Annual Report
and Accounts
2017
Contents
Strategic Report
04 At a Glance
06 Chairman’s Statement
09 Our Business
18 Key Performance Indicators
20 Principal Risks and Uncertainties
30 Viability Statement
32 Chief Executive’s Review
44 Divisional Reviews
50 Finance Review
69 Corporate Responsibility
Directors’ Report
86 Corporate Governance Report
86 Board of Directors
88
Chairman's Governance
Overview
91 Board and Governance
93
Group Risk Committee Report
96 Audit Committee Report
102 Nomination Committee Report
105 Corporate Responsibility
Committee Report
108 Compliance with the UK
Corporate Governance Code
110 Remuneration Report
144 Directors' Report
150 Directors' Responsibility Statement
Financial Statements
152 Independent Auditor’s Report
158 Consolidated Income Statement
159 Consolidated Statement
of Comprehensive Income
160 Consolidated Statement
of Changes in Equity
161 Consolidated Balance Sheet
162 Consolidated Cash Flow Statement
163 Notes to the Consolidated
Financial Statements
228 Company Balance Sheet
229 Company Statement of
Changes in Equity
230 Notes to the Company
Financial Statements
234 Appendix: List of Subsidiaries
237 Appendix: Supplementary
Information
238 Shareholder Information
239 Useful Contacts
Serco Group plc is a leading provider
of public services. Our customers are
governments or others operating in the
public sector. We gain scale, expertise
and diversification by operating
internationally across five sectors and
four geographies: Defence, Justice &
Immigration, Transport, Health and
Citizen Services, delivered in UK &
Europe, North America, Asia Pacific
and the Middle East.
Serco's roots go back to 1929, and in
1988 was listed on the London Stock
Exchange. Now, Serco is a FTSE 250
company managing over 500 contracts
worldwide and employing over 50,000
people across our operations.
+500
CONTRACTS
+20COUNTRIES
+50,000
EMPLOYEES
For more and the latest information please visit our website at:
www.serco.com
Serco Group plc Annual Report and Accounts 2017
Strategic Report
Directors’ Report
Financial Statements
Strategic Report
At a Glance
Chairman's
Statement
Our Business
Key Performance
Indicators
Principal Risks
and Uncertainties
Viability
Statement
Chief Executive’s
Review
Divisional
Reviews
Finance
Review
Corporate
Responsibility
04
06
09
18
20
30
32
44
50
69
03
03
At a glance
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 deliver 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.
Our core sectors
Our business is focused across five core sectors and four geographies, with
revenue in 2017 (including share of joint ventures and associates) of £3,310m
Defence
Justice &
Immigration
Transport
Health
Citizen Services
£973m
29%
£559m
17%
£559m
17%
£348m
11%
£871m
26%
Base and
operational
support
Engineering,
management
and information
services
Maritime services
Custodial
services
Immigration
detention
services
Detainee
transport and
monitoring
Key Services
Rail and ferries
Road traffic
management
Air traffic control
Non-clinical
support services
Patient
administration
and contact
Contact centres
and case
management
Middle and back
office services;
IT services
Employment and
skills services
Our purpose and ambition
Our purpose at Serco is to be a trusted partner of
governments, delivering superb public services that
transform outcomes and make a positive difference
for our fellow citizens.
pg09
For more information
on our business
Our ambition is to be considered the best-managed
business in our sector. Since our success in delivering
is almost entirely dependent on people, we believe
that such an ambition is a worthy and value-creating
aspiration, and one that we can use to inspire our
management teams and customers.
04
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Our geographical footprint
Americas
£688m
21%
UK & Europe
£1,685m
51%
Middle East
£352m
10%
Revenue in 2017 (including share of joint ventures and associates).
Our values
Our values are lived every day, used to help us work through any challenges
we may face and help us recognise and celebrate our achievements. They
guide us in our dealings with colleagues, customers, suppliers, partners,
shareholders and the communities we serve.
Asia Pacific
£585m
18%
Trust
Care
Innovation
Pride
pg15
For more information
on our values
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.
pg14
For more information
on our performance framework
Our deliverables
We consider the tangible evidence of our success or otherwise can be measured in the three key planned outcomes
of our strategy:
Employee engagement
>60% and increasing
Revenue growth
~5–7%
Trading margin
~5–6%
pg16
For more information
on our deliverables
05
Financial StatementsDirectors’ ReportStrategic Report Chairman’s Statement
2017 has seen further progress in implementing
the strategy presented to shareholders in 2015.
The transformation of the business continues
apace and is delivering significant improvements
in our efficiency and competitiveness.
I am delighted that we have delivered a
trading result in line with expectations in
2017, as well as over £3bn of order intake
and a further improvement in employee
engagement. We have also added further
skills and diversity to the Board, with strong
governance being a key focus of the business
at all levels. Whilst trading conditions are
currently difficult in several of our markets,
we have over the last three financial years
delivered on the plan set out in 2015; having
already stabilised the business, we have
been improving our operating efficiency
through our transformation programme.
Importantly, as we now look ahead, we
expect profits to start to grow over the
next two years.
Serco’s mission is to be a trusted partner of
governments, providing superb public services that
transform outcomes and make a positive difference for
our fellow citizens, whilst delivering attractive returns
to our shareholders and rewarding careers to our
employees. Our aspiration is to be the best-managed
company in our sector, and our method to achieve this
is through concentrating on doing four things really
well: winning good business; executing brilliantly;
being a place people are proud to work; and being
profitable and sustainable. 2017 has produced tangible
evidence of performing well against these objectives.
I am proud of the work we do and of the continued
progress being made.
Delivering our strategic plan
In 2015, we set out a three-stage plan for Serco:
Stabilisation, Transformation, Growth. Stabilisation was
largely completed in 2014 and 2015 with the recruitment
of a new management team, recapitalising the business
and delivering the corporate renewal programme.
Transformation then started in earnest, and will
continue through 2018 and 2019. In 2018 we expect to
also start delivering the third phase – Growth.
Three achievements in 2017 underline the progress
Serco is making. First, we had very strong order intake,
at £3.4bn. This represents a book-to-bill ratio – the value
of how much we add to the order book compared to
how much revenue we are billing our customers – of
over 100%, the first time this has been achieved since
2012. The strong order intake, with very large contracts
won in Health and Justice, underlines the progress we
have made developing our customer propositions and
business development skills.
Second, the work we have done transforming the
business enabled us to meet our target of reducing the
run-rate of our overheads by over £100m by the end of
2017. We expect to gain further cost efficiency benefits
in 2018, notably from merging the UK operations into
a single entity, as well as further reducing our other
central support costs.
Thirdly, Serco employs over 50,000 people, including
those at our joint venture operations, the vast majority
of whom are responsible for delivering on a daily basis
critical and sensitive frontline services for Government.
Our success therefore is dependent on how well we
select, manage, organise, motivate, develop and engage
the people who work for Serco. Every year we run a
detailed ‘Viewpoint’ employee survey to gauge how well
our colleagues think we are doing, and I am delighted to
say that, for the fourth successive year, the aggregated
measure of ‘employee engagement’ improved again in
2017, with some 31,000 people responding.
You can read more about all of these points in the Chief
Executive’s Review on pages 32 to 43.
Achieving our financial targets
Our initial guidance for 2017 Underlying Trading
Profit was between £65m and £70m, with the result of
£69.8m therefore coming in at the top of that range.
Supporting this, we achieved our targeted cost
savings through the delivery of operational efficiency
improvements. Furthermore, we have continued to
reduce the burden of loss-making contracts, which is
also paramount to ensuring sustainable profitability.
06
Strategic ReportSerco Group plc Annual Report and Accounts 2017 After exceptional items, net finance costs and tax,
the profit for the year was £0.1m.
Net Debt at the year-end was £141m, also better than
our guidance at the start of the year. This equates to
EBITDA leverage of 1.4x, well within our medium-term
target range of 1–2x and comfortably below the 3.5x
debt covenant requirement.
You can read more about the drivers of financial
performance in the Chief Executive’s Review, with
further detail provided in the Divisional Reviews on
pages 44 to 49 and the Finance Review on pages 50
to 68.
Targeting further progress
As we look ahead to 2018, we expect Underlying
Trading Profit to grow to around £80m on revenues of
£2.8–2.9bn. Since the second half of 2016, we have been
making progress on increasing our profit margin – a key
deliverable of successfully implementing our strategy
– and in 2018 we expect that further margin and profit
progress will be driven largely by transformation savings.
Looking further ahead, we expect 2019 to be a year of
further good growth in Underlying Trading Profit, which
is again likely to be driven by additional transformation
savings. As we have said previously, the rate of growth
thereafter will be more dependent on our ability to
grow revenues. The Strategy Review announced in
March 2015 set out a long term ambition that the
business could grow in line with a market which was
expected to expand at a long term trend rate of 5–7% a
year and deliver margins of 5–6%. Our margin ambition
was predicated on three conditions: first, reducing
costs as a percentage of sales; second, containing
losses on onerous contracts and converting a number
of them into profitable contracts on rebid; and, thirdly,
increasing margins by growing revenues whilst bearing
down on overheads. We remain broadly on track on
costs and onerous contracts, but some markets, and
in particular the UK, are currently challenging and
therefore growing more slowly than their former trend
rate. We can and will partly compensate for a weaker
organic revenue outlook through increased actions
on the cost base, and our ambitions of 5–7% revenue
growth and 5–6% margin remain intact, but the timing
of achieving this will be dependent upon when demand
reverts to trend in our target markets.
Our Board
Serco’s Board has seen considerable change since I
became Chairman in July 2015. In considering new
members of the Board, we have been determined to
have a mix of backgrounds and experience to ensure
that we have a balanced, dynamic and effective Board.
During the year, Ralph Crosby and Angie Risley stepped
down from the Board, both having joined Serco during
2011. I would like to extend my sincere thanks to both
Ralph and Angie for the sterling service they have
given the Company through some very difficult times;
in particular I would like to thank Angie for her expert
leadership of the Remuneration Committee.
I was delighted to welcome three new Non-Executive
Directors – Lynne Peacock, Ian El-Mokadem and Kirsty
Bashforth – each of whom bring highly relevant and
complementary skills. Lynne Peacock has assumed
Chairmanship of the Remuneration Committee. The
background and experience of each are detailed in the
Directors’ Report on pages 86 to 87 and details of the
selection process to the appointments are set out in
the Nomination Committee Report on page 102.
Ed Casey, our Chief Operating Officer, left Serco at
the end of 2017 after 12 years of dedicated service
to the Company. For the last four years, Ed had been
commuting weekly across the Atlantic, and we quite
understand his desire to return to the US, where he is
taking up a senior role with a company in a different
sector. I would like to express the Board’s appreciation
for Ed’s significant contribution, particularly in
supporting the stabilisation phase of our strategy and
developing our plans for the transformation phase.
We do not currently intend to seek a replacement
for Ed as Chief Operating Officer, but will distribute
his responsibilities amongst members of the Serco’s
Executive Committee, reflecting the strength of the
established senior leadership of Serco.
We have continued in 2017 to further develop the
effectiveness of our governance, operational resilience
and organisational change processes. 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. Board members
regularly visit contracts and meet with members of the
wider management team; in particular, Non-Executives
participate in our Oxford Saïd Serco Management
training course, which is attended by around 30
managers and runs four times a year.
07
Financial StatementsDirectors’ ReportStrategic Report Chairman’s Statement
I am pleased to report that we have fully complied
with the provisions of the UK Corporate Governance
Code with the exception of conducting an external-led
Board evaluation, which, considering that our three new
Non-Executive Directors joined in the second half of
2017, the Board considered would be more appropriate
to defer to 2018. As in previous years, the Board
conducted an internally-led evaluation, as detailed on
page 92.
The Board believes that strong governance is a vital
component in the long-term success of the Company;
further detail on our structures and processes are set
out in our Corporate Governance Report on pages 86
to 109, as well as the Committee reports.
Securing our future success
Your Board is absolutely focused on long-term,
sustainable shareholder value creation, and doing so by
promoting the best interests of shareholders alongside
those of our employees, customers, and the societies
and communities in which we work. Serco has a clear
strategy to transform the business and position it for
long-term success in attractive markets, and is on track
to achieve this through a highly effective executive
management team and a committed workforce that
cares passionately about public service delivery.
We will continue to transform the business and expect
good profit growth in 2018 and 2019. Beyond, our long-
term ambitions for margins and revenue growth remain
intact, but the timing of achieving these remains subject
to seeing improvements in the trading conditions across
our markets.
The current challenges in some of our markets are
covered in the following section on Our Business,
together with the Chief Executive's Review; importantly,
these also cover the strong progress Serco is already
making, the opportunities that are expected to arise for
us, and the long-term effectiveness of the markets that
remain in place.
I would like to thank all colleagues in the business for
their efforts in achieving a successful 2017, and for their
continued support in helping Serco to be a superb
provider of public services that everyone will be proud
to be associated with.
Sir Roy Gardner
Chairman
08
Strategic ReportSerco Group plc Annual Report and Accounts 2017 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, transparency 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.
Serco’s origin dates back to 1929, when the Radio
Corporation of America established a UK subsidiary
providing technical services to cinemas. In the years
leading up to 1987, the UK subsidiary diversified its
services to cover facilities management, systems
engineering and support services. Following a
management buy-out in 1987, the Company was
subsequently listed on the London Stock Exchange as
Serco Group plc. Throughout the eighties and nineties,
Serco was at the forefront of the emerging outsourcing
market in the UK, pioneering in areas such as large scale
transfers of staff and in being the operations contractor
for new public infrastructure and services.
Serco delivers services to Government through
people, supported by 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 pending the
adjudication of their applications, asylum seekers should
be housed in the community, rather than in detention:
such a policy requires the government to employ –
directly or indirectly – the people required to manage
housing and welfare services. Another example of a
policy that requires a dedicated workforce to deliver it
would be air traffic control, which requires highly qualified
staff to be deployed, often to remote locations.
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).
The labour intensive nature of government service
delivery 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.
09
Financial StatementsDirectors’ ReportStrategic Report Our Business continued
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 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. Between them, these sectors
account for a very large proportion of government
expenditure and employ significant numbers of people
in service delivery.
We structure ourselves with three types of function:
Divisions, Group, and Shared Services. All operational
delivery is executed through four geographic Divisions:
UK & Europe, 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 Centre
of Excellence (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.
10
Strategic ReportSerco Group plc Annual Report and Accounts 2017 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
will continue to grow, albeit at a slower rate than
previously, 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 all of our markets the degree to which government
should use private companies to provide public
services is one debated, sometimes fiercely, and the
pendulum can swing quite sharply. By way of example,
the elections in Western Australia in 2017 saw a Labor
government committed to reducing private sector
participation replace a Liberal administration which had
overseen the introduction of private sector companies
into the prison and healthcare systems; on the other
side of the country, however, in New South Wales, the
administration is a sophisticated user of private sector
services, as is the Federal Government. In the US, the
Obama administration was notably seen as less ‘private
sector friendly’, while the new Trump administration is
considered the reverse. Recently, in the UK, the collapse
of Carillion has reignited debate, with the two main
political parties taking sharply divergent views. This
‘two-way street’ is well established, but on a smaller
scale, in the commercial outsourcing market, where on
a daily basis some companies decide to outsource, and
others decide to insource.
11
Financial StatementsDirectors’ ReportStrategic Report Our Business continued
We believe, however, that the long-term pressures to
deliver value-for-money, increasing demand for services,
and the need to improve service delivery will ensure that
the role of the private sector in the delivery of public
services will remain robust.
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.
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.
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 North America; 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.
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 2016 we did 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.
12
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Our business model
Our drivers:
Values…
Trust
Care
What we do:
How we add value:
Efficiency & commercial nous
Justice &
Immigration
Public service ethos
Innovation
Pride
Defence
Superb
public
Services
Health
Transport
Purpose…
Citizen Services
A trusted partner of
governments, delivering superb
public services, that transform
outcomes and make a positive
difference for our fellow citizens
The ‘Four Forces’: long-term
structural growth drivers…
Growing costs: healthcare, ageing
population and infrastructure
Need to balance public income
and expenditure, and reduce debt
Rising expectations
of service quality
Voters unwilling to tolerate
higher taxation
Deliverables…
Revenue growth
~5–7%
Trading margin
~5–6%
Employee engagement
>60% and increasing
Transferable global experience
Full service integration
Expert & empowered people
Trusted partnership
Transformational capability
Citizen-centred, outcome focused
Ability to test and innovate
Strong governance &
risk management
Our core sectors
Our business is focused across five core sectors and four geographies,
with revenue in 2017 (including share of joint ventures and associates) of £3,310m
Defence
Justice &
Immigration
Transport
Health
Citizen Services
£973m 29%
£559m 17%
£559m 17%
£348m 11%
£871m 26%
Base and operational
support
Engineering,
management and
information services
Maritime services
Custodial services
Immigration
detention and
services
Detainee transport
and monitoring
Key Services
Rail and ferries
Road traffic
management
Air traffic control
Non-clinical support
services
Contact centres and
case management
Patient administration
and contact
Middle and back
office services; IT
services
Employment and
skills services
13
Financial StatementsDirectors’ ReportStrategic Report Our Business continued
Implementing our strategy
We combine people, processes and technology to deliver superb services. Serco is not a
consultancy 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
Employee engagement
>60% and increasing
Revenue growth
~5–7%
Trading margin
~5–6%
14
Strategic ReportSerco Group plc Annual Report and Accounts 2017 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 people – many thousands of them – delivering
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
guide 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 in storm or battle. It is because they
care about their work, they recognise the importance of
what they do, and they take immense 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 so important.
We don’t pretend to be saints, or to be holier-than-thou;
we are not so naïve as to believe that in a workforce of
over 50,000 people there will not be some uncaring bad
eggs. But the overwhelming majority of our colleagues
are decent, hard-working, committed, and want to
make a positive difference to those they serve. In this,
we reflect the values of our customers, which they call a
“public service ethos”, and we call our Values.
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.
15
Financial StatementsDirectors’ ReportStrategic Report Our Business continued
Our performance framework continued
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 in
the past were around 5–7%, and Trading Profit margins
across Serco’s mix of business in the range of 5–6%. In
the last two years the rate of growth in our markets has
probably declined as the UK, which is our largest region
by revenues, having seen reduced expenditure in key
government departments driven in part by the necessary
focus on the challenge of Brexit. However, there is no
reason to believe that the long term future rate of growth
should be any different from the long term historic rate
of growth. 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 historic
average of our industry and to levels necessary to deliver
appropriate returns.
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 confidence and employee morale following
the very significant write-downs following the realisation
that Serco had a number of very heavily loss-making
contracts. This phase was largely completed in 2014,
although the fundraising and essential stabilisation of our
balance sheet did not take place until 2015 after which
further rebuilding of customer confidence and trust
could then follow. The Transformation phase gathered
pace in 2016 and 2017, and in practice will continue
through into 2018 and 2019, and will be an essential
underpin as we progressively move into the Growth
stage. When we launched the plan, it was conceived
that Growth would refer to both revenues and profit.
However, more recently, we believe that market rates
of growth have been declining and certainly for the
next few years revenues are likely to be flat, but margins
will increase as we extend our Transformation phase
and see more growth coming from cost reduction and
increased efficiency. Nature does not draw lines – she
smudges them, and the same applies to our strategy
implementation, where the phases of Stabilisation,
Transformation and Growth necessarily overlap.
Our Ambition
To be a superb provider of public services by being the best-managed business in our sector
Stabilise: 2014–15
• Hire new
management
• Identify issues
• Develop strategy and
implementation plan
• Roll out corporate
renewal
• Undertake Contract &
Balance Sheet Review
• Stabilise morale
Transform: 2015–19
• Strengthen balance sheet
• Rebuild confidence and trust
• Improve risk management
• Rationalise portfolio
• Mitigate loss-making contracts
• Re-build business development
and pipeline
• Strengthen sector propositions
• Build differentiated capability
• Improve execution and cost
efficiency
Grow: 2018 and beyond
• Harvest benefits
of transformation
savings
• Further leverage scale
and capabilities
• Capture improvement
in market demand
• Build out geographical
footprint
• Move into new
sub-segments
• Continuously
review portfolio
Planned Outcome
Chosen sectors will grow
at ~5–7%
Industry margins in our
sectors ~5–6%
Employee engagement >60%
16
Strategic ReportSerco Group plc Annual Report and Accounts 2017 In terms of progress in the Transformation phase:
• We have succeeded in reducing the businesses'
operating costs; in 2017 they were more than £1bn
lower than in 2014. 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. Importantly, our cost reduction
also includes over £100m removed through our
programmes to deliver savings by reducing the
number of management layers, implementing better
procurement and driving greater efficiency in the
operation of shared services.
Summary
We believe we have the right strategy for our business,
and over the last three years we have delivered in each
year results which have been in line with our plan, which
is no mean achievement. So far, so good, but the real
test of the strategy will be our ability to start growing
again. The market is currently growing at rates below
historic trend, and we think that the growth we expect to
achieve in 2018 and 2019 will come more from increasing
cost efficiency and transformation than from growing
revenues. It is nevertheless the case that if we can deliver
the margin growth we are targeting over the coming
years, this will of itself drive very considerable growth
in profits.
• 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 1.4x, with period-end net debt
reduced from £745m at the end of 2013 to £141m at
the end of 2017.
• We have made further 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. Up to the end of 2017, actual
expenditure against the £447m of Onerous Contract
Provisions has been very close to the original estimate.
