically expose the Group to actuarial risks such as those set out below:
• 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 and therefore 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 benef it 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.
192
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 The defined benefit schemes 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. Under contractual arrangements the Group sponsors a section of an industry wide
defined benefit scheme, the Railways Pension Scheme (RPS), paying contributions in accordance with a Schedule of Contributions.
There is no residual liability to fund a deficit at the end of the franchise period any costs are shared 60% by the employer and 40% by
the members. The Group also makes contributions under Admitted Body status to a number of sections of the Local Government
Pension Scheme for the period to the end of the relevant customer contracts. The Group will only participate in the Local Government
Pension Schemes for a finite period up to the end of the contracts. The Group is required to pay regular contributions as decided by the
respective Scheme Actuary and as detailed in each scheme’s Schedule of Contributions. In addition, the Group may be required to pay
some or all of any deficit (as determined by the respective Scheme Actuary) that is remaining at the end of the contract. In respect of
this, the Group recognises a sufficient level of provision in these financial statements based on the IAS 19 valuation at the reporting date
and contractual obligations.
• Non contract specific. These do not relate to any specific contract and consist of two pre-funded defined benefit schemes and an
unfunded defined benefit scheme. Any liabilities arising are recognised in full and liabilities in relation to unfunded scheme amounts to
£0.2m (2015: £0.3m). The unfunded scheme is the only non UK scheme. The funding policy for the pre-funded schemes is to contribute
such variable amounts, on the advice of the actuary, as will achieve 100% funding on a projected salary basis. One of these schemes is
SPLAS and the other is another section of the RPS.
ii) Partial settlement of SPLAS in the year
Following the finalisation of the Revised Fair Deal a number of employees are being transferred from SPLAS back to the Principal Civil
Service Pension Scheme. This transfer was finalised in December 2016 at which point all obligations of SPLAS to pay retirement benefits for
these individuals were eliminated and as a result a settlement charge of £10.7m arose, which was treated as an exceptional item in the year.
The final administrative process and payment completed in January 2017 and as result the related assets and liabilities are retained in the
balance sheet values disclosed in section iv) below.
iii) Balance sheet values
The assets and liabilities of the schemes at 31 December are:
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
Net retirement benefit asset
Net pension liability
Net pension asset
Deferred tax liabilities
Net retirement benefit asset (after tax)
3.3
0.7
–
–
0.6
1.2
–
5.8
(12.0)
(6.2)
3.7
2.5
–
–
–
–
–
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
Contract
specific
2016
£m
Non contract
specific
2016
£m
Total
2016
£m
46.6
20.9
43.3
20.2
1,390.6
1,390.6
72.4
–
4.2
20.0
1,550.7
(1,418.0)
132.7
–
–
132.7
(17.7)
150.4
(17.6)
115.1
72.4
0.6
5.4
20.0
1,556.5
(1,430.0)
126.5
3.7
2.5
132.7
(17.7)
150.4
(17.6)
115.1
193
Financial StatementsStrategic ReportDirectors’ Report 33. Retirement benefit schemes continued
33 (a) Defined benefit schemes continued
iii) Balance sheet values continued
Contract
specific
2015
£m
Non contract
specific
2015
£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*
Members’ share of deficit
Net retirement benefit asset
Net pension liability
Net pension asset
Deferred tax liabilities
Net retirement benefit asset (after tax)
2.8
0.3
–
–
0.6
0.9
–
4.6
(7.7)
(3.1)
1.9
1.2
–
–
–
–
–
Total
2015
£m
41.9
0.3
39.1
–
1,144.4
1,144.4
68.1
–
30.7
22.0
1,304.3
(1,188.7)
115.6
–
–
115.6
(11.5)
127.1
(20.8)
94.8
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
(20.8)
94.8
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
As required by IAS 19, the Group has considered the extent to which the pension plan assets should be classified in accordance with the
fair value hierarchy of IFRS 13. Virtually all equity and debt instruments have quoted prices in active markets. Annuity policies and property
assets can be classified as Level 3 instruments, and LDIs are classified as Level 2.
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 1.75% p.a. to 2.55% p.a. during 2016 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.
194
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 iv) Values recognised in total comprehensive income in the year
The amounts recognised in the financial statements for the year are analysed as follows:
Recognised in the income statement
Current service cost – employer
Past service cost
Curtailment loss 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 gain recognised in the SOCI
Contract
specific
2016
£m
Non contract
specific
2016
£m
0.4
–
–
–
0.4
(0.1)
(0.1)
0.2
–
0.9
(0.2)
0.7
–
(3.5)
–
(2.8)
1.7
1.2
2.9
0.1
7.4
0.4
(1.9)
5.4
11.3
(49.0)
–
44.3
(4.7)
285.2
(49.0)
236.2
26.2
(279.3)
28.7
11.8
–
–
–
11.8
Total
2016
£m
7.8
0.4
(1.9)
5.4
11.7
(49.1)
(0.1)
44.5
(4.7)
286.1
(49.2)
236.9
26.2
(282.8)
28.7
9.0
1.7
1.2
2.9
11.9
195
Financial StatementsStrategic ReportDirectors’ Report 33. Retirement benefit schemes continued
33 (a) Defined benefit schemes continued
iv) Values recognised in total comprehensive income in the year continued
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
Contract
specific
2015
£m
Non contract
specific
2015
£m
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)
–
–
–
(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)
(16.2)
196
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 Changes in the fair value of scheme liabilities are analysed as follows:
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
At 1 January 2016
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
Plan curtailments
At 31 December 2016
Contract
specific
£m
Non contract
specific
£m
Total
£m
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)
7.7
7.7
0.4
0.3
–
–
0.2
0.1
(0.1)
–
3.5
–
–
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)
1,188.7
1,196.4
1,188.7
1,196.4
7.4
–
0.4
0.5
44.3
–
(45.9)
(26.2)
279.3
(28.7)
(1.9)
7.8
0.3
0.4
0.5
44.5
0.1
(46.0)
(26.2)
282.8
(28.7)
(1.9)
12.1
1,417.9
1,430.0
197
Financial StatementsStrategic ReportDirectors’ Report 33. Retirement benefit schemes continued
33 (a) Defined benefit schemes continued
iv) Values recognised in total comprehensive income in the year continued
Changes in the fair value of scheme assets are analysed as follows:
Contract
specific
£m
Non contract
specific
£m
134.4
1.0
–
–
0.6
0.3
(0.8)
0.3
4.5
(31.0)
(104.7)
4.6
4.6
0.1
0.1
–
0.3
0.2
(0.1)
0.7
5.9
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
At 1 January 2016
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
At 31 December 2016
Changes in the franchise adjustment is analysed as follows:
At 1 January 2015
Taken to SOCI
Arising on acquisition of scheme
Eliminated on disposal of scheme
At 31 December 2015
At 1 January 2016
Interest on franchise adjustment
Taken to SOCI
At 31 December 2016
1,361.8
48.6
–
(4.5)
11.5
0.6
(46.5)
(67.2)
–
–
–
1,304.3
Total
£m
1,496.2
49.6
–
(4.5)
12.1
0.9
(47.3)
(66.9)
4.5
(31.0)
(104.7)
1,308.9
1,304.3
1,308.9
49.0
–
(5.4)
11.9
0.5
(45.9)
236.2
1,550.6
49.1
0.1
(5.4)
12.2
0.7
(46.0)
236.9
1,556.5
Total
£m
22.9
(0.1)
2.0
(22.9)
1.9
1.9
0.1
1.7
3.7
v) Actuarial assumptions
The average duration of the benefit obligation at the end of the reporting period is 17.7 years (2015: 16.7 years).
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 2016 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% (2015: 4.6%).
198
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 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
2016
%
2.80
2015
%
2.80
2.30 (CPI) and 3.30 (RPI)
2.00 (CPI) and 3.00 (RPI)
2.30 (CPI) and 3.30 (RPI)
2.10 (CPI) and 3.10 (RPI)
2.30 (CPI) and 3.30 (RPI)
2.10 (CPI) and 3.10 (RPI)
2.70
2016
years
22.5
25.0
24.2
26.9
3.80
2015
years
22.6
25.1
24.4
27.1
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 2016 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.
The defined benefit obligation as at 31 December 2016 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.
Discount rate – 0.5% increase
Discount rate – 0.5% decrease
Inflation – 0.5% increase
Inflation – 0.5% decrease
Rate of salary increase – 0.5% increase
Rate of salary increase – 0.5% decrease
Mortality – one year age rating
2016
£m
2015
£m
(116.5)
(98.6)
132.5
106.1
(87.6)
7.8
(7.4)
44.2
111.3
97.4
(88.2)
10.4
(10.0)
28.7
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.
33 (b) Defined contribution schemes
The Group paid employer contributions of £73.9m (2015: £75.7m) into UK and other defined contribution schemes and foreign state
pension schemes.
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.
199
Financial StatementsStrategic ReportDirectors’ Report 34. Share capital
Issued and fully paid
1,098,559,781 (2015: 549,265,547) ordinary shares of 2p each at 1 January
Issued on the exercise of share options and the Rights Issue
2016
£m
Number
2016
millions
22.0
1,098.6
–
–
1,098,564,237 (2015: 1,098,559,781) 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.
35. Share premium account
At 1 January and 31 December
2015
£m
11.0
11.0
22.0
Number
2015
millions
549.3
549.3
1,098.6
2016
£m
327.9
2015
£m
327.9
36. Reserves
36 (a) Retirement benefit obligations reserve
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.
36 (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.
36 (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 2016, the ESOT held
9,864,986 (2015: 10,540,181) shares equal to 0.9% of the current allotted share capital (2015: 1.0%). The market value of shares held by the
ESOT as at 31 December 2016 was £14.1m (2015: £10.1m).
36 (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 2015
Total comprehensive (expense) / income for the year
At 1 January 2016
Total comprehensive income for the year
At 31 December 2016
Hedging
reserve
£m
Translation
reserve
£m
(5.0)
2.2
(2.8)
2.3
(0.5)
(13.9)
(41.0)
(54.9)
80.0
25.1
Total
£m
(18.9)
(38.8)
(57.7)
82.3
24.6
200
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 37. 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
2016
£m
–
8.9
0.8
–
9.7
2015
£m
–
9.9
0.3
(0.4)
9.8
Executive Option Plan (EOP)
Options granted under the EOP may be exercised after the third anniversary of grant, dependent upon the achievement of a financial
performance target over three years. The options are granted at market value and awards made to eligible employees are based on
between 50% and 100% of salary as at 31 December prior to grant. If the options remain unexercised after a period of ten years from the
date of grant, the options expire. Furthermore, options may be forfeited if the eligible employee leaves the Group before the options vest.