• We continue to strengthen our sector propositions,
most particularly through the work carried out by our
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), and Grafton
prison in Australia (our largest ever order, worth
£1.5bn, won in 2017).
• Our order intake has grown very substantially, and
in 2017 was for the first time since 2012 ahead of our
revenues, resulting in an increase in our order book,
which at the end of 2017 stood at £10.7bn.
17
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. In recent years, we have also evolved and improved 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 2017. We have
made no changes in 2017 to the KPIs presented and
therefore there is comparability and consistency with
our focus in the business and the guidance that we
issue. The Finance Review provides further detail on
our use of Alternative Performance Measures (APMs).
Information on our carbon emissions that was presented
in this section in previous years can be found within our
Corporate Responsibility Report on pages 69 to 84.
A large number of other corporate responsibility
measures can also be found on those pages, as well as in
our more detailed corporate responsibility report for the
year which is available on our website www.serco.com
1. Underlying Trading Profit (UTP), £m
300
200
£257.4m
100
0
£113.2m
2013
2014
£95.9m
2015
£82.1m
£69.8m
2016
2017
Definition
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 for consistency with previous disclosures. 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 & 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 in prior years, and other material one-time items as set out in
the Finance Review.
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 16 that the delivery of strategic success, after the
completion of further transformation, has potential to deliver revenue
growth of 5–7% and trading margins of 5–6%.
Performance
The outcome was at the top end of our guidance of £65–70m given
at the start of the year. The reduction on 2016 was driven by the first
half of that year benefiting from £11m of non-recurring trading items.
The underlying margin reduced from 2.7% to 2.4%.
2. Underlying Earnings Per Share (EPS), pence
30
20
10
0
28.64p
4.73p
3.44p
4.13p
3.42p
2013
2014
2015
2016
2017
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 takes into account
any non-controlling interests share of the result for the period, and
divides the remaining result that is attributable to the equity owners
of the Company 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 reduction reflects the UTP performance as described, partially
offset by incurring lower finance costs; our underlying effective tax
rate and the number of shares were broadly flat in 2017 versus 2016.
3. Free Cash Flow (FCF), £m
80
60
40
20
0
(20)
(40)
£62.9m
£62.2m
(£35.5m)
(£33.0m)
(£6.7m)
2013
2014
2015
2016
2017
Definition
Free Cash Flow is the net cash flow from operating activities before
exceptional items in accordance with IFRS and 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.
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
in 2017 versus 2016, as reflected in the lower rate of OCP utilisation.
The working capital outflow was also lower at £9m, which included
£8m of reduction in the utilisation of the Group’s receivables financing
facility, resulting in zero utilisation by the end of 2017.
18
Strategic ReportSerco Group plc Annual Report and Accounts 2017 4. Pipeline of larger new bid opportunities, £bn
12
9
6
3
0
£12bn
£6.5bn
£5bn
£8.4bn
£4.4bn
Performance
The reduction in ROIC reflects both the lower UTP as described,
as well as slightly higher invested capital largely resulting from the
normalisation of average working capital balances. We expect an
improvement in ROIC to be driven by the development in profit
margin when we successfully complete the ‘Transform’ stage and
make progress with the ‘Grow’ phase of our strategy.
2013
2014
2015
2016
2017
6. Major incident frequency rate, per 1m hours worked
Definition
The estimated aggregate value at the end of the reporting period of
new bid opportunities with estimated Annual Contract Value (ACV)
of at least £10m and which we expect to bid and to be adjudicated
within a rolling 24-month timeframe. The Total Contract Value (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 US in particular where there
are numerous arrangements classed as ‘IDIQ’ – Indefinite Delivery/
Indefinite Quantity.
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 further into the
third and final stage of our strategy implementation – the ‘Grow’ stage.
Performance
As anticipated, the pipeline was noticeably lower given the number of
unusually large opportunities that moved through the pipeline over
the course of 2017 but also reflecting challenging market conditions
in terms of the lower level of new opportunities being added. The
reduction included winning new business, which is reflected in the
order intake (the value of all signed contracts) being strong at £3.4bn
and the book-to-bill ratio (order intake versus revenue) exceeding
100% for the first time since 2012.
0.35
0.28
0.21
0.14
0.07
0
0.33
0.34
0.27
0.30
0.25
2013
2014
2015
2016
2017
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.
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
There were 29 major incidents reported in 2017. This resulted in a
frequency rate of 0.30 per 1m hours worked which is 11% up on 2016
and exceeds our target which was set at 0.23. This indicator has been
impacted by increasing numbers of physical assaults and particularly
serious physical assaults within our Justice & Immigration business.
This and the range of initiatives being implemented to address the
situation are covered in the Corporate Responsibility Report.
5. Underlying Return on Invested Capital (ROIC), %
7. Employee engagement, %
15
10
5
0
13.9%
11.3%
11.1%
10.7%
8.7%
2013
2014
2015
2016
2017
60
40
20
0
51%
53%
54%
56%
42%
2013
2014
2015
2016
2017
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
and associates; 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 & 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.
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
2017’s Viewpoint survey, which is based on some 31,000 employees
responding, showed a fourth successive year of improvement in
our global score. The score is now at the highest level since we
started measuring it in 2011. The Viewpoint results are cascaded to
the organisation each year and we have a global plan of activity in
place to sustain and drive further employee engagement, led by our
Executive Committee.
19
Financial StatementsDirectors’ ReportStrategic Report Principal Risks and Uncertainties
Each of our risks have an appetite statement to
determine the nature and amount of risk that the
Group is willing to accept as well as informing our
decision-making as to the level of resource that should
be expended to mitigate the principal risks. These
statements are aligned to our Values, Code of Conduct
and other ethical requirements to support and drive
the right risk culture within the Group.
Principal risks
Our 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 have been reviewed
and endorsed by the Risk Committee. 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
priorities going forward to improve the effectiveness
of the controls.
The risks are considered over a three-year timeframe
which is the same time period that has been used in
the Viability Statement (see pages 30 and 31). The
Viability Statement takes into account the principal
risks in its assessment.
Risk management approach
We are faced with a number of challenges and risks due
to the diverse services we provide around the world. We
have to respond to the changing political environment
which in some cases has unknown consequences.
Brexit is just one example, where today there are few
conclusions as to the real impacts, both negative and
positive, on our economic landscape in the UK, Europe
and the wider global economy.
We manage risks through our risk management
policy, standards, and risk management lifecycle
processes. The risk management lifecycle includes
six key processes that aim to manage the key risks to
our operations. This enables us to 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.
These align to the guidance contained within the
UK Corporate Governance Code and form part of
the Serco Management System (SMS). The SMS is a
set of requirements and procedures that define how
we operate and how we behave. This system seeks
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
business and operational risks and the level of control
considered necessary to protect our interests and
those of our stakeholders.
Management oversight and risk appetite
We have a systematic approach to our risk oversight,
with nominated people tasked to ensure that the
risk management framework is understood and
implemented, together with reporting requirements.
This allows for a robust reporting structure, both top
down and bottom up, with a current focus on better
aligning the Business and Divisional risks to our
principal risks, and vice versa.
The Group Risk Committee (initiated in 2016, as a
focused committee that previously was covered as part
of the responsibilities of the Corporate Responsibility
and Risk Committee) is now fully embedded, reporting
quarterly to the Board, and this has improved our
management oversight on the principal risks
(see pages 93 to 95 for the detailed Corporate
Governance Report). ‘Deep Dives’ into a number of
principal risks are carried out during the year, together
with a review of the operating environment
to determine any changes to our ‘Top 10’ risks.
20
Strategic ReportSerco Group plc Annual Report and Accounts 2017
Risk Management Lifecycle
RISK PLANNING
• Assigning responsibility for
risk management implementation,
planning the approach and
capturing this information in a Risk
Management Plan (RMP)
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
Risk
Management
Lifecycle
Processes
•• 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
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 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
Summary of principal risks
Strategic Risks
Failure to grow profitably
Failure to manage our
reputation
Failure to deliver expected
benefits from Transformation
Financial Risks
Financial control failure
Operational Risks
Major information
security breach
People Risks
Failure to act with integrity
Hazard Risks
Catastrophic incident
Legal and
Compliance Risks
Material legal and
regulatory compliance failure
Contract non-compliance,
non-performance or
misreporting
Failure of business
critical partner, supplier,
sub-contractor
21
Financial StatementsDirectors’ ReportStrategic Report Principal Risks and Uncertainties continued
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:
Material controls:
Mitigation priorities:
Lack of opportunities in chosen markets – some
market sectors may not have a favourable policy of
private sector provision of public services, reducing
pipeline opportunities.
External factors reducing the pipeline of
opportunities – political and policy changes in
our markets (such as changes in federal or state
governments, or decisions such as Brexit) may make
it more difficult for us to win in some geographies, or
result in fewer opportunities.
Failure to be competitive – lack of appropriate
references and value proposition for the markets in
which we compete, may put us at a disadvantage to
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 inefficient
or non-innovative solutions, and misunderstanding
risks, may prevent us from achieving our growth
ambitions.
Ineffective business development – poor
account management, market shaping, proposition
development and visibility of pipeline opportunities
will affect our ability to set targets for growth,
understand business wins and drive process
improvements.
Failure to obtain or capitalise on benefits from
our Transformation Programme – (see ‘Failure to
deliver expected benefits from Transformation’).
• Serco Group Strategy focusing on
specific markets and geographies
with the greatest growth potential.
• Review pipeline opportunities
to ensure all market activity is
accurately captured.
• Serco Operating Model.
• Review bid solution processes
• Investment Committee.
• Serco Management System (SMS).
• Sector-specific Centres of Excellence
(CoEs) and Value Propositions.
• Business Lifecycle Review Team
(BLRT) process.
• Pipeline and Business Development
spend reviews to ensure efficient
deployment of resources.
• Divisional Performance Reporting
(DPR) process.
• Annual Performance Reviews, Talent
Reviews and Succession Planning
processes.
and SME resources to ensure our
propositions remain competitive.
• Streamline and standardise the
Business Development processes.
• Refinement of BLRT process to
ensure lessons learnt and price-to-
win competitive analysis are formally
embedded in the solution process.
• Continued focus on account
management for major re-bids
to ensure existing clients are
experiencing good service from
Serco and fully understand the value
and quality of our services.
• Continuation of efficiency
improvements to Group and
Divisional overhead and shared
services structures as part of the
Transformation Programme to
ensure we remain cost competitive.
Failure to manage our reputation
Failure to manage our reputation 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.
Key risk drivers:
Failure to clearly define what Serco stands for and
how we wish to be seen – may result in inconsistent
communication and misunderstanding by our key
stakeholders.
Not understanding our customers’ and
stakeholders’ expectations – may result in a failure
to recognise changes in our business environment or
our customers’ priorities.
Failure to manage incidents appropriately –
may result in us not responding in a collaborative
approach with our customers, or not communicating
in an open and ethical manner to key stakeholders.
Material controls:
• Serco Values.
• Group Reputation Brand and
Communication Standard.
• Customer and stakeholder
relationship and engagement
programmes.
• Proactive engagement with the
media.
• Media training and understanding
of reputational issues for senior
management.
• Continual media monitoring.
• Incident management processes
and crisis management plans.
Mitigation priorities:
• Maintain momentum of ‘Executing
Brilliantly’.
• Review and refine existing controls
to ensure maximum effectiveness.
22
Strategic ReportSerco Group plc Annual Report and Accounts 2017
Failure to deliver expected benefits from Transformation
If components of the Transformation Programme do not deliver the anticipated benefits, then we will not achieve the efficiency savings
needed to become a sufficiently profitable and growing business.
Key risk drivers:
Material controls:
Mitigation priorities:
• Development of programme benefit
cards to facilitate measurement of
anticipated benefits.
• Full alignment of Group, Divisions
and Business Units to Operating
Model.
• Refine DPR to capture transformation
delivery and performance.
• Serco Operating Model objectives.
• Group Transformation Programme
Management Office (PMO) and
Programme Governance Boards.
• Programme risk management
process.
• Stakeholder engagement and
communication plans.
• Serco Management System (SMS).
• Divisional Performance Reporting
(DPR) process.
• Benefits management process.
• Embedding benefits within
Divisional budgets.
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
objectives due to poor integration across activities
and inadequate programme management, and we
negatively impact on ‘Business As Usual’ activities.
Watering down of value/ambition of Group
Operating model – due to a sum of compromises
across the organisation and the possible
misalignment across the Divisions.
Failure of the businesses to understand the
imperative to change – due to ineffective
communication from the leadership teams.
Failure to comply with new operating model – due
to ineffective enforcement of the model and changes
not embedded into the business.
Failure to communicate the change and impact of
the change to clients – potentially causing opposing
short-term drivers.
FINANCIAL RISKS
Financial control failure
Financial control failure may result in: an inability to accurately report timely financial results and meet contractual financial reporting
obligations; a heightened risk of error and fraud; poor quality data leading to poor business decisions; an inability to forecast accurately;
the failure to create a suitable capital structure; and an inability to make critical financial transactions; therefore, leading to financial
instability, potential business losses and negative reputational impact.
Key risk drivers:
Material controls:
Mitigation priorities:
Not setting the right tone from the top – without
which, 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.
Impact of Transformation Programme activities
– programme activities may lead to poor change
control or 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.
• Group governance and finance
strategy.
• Continued delivery of finance
transformation programme.
• Finance transformation programme
• Complete knowledge transfer
governance.
process within the UK.
• Active monitoring of outsourced
• Embedding new forecasting tool,
partners.
policies and practices.
• Serco Management System (SMS) –
finance processes and controls.
• Standardised reporting, forecasting
• Continuous improvement of
reporting processes as a result of
better data capture.
and financial processes.
• Monitor compliance with billing
• Standardised financial systems and
data structures.
processes and continuous billing
assurance programme.
• Skilled and adequately trained
• Standardisation of Integrated
finance staff.
Assurance Maps.
• Financial assurance and second line
of defence assurance activities.
• Complete gap analysis of benchmark
controls and assurance activities
across key risk drivers managed by
Divisions.
23
Financial StatementsDirectors’ ReportStrategic Report
Principal Risks and Uncertainties continued
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:
Material controls:
Mitigation priorities:
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.
Vulnerability of systems and information – if we
do not identify sensitive information and protect
and test the vulnerability of our systems, then we are
potentially exposed to a 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.
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.
• Enterprise Architecture Boards and
Solution Review meetings.
• Serco Management System (SMS).
• IT security infrastructure, process
• Completion of Cyber Defence
and Hardening Programmes in
all Divisions.
• Completion of PUM roll out across
and controls.
all Divisions.
• Privilege User Management (PUM)
• Routine vigilance and proactive
vulnerability identification
coordinated through our Security
Operations Centre.
• Regular controls assurance.
• Embed third party due diligence
checks for key suppliers.
process.
• External accreditation (eg, Cyber
Essentials Plus (CES+) in the UK).
• Third party due diligence checks.
• Global Security Operations Centre
and Computer Security Incident
Response Teams.
• My HR – standardised HR processes
and corporate HR system.
• Serco Essentials training.
• Cyber security awareness training,
including regular Phishing training
exercises.
Contract non-compliance, non-performance or misreporting
Failure to deliver contractual requirements or failure to meet and report against agreed service performance levels accurately may lead
to significant financial penalties, legal notices, onerous contract provisions, or ultimately early termination of contracts.
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:
Material controls:
Mitigation priorities:
Poor leadership and culture – if our leaders do not
align with our Values, and staff feel under pressure
to meet challenging operational targets and/or
performance indicators, then deliberate misreporting
may occur.
Lack of process and controls – poorly documented
or poorly communicated processes may lead to
deliberate or unintentional misreporting or contract
non-compliance.
Ineffective assurance and human error –
insufficient oversight and assurance of contract
performance, could lead to contract non-compliance,
non-performance or a misreporting of performance.
Poor understanding of contract obligations –
may result in staff failing to acknowledge and act on
obligations or a failure to provide adequate resources
to deliver against contractual obligations.
Poor systems/IT – unreliable or incorrectly
configured systems may result in late or incorrect
data produced.
• Viewpoint checks, communication of
Our Values and Code of Conduct.
• Consistent Contract Management
training.
• Contract Management Application
• Embed use of the CMA.
• Development of additional contract
performance Indicators (‘health
checks’).
(CMA).
• Serco Management System (SMS).
• Business Lifecycle Review Team
(BLRT) process.
• Leadership Development
Programme and Contract Manager
training.
• Contract governance including
Monthly Contract Reviews,
Business Unit reviews and Divisional
Performance Reporting (DPR)
process.
• Speak Up process (EthicsPoint).
24
Strategic ReportSerco Group plc Annual Report and Accounts 2017
Failure of business critical partner, sub-contractor or supplier
As a result of the failure of a business critical partner, sub-contractor or supplier1 to deliver and/or perform to the required standard,
Serco may be unable to meet its customer obligations or perform critical business operations which could result in a financial,
operational or reputational impact.
1
A partner, sub-contractor or supplier on whom Serco depends to deliver customer critical services or perform critical Serco business operations and
therefore ability to earn revenue.
Key risk drivers:
Material controls:
Mitigation priorities:
Ineffective procurement and supply chain
governance – no Group functional owner for
procurement resulting in inconsistencies in
implementation of standards, potential non-
compliance to those standards and lack of
consequence management for non-compliance.
Identification of significant suppliers – a failure
to identify who are our critical suppliers may result
in lack of focused oversight, and understanding of
the impacts on Serco should they fail to deliver our
customer critical service.
Limited oversight – resulting in poor sourcing,
contracting and monitoring of business critical
partners, sub-contractors and suppliers as well as
the potential for engaging in ineffective or onerous
contracts with suppliers or sub-contractors.
Lack of resilience in the supply chain – exposing
us to potential service provision or financial losses
should they have ineffective Business Continuity and
Disaster Recovery plans.
PEOPLE RISKS
• Serco Management System (SMS) –
procurement policy, standards and
procedures.
• Consistent understanding and
management of the risk across
all Divisions.
• Sourcing Standard Operating
• Establish Divisional compliance
Procedure.
assurance testing.
• Supplier Relationship Management
(SRM) Pilot and development of
future approach to SRM.
• Audit business critical sub-
contractor and supplier business
continuity plans.
• Supplier Management Standard
Operating Procedure.
• Maintenance of business critical
partner, sub-contractor and
supplier list.
• Compliance Assurance Testing.
• Consequence management.
• Financial health checks and
monitoring.
• Supplier performance and risk
reviews.
• Supplier Business Continuity
Plan audits.
Failure to act with integrity
Being found to have engaged in a significant corrupt or dishonest act (bribery, fraud, misreporting, cheating, and lying) leads to customers
being reluctant to do business with such organisations. Such behaviour might arise through the actions of rogue employees or as a result
of pressures individuals feel they are being placed under (culture). Such acts might lead to the loss of existing business; restrictions on our
ability to bid or win new business; our ability to attract high-quality people or partners; and an adverse impact on shareholder, investor
and financial institutions' confidence in Serco.
Key risk drivers:
Material controls:
Mitigation priorities:
Failure to communicate – if we do not define and
communicate our Values and expected standards
adequately, our staff and third parties will fail to
understand these, which may result in inappropriate
leadership actions and low engagement with
our Values.
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 poor
decision-making, unacceptable business conduct,
and unethical or illegal behaviour bringing our
operations into disrepute.
Direct or indirect contribution to human rights
abuse – staff either directly or indirectly contributing
to human rights (including slavery and forced labour)
abuses may result in a breach of laws/regulations.
• Top level commitment/tone from
• Implementation of on-line Conflict of
top.
Interest registers.
• Strong, meaningful and understood
• Refinement of divisional compliance
Values.
• Code of Conduct.
• Corporate Governance with
oversight by the Corporate
Responsibility Committee (CRC).
risk assessment.
• Clarification of ethics roles and
investigation responsibilities.
• Embed the new third party due
diligence tool.
• Delegated Authority Register (DAR).
• Refresh Serco Essentials Plus
• Serco Management System (SMS).
training.
• Continue with divisional Anti-bribery
and Corruption reviews.
• Financial controls and processes,
with segregation of duties for core
financial controls.
• Gifts and Hospitality process and
registers.
• Risk management procedures.
• Third party due diligence.
• Leadership Academy.
• People development and
remuneration.
• Speak Up process (EthicsPoint).
25
Financial StatementsDirectors’ ReportStrategic Report Principal Risks and Uncertainties continued
HAZARD RISKS
Catastrophic incident
An incident or accident as a result of Serco’s actions or failure to effectively respond to an event that results in multiple fatalities,
severe property/asset damage/loss or very serious long term environmental damage.
Key risk drivers:
Material controls:
Mitigation priorities:
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 a serious event.
Lack of safety cultural alignment – a safety culture
which does not reflect our Values and fails to engage
our staff and work safely may result in a serious event.
Ineffective or 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.
• Serco Health, Safety and
• Refinement of controls following
Environmental (HSE) Strategy.
effectiveness review.
• Effective and engaged safety
culture.
• Regular safety communications and
maintenance of safety awareness.
• Testing of Crisis Management,
Disaster Recovery and Business
Continuity plans.
• Review of contractual risk allocation
• Competency based recruitment
and insurance.
programme.
• Role description and competency
definition.
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.
• Serco Essentials training.
• Access to subject matter expertise.
• Serco Management System (SMS).
• Business Lifecycle Review Team
Factors resulting in unsafe conditions – a lack
of identification and assessment of risks, sudden
equipment failure or inadequate security may result in
poor mitigation of and/or response to a serious 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.