Details of the movement in all EOP options are as follows:
Outstanding at 1 January
Rights Issue adjustment
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2016
thousands
Weighted
average
exercise price
2016
£
Number of
options
2015
thousands
Weighted
average
exercise price
2015
£
187
–
–
(94)
93
3.77
–
–
3.39
4.16
336
79
–
(228)
187
4.16
4.16
–
4.48
3.77
Of these options, 92,540 (2015: 187,308) were exercisable at the end of the year, with a weighted average exercise price of £4.16 (2015: £3.77).
The options outstanding at 31 December 2016 had a weighted average contractual life of 1.87 years (2015: 1.6 years).
The exercise prices for options outstanding at 31 December 2016 ranged from £3.88 to £4.55 (2015: £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
£1.13 (2015: £3.30).
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 and all
shares are now vested.
There were no new options granted under Executive Option Plan during the year.
201
Financial StatementsStrategic ReportDirectors’ Report 37. Share based payment expense continued
Executive Option Plan (EOP) continued
Long-Term Incentive Scheme (LTIS) and Long-Term Incentive Plan (LTIP)
Awards made to eligible employees under the above schemes are structured as options with a zero exercise price. 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
2016
thousands
Weighted
average
exercise price
2016
£
Number of
options
2015
thousands
Weighted
average
exercise price
2015
£
240
–
(54)
(70)
116
Nil
Nil
Nil
Nil
Nil
276
64
(70)
(30)
240
Nil
Nil
Nil
Nil
Nil
Of these options, 115,818 (2015: 240,058) were exercisable at the end of the year. The options outstanding at 31 December 2016 had a
weighted average contractual life of 0.65 years (2015: 1.3 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
2016
thousands
Weighted
average
exercise price
2016
£
Number of
options
2015
thousands
Weighted
average
exercise price
2015
£
23,771
18,419
–
(666)
(7,039)
34,485
0.02
0.02
–
0.02
0.02
0.02
10,743
15,053
2,565
(654)
(3,936)
23,771
0.02
0.02
0.02
0.02
0.02
0.02
Of these options, 133,470 (2015: 207,643) were exercisable at the end of the year. The options outstanding at 31 December 2016 had a
weighted average contractual life of 7.5 years (2015: 7.8 years).
In the year, eight grants were made, of which three were non-performance conditional share awards. The remaining five performance
based awards are with Earnings per Share (EPS), Total Shareholder Return (TSR) and Return on Invested Capital (ROIC) performance
conditions each attached to 33.3% of options.
The options subject to market-based performance conditions (such as the TSR condition for these awards), were valued using the Monte
Carlo Simulation model. The options subject only to non-market based performance conditions (such as the EPS and ROIC conditions) a
Black-Scholes model has been used. This approach has also been used for the Awards made with no performance conditions attached
to them.
202
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 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 Monte Carlo and Black-Sholes Models used the following inputs:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
2016
£0.98
£0.02
47.3
3 years
0.45%
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 weighted average fair value of options granted under this scheme in the year is £0.89 (2015: £1.20).
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
2016
thousands
Weighted
average
exercise price
2016
£
Number of
options
2015
thousands
Weighted
average
exercise price
2015
£
906
2,186
–
(147)
2,945
Nil
Nil
Nil
Nil
Nil
351
759
83
(287)
906
Nil
Nil
Nil
Nil
Nil
None of these options were exercisable at the end of the year (2015: none). The options outstanding at 31 December 2016 had a weighted
average contractual life of 2.10 years (2014: 2.08 years).
There were 2,185,750 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 £0.95 (2015: £1.36).
2016
£0.95
Nil
47.4
3 years
0.64%
203
Financial StatementsStrategic ReportDirectors’ Report 37. 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
2,051
–
–
(2,051)
–
Weighted
average
exercise price
2016
£
Number of
options
2015
thousands
Weighted
average
exercise price
2015
£
5.14
–
–
5.14
–
2,875
–
504
(1,328)
2,051
5.14
5.14
5.14
5.14
5.14
Of these options, none (2015: none) were exercisable at the end of the year. There were no outstanding options at 31 December 2016 (2015:
weighted average contractual life of 0.4 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.
38. 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 and associates are disclosed below.
Transactions
During the year, Group companies entered into the following transactions with joint ventures and associates:
Sale of goods and services
Joint ventures
Associates
Other
Dividends received – joint ventures
Dividends received – associates
Receivable from consortium for tax – joint ventures
Total
Transactions
2016
£m
Current
outstanding at
31 December
2016
£m
Non-current
outstanding at
31 December
2016
£m
0.5
6.2
20.4
19.6
3.2
49.9
0.1
0.5
–
–
7.7
8.3
–
–
–
–
–
–
AWE Management Limited (AWEML) was formerly a joint venture but in August 2016 there was a change in the AWE Management Limited
shareholding structure, with the Group’s shareholding reducing from 33.3% to 24.5% by way of a return of shares and Lockheed Martin
taking a majority holding. Subsequent to the change in share ownership AWEML has been accounted for as an associate as we continue to
have significant influence. In the prior year, the AWE transactions and outstanding balances were disclosed within joint ventures below.