(BLRT) process.
• Planned and preventative
inspections, maintenance and repair
programmes.
• Third party ethical due diligence
procedure.
• Assure – Serco's incident and
compliance reporting system.
• Incident/near miss investigations.
• Divisional Performance Reporting
(DPR) process.
• Crisis and incident emergency
response plans and testing.
• Business Continuity plans and
testing.
• Compliance assurance and audit
programmes.
• Adequate insurance policies.
26
Strategic ReportSerco Group plc Annual Report and Accounts 2017 LEGAL AND COMPLIANCE RISKS
Material legal and regulatory compliance failure
Serco is subject to numerous laws and regulations as a result of the complexity and breadth of the sectors and jurisdictions in which
it operates. Failure to comply with laws and regulations may cause significant loss and damage to the Group including exposure to
regulatory prosecution and fines, reputational damage and the potential loss of licences and authorisations, all of which may prejudice
the prospects for future bids and the retention of existing business. Defending legal proceedings may be costly and may also divert
management attention away from running the business for a prolonged period. Uninsured losses or financial penalties resulting from
any current or threatened legal actions may also have a material adverse effect on the Group.
Key risk drivers:
Material controls:
Mitigation priorities:
Lack of governance and oversight – may result in
a failure to identify potential or actual breaches to
legal requirements and result in a failure to respond
appropriately, or weaken our ability to confirm
compliance with legal and regulatory requirements.
Failure to comply with the SMS and contractual
obligations – may result in compliance failures
for Group-wide material legal and regulatory
requirements.
Failure to identify and respond to material
changes in 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.
Lack of awareness by employees of the legal
and regulatory requirements placed upon them
– may result in lack of identification and subsequent
compliance to requirements.
Inadequate provision of systems and tools –
may result in ineffective methods to support the
management of legal and regulatory compliance.
• Use of trend analysis and analytics
from Legal Tracker software.
• Launch of revised Code of Conduct
and Supplier Code of Conduct.
• Complete and embed General
Data Protection Regulation (GDPR)
readiness programme.
• Refresh Serco Essentials training
programmes.
• Implement revised Group Standard
Operating Procedures (GSOP).
• Develop and implement new GSOPs
including export controls, parental
guarantees and conflicts of interest.
• Continue with contract and
compliance assurance reviews.
• Embedding and sustaining
the Corporate Renewal Program.
• Automated alerts on material legal
and regulatory obligations and
changes.
• Investment Committee process and
governance.
• Third party due diligence.
• Serco Management System (SMS).
• Legal Tracker case management
software.
• Gift and Hospitality process
and registers.
• Legal training.
• Serco Essentials training.
• Compliance Assurance Programme
(CAP) reviews.
• Business Lifecycle Review Team
(BLRT) process and governance.
• External regulatory audit.
• Bi-annual reporting to Board and
Executive Committee on new laws
across the Group.
• Speak up process and case
management system (EthicsPoint).
27
Financial StatementsDirectors’ ReportStrategic Report Principal Risks and Uncertainties continued
SFO investigation
We remain under investigation by the UK Serious Fraud Office (SFO). We are cooperating fully with the SFO's
investigation but it is not possible to predict the outcome. No conclusion has yet been reached. However, in the
event that the SFO decides to charge, the range of possible adverse outcomes is any one or a combination of
the following:
• 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
• 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
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.
28
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Material changes to principal risks
Failure of business critical partners, sub-contractor or supplier
Following the 2017 November Group Risk Committee meeting, this new risk was proposed and accepted by the
Board. We have a fundamental business dependence on critical partners, sub-contractors and suppliers, as a result
of which, the failure of any of these to deliver and/or perform to the required standard, may result in our inability to
meet customer obligations or to perform critical business operations.
(See detail on this risk within the Principal Risk description page 25).
Contract non-compliance, non-performance or misreporting
Previously we reported misreporting of performance and contract non-compliance as separate risks. Both of
these areas have had a significant focus over the last few years and the positive impacts of these are being seen
(our Key Risk Indicators (KRIs) demonstrate that our residual risk is decreasing in both areas). This is due to our
improvements in contract assurance, the increased coverage of our contractual management systems, together
with the roll out of our operational excellence programmes as well as a better understanding of our contractual
Key Performance Indicators (KPIs) and reporting requirements. Given the overlap of the controls in place for both
these risks, we have determined that they can be combined into a single risk on the Group Risk Register.
Failure to build reputation or act with integrity
This risk has been separated into two discrete risks: failure to manage reputation, and; failure to act with integrity.
This enables greater ownership and focus given the distinct control sets and mitigation plans. By demerging
the risks, we are able to assign separate Subject Matter Experts (SMEs) and Executive Sponsors with the correct
expertise to take ownership of the risk and develop and implement separate mitigation plans, thereby supporting
the achievement of our target risk rating.
Failure to attract and retain key resources and skills fit for the future
During 2016/2017, we focused on our Serco leadership model, functional talent boards, succession planning, market
competitive reward packages, talent pool capability and a number of other initiatives. These initiatives, together
with existing controls, were considered sufficient to reduce the risk to the extent that it no longer forms part of our
principal risks.
29
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 April 2016, the Directors have assessed the prospects
of the Group over the three-year period to 31 December 2020.
The Directors believe that a three-year period is
appropriate since it reflects the fact that:
–
–
–
The Group has limited visibility of contract bidding
opportunities beyond three years.
Approximately 50% (2016: 40%) of the current year
revenue relates to contracts where the contract
term potentially comes to an end within three years.
The United Kingdom’s withdrawal from the
European Union in March 2019 could potentially
delay timeframes for public service outsourcing
whilst politicians and civil servants focus on the
timetable for Brexit and any potential transition
arrangement.
–
There is also significant political uncertainty in a
number of our other markets.
The strategic plan set out in March 2015 significantly
changed the direction of the Group as was necessary
given its recent history as explained in previous
shareholder communications and the onerous
contracts which exist. The Group prepares a five-year
business plan each year to establish whether it is on
target to achieve its medium term goals. However, the
financials for the last two years of this period are largely
extrapolations of key assumptions as there is insufficient
certainty, as discussed above, for conclusions to be
drawn on the future prospects of the Group and for
sensitivities and mitigation strategies to be overlaid.
Therefore, whilst the strategic plan continues to be
developed, it remains a goal for the Group and is a not
a forecast based on known assumptions and a proven
track record of performance; this makes assessing the
longer term viability a challenge.
Good progress has been made on the five-year plan
however the ability of the Group to harvest fully
the benefits of the transformation are still largely
unproven. Management has previously highlighted the
dependence on the external market and its ability to
win new contracts whilst reducing its cost base. Market
rates of growth have been declining in recent years and
for the next few years revenues are likely to be flat, but
margins are expected to increase as the Transformation
phase is extended and growth comes from cost
reduction and increased efficiency. The Directors
expect this to deliver the target margin increases which
has been set although achieving this will take longer.
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 22 to 27, 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 2018 and 2019 which has been approved by the
Board, and an extrapolation to 2020 using higher level
assumptions based on local market growth rates and
identified opportunities.
The Group’s covenant net debt balance at 31 December
2017 is £179m. 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 RCF maturing in
April 2020 under similar terms.
30
Strategic ReportSerco Group plc Annual Report and Accounts 2017 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. The sensitivities tested include
a reduction in the win rates for rebids, extensions and
the pipeline of new opportunities, a delay in delivering
margin improvements and a potential penalty arising
from risks such as contract non-compliance, major
information security breach or a material legal and
regulatory compliance failure. The ability for the Group
to absorb these sensitivities within its exiting finance
arrangements drove the assumptions below which the
Directors felt appropriate to disclose in making this
viability statement.
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.
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
rebid over the next three years;
There is no significant reduction in scale of existing
contract operations or future bid pipeline as a
result of customer 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
2018 and 2019, and making progress to revenue
growth and further margin improvement from 2019
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.
–
–
–
–
–
.
31
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review
With profits at the top end of the expectations
we set out some 15 months ago, net debt
lower than we expected, fully funded pension
schemes, and strong order intake, we delivered
a solid performance in 2017 in a difficult market.
Most importantly, we expect profits to grow
in both 2018 and 2019. We understand that
getting to this point has been a long haul
for investors, and that there is still a long,
and probably bumpy, road ahead before we
are producing acceptable returns. But we
are now moving forward, not backward.
The benefits of our international footprint have never
been more evident as the UK market for public service
outsourcing is afflicted by well-publicised traumas. This
environment may produce opportunities for suppliers
with strong track records of delivery, and Serco also
has the advantage of choice as to where we allocate
resources and effort between different markets.
Therefore, as well as ensuring that we support our UK
customers, and respond appropriately to opportunities
as they arise, we will also be investing in our businesses in
North America, Europe, the Middle East and Asia Pacific.
The challenges facing governments around the world
remain unchanged. Ageing populations are driving
demand for more and better public services; almost
all governments spend more than they receive in tax;
citizens have ever-higher expectations of the quality of
public services. In this environment, governments are
likely to want to use all means at their disposal to deliver
value for money and high quality public services, which
should mean a strong continuing role for the private
sector as a provider of innovation, investment and
operational management.
Highlights
• Reported Revenue(1) down 2%, comprising a 6%
organic decline from net contract attrition, partially
offset by a 4% currency benefit.
• Order intake up 36% at £3.4bn (2016: £2.5bn), includes
Grafton prison in Australia which is the Group’s
largest ever contract win, and over 30 other contract
awards worth more than £10m each across the UK,
Europe, America and the Middle East; book-to-bill
ratio of over 100% for the first time since 2012; closing
order book increased to £10.7bn, up from £9.9bn a
year earlier.
• Underlying Trading Profit(2) was at the top end of
our guidance given at the start of the year; run-rate
throughout 2017 has been approximately 10% ahead
of that achieved in H2 2016.
• Operating costs reduced in proportion to the scale
of revenue reduction; further shared services and
overhead savings of around £20m achieved, taking
total overhead savings over the last three years to
over £100m.
• Reported result includes a £16m net charge of Contract
& Balance Sheet Review adjustments, compared
to a net release of £14m in 2016; cumulatively over
the last three years, we are tracking 3% better than
the Contract & Balance Sheet Review charges taken
in 2014. Closing balance sheet Onerous Contract
Provision (OCP) liability now stands at £168m, down
from £220m in 2016 and £447m in 2014.
• Pre-exceptional tax costs were £14m (2016: £16m),
and net exceptional costs were significantly lower at
£25m (2016: £68m).
• Free Cash Flow(4) outflow improved by £26m to
(£6.7m), which includes (£8m) of outflow as we
reduced our working capital facility utilisation to zero
by the end of 2017. Net Debt at £141m (2016: £109m)
was some £9m below our guidance range at the start
of the year, and Net Debt : EBITDA leverage of 1.4x
remains well within our medium term target of 1–2x.
• Pension schemes fully funded and in a surplus on an
accounting basis; around half of our pension liabilities
are now fully underwritten by bulk annuity purchases,
further reducing pension scheme residual risks.
• Pipeline of larger new bid opportunities reduced to
£4.4bn, as a number of unusually large opportunities
moved through the pipeline during 2017; £3bn of the
pipeline are opportunities added over the course
of 2017.
32
Strategic ReportSerco Group plc Annual Report and Accounts 2017 • Acquisition of BTP Systems completed for
• IFRS15 estimated restatement to 2017 not anticipated
$20m, bringing deep skills in defence satellite
communication and radar engineering technical
services, together with a pipeline of $200m.
• We have signed a revised agreement with the Special
Managers and Provisional Liquidators of Carillion
plc, and while it is subject to requisite third party
consents, we continue to work with all relevant parties
to acquire the portfolio of selected UK health facilities
management contracts.
to be significant; decrease revenue by £3m and
Underlying Trading Profit by £0.3m.
• Guidance for 2018 unchanged: we expect revenues
to be £2.8–2.9bn, broadly flat in constant currency,
and Underlying Trading Profit to grow to around
£80m, driven largely by transformation savings. We
expect 2019 to see further good growth in Underlying
Trading Profit.
How we performed
Year ended 31 December
Revenue – continuing and discontinued operations(1)
Reported Revenue (continuing operations only)(1)
Underlying Trading Profit (UTP)(2)
Reported Operating Profit (after exceptional items; continuing operations only)(2)
Underlying EPS, basic(3)
Reported EPS, basic (after exceptional items; continuing and discontinued operations)
Free Cash Flow(4)
Net Debt
Notes to summary table of financial results:
2017
2016
£2,953.6m
£3,047.8m
£2,953.6m
£3,011.0m
£69.8m
£30.0m
3.42p
(0.02p)
(£6.7m)
£82.1m
£42.2m
4.13p
(0.11p)
(£33.0m)
£141.1m
£109.3m
(1)
(2)
Revenue is as defined under current IFRS (before adoption of IFRS15), which excludes Serco’s share of revenue of its joint ventures and associates. Revenue
including that from discontinued operations (£nil in 2017 and £36.8m in 2016) is shown for consistency with previous disclosures. Reported Revenue excludes
revenue from discontinued operations. Organic revenue growth is the change at constant currency after adjusting to exclude the impact of relevant
acquisitions or disposals. Change at constant currency is calculated by translating non-Sterling values for the year ended 31 December 2017 into Sterling at
the average exchange rate for the year ended 31 December 2016.
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 in 2016. 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 & 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 during 2016, and other material one-time
items such as the pension scheme settlement in the first half of 2016 related to 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 Trading Profit and Reported Operating Profit is as follows:
Year ended 31 December £m
Underlying Trading Profit
Include: non-underlying items
Contract & Balance Sheet Review adjustments
Assets held for sale depreciation and amortisation
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 Before Exceptional Items from discontinued operations(5)
Reported Operating Profit Before Exceptional Items (continuing operations only)
Operating Exceptional Items (continuing operations only)
Reported Operating Profit (after exceptional items; continuing operations only)
2017
69.8
(15.8)
–
–
54.0
(4.4)
49.6
–
49.6
(19.6)
30.0
2016
82.1
14.2
0.5
3.5
100.3
(5.1)
95.2
3.3
98.5
(56.3)
42.2
(3) Underlying EPS reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs and related tax effects.
(4)
(5)
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.
The Global Services division, representing private sector BPO operations, was classified as a discontinued operation in 2015 and 2016. Disposal of the
offshore business was largely completed in December 2015, with the disposals of two remaining much smaller elements completed in March 2016 and
December 2016. The residual UK onshore private sector BPO operations were sold or exited in 2016 with the exception of one business, consisting of a single
contract, which completed in July 2017. Total revenues for the remaining operations were £5.4m and the loss before exceptional items was £0.6m for the year
ended 31 December 2017, and therefore the results have been included in continuing operations in 2017 on the grounds of materiality.
Reconciliations and further detail of financial performance are included in the Finance Review on pages 50 to 68. 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 151 to 227.
33
Financial StatementsDirectors’ ReportStrategic Report
Chief Executive's Review continued
Summary of financial performance
Revenue and Trading Profit
Reported Revenue declined 2% to £2,954m (2016:
£3,011m); this measure excludes Serco’s share of revenue
from joint ventures and associates of £357m (2016: £481m);
also excluded in the prior year is revenue of £37m from
discontinued operations, which reflected the residual
run-off of the private sector BPO division. Net currency
movements provided a £122m benefit or a 4% increase.
At constant currency and adjusting for minor effects of
relevant acquisitions and disposals, the organic revenue
decline was £188m or 6%; around a third of the organic
element of the decline relates to no longer recognising
as revenue the value of goods purchased on behalf of
customers following changes to two health procurement
services contracts in the UK; the balance of the decline
relates to the ending or transfer of contracts such as those
for the UK Defence Science and Technology Laboratory
(DSTL), Armidale Class Patrol Boats (ACPB) for the Royal
Australian Navy, Virginia Department of Transportation
(VDOT), US Army transition assistance (SFLTAP) and
Western Australia Court Security and Custodial Services
(WACSCS). These and the effect of other smaller contract
attrition were only partially offset by growth elsewhere
including that from the phased start of new services
during the year at Barts Health NHS Trust, University
Hospital Southampton NHS Foundation Trust and Skills
Support for the Workforce (SSW).
Underlying Trading Profit was £69.8m (2016: £82.1m), a
decline of £12.3m or, excluding the £6.5m net currency
benefit, a decline of £18.8m. The reduction was driven
by the first half of 2016 benefiting from £11m of non-
recurring trading items, which included: the previous
higher shareholding and therefore larger share of the
profits of the Atomic Weapons Establishment (AWE);
the final settlement arrangements on the transfer of the
Northern Rail franchise; the conclusion of the VDOT and
SFLTAP operations; and a spike in activity on a defence
logistics contract in the Middle East. In addition, as well
as the attrition impact from profitable contracts coming
to an end, some of the new contracts added revenue
growth in 2017 but were at reduced profitability due to
their initial transition and transformation stages.
In the second half of 2016 our Underlying Trading
Profit was £31.5m, which was a period that did not
benefit from the non-recurring trading items that were
a feature of the first half of 2016, and was a period
that had broadly comparable average currency rates
to 2017. Profits in both the first and second half 2017
were £35m, and therefore we have delivered a run-
rate approximately 10% ahead of that achieved in the
second half of 2016.
Within our performance for the year, we delivered
our target of £20m of cost savings from efficiencies in
central support functions and overheads. Cumulatively
over the last three years, over £100m of cost has been
removed through our programmes to deliver savings
by reducing the number of management layers,
implementing better procurement and driving greater
efficiency in the operation of shared services. These
savings have been central to our efforts to reduce the
scale of Serco’s cost base in proportion to the scale
of the revenue reduction incurred through the loss of
contracts and the disposals undertaken.
Trading Profit was £54.0m (2016: £100.3m), with three
categories of adjusting items which are within Trading
Profit, but excluded from our measure of Underlying
Trading Profit. First, there was a £15.8m net charge
(2016: net release of £14.2m) within Trading Profit arising
from the review of Onerous Contract Provisions (OCPs)
and other Contract & Balance Sheet Review items; the
OCP adjustments comprised gross charges totalling
£62m (2016: £56m), partially offset by gross releases
totalling £43m (2016: £66m). By far the most significant
charge (£47m) related to the future revenue and cost
assumptions of operating the Caledonian Sleepers
contract, though across other OCPs in the UK & Europe
division there was a net release of £16m and in AsPac
a net release of £11m. Notwithstanding this year’s net
charge, it is worth noting that cumulatively over the last
three years, the net improvement to Trading Profit from
OCPs and other Contract & Balance Sheet Review items
is £19m; we are therefore tracking 3% better than the
original charge taken through Trading Profit in 2014. A
detailed review of provisions and Contract & Balance
Sheet Review items is included in the Finance Review on
pages 50 to 68. The second area that we exclude from
Underlying Trading Profit is other material one-time
items; in 2016 we therefore excluded from Underlying
Trading Profit a £3.5m beneficial pension settlement
negotiated as part of the early termination of the
Thurrock contract. Third, and again only related to 2016,
we excluded the beneficial impact of £0.2m related
to depreciation and amortisation treatment of assets
classified as held for sale during 2016.
As with prior years, both Trading Profit and Underlying
Trading Profit benefited from losses on previously-
identified onerous contracts being neutralised by the
utilisation of OCPs; the £69m utilised in 2017 was both
better than our expectations of around £80m, and lower
than the £84m utilised in 2016. The closing balance of
OCPs now stands at £168m, compared to £220m a year
earlier and the initial charge of £447m taken at the end
of 2014. We expect of the remaining £168m provision
approximately £70m will be utilised in 2018.
34
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Financing and pensions, tax and exceptional costs
Pre-exceptional net finance costs were £11.6m (2016:
£12.6m); while average net debt of £184m was £65m
higher than the prior year, the increased cost of
financing this was more than offset by other small
movements. Cash net interest paid was £17.0m
(2016: £19.0m).
Within net finance costs is a net credit of £3.8m (2016:
£4.7m) related to the strong funding position of Serco’s
pension schemes. This net credit is lower than the
prior year following the purchase in June 2017 by the
Trustees of the Serco Pension and Life Assurance
Scheme (SPLAS) of a bulk annuity from an insurer,
which, for a significant proportion of scheme members,
has the effect of fully removing longevity, investment
and accounting risks. Assets of the pension scheme
have been transferred to the insurer to purchase the
annuity, resulting in a reduction in the IAS19 net balance
sheet asset. The gross liability remains recognised
on our balance sheet, but there is now an equal and
opposite insurance asset reflecting the perfect hedge
established by the transaction.
Including the effect of the transaction, the overall
pension scheme accounting surplus, before tax, was
£26m at 31 December 2017 on a scheme gross asset
base of £1,385m. As described below, the transaction
resulted in an exceptional non-cash tax charge of
£16.1m reflecting a deferred tax adjustment related to
the pension asset movements. Further details of Serco’s
pension funding and the bulk annuity purchase are
described more fully in the Finance Review.
Tax and exceptional costs
The underlying effective tax cost was £20.6m (2016:
£24.4m), representing an underlying effective rate of
35% (2016: 35%) based upon £58.2m (2016: £69.5m)
of Underlying Trading Profit less pre-exceptional net
finance costs. The rate is higher than the UK statutory
rate of corporation tax as there was no deferred tax
credit taken against UK losses incurred in the year, and
because it reflects the tax charges at locally prevailing
rates in the international divisions which tend to be
higher than the UK’s rate; these two factors are partially
offset by the proportion of Serco’s profit before tax
generated by consolidating our share of joint venture
and associate earnings which have already been taxed.
The Underlying effective rate was lower than our initial
guidance of approximately 50% due to a beneficial
mix of profitability earned for the year, and due to a
one-off effect of UK tax legislation enactment being
recognised as an exceptional tax cost rather than within
the underlying measure.
Tax on non-underlying items was a net credit of £6.6m
(2016: credit of £8.5m). The principal driver of this has
been a credit to reflect recognising a UK deferred tax
asset of £11.1m based upon the improved outlook of
future profitability; there is now UK deferred tax asset
totalling £17.4m recognised on the balance sheet; there
is a further estimated £160m deferred tax asset in the UK
that is currently unrecognised and therefore contingent
upon further improvement in the outlook. Total pre-
exceptional tax costs were therefore £14.0m (2016:
£15.9m). Exceptional tax costs were £5.0m (2016: credit
of £3.1m). The principal drivers of this were one-time
non-cash deferred tax adjustments as follows: a charge
of £16.1m related to the pension asset movements on
the bulk annuity purchase; a charge of £3.7m related to
the change in UK tax legislation regarding the speed of
utilising tax losses and hence our deferred tax assets;
and a £12.5m credit reflecting the reduction in the US
deferred tax liability following the fall in future expected
US rates primarily due to the enactment of the Tax Cuts &
Jobs Act in December 2017.
Total tax costs were therefore £19.0m (2016: £12.8m).
Cash net tax paid was £11.4m (2016: £5.6m). As previously
described, although we expect our cash tax to be
reasonably predictable in future periods, our effective
tax rates are 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 all of the UK tax asset
arising from losses in 2014 and 2015 principally as a result
of the Contract & Balance Sheet Review. Our guidance of
the underlying effective tax rate for 2018 is however for
a modest reduction towards 30%, reflecting our forecast
mix of profitability and the net effect of US tax reform,
and for it to continue to reduce further over the longer
term assuming further improvement in profits.
The Group incurred operating exceptional costs of
£19.6m (2016: £56.3m), mainly comprising £28.6m
of restructuring programme costs related to the
Transformation stage of our strategy, including
redundancy charges, asset impairments and other
incremental costs; these were partially offset by a non-
cash credit of £10.3m related to the previous transfer
of employees from the Serco defined pension scheme
back to the Principal Civil Service Pension Scheme
(PCSPS). Together with exceptional tax costs of £5.0m
(2016: credit of £3.1m) and exceptional items related
to discontinued operations were £nil (2016: £14.6m);
total net exceptional costs were therefore £24.6m
(2016: £67.8m).
35
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review continued
Reported result for the year
Dividends
The reported result for the year, as presented at the
bottom of the Group’s Consolidated Income Statement
on page 158, was a profit of £0.1m (2016: loss of £1.1m).
This reflects: Trading Profit of £54.0m (2016: £100.3m);
amortisation and impairment of intangibles arising on
acquisition of £4.4m (2016: £5.1m); pre-exceptional net
finance costs of £11.6m (2016: £12.6m); a non-cash fair
value gain of £0.7m (2016: £nil) relating to increasing our
ownership in a joint venture; pre-exceptional tax costs
of £14.0m (2016: £15.9m); and total net exceptional costs
of £24.6m (2016: £67.8m).
Earnings Per Share (EPS)
Underlying EPS, which reflects the Underlying Trading
Profit measure after deducting pre-exceptional finance
costs and related tax effects, was 3.42p (2016: 4.13p).
The reduction reflects the lower Underlying Trading
Profit, partially offset by lower net finance costs; the
weighted average number of shares in issue was broadly
unchanged at 1,089.7m (2016: 1,088.3m). Reported EPS,
which includes the impact of the other non-underlying
items and lower tax and exceptional costs, was a loss
per share of 0.02p (2016: loss per share of 0.11p).
Cash Flow and Net Debt
Free Cash Flow was negative £7m (2016: negative
£33m). Cash generated from Underlying Trading Profit
was largely offset by the outflows related to loss-
making contracts subject to OCPs. These cash outflows
lessened versus the prior year, as reflected in the lower
rate of OCP utilisation. There was a working capital
outflow of £9m (2016: outflow of £24m), which included
£8m (2016: £22m) of reduction in the utilisation of the
Group’s receivables financing facility; at 31 December
2017 there was £nil utilisation of the £30m facility,
whereas £8m was utilised a year earlier.
Closing net debt at 31 December 2017 increased to
£141m (2016: £109m); the increase includes the Free Cash
outflow, together with a £33m cash outflow related to
exceptional items. There was a beneficial gross currency
translation effect on net debt of £17m, predominantly
reflecting the Group’s US Private Placement debt,
however this was partially offset by a £3m adverse
movement on hedging instruments. The closing net debt
compares to a daily average of £184m (2016: £119m) and a
peak net debt of £243m (2016: £183m).
At the closing balance sheet date, our leverage for debt
covenant purposes was 1.4x EBITDA (2016: 0.7x), which
compares with the covenant requirement to be less than
3.5x and remains well within our medium term target
range of 1–2x.
The Board is not recommending the payment of a
dividend in respect of the 2017 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 2017, we have been mindful
of the fact there has been a reduction in earnings, a
free cash outflow and an increase in net debt. In these
circumstances, the Board believes that it would not be
prudent to resume dividend payments at the current
juncture. For 2018, our guidance is for an improvement
in Underlying Trading Profit, but we anticipate a
further modest Free Cash outflow and expect net
debt to still increase, largely as a result of cash outflows
related to exceptional restructuring costs and taking
opportunities for value-enhancing infill acquisitions.
The Board will continue to keep the dividend policy
under close consideration as we progress with
transforming the Group and implementing our strategy.
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
Delivering a financial performance for 2017 at the
top end of our expectations has been accompanied
by strong operational delivery and further progress
on implementing our strategy and transformation.
Within our operating framework, we insist that all our
management initiatives fit into one or more of four
categories: winning good business, executing brilliantly,
making Serco a place people are proud to work, and
delivering profitability and sustainability.
Problematic contracts continue to reduce in number and
financial impact versus where we started three years ago,
and relationships with customers in each of our markets
are also fundamentally improved. Where we have exited
contracts during the year, we have done so with pride
and excellence, mindful of the military adage that you
judge a battalion as much by how it leaves its barracks, as
by how it arrives. Where we have started new operations,
which have involved the transition and recruitment of
several thousand employees, again I am pleased with the
36
Strategic ReportSerco Group plc Annual Report and Accounts 2017 skill of our operational managers. Where we are making
losses on contracts, we are resolute in still delivering
what is required of us to appropriately serve our
customers and service users; and while doing so, working
to improve the financial performance of individual
contracts. Three years on, it is reassuring to note how
accurate was our initial estimation of the total level of
onerous provisions required.
Similarly, delivering cost savings at the same time as
investing in and improving the business is challenging,
but this has also been paramount to ongoing
transformation. We achieved our savings target for
2017, and the cumulative reduction of over £100m from
efficiencies in central support functions and overheads
is equivalent to approximately 24% over the last three
years. Our guidance, as set out in more detail below,
includes that we expect Underlying Trading Profit to
grow over the next two years, and this will be driven
largely by further transformation savings. Over that
period, we are in particular looking to transform our
IT systems, capabilities and structures. This means
not only reducing their cost, but also improving their
performance and security. We are implementing
further operating model changes to deliver greater
efficiency and effectiveness of the organisation; there
will also be increased contribution to savings from the
transformation of the finance function and centralising
expertise for reporting, forecasting, planning and
analysis with a third party provider, and seeking
additional rationalisation of disparate procurement
spend across the Group.
Our ongoing transformation of the business involves
further strengthening of our sector propositions,
building differentiated capability, and capturing
business development opportunities to enhance our
pipeline and order book. As previously reported, we
are using Centres of Excellence (CoEs) for Group-wide
propositions and capabilities in our core markets, which
are improving the sharing of skills, best practice and
intellectual property across Serco.
Whilst demand across our markets has not been as
strong as we anticipated at the time we announced
our strategy in 2015, the availability of value-adding
acquisitions, be they of companies or of contracts,
presents an opportunity to increase our scale and
capabilities which was not foreseen in 2015. In our
US defence business, the acquisition of BTP Systems
for $20m adds deep skills in satellite communication
and radar engineering technical services, which
complements our existing service offering, and also
brings with it a pipeline of new opportunities of $200m.
In December 2017, we also signed a Business Purchase
Agreement to acquire a portfolio of selected UK health
facilities management contracts from Carillion plc, and
have subsequently signed a revised agreement with the
Special Managers and Provisional Liquidators of Carillion;
whilst it is subject to requisite third party consents, we
continue to work with all relevant parties to give effect to
achieving the transfer of the contracts. If it is executed as
envisaged, this transaction would significantly increase
the scale of our equivalent Health business, and would
add around £1bn to our order book.
Serco employs (including our joint venture operations)
over 50,000 people, the vast majority delivering services
to customers. Motivating and engaging employees is
absolutely central to our business, and will be a key
determinant of demonstrating we have successfully
implemented our strategy. The latest results of our
global employee survey, managed independently
by Aon Hewitt, and with some 31,000 responses,
showed a fourth successive year of improvement in
the aggregated measure of ‘employee engagement’.
During 2017, we also delivered many other elements
to build capabilities and support our ambition to be
the best-managed business in our sector. Some 200
out of 300 senior managers have completed our highly
tailored Oxford Saïd Serco Management course. We
have rolled out Continuous Improvement training to all
managers and embedded it as part of onboarding new
staff, and over 1,400 employees are now trained to more
advanced levels. And we have further invested in our
Contract Management tools such as apps that monitor
contractual obligations and report in real time, our
Learning Management System for tracking training and
qualifications, and our Serco Management System which
covers all aspects of a contract’s lifecycle, processes
and compliance requirements.
Contract awards, order book, rebids and pipeline
Contract awards
The Group signed contracts with a total value of
£3.4bn during the year (2016: £2.5bn), which was
another year of strong performance. This is the largest
order intake since 2012, and represents a book-to-
bill ratio of approximately 115%. There were over 30
contract awards worth more than £10m each, and
the large value of new business won resulted in this
being approximately 70% of the total value signed,
with the balance represented by the value of secured
extensions or rebids of existing work; the latter was also
an abnormally small balance by virtue of there being a
relatively small amount of contracts coming up for rebid
or extension during 2017.
37
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review continued
The largest new contract signed in the year was to
operate the New Grafton Correctional Centre (NGCC)
in New South Wales, which, when completed, will be the
largest correctional facility in Australia; the estimated
total contract value to Serco over a 20-year term is
approximately AUD2.6bn (equivalent to approximately
£1.5bn). The second largest new contract was with
University Hospital Southampton NHS Foundation
Trust to transform catering and cleaning, with an
estimated value of £125m over the ten-year term.
The third largest was in the Americas division to deliver
US Army base modernisation services and in particular
IT support, valued at a total of $140m for the five-year
base period and five one-year option periods, with
the fourth also in the US to provide three Navy Fleet
Readiness Centers with supply chain management
services for hazardous materials, valued at a total of
$101m for the base period and four one-year option
periods. Smaller new bids won included environmental
services for Rushmoor Borough Council, contact
services support in Australia for the Department of
Human Services, facilities management to a financial
services company in Abu Dhabi, safety service patrol
for the Texas Department of Transportation, and
numerous US Navy ship and shore defence equipment
modernisation task orders.
Of rebids and extensions secured, the largest was
for NHS Forth Valley to continue providing facilities
management services for a further seven years, followed
by the US Patent & Trademark Office (USPTO) for a
further ten years. Others of note included contact
services for Hertfordshire County Council, specialist
scientific and engineering support for the European
Space Agency, facilities management at the Cleveland
Clinic in Abu Dhabi, fleet services for Louisville
Gas & Electric Company, air navigation services in
Bahrain and Iraq, environmental services for various
London boroughs, traffic camera support in the
Australian state of Victoria, and support to passenger
information services for the Western Australia Public
Transport Authority.
Win rates by volume were over 50% for new bids and
over 90% for rebids and extensions. Win rate by value
was around 25% for new work, with the benefit from the
sheer scale of the Grafton win being offset by the loss
of the other big opportunities in Middle East rail and
UK immigration escorting; the win rate by value was
approximately 90% for securing existing work.
Order book
The Group’s order book now stands at an estimated
£10.7bn, up by £0.8bn versus a year earlier. There is
£2.4bn of revenue secured in the order book for 2018,
equivalent to around 85% visibility of our £2.9bn revenue
guidance at current exchange rates. The secured order
book is £1.6bn for 2019 and £1.2bn for 2020.
Rebids
Through to the end of 2020, across the Group there
are around 60 contracts in our order book with annual
revenue of over £5m where an extension or rebid will
be required, representing current annual revenue of
approximately £1.4bn in aggregate or approaching
half of the Group’s 2018 £2.9bn revenue guidance.
This proportion of revenue that requires securing at
some point over the next three years is not unusual
given our average contract length of around seven years
(or approximately ten years on average on a revenue-
weighted basis, as larger contracts typically have longer
terms). Contracts that could potentially end at some
point by the end of 2018 have aggregate annual revenue
of around £500m, with the higher amount versus recent
years driven in particular by the US Affordable Care Act
contract becoming due for full rebid this year, and with
the next largest being Northern Isles Ferries. In 2019, it
increases to around £700m, with Australian immigration
services, the Dubai Metro, one of our US Navy
installation contracts and COMPASS all due for rebid
or potential extension. In 2020, it is around £200m, with
PECS the only particularly large contract anticipated to
become due in that year.
Pipeline
Our pipeline is tightly defined as new bid
opportunities with estimated Annual Contract Value
(ACV) of at least £10m and which we expect to bid
and to be adjudicated within a rolling 24-month
timeframe. The Total Contract Value (TCV) of individual
opportunities is capped at £1bn. The definition does
not include rebids and extension opportunities, and
on average over the last five years, more than half
of our order intake has come from opportunities
outside the reported pipeline. It is 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 division 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;
38
Strategic ReportSerco Group plc Annual Report and Accounts 2017 whilst the ultimate value of such an agreement may
be very large and run over many years, a 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, at the start of
2015 the pipeline stood at around £5bn and began
to grow again, increasing to £6.5bn at the start of
2016, and stood at £8.4bn at the start of 2017. During
the year, around £7bn has come out of the pipeline,
predominantly due to: wins, such as Grafton prison
(which was capped in the pipeline at £1bn) and
Southampton NHS Foundation Trust; losses, such as
those in Middle East rail, UK immigration escorting
and a US Navy systems support opportunity; as well
as due to a small number of other opportunities being
removed such as immigration services in the US. A
number of new opportunities have now matured to the
stage where they meet our pipeline definition, adding in
aggregate around £3bn over the course of the year. As
a result, the pipeline currently stands at £4.4bn, which
consists of around 25 bids that have an ACV averaging
approximately £30m and a contract length averaging
around six years.
In the services industry in which Serco operates,
pipelines are often lumpy, as individual opportunities
can be very large, and when they come in and out
of the pipeline they can have a material effect on
reported values. In 2017, a number of unusually large
bids travelled through the pipeline, and, as anticipated,
immediately replacing these has been challenging in
the prevailing market conditions. A lower pipeline is
not a matter of undue concern: growing our pipeline
should not be expected to be a smooth progression
given the effects of the timing and scale of individual
awards, and we expect profit growth in the next two
years to be driven by transformation savings. However,
progress beyond the next two years will require seeing
improvements in the trading conditions across our
markets which will need to be first evidenced by a
pipeline that is growing once again.
Key opportunities in the pipeline are described further
in the Divisional Reviews.
Risks associated with Serco’s trading environment
Last year, we reported on the risks around our trading
environment, and focused on the possible impact of
Brexit, instability in the Middle East, and lack of clarity
in the US following the election of President Trump.
None of these risks has markedly reduced in the last
twelve months: in terms of Brexit, our business directly
serving European bodies which accounts for around 5%
of Serco’s revenue is unlikely to be greatly affected, as it
is served by EU-resident companies. We believe Brexit
may have an impact on labour cost and availability
in the UK if EU citizens cannot come to UK to work in
essential frontline service roles. The greatest impact
for us is that UK Central Government is largely focused
upon the overwhelming need to manage Brexit, which
has been described by the Head of the Civil Service
as the greatest peacetime challenge ever faced by the
Civil Service, and it is clear that their priority is going
to be focused in this direction for several years to
come. However, in the medium term the repatriation of
swathes of regulatory functions may lead to important
opportunities, and many of our largest customers –
most notably the Ministry of Defence, the Ministry of
Justice and the Home Office – still have pressing needs
to reduce costs and increase efficiency.
In the US, it is clear that the Affordable Care Act or
‘Obamacare’, and associated contracts such as ours
providing eligibility processing services to those
seeking health insurance, will continue in some form,
although the promised expansion in Defence spending
is yet to be seen. Disappointingly, there are few signs
of resolution in the dispute between Qatar and other
states in the Middle East.
However, since last year’s report, in addition to the
risks set out above, the UK public sector outsourcing
market has in recent months been thrown into turmoil
as the result of the collapse of Carillion, and the
crystallisation on some contracts of very significant risks
which government had transferred to suppliers. This has
reignited the debate about the wisdom of government
outsourcing to private companies the delivery of public
services, and we suspect that this will become a theme
in the next General Election. There is a very real risk that
this will make the UK Government more than normally
cautious in dealing with its suppliers. On the other hand,
it may make them more inclined to deal with suppliers
who have established a track record for strong delivery,
prudent accounting and who have a robust balance
sheet. The possible consequences of these events are
examined in more detail under ‘Industry Backdrop and
Concluding Thoughts’, below.
39
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review continued
We anticipate a further small Free Cash outflow.
After the cash outflow on exceptional costs, and the
acquisition consideration for BTP Systems, we anticipate
closing accounting net debt to increase to £200–250m,
equivalent to leverage for covenant purposes in the
range of 1.5–2x EBITDA.
As noted in our previous announcement regarding the
potential acquisition of health facilities management
contracts formerly operated by Carillion plc, the effect
of this transaction is not included in any of our guidance
at this stage.
Looking further ahead, we expect 2019 to be a year of
further good growth in Underlying Trading Profit, which
is again likely to be driven by additional transformation
savings. The rate of growth thereafter will be more
dependent on our ability to grow revenues. The
Strategy Review announced in March 2015 set out a
long term ambition that the business could grow in line
with a market which was expected to expand at a long
term trend rate of 5–7% a year and deliver margins of
5–6%. Our margin ambition was predicated on three
conditions: first, reducing costs as a percentage of sales;
second, containing losses on onerous contracts and
converting a number of them into profitable contracts
on rebid; and, thirdly, increasing margins by growing
revenues whilst bearing down on overheads. We remain
broadly on track on costs and onerous contracts, but
some markets, and in particular the UK, are currently
growing more slowly than their former trend rate. We
can and will partly compensate for a weaker organic
revenue outlook through increased actions on the cost
base, and our long term ambitions of 5–7% revenue
growth and 5–6% margin remain intact, but the timing
of achieving this will be dependent upon when demand
reverts to historic levels in our target markets.
Guidance and outlook
Our guidance for 2018 and outlook beyond is
unchanged from that initially provided in our update
on 13 December 2017.
For 2018, we expect that Underlying Trading
Profit will grow to around £80m, on revenues of
£2.8–2.9bn (i.e. broadly flat organic revenue growth
on a constant currency basis). We therefore expect
some improvement in margins, driven largely by
transformation savings. Our guidance reflects latest
currency rates, which now imply greater pressure from
adverse currency impacts estimated at £5–6m for profit
and £100–120m for revenue when compared to
the average rates for 2017.
As we have noted before in regard to our previous
guidance, we reiterate that the range of potential
outcomes is significantly wider than that implied by
our budget’s central case, both to the upside and
downside; this reflects Serco’s relatively low margins
and the sensitivity of our profits to even small changes
in revenues and costs, as well as movements in currency.
Furthermore, and as described in more detail in the
Divisional Reviews, the outcome of new bids in our
pipeline and in our progress securing extensions or
rebids including that for the Affordable Care Act in the
US, could have a material impact on our business both
in 2018 and more so the following year.
The 2018 financial year will be the first to be reported
under the new IFRS15 accounting standard. As previously
disclosed and reflective of the prudent accounting
practices adopted in recent years by Serco, we do not
anticipate the impact to be significant – as set out in
Note 2 to the Group’s consolidated financial statements,
the estimated restatement to 2017 is to decrease revenue
by £3m and Underlying Trading Profit by £0.3m. IFRS15
will be potentially of more relevance to the Group in
relation to the accounting for new contracts rather
than those already in place at the time of adopting the
new standard. The changes brought about by IFRS15
on previous percentage of completion accounting is
expected to have little impact on Serco as this form of
accounting has never been of particular relevance to
Serco. However, if Serco enters into future contracts
that have significant transition phases, this could result
in a greater proportion of revenue and profit being
recognised later on in the life of the contract than
under previous accounting. The UK Defence Fire & Risk
Management Organisation (DFRMO) contract, which
we are currently bidding, is one such.