204
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 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. The only loan amounts owed by joint ventures or associates related to a single entity which have
been provided for in full (see note 11).
Sale of goods and services
Joint ventures
Other
Dividends received – joint ventures
Loans and other receivables – joint ventures
Receivable from consortium for tax – joint ventures
Total
Transactions
2015
£m
Current
outstanding at
31 December
2015
£m
Non-current
outstanding at
31 December
2015
£m
6.1
32.5
–
4.2
42.8
0.6
–
0.8
9.3
10.7
–
–
7.2
–
7.2
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
Share based payment expense
2016
£m
11.9
4.7
16.6
2015
£m
8.4
1.1
9.5
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee
(2016: 20 individuals, 2015: 19 individuals).
Aggregate directors’ remuneration
The total amounts for directors’ remuneration in accordance with Schedule 5 to the Accounting Regulations were as follows:
Salaries, fees, bonuses and benefits in kind
Amounts receivable under long-term incentive schemes
2016
£m
5.6
5.6
11.2
2015
£m
3.7
4.7
8.4
None of the Directors are members of the company’s defined benefit pension scheme.
One director is a member of the money purchase scheme.
Further information about the remuneration of individual directors is provided in the audited part of the Directors’ Remuneration Report
on pages 96 to 125.
205
Financial StatementsStrategic ReportDirectors’ Report 39. 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 (loss) / profit for the year –
discontinued operations
Operating profit / (loss) for the year*
Adjustments for:
Share of profits in joint ventures and associates
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
Impairment of property, plant and equipment
Depreciation of property, plant and equipment
Amortisation of intangible assets
Exceptional profit on disposal of
subsidiaries and operations
Loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Non cash R&D expenditure offset against
intangible assets
Decrease in provisions
Other non cash movements*
Total non cash items
Operating cash inflow / (outflow)
before movements in working capital
Decrease in inventories
Decrease in receivables
Decrease in payables
Movements in working capital
Cash generated by operations*
Tax paid
Non cash R&D expenditure
2016
Before
exceptional
items
£m
2016
Exceptional
items
£m
2015
Before
exceptional
items
(restated*)
£m
2016
Total
£m
2015
Exceptional
items
£m
2015
Total
(restated*)
£m
98.5
(56.3)
42.2
106.1
(109.9)
(3.8)
(3.3)
95.2
(33.4)
9.7
–
–
–
0.7
0.7
24.8
26.2
–
0.4
0.8
0.2
(118.4)
0.4
(54.5)
7.3
1.3
59.0
(84.0)
(23.7)
(16.4)
(5.6)
(0.4)
(14.2)
(70.5)
–
–
17.8
(0.8)
0.3
–
–
–
–
(17.5)
24.7
(33.4)
9.7
17.8
(0.8)
0.3
0.7
0.7
24.8
26.2
(0.1)
(0.1)
–
–
–
(1.1)
–
0.4
0.8
0.2
0.4
16.1
(38.4)
(54.4)
(47.1)
–
13.9
0.6
14.5
1.3
72.9
(83.4)
(9.2)
(39.9)
(56.3)
–
–
(5.6)
(0.4)
26.5
132.6
(37.0)
9.8
–
–
–
11.5
2.1
28.9
29.0
–
0.1
1.5
0.8
(77.6)
(187.5)
–
–
(51.1)
(54.9)
(37.0)
9.8
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
(0.1)
(32.4)
63.2
5.6
20.6
(48.8)
(22.6)
40.6
(2.7)
(0.7)
37.2
–
(0.1)
141.6
109.2
(45.9)
–
–
(10.7)
(10.7)
(56.6)
–
–
(56.6)
17.3
5.6
20.6
(59.5)
(33.3)
(16.0)
(2.7)
(0.7)
(19.4)
(119.5)
(116.0)
(9.5)
(125.5)
Net cash (outflow) / inflow from operating activities*
(22.4)
(39.9)
(62.3)
* Operating Profit has been restated following the change in accounting policy to include foreign exchange movements on investment and financing
arrangements in net finance costs.
Additions to property, plant and equipment during the year amounting to £0.5m (2015: £5.2m) were financed by new finance leases.
206
Financial StatementsNotes to the Consolidated Financial Statements continuedSerco Group plc Annual Report and Accounts 2016 40. Assets held for sale
As part of the Strategy Review, certain assets and liabilities were designated as non core and plans were put in place to dispose of them.
As at 31 December 2016 the only business remaining to be sold is an onshore private sector BPO business, which is expected to be sold
in 2016. It is not expected that any of the assets or liabilities will transfer to the purchaser on disposal based on the current expected deal
structure and therefore the net assets transferred out of held for sale at 31 December 2016.
The balances included as held for sale are as follows:
Assets
Goodwill
Other intangible assets
Property, plant and equipment
Other non-current assets
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
Liabilities directly associated with assets classified as held for sale
At 31 December
2016
£m
At 31 December
2015
£m
Note
19
20
21
23
25
23
26
29
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)
(32.5)
207
Financial StatementsStrategic ReportDirectors’ Report Financial Statements
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
Current tax asset
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
2016
£m
2015
£m
42
43
43
47
47
43
44
45
46
47
45
48
46
49
50
51
52
54
2,001.3
1,994.9
4.5
275.1
4.3
14.2
3.7
126.7
428.5
3.1
793.5
9.0
7.8
–
147.6
961.0
2,429.8
2,955.9
(66.9)
(9.7)
(3.2)
(0.1)
(0.6)
(80.5)
348.0
(278.4)
(1,043.5)
–
(41.1)
(1,363.0)
(1,443.5)
986.3
22.0
327.9
0.1
633.8
68.5
(52.1)
(13.9)
986.3
(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
The financial statements (registered number 02048608) were approved by the Board of Directors on 22 February 2017 and signed
on its behalf by:
Rupert Soames
Group Chief Executive
Angus Cockburn
Group Chief Financial Officer
208
Serco Group plc Annual Report and Accounts 2016
Notes to the Company Financial Statements
41. 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. The Company has not presented its own profit and loss
account as permitted by Section 408 of the Companies Act 2006.
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.
42. Investments held as fixed assets
Shares in subsidiary companies at cost
At 1 January 2015
Options over parent’s shares awarded to employees of subsidiaries
Impairment
Additions:
Serco Holdings Limited
At 1 January 2016
Options over parent’s shares awarded to employees of subsidiaries
At 31 December 2016
The Company directly owns 100% of the ordinary share capital of the following subsidiaries:
Name
Serco Holdings Limited
43. Debtors
Amounts due within one year
Current tax asset
Other debtors
Amounts due after more than one year
Amounts owed by subsidiary companies
Amounts owed by joint ventures and associates of Serco Group
£m
1,963.8
8.7
(127.6)
150.0
1,994.9
6.4
2,001.3
% ownership
100%
2015
£m
–
3.1
3.1
2015
£m
788.8
4.7
793.5
2016
£m
3.7
4.5
8.2
2016
£m
275.1
–
275.1
209
Financial StatementsStrategic ReportDirectors’ Report Notes to the Company Financial Statements continued
44. Trade and other payables
Amounts owed to subsidiary companies
Trade creditors
Accruals and deferred income
Other creditors including taxation and social security
45. Borrowings
Loans
Less: Amounts included in creditors falling due within one year – loans
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
46. Provisions
At 1 January 2016
Charged to income statement – exceptional
Utilised
At 31 December 2016
Analysed as:
Current
Non-current
2016
£m
51.6
0.6
12.5
2.2
66.9
2016
£m
288.1
(9.7)
278.4
9.7
34.2
125.8
118.4
288.1
Other
£m
30.7
13.5
–
44.2
3.1
41.1
2015
£m
237.4
–
11.0
–
248.4
2015
£m
371.7
(132.2)
239.5
132.2
–
52.4
187.1
371.7
Total
£m
31.1
13.5
(0.3)
44.3
3.2
41.1
Employee
related
£m
0.4
–
(0.3)
0.1
0.1
–
Total provisions held by the Company at 31 December 2016 amount to £44.3m (2015: £31.1m).
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, in respect of past events. These costs are based on past experience
of similar items and other known factors and represent management’s best estimate of the likely outcome.
210
Financial StatementsSerco Group plc Annual Report and Accounts 2016
47. Derivative financial instruments
Currency swaps
Forward foreign exchange contracts
Analysed as:
Non-current
Current
Assets
2016
£m
Liabilities
2016
£m
Assets
2015
£m
Liabilities
2015
£m
14.2
4.3
18.5
14.2
4.3
18.5
–
(0.6)
(0.6)
–
(0.6)
(0.6)
10.4
6.4
16.8
7.8
9.0
16.8
–
(0.9)
(0.9)
–
(0.9)
(0.9)
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 32 of the Group’s consolidated financial statements.
48. Deferred tax
The deferred tax asset not provided is as follows:
Depreciation in excess of capital allowances
Short-term timing differences
Losses
At 31 December
49. Called up share capital
Issued and fully paid
1,098,559,781 (2015: 549,265,547) ordinary
shares of 2p each at 1 January
Issued on the exercise of share options and the share placement
1,098,564,237 (2015: 1,098,559,781) ordinary
shares of 2p each at 31 December
2016
£m
22.0
–
22.0
Number
2016
millions
1,098.6
–
1,098.6
The Company has one class of ordinary shares which carry no right to fixed income.
50. Share premium account
At 1 January and 31 December
2016
£m
0.3
2.3
23.5
26.1
2015
£m
11.0
11.0
22.0
2016
£m
327.9
2015
£m
0.3
2.8
30.1
33.2
Number
2015
millions
549.3
549.3
1,098.6
2015
£m
327.9
211
Financial StatementsStrategic ReportDirectors’ Report Notes to the Company Financial Statements continued
51. Profit and loss account
At 1 January
Loss for the year
Issue of shares from Rights Issue
At 31 December
2016
£m
673.6
(39.8)
–
633.8
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.