40
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Industry backdrop and concluding thoughts
“No plan ever survives first contact with the enemy”
was a phrase first coined by the military strategist
Helmuth von Moltke in the 19th century. So far, Serco’s
three-stage plan (Stabilise – Transform – Grow), which
we conceived in late 2014, has survived contact with
the flow of events surprisingly well. After a period of
decline, our profits have started to grow again; we have
re-established our reputation for operational delivery;
we have kept our promises to our customers; our
portfolio of onerous contracts is running off in line with
the expectations we set in 2014; we have had a strong
year of order intake in 2017; and we are taking steps to
improve margins to take us to more normal levels, even
if weak demand will probably mean it will take us longer
to get there. We are not yet able to resume dividend
payments, but our pension schemes are fully funded
and our balance sheet is robust.
How has this situation arisen? In one sense, this is
the market at work, with a tendency for the balance
of advantage to move between buyers and sellers in
accordance with supply and demand. In the ’90’s and
’00’s, Government was keen to enlist the support of
private sector companies to improve the efficiency
and productivity of public services, and many new
opportunities came to market; the Government was
feeling its way and trying to develop new contracting
structures such as Private Finance Initiatives which
had never been tested before, and was sometimes
outrun by more sophisticated and canny suppliers,
who were double-digit revenue growth a year with
strong margins, cash flows and returns on capital.
As is the way of markets, this strong growth attracted
new competitors, many from abroad or from other
sectors. As is also the way of markets, the flow of
milk and honey did not last indefinitely.
Into this generally positive scene of Serco’s own
progress has intruded a traumatic event in the form
of the collapse of one of the UK’s largest suppliers of
public services, Carillion. Quite apart from the usual
miseries associated with the bankruptcy of a major
company, it has put at risk the supply of a number of
sensitive public service contracts and caused the UK
Government distraction and expense. Not unnaturally,
this has reignited the already-glowing embers of
the debate about the desirability of allowing private
companies to deliver public services. This cuts to the
heart of what we do; the UK is Serco’s home market,
and accounts for around half of our revenue, and
understanding recent developments is high on the
agenda of many investors.
It must be stressed that the UK Government successfully
buys some £200bn of goods and services from private
companies and charities each year. There are over
one million people employed by the private sector
delivering services to Government, and the vast majority
of this work is delivered to a high standard. Huge
benefits have been delivered by private companies
and charities providing public services which are both
efficient and innovative. Nevertheless, the collapse
of Carillion stands as a reminder that since 2010 a
significant number of businesses supplying Government
services in the UK have suffered very large losses,
Serco included, and that all is not right in the market
for Government services in the UK.
Around 2010, the balance of power in the market began
to turn. Government introduced austerity and sought
to reduce expenditure, the supply of new work slowed,
just as new competitors entered the market. At the
same time, Government started to hire poachers and
made them its gamekeepers, and in recent years has
improved its commercial and contracting capabilities
beyond all recognition. Feeling compelled to deliver the
growth they had promised, suppliers competed fiercely
for a reducing pool of new business; prices fell, and
a newly-savvy Government discovered it had anxious
suppliers prepared to accept risks and contract terms
which in normal conditions they would not have agreed
to. Sophisticated buying techniques were imported
from the private sector; contracts for sensitive public
services such as caring for asylum seekers were awarded
to the lowest bidder by online auction. As margins fell,
suppliers shrank their capital employed and increased
their debt; some made assumptions in their accounting
which had the effect of pulling forward reported profits;
some used opaque financing facilities and extended the
payment terms to their suppliers to make their reported
cash flow more nearly match the stretched profits. At
the same time, falling interest rates and increasing
longevity sent pension deficits soaring. So in a matter
of a few years, a sector which previously had delivered
healthy returns and supported well-capitalised balance
sheets became under-capitalised, over-leveraged, and
operationally and financially fragile. Given the amount
of contractual risk suppliers were carrying, that fragility
was going to show itself sooner or later.
41
Financial StatementsDirectors’ ReportStrategic Report Chief Executive's Review continued
Serco was the first major UK public services supplier to
reveal the consequences of carrying those risks. In 2014,
we had to take £447m of onerous contract provisions
to reflect the cost of contractual commitments we
had made, and in total some £1.3bn of provisions and
write-downs were required. Fortunately, our banks
and shareholders backed our decision to stand by our
commitments to our customers, and we raised some
£700m of equity and a further £250m from disposals
to make our balance sheet robust. Since then, few
suppliers in the sector have escaped unscathed, but
Carillion is the first major bankruptcy.
Does this matter? Over 12,000 companies go into
insolvency in a year in the UK, so why should Carillion
be of such concern? The reason is that the nature of
public services contracts are that they often involve the
delivery of services of national importance that need
to operate 24 hours a day. Hospitals cannot operate
without cleaners and caterers; courts cannot operate
without prisoner transport; defence bases cannot
operate without air traffic control. The security of supply
of these contracts is a matter of national importance
and a proper concern of Government.
How did we get into this position? The answer is:
nobody is blameless. Company managers and directors
should have remembered the adage that “no deal
is better than a bad deal”; and that over-optimistic
accounting judgements, or flattering reported cash
flow, will always be found out in the end; and that
pension deficits were not a temporary aberration but a
liability that needed to be addressed. And for its part,
Government has used its position as a monopoly buyer
to push companies, large and small, into accepting
contractual terms and risks that they could not
conceivably manage or hedge. Sooner or later, some
of those risks were bound to crystallise, and when they
did, suppliers delivering vital public services would be
mortally wounded and even become functionally or
formally insolvent, which would not be in the interests
of either taxpayers or service users.
Where will the market go next? Clearly, both
Government and suppliers should take time to consider
carefully the implications of recent events. Suppliers
will likely become much more wary; there will be fewer
new entrants; existing players may shift the balance
of their attention towards other markets, if they can.
The UK Government runs the risk of being offered less
choice and innovation, less competition and higher risk
premiums. And efforts to encourage small and medium
sized suppliers into the market are likely to be set back,
as they see what has happened to some of the large and
strong companies who supply Government.
In the short term, the situation may offer opportunities
to companies such as Serco which have already
re-financed their balance sheets and focused
on developing the strength and depth of their
management. But this is no time for schadenfreude.
Serco’s interest lies in seeing the market restored
to health as soon as possible, where suppliers have
the confidence to invest in bringing innovation and
efficiency to help Government rise to the challenges
of providing what it so badly needs, which is more
public services, of higher quality, at lower cost. And
Government needs to feel confident that it has a choice
of strong suppliers, who it can trust to deliver and stand
by their promises, and who have balance sheets robust
enough to sustain them through the lumps and bumps
inherent in the delivery of large and complex contracts.
We believe that recent events present an opportunity
for both Government and its suppliers to work together
to construct a new approach to the provision of public
services which will avoid the problems of the past.
There is broad consensus that public service provision
should be a mixed economy of the state, not-for-profit
organisations, and the private sector; and also that the
provision of public services should not be completely
exposed to the harshest rough-and-tumble, boom-
and-bust cycle of a totally free market where the
relative powers of either buyer or seller may become
unbalanced. Few people believe that the delivery
of public services should always be a monopoly of
employees of the state. The question is a practical one
of how to make the procurement of public services,
whether delivered by the state itself, by not-for-profits,
or private companies, work better.
Serco will be contributing energetically to this
discussion, and we will be proposing four principles
which we suggest should govern relations between
Government and its suppliers, be they public bodies,
not-for-profit organisations or private sector companies.
• We should strengthen transparency in public
contracting. This means that for large contracts
for public services, which are not commoditised,
which do not impinge on National Security, and
which do not include significant amounts of
intellectual property, the presumption should be
in favour of open-book accounting, in which the
Cabinet Office and National Audit Office can see
the suppliers’ accounts of major contracts, whether
they be performed by public or private operators.
There should also be far greater transparency of
operational performance: except in exceptional
circumstances, suppliers, be they private or
Government-owned, should be required to publish
42
Strategic ReportSerco Group plc Annual Report and Accounts 2017 It is vital to the well-being of any country that public
services are delivered to high standards and offer
value for money, and for the most part, in the UK,
private and third-sector providers have done a
good job of doing this. The UK has hundreds of
new hospitals and schools, built and maintained
to high standards; thousands of contracts have
delivered innovation, improved services and lowered
costs, along with far higher degrees of visibility of
operational performance than is commonly available
from public sector delivery. And as the UK advances
towards Brexit, it is clear that there will be the need
for a whole lot more Government as we “take back
control”. With this in mind, we believe that there is
an urgent need to re-think the relationship between
the UK Government and its suppliers. We believe an
approach based on the Four Principles above would
serve to restore trust and common sense in the market;
remove the risk of excessive profits or losses; and
encourage a more vibrant and competitive market for
Government services, one in which Serco would be an
enthusiastic participant.
Rupert Soames
Group Chief Executive
Serco – and proud of it.
every six months their performance against key
operational indicators, so they are held accountable
for the delivery of their promises to the taxpayers
who are paying for them and the users who they
are serving. And we believe that there should be a
formal, rigorous and transparent decision-making
process by which Government decides what
mechanism it should use, be it in-house or by a
third party, to deliver a given project or policy.
We call this the “Transparency Principle”.
• Both suppliers and the Government should have
the right, on payment of an agreed break fee, to
exit a contract at pre-determined intervals. We call
this the “Orderly Exit Principle”. The purpose of this
is to give both Government and supplier the ability to
exit contracts which are not working out as intended.
For instance, if the supplier is making greater than
expected profits, or Government policy changes,
or performance is unsatisfactory but still within the
bounds of the contract, the Government should
be able, on payment of a break fee, to re-compete
or take back in-house the contract; and likewise
if the supplier was making unexpected losses, or
changes in regulation had made it impossible to
deliver the contract as intended, the supplier can
exit the contract on payment of a fee which would
compensate the Government for the cost of re-
tendering. This would, for both Government and
supplier, significantly reduce the risk of being stuck
together in unhappy marriages.
• Suppliers of sensitive contracts should be obliged
to lodge with Government a “living will”, being
a set of arrangements to facilitate the transfer of a
contract back to Government or to another supplier
if required. This would significantly reduce the
operational risk to Government of supplier failure.
This is the “Security of Supply Principle”.
• Government and suppliers should agree to abide
by a mutually-agreed code of conduct, which
would set out expected standards of behaviour from
Government and its contractors. This would involve
the Government agreeing not to impose punitive or
unfair terms and conditions or transfer unmanageable
state risk; and suppliers would agree to maintain
certain metrics of financial stability; pay their sub-
contractors in a timely fashion; and adequately fund
their pensions. We think it would be important to
have a process of independent arbitration built into
the code of conduct to ensure that there is some
avenue of redress and calling to account those
who do not abide by the code. We call this the
“Fairness Principle”.
43
Financial StatementsDirectors’ ReportStrategic Report Divisional Reviews
Serco’s operations are reported as four regional divisions: UK & Europe (UK&E); the Americas; the Asia Pacific region
(AsPac); and the Middle East. The Global Services division previously consisted of Serco’s private sector BPO operations,
which for statutory reporting purposes were classified in 2016 as discontinued operations following the previously
announced strategic exit from this market and the subsequent disposals. Serco presents alternative measures to
include the Revenue and Trading Profit of these discontinued operations in prior periods for consistency with previous
disclosures. Reflecting statutory reporting requirements, 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
Underlying Trading Profit. As previously disclosed and for consistency with guidance, Serco’s Underlying Trading Profit
measure excludes Contract & Balance Sheet Review adjustments (principally OCP releases or charges), and the benefit in
2016 from not depreciating and amortising assets held for sale, and other one-time items such as those in 2016 related to
the early exit from the Thurrock contract.
Year ended 31 December 2017
£m
UK&E
Americas
AsPac
Middle
East
Corporate
costs
Total
Revenue
Change
Change at constant currency
Organic change at constant currency
Underlying Trading Profit/(Loss)
Change
Change at constant currency
Margin
Contract & Balance Sheet Review adjustments
Trading Profit/(Loss)
Amortisation of intangibles arising on acquisition
Operating profit/(loss) before exceptionals
1,334.7
688.0
579.0
351.9
–
2,953.6
(3%)
(4%)
(4%)
35.1
(23%)
(25%)
2.6%
(30.6)
4.5
–
4.5
0%
(7%)
(7%)
36.4
(15%)
(21%)
5.3%
3.4
39.8
(3.0)
36.8
(7%)
(14%)
(15%)
23.7
(5%)
(13%)
4.1%
11.4
35.1
(1.4)
33.7
+8%
+2%
+2%
16.2
(2%)
(10%)
4.6%
–
16.2
–
16.2
(41.6)
(4%)
(4%)
n/a
–
(41.6)
–
(41.6)
(2%)
(6%)
(6%)
69.8
(19%)
(27%)
2.4%
(15.8)
54.0
(4.4)
49.6
Year ended 31 December 2016
£m
UK&E
Americas
Revenue including discontinued operations
1,375.1
691.4
Discontinued operations adjustment*
–
–
AsPac
619.7
–
Revenue
1,375.1
691.4
619.7
324.8
Underlying Trading Profit/(Loss)
Margin
Contract & Balance Sheet Review adjustments
Assets held for sale depreciation and amortisation
Other one-time items
Trading Profit/(Loss)
Amortisation of intangibles arising on acquisition
Discontinued operations adjustment*
Operating profit/(loss) before exceptionals
45.7
3.3%
35.3
–
3.5
84.5
(0.3)
–
84.2
43.0
6.2%
(36.6)
–
–
6.4
(2.8)
–
3.6
24.9
4.0%
9.3
–
–
34.2
(2.0)
–
32.2
Middle
East
Corporate
costs
Sub-total
continuing
Global
Services
324.8
–
16.6
5.1%
2.2
–
–
–
–
–
(43.5)
n/a
3.2
–
–
3,011.0
–
36.8
(36.8)
Total
3,047.8
(36.8)
3,011.0
–
3,011.0
86.7
2.9%
13.4
–
3.5
(4.6)
(12.5%)
0.8
0.5
–
82.1
2.7%
14.2
0.5
3.5
18.8
(40.3)
103.6
(3.3)
100.3
–
–
–
–
18.8
(40.3)
(5.1)
–
98.5
–
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.
The trading performance and outlook for each division are described on the following pages. Reconciliations and
further detail of financial performance are included in the Finance Review on pages 50 to 68. 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 151 to 227.
44
Strategic ReportSerco Group plc Annual Report and Accounts 2017 UK & Europe
Serco’s UK & Europe division supports public
service delivery and outcomes across all five of the
Group’s chosen sectors: our Justice & Immigration
business provides a wide range of services to support
safeguarding society and reducing reoffending, from
secure accommodation management through to
housing and welfare services for asylum seekers; in
Defence, we are trusted to deliver critical support
services and operate sensitive facilities; we operate
complex public Transport systems and services; our
Health business provides primarily non-clinical support
services to hospitals; and the Citizen Services business
provides environmental and leisure services, as well
as a wide range of other front, middle and back-office
services to support public sector customers in the
UK or European institutions. Serco’s operations in the
UK represent approximately 40% of total Revenue
for the Group, and those across the rest of Europe
approximately 5%.
Serco announced in September 2017 that it would
merge its UK and European operating divisions to
create a single, integrated business, Serco UK &
Europe. This combined the two previous divisions
– UK Central Government and UK & Europe Local &
Regional Government – and will simplify and improve
the efficiencies and capabilities of our operations
in the region, in particular as we continue to drive
transformation benefits across the Group as a whole.
Kevin Craven, previously Chief Executive of UK Central
Government became the Chief Executive of Serco UK &
Europe. Kevin joined Serco in September 2014, prior to
which he was CEO of Balfour Beatty Services, leading a
business with 16,000 employees and revenues of over
£1.6bn, covering sectors such as facilities management,
rail, highways and utilities. Before joining Balfour Beatty,
he was the Managing Director for Healthcare, Education
& Defence at Aramark, and the Managing Director of
Transport & Travel for Sodexo.
Revenue for 2017 was £1,334.7m (2016: £1,375.1m), a
decline of 3%; reported revenue excludes that from
our joint venture and associate holdings which are
predominantly the operations of AWE, Merseyrail and
previously Northern Rail, with these representing the
vast majority of the Group’s activity in joint ventures and
associates. At constant currency, the decline in revenue
was 4%. Drivers of the reduction included: in our Health
business, we ceased to recognise as revenue the value
of goods purchased on our customers’ behalf following
changes to two procurement services contracts; in our
Defence business, the phased transfer back during 2016
of services that Serco had previously been providing
to the Defence Science & Technology Laboratory
(DSTL) and for Defence Business Services (DBS); we
also saw reduced volumes in our Child Maintenance
Group operations, and the ending or reduced scale of
various other BPO and IT support services contracts.
These revenue reductions were partially offset from
growth elsewhere, namely the start of hospital facility
management services for Barts Health NHS Trust and
University Hospital Southampton NHS Foundation
Trust, as well as some growth in our European agency
operations and from the new Skills Support for the
Workforce (SSW) contracts.
Underlying Trading Profit was £35.1m (2016: £45.7m),
representing an implied margin of 2.6% (2016: 3.3%).
Trading Profit includes the profit contribution (from
which tax and interest have already been deducted) of
joint ventures and associates; if the £350m (2016: £474m)
proportional share of revenue from joint ventures and
associates was also included and if the £7.0m (2016:
£7.4m) share of interest and tax cost was excluded,
the overall divisional margin would have been 2.5%
(2016: 2.9%). The joint venture and associate profit
contribution of £26.6m (2016: £31.3m) was £4.7m lower,
reflecting the end of the Northern Rail franchise in
March 2016 and the lower shareholding of AWE from
September 2016. The reduction in Underlying Trading
Profit also included the impact of other contract
attrition and in-contract reductions, and the lower
profitability from new contracts in their initial transition
and transformation stages. The non-repeat of certain
costs and impairments that occurred in 2016 and the
progress made on cost efficiencies in 2017 only partially
offset these areas of profit reduction. Within Underlying
Trading Profit there was £55m of OCP utilisation (2016:
£60m), which served to offset the Division’s loss-making
operations, principally COMPASS UK asylum seeker
support services, the Caledonian Sleeper, Future
Provision of Marine Services (FPMS), Lincolnshire
Country Council, and the Prisoner Escort & Custody
Services (PECS) contracts.
45
Financial StatementsDirectors’ ReportStrategic Report Divisional Reviews continued
Contract & Balance Sheet Review adjustments resulted
in a £30.6m net charge, driven by updating the
assumptions regarding operational and maintenance
costs of running the Caledonian Sleepers contract,
partially offset by a net £16m of releases across other
contracts. The Caledonian Sleepers charge of £47m
reflects a sharp increase in the estimated costs related
to the delayed introduction and operation of the new
sleeper service. We will be examining every option
for reducing operating costs; the position under the
contract is expected to improve over time, as the terms
of the Franchise Agreement provide a mechanism that
requires Transport Scotland to bear 50% of contract
losses from 1 April 2020. In addition, from 1 April 2022,
we have the right to seek adjustments to the financial
terms of the Franchise Agreement that would result
either in a small positive profit margin for Serco from
that date, or allow us to exit the contract. A detailed
review of provisions and Contract & Balance Sheet
Review items is included in the Finance Review on pages
50 to 68. After these adjustments, Trading Profit was
£4.5m (2016: £84.5m, reflecting £35.3m net release for
Contract & Balance Sheet Review adjustments and a
£3.5m one-time profit arising from a pension
scheme settlement).
The UK & Europe division represented around £0.7bn of
the Group’s aggregate total value of signed contracts
during 2017. The largest award was a new contract
to transform catering and cleaning for University
Hospital Southampton NHS Foundation Trust, with an
estimated value of £125m over the ten-year term. Other
new work included adding patient transport services
to our relationship with Barts Health NHS Trust, and
environmental services to Rushmoor Borough Council.
Of large new bids where we were unsuccessful, these
included immigration escorting for the Home Office
and the regional MOD contracts for Technical Support
Services Provision to the UK's Royal Air Force.
The largest rebid or extension that was due during the
year was for our provision of facilities management
services at NHS Forth Valley, where we successfully
secured these for a further seven years. Others secured
included contact services for Hertfordshire County
Council, specialist scientific and engineering support
for the European Space Agency, our helicopter aircrew
training for the MOD and a number of other defence
support services contracts, parking services for the
West London Alliance, environmental services for
Wandsworth Council, and citizen services support
to customers including Invest Northern Ireland, the
Department of Health and the Skills Funding Agency.
Of existing work where an extension or rebid will be
required at some point before the end of 2020, there
are 30 contracts with annual revenue of over £5m
within the UK & Europe division; in aggregate, these
represent approximately a third of the current level of
annual revenue for the division. The largest of these
are the Northern Isles Ferries operations that are
expected to be extended from April 2018 to the end of
2019; the COMPASS contract is also due in 2019, along
with a large European agency contract; and in 2020,
PECS is now assumed to be rebid if a final extension
option is not exercised by the customer, as well as
that year our Anglia Support Partnership healthcare
shared services operations. The Glasgow ACCESS
operations transferred by the end of 2017, therefore
representing known attrition of approximately 4% of
divisional revenue.
Our pipeline of new bid opportunities has been
significantly reduced following the removal of wins such
the Barts and Southampton NHS contracts, as well
as from losses such as immigration escorting for the
Home Office. The Defence Fire & Risk Management
Organisation (DFRMO) tender is still ongoing, as is that
for an immigration removal centre. We have partially
reloaded the pipeline with some other smaller tenders for
various defence support, hospital facilities management
and environmental services. For the successor to the
COMPASS arrangements, we are also including in our
new bid pipeline the incremental opportunity beyond
the regions where we currently operate.
Americas
Our Americas division accounts for approximately 23%
of Serco’s overall revenue, and 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 2017 was £688.0m (2016: £691.4m), a modest
reduction in reported currency. In US dollars, the main
currency for operations of the division, revenue was
equivalent to approximately US$890m (2016: US$940m).
The strengthening of local currencies against Sterling
increased revenue by £42m or 7%; the organic change
at constant currency was therefore a decline of 7%. The
decline was driven by the end of the contracts during
2016 for the Virginia Department of Transportation
(VDOT) and for US Army transition assistance (SFLTAP).
46
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Of existing work where an extension or rebid will be
required at some point before the end of 2020, there are
12 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 US Affordable Care Act (ACA), which
currently accounts for around 30% of divisional revenue,
requires securing a rebid from 30 June 2018; the Global
Installation Contract covering areas of our defence ship
modernisation work is due for rebid in 2019, while our
support to the Federal Aviation Administration’s (FAA)
Contract Tower (FCT) Program will become due for
rebid once again in 2020.
Our pipeline of major new bid opportunities due for
decision within the next 24 months includes further
important opportunities to provide various support
functions to the US Navy. A defence opportunity to
support US Air Force radar systems as well as various
other defence support bids were added during the year,
as were other tenders for transport operations and fleet
support and Citizen Services records management.
Opportunities for immigration services were removed
from the pipeline due to delays in tender processes.
Future profitability will as usual be shaped by the
outcomes of the major new bid opportunities in the
region, but in particular by the rebid outcome due by
30 June 2018 and the future scale of operation of the
ACA contract and its absorption of overhead costs.
Serco was pleased to announce in June 2017 that
David J. Dacquino would become Chief Executive
Officer of the Americas division, with Dan Allen having
informed the business back in February of his intention
to retire. Dave Dacquino joined Serco in 2015 to lead the
Americas’ Defence business, bringing deep knowledge
and experience from across the defence, aeronautics,
logistics and technical services industries.
These and other smaller reductions were partially offset
by growth in our support of advanced anti-terrorism
systems for ships and infrastructure at US Navy ports
and federal facilities, and some increases elsewhere in
the volume of workload or task orders.
Underlying Trading Profit was £36.4m (2016: £43.0m),
representing a margin of 5.3% (2016: 6.2%). While there
was a £2.4m favourable currency movement, there
was the impact of the first half of 2016 benefiting from
the longer running of the VDOT and SFLTAP contracts
which were only partially offset by cost efficiencies
in 2017. Within Underlying Trading Profit there was
£5m (2016: £9m) of OCP utilisation, which reflects the
offset of losses on the Ontario Driver Examination
Services contract.
Contract & Balance Sheet Review adjustments resulted
in a £3.4m net release. After these adjustments,
Trading Profit was £39.8m (2016: £6.4m, reflecting
£36.6m net charge for Contract & Balance Sheet
Review adjustments).
Americas represented around £0.8bn of the Group’s
aggregate total value of signed contracts during the
year. The largest new award was for US Army base
modernisation services and in particular IT support,
valued at a total of $140m for the five-year base
period and five one-year option periods. The second
largest was to provide supply chain management
services for hazardous materials at three US Navy Fleet
Readiness Centers, valued at a total of $101m for the
base period and four one-year options. Smaller new
awards included safety service patrol for the Texas
Department of Transportation, and numerous US Navy
ship and shore defence equipment modernisation task
orders. Of rebids and extensions secured, the largest
was for the US Patent & Trademark Office (USPTO)
for a further ten years, albeit the new contract is for
a reduced volume of work; others secured included
fleet services for Louisville Gas & Electric Company,
parking meter management in San Francisco and
support services for the US Federal Retirement
Thrift Investment Board and the US Government
Accountability Office. Serco was unsuccessful in a
large new bid opportunity to be prime contractor for
US Navy systems support, but has potential for a share
of work through sub-contract relationships; there were
no other major new pipeline decisions or large rebids
or extensions due during the year.
47
Financial StatementsDirectors’ ReportStrategic Report Divisional Reviews continued
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 19% of total Revenue for the Group.
Revenue for 2017 was £579.0m (2016: £619.7m), a decline
of 7%. In Australian dollars, the main currency for
operations of the division, revenue for the year was
equivalent to approximately A$980m (2016: A$1,140m).
The movements in local currencies against Sterling
increased revenue by £48m or 7%; the acquisition
of the other 50% of a small defence services joint
venture added 1% to revenue; the organic change at
constant currency was therefore a decline of 15%. This
reduction was driven by the end of the Armidale Class
Patrol Boats (ACPB), Western Australia Court Security
& Custodial Services (WACSCS) and Mount Eden
contracts, together with some smaller reductions from
other contracts ending or reducing in scope; there was
some growth in Citizen Services contact and processing
support which partially offset this attrition.
Underlying Trading Profit was £23.7m (2016: £24.9m),
representing a margin of 4.1% (2016: 4.0%). While there
was a favourable currency movement of £2.1m, the net
of other movements reflected contract attrition and
other margin pressures with only partial offset from
progress on cost efficiencies and growth from new
work. Within Underlying Trading Profit there was
£9m of OCP utilisation (2016: £12m).
Contract & Balance Sheet Review adjustments resulted
in a £11.4m net release, the largest element of which
was a further OCP release on ACPB reflecting revised
assumptions of the residual liability after the contract
transferred to a new operator during the year. The ACPB
contract was the largest of the OCP contracts, and is
the first of the major OCP contracts to come to an end.
After these adjustments, Trading Profit was £35.1m
(2016: £34.2m, reflecting £9.3m net release for Contract
& Balance Sheet Review adjustments).
AsPac represented around £1.8bn of the Group’s
aggregate total value of signed contracts during
the year. By far the largest element of this was
approximately £1.5bn for the 20-year contract valued at
A$2.6bn for the operation of New Grafton Correctional
Centre (NGCC) which is expected to commence in
2020; NGCC will be the largest correctional centre in
Australia, consisting of a total of 1,700 beds in three
individual security categories, and draws upon Serco’s
experience of managing correctional facilities in the UK,
New Zealand and elsewhere in Australia, which includes
Australia’s current largest facility, Acacia Prison. Other
smaller new wins included contact services support
in Australia for the Department of Human Services.
Extensions and rebids awarded in the year included
traffic camera support in the Victoria, and passenger
and integrated transport information services for
transport authorities in Western Australia and New
South Wales. There were no other larger rebids or
major new bid pipeline decisions made in the year.
Of existing work where an extension or rebid will be
required at some point before the end of 2020, there
are 10 contracts with annual revenue of over £5m within
the AsPac division; in aggregate, these represent just
over half 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.
Our pipeline of major new bid opportunities due
for decision within the next 24 months includes
some further (but far smaller than Grafton) Justice
& Immigration opportunities, as well as in Defence
support services. We will look to build the pipeline
further in these sectors as well as Citizen Services,
Transport and Health.
Middle East
Operations in the Middle East division include
Transport, Defence, Health and Citizen Services,
with the region accounting for approximately 12%
of the Group’s total revenue.
Revenue for 2017 was £351.9m (2016: £324.8m), an
increase of 8%. The strengthening of local currencies
against Sterling provided growth of £21m or 6%; the
organic change at constant currency was therefore
growth of 2%. Growth came from new contracts for
facilities management at Dubai Airport and for a
financial services company in Abu Dhabi, though these
were partially offset by reductions related to the Dubai
Air Navigation Services and Staff College training
for the Qatar Armed Forces contracts, as well as a
small number of other operations reducing in scope
or volume including the Middle East Logistics & Base
Support (MELABS) contract that supports the Australian
Defence Force in the region.
48
Strategic ReportSerco Group plc Annual Report and Accounts 2017 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.
Benefiting from actions to deliver savings and improve
efficiencies of our central functions, corporate costs in
2017 reduced to £41.6m (2016: £43.5m).
Underlying Trading Profit was £16.2m (2016: £16.6m),
representing a margin of 4.6% (2016: 5.1%). While there
was a £1.2m favourable currency movement, there
was an overall reduction in profitability due in large
part to the non-repeat of the higher defence logistics
volumes experienced in the first half of 2016, together
with the impact of other contract scope reductions and
attrition. There are no OCP contracts in the division
and therefore no OCP utilisation within Underlying
Trading Profit.
There were no Contract & Balance Sheet Review
adjustments in the year, therefore Trading Profit was
also £16.2m (2016: £18.8m, reflecting £2.2m net release
for Contract & Balance Sheet Review adjustments).
The Middle East represented around £0.1bn of the
Group’s aggregate total value of signed contracts
during the year. Amongst smaller contract awards
were new wins to provide facilities management in
Abu Dhabi and defence training support in Qatar.
Serco was unsuccessful however in pursuing the very
large tenders for light rail and tram operations in the
region. Extensions to existing work included facilities
management for Cleveland Clinic Abu Dhabi, and air
navigation services and training in Bahrain and Iraq;
there were no other large rebid or extension decisions
due in the year.
Of existing work where an extension or rebid will be
required at some point before the end of 2020, there are
13 contracts with annual revenue of over £5m within the
Middle East division; in aggregate, these represent well
over 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; by 2020, our Dubai Air Navigation Services
will also become due for further extension or rebid.
Our pipeline of major new bid opportunities in the
region has reduced very significantly following the
outcome of the light rail and tram bids. There are some
other smaller opportunities in transport and defence
support services, and effort is ongoing to rebuild a
stronger pipeline.
49
Financial StatementsDirectors’ ReportStrategic Report Finance Review
Underlying Trading Profit of £69.8m was at the top end of
our guidance given at the start of the year; it was £12m lower
than 2016, driven by the first half of 2016 benefiting from
non-recurring trading items, and by net contract attrition.
Revenue from continuing and discontinued operations was
£94m lower at £2,954m. Closing Net Debt of £141m was better
than expected and represents a year-on-year increase of £32m,
driven by the outflows related to loss-making contracts.
For the year ended
31 December 2017
Underlying
£m
Non
underlying
items
£m
Revenue
Cost of sales
Gross profit
Administrative expenses
Share of profits in joint ventures
and associates, net of interest
and tax
Profit before interest and tax
Margin
Net finance costs
Other gains
Profit before tax
Tax charge
Effective tax rate
Profit/(loss) for the period
Minority interest
Earnings/(loss)
per share (pence)
2,953.6
(2,688.9)
264.7
(222.2)
27.3
69.8
2.4%
(11.6)
–
58.2
(20.6)
(35.4%)
37.6
0.3
3.42
–
(15.8)
(15.8)
–
–
(15.8)
–
0.7
(15.1)
5.0
(10.1)
Trading
£m
2,953.6
(2,704.7)
248.9
(222.2)
27.3
54.0
1.8%
(11.6)
0.7
43.1
(15.6)
(36.2%)
27.5
0.3
2.50
Amortisation
and impairment
of intangibles
arising on
acquisition
£m
Less
discontinued
pre-
exceptional*
£m
–
–
–
(4.4)
–
(4.4)
–
–
(4.4)
1.6
(2.8)
–
–
–
–
–
–
–
–
–
–
–
Continuing
and
discontinued
exceptional
items
£m
Less
discontinued
exceptional
items*
£m
–
–
–
(19.6)
–
(19.6)
–
–
(19.6)
(5.0)
(24.6)
–
–
–
–
–
–
–
–
–
–
–
Statutory
pre-
exceptional
£m
2,953.6
(2,704.7)
248.9
(226.6)
27.3
49.6
1.7%
(11.6)
0.7
38.7
(14.0)
(36.2%)
24.7
0.3
2.24
Statutory
£m
2,953.6
(2,704.7)
248.9
(246.2)
27.3
30.0
1.0%
(11.6)
0.7
19.1
(19.0)
(99.5%)
0.1
0.3
(0.02)
*
No amounts are recorded as discontinued operations for the year ended 31 December 2017.
50
Strategic ReportSerco Group plc Annual Report and Accounts 2017
For the year ended
31 December 2016
(restated*)
Revenue
Cost of sales*
Gross profit*
Administrative expenses*
Share of profits in joint ventures
and associates, net of interest
and tax
Profit before interest and tax
Margin
Net finance costs
Profit before tax
Tax charge
Effective tax rate
Profit for the period from
continuing operations
Loss for the period from
discontinued operations
Profit/(loss) for the period
Minority interest
Earnings/(loss)
per share (pence)
Underlying
£m
3,047.8
(2,782.9)
264.9
(216.2)
33.4
82.1
2.7%
(12.6)
69.5
(24.4)
35.2%
45.1
–
45.1
0.1
4.13
Non
underlying
items
£m
–
18.2
18.2
–
–
18.2
–
18.2
6.7
24.9
–
24.9
Trading
£m
3,047.8
(2,764.7)
283.1
(216.2)
33.4
100.3
3.3%
(12.6)
87.7
(17.7)
20.2%
70.0
–
70.0
0.1
6.42
Amortisation
and impairment
of intangibles
arising on
acquisition
£m
Less
discontinued
pre-
exceptional
£m
–
–
–
(5.1)
–
(5.1)
–
(5.1)
1.8
(3.3)
–
(3.3)
(36.8)
40.1
3.3
–
–
3.3
–
3.3
0.1
3.4
(3.4)
–
Continuing
and
discontinued
exceptional
items
£m
Less
discontinued
exceptional
items
£m
–
–
–
–
–
–
(70.5)
14.2
Statutory
pre-
exceptional
£m
3,011.0
(2,724.6)
286.4
(221.3)
Statutory
£m
3,011.0
(2,724.6)
286.4
(277.6)
33.4
42.2
1.4%
(12.6)
29.6
(12.7)
42.9%
–
14.2
0.4
14.6
–
14.6
16.9
(14.6)
–
(18.0)
(1.1)
0.1
(0.11)
–
(70.5)
(0.4)
(70.9)
3.1
(67.8)
–
(67.8)
33.4
98.5
3.3%
(12.6)
85.9
(15.8)
18.4%
70.1
(3.4)
66.7
0.1
6.12
*
Costs included within cost of sales and administrative expenses have been reallocated, resulting in a restatement. See Note 2 to the Consolidated Financial Statements.
Change regarding the classification of cost items within
cost of sales and administrative expenses
The Group has undergone a programme of work on its financial
data structures to appropriately allocate and charge costs to the
relevant divisions and between cost of sales and administrative
expenses. As a result of the activities performed in this area, the
Group’s classification of cost items in the income statement has
changed. The prior year’s results have been restated to reflect
the cost items identified which should have been reallocated
in 2016. This resulted in increasing administrative expenses by
£43.0m and decreasing cost of sales by the same amount. The
change in policy has no impact on operating profit, any other item
below this on the income statement, or any of the Group’s key
performance measures.
Cost of sales are considered to be the costs of operating
contracts. This includes the unavoidable costs of servicing
contracts and all costs that a contract would incur purely on its
own without a parent company, regardless of how those services
are delivered within the wider Group, such as IT or Human
Resource management services provided centrally.
Alternative Performance Measures (APMs)
and other related definitions
Overview
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, except
where amounts are recalculated to reflect constant currency.
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.
51
Financial StatementsDirectors’ ReportStrategic Report For the year ended 31 December
For the year ended 31 December
2017
£m
Organic Revenue at reported
currency (continuing activities only)
Finance Review continued
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group’s
Consolidated Income Statement on page 158,
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 2017 into Sterling at the average
exchange rate for the year ended 31 December 2016.
All revenue in 2017 arose from continuing activities.
Reported revenue at constant currency
2,832.0
Foreign exchange differences
121.6
Reported revenue at reported currency
2,953.6
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,
Organic Revenue at constant currency is recalculated
by excluding the impact of any relevant acquisitions
or disposals.
For the year ended 31 December 2017, an adjustment
was required for the disposal of the remaining element
of the UK private sector BPO business, consisting of a
single contract, sold on 3 July 2017. This business was
previously reported within discontinued operations
but included as continuing in 2017 as it does not have
a material impact on the Group’s results. The Group
disposed of Service Glasgow LLP on 1 December 2017,
which also consisted of a single contract. However, this
disposal arose as a result of normal contract attrition
rather than as a result of the disposal of a wider
business and hence this is not excluded for the
Organic Revenue calculation.
The only acquisition excluded for the calculation of
Organic Revenue in the year relates to the acquisition
of 50% of the issued share capital of Serco Sodexo
Defence Services Pty Ltd, resulting in full control being
obtained. Serco Sodexo Defence Services Pty Ltd was
previously a 50% owned joint venture accounted for on
an equity accounting basis and therefore no revenues
had previously been recorded in the Group’s results.
Organic Revenue growth is calculated by comparing
the current year Organic Revenue at constant currency
exchange rates with the prior year Organic Revenue at
reported currency exchange rates.
52
For the year ended 31 December
2017
£m
Organic Revenue at constant currency
2,823.1
Foreign exchange differences
121.3
Organic Revenue at reported currency
2,944.4
Impact of any relevant acquisitions or
disposals
9.2
Reported revenue at reported currency
2,953.6
2016
£m
3,011.0
–
3,011.0
Impact of any relevant acquisitions
or disposals
Reported revenue at reported
currency (continuing activities only)
Revenue from continuing and discontinued operations
Reported revenue, as shown on the Group’s
Consolidated Income Statement on page 158, 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. 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. No operations
were classified as discontinued in 2017 as there was a
single remaining business as at 1 January 2017 which
generated insignificant revenue and profit up to the
date of disposal of 3 July 2017. Discontinued operations
in the prior year reflect the former Global Services
division which consisted of the Group’s private sector
BPO operations.
For the year ended 31 December
Revenue from continuing
and discontinued operations
Exclude revenue from
discontinued operations
Reported revenue
(continuing activities only)
2017
£m
2016
£m
2,953.6
3,047.8
–
(36.8)
2,953.6
3,011.0
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Revenue from continuing operations, including
share of joint ventures and associates
Reported revenue, as shown on the Group’s
Consolidated Income Statement on page 158,
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.
For the year ended 31 December
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)
2017
£m
2016
£m
3,310.3
3,491.8
(356.7)
(480.8)
2,953.6
3,011.0
Alternative profit measures
For the year ended 31 December
Underlying Trading Profit
Non-underlying items:
Include OCP charges and releases
Include other Contract & 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
from continuing and discontinued operations
Exclude operating loss from discontinued operations
Operating profit (continuing activities only)
2017
£m
69.8
(19.0)
3.2
–
–
(15.8)
54.0
(19.6)
(4.4)
–
30.0
2016
£m
82.1
9.6
4.6
0.5
3.5
18.2
100.3
(56.3)
(5.1)
3.3
42.2
Underlying Trading Profit (UTP)
The Group uses an 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 there were four items excluded from UTP,
only two of which required adjustment in 2017.
Charges and releases on all Onerous Contract
Provisions (OCPs) are excluded in the current and prior
years. OCPs reflect the future multiple year cost of
delivering onerous contracts and do not reflect only
the current cost of operating the contract in the latest
individual year. It should be noted that, as for operating
profit, UTP benefits from OCP utilisation of £69.3m in
2017 (2016: £84.2m) which neutralises the in-year losses
on previously identified onerous contracts, therefore it
is only charges or releases of OCPs that are adjusted for.
Revisions to accounting estimates and judgements
which arose during the 2014 Contract & Balance Sheet
Review are separately reported where the impact of an
individual item is material. Only one such item was noted
in 2017, relating to a release of a provision made during
the Contract & Balance Sheet Review which has been
released following a change in the Group’s obligations.
Both OCP adjustments and other Contract & 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.
53
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
Underlying Trading Profit (UTP) continued
UTP at constant currency
UTP disclosed above has been translated at the average
foreign exchange rates for the year. 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 2017 into Sterling at the average
exchange rate for the year ended 31 December 2016.
For the year ended 31 December
Underlying Trading Profit
at constant currency
Foreign exchange differences
Underlying Trading Profit
at reported currency
2017
£m
63.3
6.5
69.8
Alternative Earnings or Loss Per Share (EPS) measures
For the year ended 31 December
Underlying EPS from
continuing and discontinued
operations, basic
Impact of non-underlying
items and amortisation and
impairment of intangibles
arising on acquisition
EPS from continuing and
discontinued operations
before exceptional items
Impact of exceptional items
Reported EPS from
continuing and discontinued
operations, basic
2017
pence
2016
pence
3.42
4.13
(1.18)
2.24
1.99
6.12
(2.26)
(0.02)
(6.23)
(0.11)
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 158, 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.
The benefit of depreciation and amortisation charges
not being taken in the Group accounts in relation to
assets held for sale were excluded in the prior year. Such
charges were 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. No assets
are included as held for sale in 2017 and therefore no
adjustment is required in 2017.
Finally, any other significant items that have a one-time
financial impact are excluded, which for 2016 related to
the one-time pension settlement associated with the
early exit of a UK local authority contract in 2015. This
item was distinct from exceptional items in that it arose
from normal contract exit conditions. No such material
one-time items occurred in 2017.
Underlying trading margin is calculated as UTP divided
by revenue from continuing and discontinued operations.
The non-underlying column in the summary income
statement on page 50 includes the tax impact of the
above items and tax items that, in themselves, are
considered to be non-underlying. Further detail of such
items is provided in the tax section below.
Trading Profit
The Group uses Trading Profit as an alternative
measure to operating profit, as shown on the Group’s
Consolidated Income Statement on page 158, by
making three adjustments. Trading Profit is a metric
used to determine the performance and remuneration
of the Executive Directors.
First, Trading Profit excludes exceptional items, being
those considered material and outside of the normal
operating practice of the Group to be suitable of
separate presentation and detailed explanation.