52. 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
2016
£m
66.3
6.4
3.3
(7.5)
68.5
2015
£m
364.8
(210.5)
519.3
673.6
2015
£m
56.9
8.7
1.1
(0.4)
66.3
Details of the share based payment disclosures are set out in note 37 of the Group’s consolidated financial statements.
53. 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 2016, the ESOT
held 9,864,986 (2015: 10,540,181) shares equal to 0.9% of the current allotted share capital (2015: 1.0%). The market value of shares held
by the ESOT as at 31 December 2016 was £14.1m (2015: £10.1m).
54. Hedging and translation reserve
At 1 January
Fair value loss on cash flow hedges during the period
Net exchange loss on translation of foreign operations
At 31 December
2016
£m
7.9
0.4
(22.2)
(13.9)
2015
£m
18.2
2.1
(12.4)
7.9
212
Financial StatementsSerco Group plc Annual Report and Accounts 2016 55. Contingent liabilities
The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures and associates up to a maximum
value of £20.4m (2015: £21.1m). The actual commitment outstanding at 31 December 2016 was £17.9m (2015: £20.8m).
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 2016 was
£234.3m (2015: £191.6m).
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.
56. 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.
213
Financial StatementsStrategic ReportDirectors’ Report Appendix: List of Subsidiaries
Company name
Aeradio Technical Services WLL4
Antab Operations &
Contracting LLC
Serco Group
interest
Country of incorporation
49%
60%
Headquarters Building, Building # 1605, Road # 5141, Askar # 951,
PO Box 26803 Manama, Kingdom of Bahrain
Office No. 31, 4th Floor, Amar 40 Building (No. 2444), 6987 King Abdulaziz Road,
Al Masif, PO Box 50025, Riyadh 11523, Kingdom of Saudi Arabia
AWE Management Limited3
24.5%
BAS-Serco Limited
Braintree Clinical Services Limited
CCM Software Services Ltd2
Djurgardens Farjetrafik AB
DMS Maritime Pty Limited
Equity Aviation Holdings (Pty) Ltd2
Equity Aviation Investment
Holdings (Pty) Ltd
Hong Kong Parking Limited
International Aeradio (Emirates)
LLC – Abu Dhabi
International Aeradio (Emirates)
LLC – Dubai
JBI Properties Services
Company LLC
Khadamat Facilities
Management LLC
LOGTEC Inc.
Merseyrail Services Holding
Company Limited³
10%
100%
100%
50%
100%
50%
50%
40%
49%
49%
49%
49%
100%
50%
Northern Rail Holdings Limited3
50%
Orchard & Shipman
(Glasgow) Limited
Priority Properties North
West Limited
Serco (Jersey) Limited
Serco Australia Pty Limited3
Serco Belgium S.A
Serco Caledonian Sleepers Limited
Serco Canada Inc.
Serco Citizen Services Pty Ltd
Serco Consulting Bahrain WLL
100%
100%
100%
100%
100%
100%
100%
100%
100%
Serco Corporate Services Limited
100%
Serco Environmental Services Limited
100%
Serco Ferries (Guernsey) Crewing Limited 100%
Atomic Weapons Establishment, Aldermaston, Reading, Berkshire,
RG7 4PR United Kingdom
Clarendon House, 2 Church Street, Hamilton, HM11, Bermuda
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
135 Hillside, Greystones, Co Wicklow 216410, Ireland
Svensksundsvagen 17, 111 49 Stockholm, Sweden
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
691 Umgeni Road, Durban 4001, South Africa
Block F, 1st Floor, Gilloolys View, Osborn Lane, Bedfordview,
Johannesburg 2000, South Africa
Room 2601, World Trade Centre, 280 Gloucester Road,
Causeway Bay, 255257, Hong Kong
Office No. 503, 5th Floor, Al Muhairy Building, Zayed
The First Street, PO Box 3164 Abu Dhabi, United Arab Emirates
19th Floor, Rolex Tower, Sheikh Zayed Road, PO Box 9197 Dubai,
United Arab Emirates
Al Jazira Club, 303, Tower A, Muroor Road (4th Street),
PO Box 63737 Abu Dhabi, United Arab Emirates
The United Arab Emirates University, Al Jamea Street,
Al Maqam District, PO Box 15551 Al Ain, United Arab Emirates
Suite 1000, 1818 Library Street, Reston VA 201901 United States
Eversheds House, 70 Great Bridgewater Street, Manchester,
Lancashire, M1 5ES United Kingdom
Eversheds House, 70 Great Bridgewater Street, Manchester,
Lancashire, M1 5ES United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
13 Castle Street St Helier Jersey JE4 5UT, Jersey
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Avenue de Cortenbergh 60 – 1000 Brussels, Belgium
Basement And Ground Floor Premises, 1–5 Union Street,
Inverness, IV1 1PP, Scotland, United Kingdom
330 Bay Street, Suite 400, Toronto, Canada M5H 2S8
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Suite 106, 10th Floor, Al Jasrah Tower, Building No. 95, Road 1702,
Diplomatic Area, Manama, PO Box 3214, Kingdom of Bahrain
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
4th Floor, West Wing, Trafalgar Court, Admiral Park, St Peter Port,
GY1 2JA, Guernsey
214
Financial StatementsSerco Group plc Annual Report and Accounts 2016 Company name
Serco Ferries (HR) Limited
Serco Geografix Limited
Serco Group
interest
Country of incorporation
100%
100%