Second, 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.
Third, the Trading Profit of discontinued operations
is included as 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. There were no discontinued operations
in 2017.
54
Strategic ReportSerco Group plc Annual Report and Accounts 2017 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 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. As Trading Cash
Flow was an outflow in 2016, a conversion percentage
of UTP is not presented.
For the year ended 31 December
Free Cash Flow
Add back:
Tax paid
Non-cash R&D expenditure
Net interest received
Capitalised finance costs paid
Trading Cash Flow
Underlying Trading Profit
Underlying Trading Profit
cash conversion
Net Debt
2017
£m
(6.7)
11.4
0.2
17.0
–
21.9
69.8
31%
2016
£m
(33.0)
5.6
0.4
18.7
0.3
(8.0)
82.1
N/A
We present an alternative measure to bring together
the various funding sources that are included on the
Group’s Consolidated Balance Sheet on page 161 and
the accompanying notes. 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
Loans payable
Obligations under finance leases
Derivatives relating to Net Debt
Net Debt
2017
£m
112.1
25.7
2016
£m
177.8
22.9
(271.5)
(299.9)
(20.2)
12.8
(28.2)
18.1
(141.1)
(109.3)
Underlying EPS from continuing and
discontinued operations
Reflecting the same adjustments made to operating
profit to calculate UTP as described above, and
including the related tax effects of each adjustment and
any other non-underlying tax adjustments as described
in the tax charge section below, an alternative measure
of EPS is presented. This aids consistency with historical
results, and enables performance to be evaluated
before the unusual or one-time effects described
above. The full reconciliation between statutory EPS
and Underlying EPS from continuing and discontinued
operations is provided in the summary income
statements on page 50.
Alternative cash flow and Net Debt measures
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 162.
This IFRS measure is adjusted 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.
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
2017
£m
(6.7)
(28.2)
17.0
–
2016
£m
(33.0)
(40.0)
18.7
0.3
34.6
31.6
16.7
(22.4)
(32.5)
(15.8)
(39.9)
(62.3)
55
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
Pre-tax Return on Invested Capital (ROIC)
ROIC is a measure 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
Total invested capital assets
Current liabilities
Trade and other payables
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%
2017
£m
551.3
66.7
65.2
14.3
57.3
17.4
506.5
1,278.7
2016
£m
577.9
83.6
69.3
14.4
44.4
22.4
543.5
1,355.5
(462.8)
(524.5)
(28.7)
(491.5)
787.2
800.7
54.0
6.7%
69.8
8.7%
(16.8)
(541.3)
814.2
768.7
100.3
13.0%
82.1
10.7%
56
Strategic ReportSerco Group plc Annual Report and Accounts 2017
Overview of financial performance
Revenue
Reported Revenue declined by 2% in the year to
£2,953.6m (2016: £3,011.0m), a 6% reduction in
constant currency.
No revenue arose in 2017 from operations classified as
discontinued, with total revenues for the year ended
31 December 2016 from continuing and discontinued
operations being £3,047.8m.
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 £54.0m (2016: £100.3m).
Trading Profit for the year ended 31 December 2016
included a loss on discontinued operations of £3.3m.
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 £69.8m (2016: £82.1m), down 15%. At constant
currency, UTP was £18.8m lower than 2016 at £63.3m,
with a movement of £4.6m relating to the results of
discontinued operations in 2016.
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 charges from OCPs
of £19.0m (2016: net releases of £9.6m) following
the annual reassessment undertaken as part of the
budgeting process. Also excluded from UTP were
net releases of £3.2m (2016: net releases of £4.6m)
relating to other provisions and accruals for items
identified during the 2014 Contract & Balance Sheet
Review. UTP also excluded the benefit arising from
the non-depreciation and amortisation of assets
classified as held for sale in 2016 of £0.5m; there
were no such assets in 2017. Other one-time items of
£3.5m excluded from UTP in 2016 related to a pension
scheme settlement arising from the early exit of a UK
Local Authority contract in 2015; there were no such
adjustments necessary for one-time items in 2017.
The cumulative to date improvement to Trading
Profit as a result of OCP charges and releases and
adjustments to items identified during the 2014
Contract & Balance Sheet Review is £19.3m (2016:
£35.1m). This represents 3% of the 2014 total charge
to Trading Profit arising from the Contract & Balance
Sheet Review.
The tax impact of items in UTP and other non-
underlying tax items is discussed in the tax section
of this Finance Review.
Discontinued operations
The Global Services division, representing private
sector BPO operations, was classified as a discontinued
operation in 2015 and 2016. Disposal of the offshore
BPO business was largely completed in December
2015, with the disposals of two much smaller remaining
elements completed in March 2016 and December 2016.
The residual UK onshore private sector BPO operations
were sold or exited in 2016 with the exception of one
business, consisting of a single contract, the disposal
of which completed in July 2017. Total revenues for
the remaining operations were £5.4m and the loss
before exceptional items was £0.6m for the year
ended 31 December 2017, therefore the results have
been included in continuing operations in 2017 on the
grounds of materiality.
57
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
The amounts reported as discontinued operations in the prior year were as follows:
For the year ended 31 December
Revenue
Underlying Trading Loss
Onerous contract and Contract & Balance Sheet Review adjustments
Benefit from non-depreciation and non-amortisation of assets held for sale
Trading Loss
Amortisation and impairment of intangibles arising on acquisition
Operating loss before exceptional items
Exceptional loss on disposal of subsidiaries and operations
Other exceptional operating items
Exceptional operating items
Operating loss
Exceptional finance costs
Loss before tax
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)
(17.9)
(0.1)
(18.0)
The decline in revenue and profits on the prior year
is partly due to the change in shareholding in AWE
Management Limited and partly due to the end of
the Northern Rail franchise on 31 March 2016.
Exceptional items
Exceptional items are 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.
Exceptional items arose on both the continuing
and discontinued operations of the Group in 2016.
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. There were no discontinued
operations in 2017.
Joint ventures and associates-share of results
In 2017, the most significant joint ventures and
associates in terms of scale of operations were AWE
Management Limited, and Merseyrail Services Holding
Company Limited, with dividends received of £17.1m
(2016: £19.6m) and £7.3m (2016: £7.3m) respectively.
Total revenues generated by these businesses were
£951.8m (2016: £968.1m) and £155.7m (2016: £150.3m)
respectively. 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.
While the revenues and individual line items are not
consolidated in the Group Consolidated Income
Statement, summary financial performance measures
for the Group’s 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 investment finance costs
Income tax expense
Profit after tax
Dividends received from joint
ventures and associates
2017
£m
356.7
34.4
(0.1)
(7.0)
27.3
28.2
2016
£m
480.8
40.7
(0.6)
(6.7)
33.4
40.0
58
Strategic ReportSerco Group plc Annual Report and Accounts 2017 For the year ended 31 December
Exceptional items arising on continuing operations
Exceptional profit on disposal of subsidiaries and operations
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
Impairment of AsPac customer lists
Other exceptional operating items
Exceptional operating items arising on continuing operations
Exceptional items arising on discontinued operations
Exceptional loss on disposal of subsidiaries and operations
Other exceptional operating items on discontinued operations
Restructuring costs
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-discontinued
Exceptional tax-continuing
Total operating and financing exceptional items in continuing
and discontinued operations
Exceptional profit on disposals
There were no material disposals of continuing operations in 2017.
2017
£m
0.3
–
(28.6)
–
(0.4)
0.4
10.3
4.5
(6.1)
(19.9)
(19.6)
–
–
–
–
–
–
(19.6)
–
(5.0)
(24.6)
2016
£m
2.9
(17.8)
(17.2)
(0.1)
(0.1)
0.6
(10.7)
(13.9)
–
(59.2)
(56.3)
(2.8)
(1.1)
(13.7)
3.4
(11.4)
(14.2)
(70.5)
(0.4)
3.1
(67.8)
Other exceptional operating items
The annual impairment testing of CGUs in 2017 has identified no impairment of goodwill.
The Group is incurring costs in relation to restructuring programmes resulting from the Strategy Review. These
costs include redundancy payments, provisions, external advisory fees and other incremental costs, including
in 2017 £2.8m of intangible asset impairment (2016: £nil). Due to the nature and scale of the impact of the
transformation phase of the Strategy Review, the incremental costs associated with this programme are considered
to be exceptional. Costs associated with the restructuring programme resulting from the Strategy Review must
meet the following criteria: that they are directly linked to the implementation of the Strategy Review; they are
incremental costs as a result of the activity; and they are non-business as usual costs. In 2017, a charge of £28.6m
(2016: £17.2m) arose in relation to the restructuring programme resulting from the Strategy Review. The Strategy
Review is discussed in more detail in the Strategic Report on page 11. Non-exceptional restructuring charges are
incurred by the business as part of normal operational activity, which in the year totalled £11.1m (2016: £6.7m) and
were included within operating profit before exceptional items. We expect restructuring costs of approximately
£35m to be incurred in 2018 which will be treated as exceptional.
There were exceptional costs totalling £0.4m (2016: £0.1m) associated with the UK Government reviews and the
programme of Corporate Renewal. These costs have historically been treated as exceptional and consistent
treatment is applied in 2017.
59
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
Other exceptional operating items continued
There were releases of provisions of £0.4m (2016: £0.6m)
which were previously charged through exceptional
items in relation to the exit of the UK frontline clinical
health contracts.
An exceptional charge of £10.7m arose in 2016 in
respect of the bulk transfer of a number of employees
that are being transferred from the Serco Pension
and Life Assurance Scheme (SPLAS) to the Principal
Civil Service Pension Scheme. This transfer was legally
agreed 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, for which a provision was made.
In 2017 a new agreement was reached with the UK
Government to transfer out the scheme members on
an individual basis and the 2016 legal and commercial
arrangements were cancelled by consent of all parties.
As a result of the changes, the impact of the transfer
was treated as an experience gain adjustment through
other comprehensive income and the majority of the
provision made in 2016 was reversed, resulting in a
£10.3m credit to exceptional items in 2017.
In 2016 a review of a joint venture’s cash flow projections
led to the impairment of certain equity interests and
associated receivables balances, totalling £13.9m.
The impairment was outside of the normal course of
business and of a significant value, and was therefore
considered to be an exceptional item. In the year ended
31 December 2017 payments of £4.5m were received
against the impaired loan. The likelihood of further cash
receipts against the receivables remains uncertain.
As a result of contracts coming to the end of their
natural lives and no significant new contracts being
awarded by the customer, the remaining customer
relationship intangible assets of the DMS Maritime
Pty Limited business acquired in 2012 were impaired,
totalling £6.1m.
Exceptional tax
Exceptional tax for the year was a tax charge of £5.0m
(2016: £3.1m credit), comprising a £2.3m credit on
exceptional items within operating profit and a £7.3m
charge in respect of other exceptional tax items.
Exceptional costs of £19.6m only gave rise to a credit of
£2.3m, as the majority of these costs were incurred in the
UK where they only impact our unrecognised deferred
tax in relation to losses.
The other exceptional tax items relate to two matters, the
first is the impact on tax of the pension buy-in disclosed
in Note 33 to the consolidated financial statements
which led to a £95.0m reduction in the IFRS valuation
of the Group’s defined benefit pension schemes and
consequently a deferred tax charge to the income
statement of £16.1m. Movements in the valuation of
the Group’s defined benefit pension schemes and the
associated deferred tax impact are reported in the
Statement of Comprehensive Income (SOCI) and do not
flow through the income statement, therefore do not
impact profit before tax or the tax charge. However, the
net amount of deferred tax recognised in the balance
sheet relates to both the pension accounting and other
timing differences, such as recoverable losses. As the
net deferred tax balance sheet position is at the level
supported by future profit forecasts, the decrease in
the deferred tax liability associated with the pension
scheme (with the benefit reported in the SOCI) leads to
a corresponding decrease in the deferred tax asset to
match the future profit forecasts. Such a reduction in the
deferred tax asset therefore leads to a charge to tax in
the income statement.
The second element is a credit of £8.8m related to
legislative changes in the UK and the US which have
impacted the value of deferred tax held on the balance
sheet. There is a reduction in the deferred tax liability
that is held in connection with our US operations
of £12.5m, as future US tax liabilities are expected
to crystallise at lower US tax rates. The fall in future
expected US rates is primarily due to the enactment
of the Tax Cuts & Jobs Act in December 2017 which
reduces the corporate income tax rate in the US from
35% to 21% effective from 1 January 2018. In addition,
there was a change in UK tax law in 2017. This UK
change will reduce the quantum of loss brought forward
that can be used to offset taxable profits arising in a
year, and will also enable losses carried forward in one
company to be used to offset profits in another. The
combined impact of these UK law changes results in a
tax charge of £3.7m.
Pre-exceptional finance costs and investment revenue
Investment revenue of £7.6m (2016: £9.3m) includes
interest accruing on net retirement benefit assets of
£3.8m (2016: £4.7m), interest earned on deposits and other
receivables of £2.6m (2016: £3.6m) and the movement in
discounting of other receivables of £1.2m (2016: £1.0m).
Finance costs of £19.2m (2016: £21.9m) includes interest
incurred on the USPP loans and the Revolving Credit
Facility of £14.0m (2016: £15.6m), facility fees and other
charges of £3.0m (2016: £3.5m), interest payable on finance
leases of £1.3m (2016: £1.6m), the movement in discount on
provisions of £1.3m (2016: £2.4m) and a credit for foreign
exchange on financing activities of £0.4m (2016: £1.2m).
60
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Other gains
On 24 August 2017 the Group acquired 50% of the issued
share capital of Serco Sodexo Defence Services Pty Ltd
for £1.6m, obtaining full control. Serco Sodexo Defence
Services Pty Ltd was previously a 50% owned joint venture
accounted for on an equity accounting basis. As a result
of the increase in ownership from 50% to 100%, the Group
fair valued the existing 50% shareholding and the resulting
uplift in value of £0.7m was recorded in Other gains,
outside of operating results.
Tax
Tax charge
Underlying tax
In 2017 we recognised a tax charge of £20.6m on
underlying trading profits after finance cost. The effective
tax rate in 2017 (35.4%) is at a similar level to 2016 (35.2%).
Pre-exceptional tax
We recognised a tax charge of £14.0m (2016: £15.8m)
on pre-exceptional profits which includes £20.6m
underlying tax, £1.6m tax impact of amortisation on
intangibles arising on acquisition and £5.0m credit on
non-underlying items. The £5.0m credit consists of the
tax impact of non-underlying items together with tax
items that are in themselves considered to be
non-underlying, specifically:
• As noted above with regards to exceptional tax,
movements in the valuation of the Group’s defined
benefit pension schemes leads to a corresponding
adjustment to the deferred tax asset to match the
future profit forecasts. Such a change in the deferred
tax asset impacts tax in the income statement.
Where deferred tax charges or releases are the result
of movements in the pension scheme valuations
rather than trading activity, these are excluded from
the calculation of tax on underlying profit and the
underlying effective tax rate, with the prior periods
being restated to reflect this. These amounted to
£1.9m for 2017 (2016: £nil).
• During the current period we have recognised an
additional £11.1m of deferred tax asset in relation to
UK losses to reflect the improved forecast profits of
our UK operations. This credit nets against the charge
(£3.7m) taken to exceptional tax and described below,
which relates to the UK law change in 2017 to give a
net increase in UK deferred tax assets of £7.4m.
• The tax on non-underlying items during the period
totalled a credit of £4.2m reflecting the impact of
current or future tax deductions available.
The tax rate on profits before exceptional items on
continuing operations, at 36.2% is higher than the UK
standard corporation tax rate of 19.25%. This is due
to the upward impact of higher rates of tax on profits
arising on our international operations, together with
the absence of any deferred tax credit for current year
losses incurred in the UK. This is only partially offset
by the downward impact of our joint ventures whose
post-tax results are included in our pre-tax profit
and additional deferred tax assets that have been
recognised in relation to historic UK losses. 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. 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.
The enactment of the Tax Cuts & Jobs Act in the US has
not impacted our pre-exceptional tax charge during
2017 with the impact on our valuation of deferred tax
shown as an exceptional item and explained further
above. In the medium term, the new law is expected
to have only a marginal impact on our tax liability in
the US. This is because although we will benefit from
the fall in tax rate, our US business bears interest cost,
associated with historic funding put in place to acquire
US businesses, an element of which will not lead to tax
deductions in the medium term.
Exceptional tax
Analysis of exceptional tax is provided in the
Exceptional items section above.
Contingent tax assets
At 31 December 2017, the Group has gross estimated
A £17.4m UK tax asset has been recognised at
31 December 2017 (2016: £10.0m) on the basis of
utilisation against forecast taxable profits.
At 31 December 2017, the Group has estimated
unrecognised UK deferred tax assets of an additional
£160m which are contingent on further improvement in
the UK profit forecast.
61
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
Taxes paid
Net corporation tax of £15.3m was paid during the year,
relating primarily to our operations in AsPac (£5.5m),
Europe (£3.2m), Middle East (£1.5m) and Americas
(£5.1m). The Group's UK operations have transferred
tax losses to its profitable joint ventures and associates
giving a cash tax inflow in the UK of £4.4m. 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 £11.4m.
The amount of tax paid (£11.4m) differs from the tax
charge in the period (£19.0m) 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 of taxes that have been paid during the
year is shown below.
Total tax contribution
Our tax strategy of paying the appropriate amount of
tax as determined by local legislation 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.
In total during 2017, Serco globally contributed
£578m of tax to government in the jurisdictions in
which we operate.
Taxes by category
For the year ended
31 December 2017
Corporation tax
VAT and similar
People taxes
Other taxes
Total
Taxes by region
For the year ended
31 December 2017
UK & Europe
AsPac
Americas
Middle East
Total
Taxes
borne
£m
Taxes
collected
£m
15.3
9.7
109.0
6.7
–
152.2
284.1
0.5
Total
£m
15.3
161.9
393.1
7.2
140.7
436.8
577.5
Taxes
borne
£m
Taxes
collected
£m
82.8
25.6
30.2
2.1
235.7
121.5
76.8
2.8
Total
£m
318.5
147.1
107.0
4.9
140.7
436.8
577.5
Corporation tax, which is the only cost to be separately
disclosed in our Consolidated 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 a further £8.20 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 £3.10 on behalf of national governments (taxes
collected). This amount is directly impacted by the
people that we employ and the sales that we make.
Dividends
The Board is not recommending the payment of a
dividend in respect of the 2017 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 2017, we have been mindful of
the fact there has been a reduction in earnings, a free
cash outflow and an increase in Net Debt. In these
circumstances, the Board believes that it would not be
prudent to resume dividend payments at the current
juncture. For 2018, our guidance is for an improvement
in Underlying Trading Profit, but we expect Net Debt
to still increase, largely as a result of cash outflows
related to exceptional restructuring costs and taking
opportunities for value-enhancing infill acquisitions.
The Board will continue to keep the dividend policy
under close consideration as we progress with
transforming the Group and implementing our strategy.
Share count and EPS
The weighted average number of shares for EPS
purposes was 1,089.7m for the year ended 31 December
2017 (2016: 1,088.3m). EPS before exceptional items
from both continuing and discontinued operations was
2.24p per share (2016: 6.12p); including the impact of
exceptional items, EPS was a loss of 0.02p (2016: 0.11p).
Underlying EPS was 3.42p per share (2016: 4.13p).
Cash flows
The UTP of £69.8m (2016: £82.1m) converts into a
trading cash inflow of £21.9m (2016: outflow of £8.0m).
The negative conversion in 2016 was primarily due to
the adverse working capital movement of £23.7m and
the cash outflows arising on the utilisation of contract
provisions of £84.2m. In 2017, the working capital outflow
is £9.0m and the OCP utilisation is £69.3m.
62
Strategic ReportSerco Group plc Annual Report and Accounts 2017 The table below shows the operating profit and FCF
reconciled to movements in Net Debt. FCF for the
year was an outflow of £6.7m compared to an outflow
of £33.0m in 2016. The improvement in FCF is largely
as a result of a reduction in operating profit before
exceptional items on continuing and discontinued
operations from £95.2m in 2016 to £49.6m in 2017,
which is more than offset by an improvement in the
net movement in non-exceptional provisions from a
reduction in 2016 of £118.4m to a reduction in 2017 of
£46.4m. The movement in non-exceptional provisions is
partly due to the reduction in total provision utilisation
from £123.4m in 2016 to £82.2m in 2017.
The movement in Net Debt is an increase of £31.8m
in 2017, a reconciliation of which is provided at the
bottom of the following table. The movement includes
a net outflow of £5.6m arising on the acquisition and
disposal of subsidiaries, primarily relating to the cash
held by Service Glasgow LLP, an entity disposed of
in the year. In 2016 a net cash inflow of £19.2m arose
primarily as a result of the disposal of the private sector
BPO business. The movement in Net Debt for 2017 also
includes a net exchange gain of £17.4m, compared to a
£41.8m loss in 2016.