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Serco Gestion de Negocios SL
100%
Serco Group (HK) Limited
Serco Group Consultants (Shanghai)
Company Limited2
Serco Group Pty Limited
Serco Holdings Limited1
Serco Immigration Services SA
Serco Inc.3
Serco Insurance Company Limited
Serco Integrated Transport
Private Limited
Serco International Limited
Serco International S.à r.l
Serco Leasing Limited
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Serco Leisure Operating Limited
100%
Serco Limited3
100%
Serco Listening Company Limited
100%
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 PIK Limited
Serco Pension Trustee Limited
Serco Projects LLC
100%
100%
100%
100%
100%
100%
100%
100%
50%
100%
100%
49%
c/o Torre Hernando Aseria Consultoria. Calle Ayala, 13 1°Dr,
28001 Madrid, Spain
Suite No1101 Sino Plaza, 255-257 Gloucester Road, Causeway Bay,
255257, Hong Kong
1206-A23, 12/F Shui On Plaza, No.333 Mid Huai Hai Road,
Shanghai 200021, China
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Avenue Edmond Van Nieuwenhuyse 6 – 1160 Auderhem, Belgium
c/o Corporation Services Company, 830 Bear Tavern Rd,
West Trenton, NJ 08628, United States
Maison Trinity, Trinity Square, St Peter Port Guernsey
Office# 431, Level 4, Augusta Point, Sector 53 Golf Course Road,
Gurgaon 122002, India
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Headstart, 7 rue Robert Stümper, L-2557 Luxembourg
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
17 Boulevard Royal 17, L – 2449 Luxembourg
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Kapteynstraat 1, 2201 BB Noordwijk ZH, Netherlands
Level 4, KPMG Centre, 18 Viaduct Harbour Avenue, Auckland Central,
Auckland, 1010, New Zealand
Level 4, KPMG Centre, 18 Viaduct Harbour Avenue, Auckland Central,
Auckland, 1010, New Zealand
Level 4, KPMG Centre, 18 Viaduct Harbour Avenue, Auckland Central,
Auckland, 1010, New Zealand
Corporation Trust Center, 1209 Orange Street, Wilmington,
DE 19801, United States
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Surrey, Ci Tower, St. George’s Square, New Malden, Surrey,
KT3 4TE United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Global Business Centre 2, Second Floor, Al Hitmi Village Building,
C-Ring Road, PO Box 25422 Doha, State of Qatar
215
Financial StatementsStrategic ReportDirectors’ Report Appendix: List of Subsidiaries continued
Company name
Serco Group
interest
Country of incorporation
Serco Regional Services Limited
100%
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
Serco Sarl
Serco SAS
Serco Saudi Arabia LLC
Serco Services GmbH
Serco Services Inc.
Serco Services Ireland Limited
Serco SpA
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%
50%
100%
100%
100%
50%
33%
15, rue Lumière 01630 Saint Genis Pouilly, France
15, rue Lumière 01630 Saint Genis Pouilly, France
Mazaya Tower, 1st Floor, King Saud Road, PO Box 366877,
Riyadh 11393, Kingdom of Saudi Arabia
Lise-Meitner-Strasse 10, 64293 Darmstadt, Germany
Corporation Trust Center, 1209 Orange Street, Wilmington,
DE 19801, United States
29 Earlsfort Terrace, Dublin 2, Ireland
Via Sciadonna 24/26, 00044 Frascati (Roma), Italy
Level 7, 301 Coronation Drive, Milton QLD 4064, Australia
86 bis Route de Frontenex, Case postale 6364, 1208 Geneva, Switzerland
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, United Kingdom
220 High Street, Glasgow, G4 0QW, Scotland, United Kingdom
Francis House, 9 King’s Head Yard, London, SE1 1NA,
United Kingdom
1 Serco Holdings Limited is 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 2016.
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
216
Financial StatementsSerco Group plc Annual Report and Accounts 2016 Appendix: Supplementary Information
Five-year Record (unaudited)
Adjusted Revenue
Less: Share of revenue of joint ventures
and associates
Revenue
Underlying Trading Profit*
OCP and Contract and Balance Sheet Review adjustments
Include benefit from non-depreciation and
amortisation of assets held for sale
Include other one-time items
Trading Profit / (Loss)*
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
2016
£m
3,529
(481)
3,048
82.1
14.2
0.5
3.5
100.3
(5.1)
95.2
0.1
(70.6)
24.7
(12.6)
(0.4)
–
11.7
(12.8)
(1.1)
(109.3)
(109.3)
2015
(restated**)
£m
4,252
(737)
3,515
95.9
20.9
11.7
9.0
137.5
(4.9)
132.6
2014
£m
4,753
(798)
3,955
113.2
(745.3)
–
–
2013
£m
5,140
(856)
4,284
257.4
–
–
–
2012
£m
4,910
(853)
4,057
310.7
–
–
–
(632.1)
257.4
310.7
(23.7)
(655.8)
2.8
(5.4)
(190.3)
(656.1)
(54.9)
(31.9)
(32.8)
–
(1,317.3)
(36.7)
–
–
(33.5)
(153.1)
(82.2)
(82.2)
6.9
(1,347.1)
(642.7)
(642.7)
(119.6)
(1,354.0)
108.3
(21.4)
236.0
19.2
(109.7)
145.5
(37.2)
–
–
(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
(Loss) / earnings per share before exceptional items**
Basic (loss) / earnings per share**
Dividend per share
Pence
Pence
Pence
6.12
(0.11)
–
6.55
(15.47)
–
(107.43)
(205.66)
3.10
*
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.
** The 2015 general and administrative expenses and net finance costs have been restated following the change in accounting policy regarding
foreign exchange movements on investment and financing arrangements. No changes have been made to the comparative periods for 2014 and
prior as it is impracticable.
217
Financial StatementsStrategic ReportDirectors’ Report Financial Statements
Shareholder Information
Our website
Our corporate website provides access to share price information
as well as sections on managing your shareholding online,
corporate governance and other investor relations information.
Changes of address
To avoid missing important correspondence relating to your
shareholding, it is important that you inform our Registrar,
Equiniti, of your new address as soon as possible.
To access the website, please visit
www.serco.com/investors
Managing your shares online
Shareholders can manage their holding online by registering to
use our shareholder portal at www.shareview.co.uk. This service is
provided by our Registrar, Equiniti, giving quick and easy access
to your shareholding, allowing you to manage all aspects of your
shareholding online, with a useful FAQ section.
Electronic communications
We encourage shareholders to consider receiving their
communications electronically. Choosing to receive your
communications electronically means you receive information
quickly and securely and allows us to communicate in a more
environmentally friendly and cost-effective way. You can register for
this service online using our share portal at www.shareview.co.uk
Sharegift
If you have a very small shareholding that is uneconomical to sell,
you may want to consider donating it to Sharegift (Registered
Charity no.10526886), a charity that specialises in the donation
of small, unwanted shareholdings to good causes. You can find
out more by visiting www.sharegift.org or by calling +44 (0) 207
930 3737.
Shareholder queries
Our share register is maintained by our Registrar, Equiniti.
Shareholders with queries relating to their shareholding should
contact Equiniti directly using one of the methods listed opposite.
For more general queries, shareholders can look
at our website at www.serco.com/investors
Duplicate documents
Some shareholders find that they receive duplicate documentation
due to having more than one account on the share register. If
you think you fall into this group and would like to combine your
accounts, please contact our Registrar, Equiniti.
American Depositary Receipts (ADRs)
Serco has established a sponsored Level I ADR programme. Serco
ADRs are traded on the US over-the-counter market (SCGPY).
For queries relating to your ADR holding, please contact our ADR
depositary bank, Deutsche Bank Trust Company Americas.
Shareholder profile
1 and 1,000
1,001 and 5,000
5,001 and 10,000
10,001 and 100,000
100,001 and 500,000
500,001 and 1,000,000
1,000,001 and 10,000,000
10,000,001+
Total
Number
of holdings
% of holdings
3,485
2,304
436
404
123
51
80
25
50.45
33.35
6.31
5.85
1.78
0.74
1.16
0.36
Number
of shares
1,396,246
5,229,575
3,077,432
11,482,860
30,872,832
36,155,874
273,008,892
737,340,526
6,908
100.00
1,098,564,237
% of shares
0.13
0.48
0.28
1.04
2.81
3.29
24.85
67.12
100.00
218
Serco Group plc Annual Report and Accounts 2016
Strategic Report
Directors’ Report
Financial Statements
Useful Contacts
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
United Kingdom
Telephone
0371 384 2932 (from within UK)
+44 (0)121 415 7047 (from outside UK)
Lines are open 8.30am to 5.30pm Monday to Friday.
Website
www.shareview.co.uk
Shareholders can securely send queries via the website
using the 'Help' section.
ADR depositary bank
Deutsche Bank Trust Company Americas
c/o American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn NY 11219
USA
Telephone
+1 866 249 2593 (toll-free within USA)
+1 718 921 8124 (from outside USA)
Website
Email
www.adr.db.com
db@amstock.com
Stockbrokers
JP Morgan Cazenove
Bank of America Merrill Lynch
Auditors
KPMG Chartered Accountants
Serco’s registered office
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY
United Kingdom
Telephone
+44 (0)1256 745 900
Email
investors@serco.com
Registered in England and Wales No. 2048608
Group General Counsel and Company
Secretary
David Eveleigh
Additional documents
The Annual Report is available for download in pdf format at
www.serco.com/investors
Unsolicited mail and shareholder fraud
Shareholders are advised to be wary of unsolicited mail or
telephone calls offering free advice, to buy shares at a discount or
offering free company reports. To find more detailed information
on how shareholders can be protected from investment scams visit
www.fca.org.uk/consumers/scams/investment-scams/share-fraud-
and-boiler-room-scams
CBP0007650703175143
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 745900
E: generalenquiries@serco.com