For the year ended 31 December
Operating profit 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
Depreciation, amortisation and impairment of property, plant
and equipment and intangible assets
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 (outflow)/inflow on acquisition and disposal of subsidiaries
Other movements on investment balances
Capitalisation and amortisation of loan costs
Unwind of discounting and capitalisation of interest on loans receivable
New, acquired and disposed finance leases
Exceptional items
Cash movements on hedging instruments
Foreign exchange gain/(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 1 January including assets and liabilities held for sale
Net Debt at 31 December
2017
£m
30.0
–
19.6
49.6
(27.3)
(46.4)
50.0
11.4
37.3
(9.0)
(11.4)
(0.2)
16.7
28.2
0.5
(17.5)
–
(34.6)
(6.7)
(5.6)
0.2
(0.8)
3.4
(4.7)
(32.5)
(2.5)
17.4
(31.8)
–
(109.3)
(109.3)
(141.1)
2016
£m
42.2
(17.5)
70.5
95.2
(33.4)
(118.4)
52.4
11.5
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)
(62.9)
(109.3)
63
Financial StatementsDirectors’ ReportStrategic Report Finance Review continued
Net Debt
Interest rate risk
As at 31 December
Cash and cash equivalents
Loans receivable
Loans payable
Obligations under finance leases
Derivatives relating to Net Debt
Net Debt
2017
£m
112.1
25.7
2016
£m
177.8
22.9
(271.5)
(299.9)
(20.2)
12.8
(28.2)
18.1
(141.1)
(109.3)
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 Policy requires 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 2017, 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.
Debt covenants
The principal financial covenant ratios are consistent
across the private placement loan notes, receivables
financing facility and 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 opposite.
Average Net Debt as calculated on a daily basis for
the year ended 31 December 2017, was £184.3m (2016:
£119.4m), compared with the opening and closing
positions of £109.3m and £141.1m respectively. Peak
Net Debt was £242.7m (2016: £182.9m).
Treasury operations and risk management
The Group’s operations expose it to a variety of
financial risks that include liquidity, the effects of
changes in foreign currency exchange rates, interest
rates and credit risk. The Group has a centralised
treasury function whose principal role is to ensure that
adequate liquidity is available to meet the Group’s
funding requirements as they arise and that the financial
risk arising from the Group’s underlying operations is
effectively identified and managed.
Treasury operations are conducted in accordance
with policies and procedures approved by the Board
and are reviewed annually. Financial instruments are
only executed for hedging purposes and 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 2017, the Group had committed
funding of £741m (2016: £770m), comprising £261m 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 which was unutilised at the year-end (2016:
utilisation of £7.7m).
Following the further small disposals relating to the
private sector BPO business, the Group was required to
offer two thirds of the net disposal proceeds to the debt
holders in prepayment. As a result of this process, £3.7m
($4.9m) of private placement notes were repaid at par on
29 June 2017.
64
Strategic ReportSerco Group plc Annual Report and Accounts 2017 For the year ended 31 December
Operating profit before exceptional items on continuing and
discontinued operations
Remove: Amortisation and impairment of intangibles arising on acquisition
Trading Profit
Exclude: Share of joint venture post-tax profits
Include: Dividends from joint ventures
Add back: Net non-exceptional charges to OCPs
Add back: Depreciation, amortisation and impairment of property,
plant and equipment and non-acquisition intangible assets
Add back: Foreign exchange credit on investing and financing arrangements
Add back: Share based payment expense
Covenant EBITDA
Net finance costs on continuing and discontinued operations
Exclude: Net interest receivable on retirement benefit obligations
Exclude: Movement in discount on other debtors
Exclude: Foreign exchange on investing and financing arrangements
Add back: Movement in discount on provisions
Covenant net finance costs
Recourse Net Debt
Exclude: Disposal vendor loan note, encumbered cash and other adjustments
Covenant adjustment for average FX rates
CTNB
CTNB/covenant EBITDA (not to exceed 3.5x)
Covenant EBITDA/covenant net finance costs (at least 3.0x)
2017
£m
49.6
4.4
54.0
(27.3)
28.2
19.0
45.6
0.4
11.4
131.3
11.6
3.8
1.2
0.4
(1.3)
15.7
141.1
30.3
7.8
179.2
1.36x
8.4x
2016
£m
95.2
5.1
100.3
(33.4)
40.0
–
47.3
1.2
9.7
165.1
12.6
4.7
1.0
1.2
(2.4)
17.1
109.3
28.5
(23.0)
114.8
0.70x
9.7x
65
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 assets
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other current liabilities
Current tax liabilities
Provisions
Obligations under finance leases
Loans
Total current liabilities
Non-current liabilities
Other non-current liabilities
Deferred tax liabilities
Provisions
Obligations under finance leases
Loans
Retirement benefit obligations
Total liabilities
Net assets
66
2017
£m
2016
£m
551.3
577.9
66.7
65.2
75.3
55.0
41.8
855.3
17.4
516.8
11.2
112.1
657.5
83.6
69.3
73.0
50.8
150.4
1,005.0
22.4
548.4
11.0
177.8
759.6
1,512.8
1,764.6
(464.0)
(25.3)
(148.5)
(8.5)
(31.8)
(678.1)
(28.7)
(20.4)
(211.5)
(11.7)
(239.7)
(15.5)
(527.5)
(525.1)
(25.9)
(172.3)
(12.3)
(9.7)
(745.3)
(16.8)
(30.5)
(249.4)
(15.9)
(290.2)
(17.7)
(620.5)
(1,205.6)
(1,365.8)
307.2
398.8
Strategic ReportSerco Group plc Annual Report and Accounts 2017
At 31 December 2017 the balance sheet had net assets
of £307.2m, a movement of £91.6m from the closing
net asset position of £398.8m as at 31 December 2016.
The decrease in net assets is mainly due to the
following movements:
• A decrease in the net retirement benefit assets of
Group funded defined benefit pension schemes of
£106.4m. In June 2017, the Trustees of the Group’s
primary defined benefit pension scheme entered into
a bulk annuity purchase whereby an insurer will fund
future benefit payments to the relevant members.
The liability to pay the members remains with the
pension scheme which continues to include the
relevant pension liabilities, but an insurance asset
is held which is an equal and opposite amount to
the liability. This removes the risk of longevity and
investment movements for this portion of the scheme
on a funding basis, and also removes the accounting
risk of movements in underlying assumptions on the
liabilities. The transaction resulted in a significant
reduction in the surplus of the pension scheme
under IFRS accounting convention, but resulted in
a reduction in the deficit that is actuarially assessed
for funding purposes of approximately £12m. As at
31 December 2017 the estimated actuarial deficit
of this scheme was £33.7m (2016: £42.6m).
• A decrease in provisions of £61.7m. Further details
on provision movements is provided below.
• The combined position of trade and other current
assets and trade and other current liabilities increased
by £29.5m and Net Debt increased by £31.8m. Further
details of these movements are provided in the cash
flow and Net Debt sections above.
• A decrease in goodwill of £26.6m, caused by
movements in foreign exchange rates.
Provisions
The total of current and non-current provisions has
decreased by £61.7m since 31 December 2016. The
movement is due to a decrease in onerous contract
provisions of £52.0m, an increase in employee-related
provisions of £10.6m, a decrease in property provisions
of £0.9m and a reduction in other provisions of £19.4m.
The £10.6m increase in employee-related provisions is
partly due to the ongoing Strategy Review restructuring
programme and partly relating to obligations arising
at the end of certain contracts. The decrease in other
provisions is primarily due to the release of £10.3m of
exceptional provisions relating to pensions, with the
remaining movement comprised of contract settlements
and releases for potential claims.
Movements in contract provisions since the
31 December 2016 balance sheet date, are as follows:
At 1 January 2017
Charged to the income statement during
the year-trading
Released to the income statement-trading
Released to the income statement-
exceptional
Utilisation during the year
Unwinding of discount
Foreign exchange
At 31 December 2017
Onerous
Contract
Provisions
£m
220.2
62.0
(43.0)
(0.4)
(69.3)
1.3
(2.6)
168.2
The balance of OCPs at 31 December 2017 was
£168.2m (2016: £220.2m). 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 net non-
exceptional charge to OCPs was £19.0m in 2017 and
utilisation was £69.3m.
In 2017, additional charges have been made in respect
of future losses on a number of onerous contracts
totalling £62.0m. This increase related to revisions to
existing OCPs of £61.5m and a new provision raised on
one contract totalling £0.5m. The new contract has been
operating for a number of years and is expected to be
terminated in 2018.
Included within additional charges made to existing
OCPs is £47.0m relating to the Caledonian Sleepers
contract. This increase is partly due to revised
assumptions for the higher costs of running the
contract and the impact from delays in the delivery
of new trains, which includes the higher cost of the
running old trains for longer, associated penalties and
the forecast benefit of revenue growth from the new
trains being pushed back. In addition we have revised
our revenue forecast for the contract based on the 2017
performance, where even a modest reduction in annual
revenue can have a significant impact on a multi-year
OCP. There continue to be a number of assumptions
underpinning the provision that have a range of
potential outcomes, including the train manufacturer
delivering the new trains to the latest timetable and
volume and pricing increases driven by the improved
passenger service from the new trains. The position
under the contract is expected to improve over time,
as the terms of the Franchise Agreement provide a
mechanism that requires Transport Scotland to bear
50% of contract losses from 1 April 2020.
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Financial StatementsDirectors’ ReportStrategic Report
Finance Review continued
In addition, from 1 April 2022, we have the right to seek
adjustments to the financial terms of the Franchise
Agreement that would result either in a small positive
profit margin for Serco from that date, or allow us to
exit the contract.
assets and liabilities will be determined at the date
when contracts are acquired. It is also not yet possible
to provide detailed information about each class of
acquired receivables and any contingent liabilities in
respect of the acquired contracts.
As noted in the overview of performance above, the
Group obtained full control of Serco Sodexo Defence
Services Pty Ltd by acquiring the remaining 50% of
issued share capital for £1.6m.
IFRS15
The Group has undertaken a robust assessment
to determine the impact of IFRS15 on the opening
balance sheet at 1 January 2017 and for the year ended
31 December 2017. The impact on opening retained
earnings will be a reduction of £32.8m and the impact
on the opening OCP balance will be a reduction of
£21.7m. Underlying Trading Profit will decrease by £0.3m
and, as a result of a lower OCP release, Trading Profit
will decrease by £8.7m for the year ended 31 December
2017. This low adjustment is reflective of the prudent
accounting practices adopted by the Group following
the Contract & Balance Sheet Review undertaken in
2014 and the repeat nature of the services provided.
Further detail on the adjustment is provided in Note 2
of the Group’s consolidated financial statements.
Angus Cockburn
Group Chief Financial Officer
21 February 2018
In addition to the Caledonian Sleepers contract, there
have been net OCP releases of £16.4m in UK & Europe
and £11.4m in AsPac.
Acquisitions
On 26 January 2018, the Group acquired 100% of
the issued share capital of BTP Systems, LLC, for
consideration of US Dollar $20.5m in cash. Further
details on this post year-end transaction are provided
in Note 40 to the Consolidated Financial Statements.
The Group signed a revised Business Purchase
Agreement (BPA) on 13 February 2018 with the Special
Managers and Provisional Liquidators acting on behalf
of the relevant Carillion plc subsidiaries to acquire a
portfolio of selected UK health facilities management
contracts. The portfolio has annual revenues of
approximately £90m and a weighted average remaining
term of 14 years. Upon the receipt by the Special
Managers and Provisional Liquidators of the requisite
third party consents, each individual contract will be
transferred to Serco on a cash-free, debt-free basis,
with the consideration to be paid in instalments and to
be satisfied using Serco’s existing financing facilities.
If all the contracts are transferred to Serco under the
revised BPA process, the total consideration payable
would be £29.7m. The consideration payable is lower
than the amount of £47.7m announced on 13 December
2017 in respect of substantially the same contracts that
were subject to the initial BPA signed with Carillion
plc at that date. The change in consideration reflects
the Group’s re-evaluation of potential liabilities,
indemnities, warranties and the additional working
capital investment required as a result of Carillion’s
liquidation. The financial effects of this transaction
have not been recognised at 31 December 2017. As
consents are required for each individual contract to
be transferred and therefore acquired, at the time the
financial statements were authorised for issue, no legal
transfer or control of assets had taken place and so no
disclosures have been made in respect of the assets
and liabilities being acquired. The fair values of the
68
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Corporate Responsibility
We deliver services to governments, serve the public and help to protect
national interests. As a provider of public services we are committed to
operate with a public service ethos and recognise our responsibilities.
Our commitment to corporate responsibility recognises
evolving political and economic landscapes, public
expectations, our broader impact as a company and
how all of these align to the outcomes our customers
seek to achieve.
In 2015/2016, we refreshed our Group strategy, clarified
our purpose and established the new Corporate
Responsibility Committee of the Board. In 2017, we have
continued the refresh of our corporate responsibility
agenda through development of a new corporate
responsibility framework, to better reflect our strategy
and the manner in which we conduct our business.
A good deal of care has been taken in the formulation
of the framework and the elements addressed within.
We have structured it around our key stakeholders –
underpinned by our Values, purpose and public service
ethos – focusing in particular on how we work to add
sustainable value whilst delivering their requirements
with accountability and transparency.
The framework defines our principal areas of
responsibility and will help to guide future practice
and behaviour whilst facilitating measurement of our
performance, supporting us in our efforts to:
• set exemplary standards in public service delivery;
• execute brilliantly to deliver our stakeholders’
expectations;
• meet or exceed the outcomes our customers seek
to achieve;
• uphold relevant laws and regulatory requirements;
• honour our relationships with our internal and
external stakeholders; and
• manage our impact on the environment and the
economies and communities in which we operate.
It will form a foundation for enhancing how we conduct
our business for years to come.
We have begun to embed the framework in our
approach. We will continue to focus on this in
2018 as well as examining stakeholder priorities
and expectations across our principal areas of
responsibility in greater detail. We will also explore
opportunities for richer corporate responsibility
performance measurement.
For now, we share here a summary of our approach to
managing corporate responsibility – of how we have
delivered our public services and lived the principles
recognised within the framework – along with our
progress and performance in 2017.
We have continued to build momentum in long-term
objectives for sustainable improvement – consolidating
progress and maintaining our key strategies. At the
same time, however, we recognise enduring challenges
that, whilst not exclusive to Serco, are high priority
issues for our business and customers.
For example:
• we continue seeking to safeguard our people and
service beneficiaries whilst ensuring that we learn and
move forward meaningfully from every experience; this
includes building our health and safety influence across
the broader context of our operations and – where
applicable – confronting developing trends in violence
and aggression with care and innovation; and
• we continue striving to strengthen gender balance at
all levels of our organisation, which includes creating
the conditions and catalysts for a more diverse and
inclusive talent pipeline.
Examples of specific activities feature in this report.
We cannot claim to have met our expectations of
progress in all areas, particularly where shifting climates,
pressures and other causal factors remain beyond our
control, but we firmly believe we can do better, and will
continue our resistance of complacency and relentless
pursuit of improvement.
More information, including a more detailed report for
the year, is available on our website: www.serco.com
(See also: Corporate Responsibility Committee Report
page 105 and Directors’ Report page 144).
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Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Our corporate responsibility framework
Our corporate responsibility (CR) framework is structured around:
Our Values: Our Values shape the way everyone
in Serco works and behaves.
Behaving with integrity and treating people
with respect: We operate morally and ethically,
with respect for human rights.
Our customers: We are driven by our public service
ethos to help our customers create positive outcomes
for society.
Our people: We are committed to enabling the
development, wellbeing and safety of our people.
Our world: We are responsible in how we impact the
communities, economies and environments in which
we operate.
Our owners: We are determined to protect our
shareholders’ interests and create long-term,
sustainable value for them.
Public service: Everything we do is motivated by
our desire to be a trusted partner of governments,
delivering superb public services that transform
outcomes and make a positive difference for our
fellow citizens.
70
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Our corporate responsibility governance
Our Code of Conduct
The Serco plc Board has ultimate responsibility for the
Group's business strategy, including CR, and for setting
the Group’s culture, Values and ethical standards.
We have a Corporate Responsibility Committee (CRC)
of the Board, chaired by Mike Clasper, the Senior
Independent Director and Non-Executive Director,
which has oversight of our approach to CR and focuses
in four areas: health and safety, people, ethics and our
CR framework.
Our Serco Management System
The Serco Management System (SMS) is our
management framework, describing how we do
business. It defines the rules governing how we operate,
behave and deliver our strategy, including all areas
covered by our CR framework.
At the heart of the SMS are 16 Group policy statements
and 23 Group standards. Group policies are signed by
the Group Chief Executive and approved by the plc
Board. They define our strategic commitments and
apply across the Group.
Group standards reflect our Values and define the
minimum standards we must achieve, focussing on
mandatory requirements applicable across the Group.
Group, Country, Divisional and Local operating
procedures build on these foundations within the SMS,
providing direction on how to achieve mandatory
requirements and comply with relevant laws and
regulations in the countries where we operate.
Operating procedures are sensitive to local customs,
traditions and cultures.
Employee and manager responsibilities regarding
SMS compliance are clearly defined and all employees
complete appropriate SMS, Code of Conduct and
Values training on joining Serco and periodically during
their time with Serco.
In 2017, a new Privacy policy statement and new Group
Standards for Insurance, Human Rights and Information
and Data Privacy were published and the Insider
Information and Share Dealing Standard was replaced
with a more detailed Group Standard Operating
Procedure and Share Dealing Code.
Our Code of Conduct helps us to drive continuous
and consistent responsibility and behaviours across our
organisation. Based on our Values it forms part of the
SMS, clearly and concisely defining our expectations of
operational and behavioural compliance. Everyone who
works for and on behalf of Serco is expected to know,
use and live our Code.
In 2017, we have updated our Code. Key changes
include reflecting our position regarding human rights,
in particular human trafficking and slavery, and adding
detail on the importance of personal security. We have
also added a behaviours section, aligned to our Values,
enabling employees, people managers and leaders to
better understand expected behaviours.
Our Values
Our culture is based on a set of four values – Trust,
Care, Innovation and Pride – that shape our individual
behaviours and hence the way the Company behaves.
They help to ensure we are all working from a commonly
understood base that can be consistently applied
across our organisation.
In 2017, we have continued to embed our refreshed
Values in our ways of working and the business
consciousness. Our Divisions have driven the Values
through local and regional initiatives, while from a
Group perspective, the Values are being incorporated
into the SMS, our Code of Conduct and all existing
channels, publications and resources. For example:
• Our annual employee engagement survey,
Viewpoint, and our premier programme of employee
recognition, the Pulse Awards, are now aligned to
our Values, enabling us to measure values-based
engagement and celebrate values-based behaviour.
• Our Values are now integrated into our Code of
Conduct, Leadership Model and annual Performance
and Development Review process, enabling us to
clearly define our expectations of values-based
behaviour and ensure they are met.
Alongside our ‘Speak Up’ whistleblowing process,
these elements also enable us to regularly assess
and reinforce our culture. Our Viewpoint Culture
Index comprises engagement levels for each of the
four Values and provides insight into our culture as
defined by our Values and perceived by our people.
Culture Index results inform annual engagement
action planning.
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Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Behaving with integrity and treating people
with respect
(See also: Fair competition page 75;
Responsible relationships page 76).
Safe and healthy operations
Our vision is zero harm. Wherever we work, we are
committed to the promotion of wellbeing and the
prevention of injury and ill health.
Across all our regions, we aim to meet the high moral
and ethical standards we have set ourselves, within
the bounds of expected individual and corporate
behaviour, with regard for relevant laws and regulatory
requirements, with sensitivity to local cultures, and with
the utmost respect for human rights.
We have zero tolerance for any form of corrupt
behaviour or activity that breaks any law relating to
human rights, either directly or indirectly, anywhere in
the world. We recognise our obligations under the UK
Modern Slavery Act 2015, publish an annual Modern
Slavery Statement on www.serco.com and do not
engage in any form of human trafficking or use forced,
bonded, illegal or child labour, nor knowingly work
with anyone who does.
We use international human rights standards as a
framework to assess, monitor, mitigate and remedy
any actual or potential adverse human rights impacts
(AHRIs) that may affect our business.
In 2017, we have refreshed our human rights assessment
and decision tree process, strengthening its coverage
of slavery and human trafficking; published a new Group
Standard for human rights; and refreshed our mandated
ethics and compliance training with a new suite of
courses ready for 2018, including modern slavery.
We have also improved our Speak Up (whistleblowing)
programme by implementing an enhanced case
management system, provided as before by an
independent third party, to make the system more
accessible and easier to use; updated our online gifts
and hospitality register to enable approval as well as
registration of items, helping ensure compliance with
the UK Bribery Act; and undertaken further reviews of
adequate procedures for Anti-Bribery and Corruption
(ABC) in our Divisions, completing UK & Europe, Middle
East and AsPac. Additionally, in the UK we piloted
an ABC assessment tool to review contracts against
required adequate procedures.
We strive to promote a 'just' health and safety culture
based on active and caring leadership and mutual
trust, innovation and pride; actively encourage input
from employees and others to build sustainable
solutions; identify and assess the health and safety
hazards, impacts and risks that arise from our activities
and services, investigating incidents and monitoring
performance and systems; and regularly review, learn
and identify opportunities for continual improvement.
In 2017, we reviewed our Group policy and strengthened
supporting Group Standards with the definition
of safety critical risks, whilst embedding Incident
Management and Reporting standards to raise visibility
of and improve consistency in related activities. We
have launched a significant review of safety-related risks
in support of the Group principal risk, ‘catastrophic
incident’. We have continued to build our health
and safety influence across the broader context of
our operations, for example in Transport, where
our experiences have intensified our resolve to help
improve road safety in the UAE – not just for our people
but for all UAE citizens – and strengthen our aviation
safety oversight and sharing of best practice – not just
regionally but internationally through a global aviation
safety forum. We also conducted a UK pilot of the
Health and Safety Laboratory (HSL) 'Safety Climate'
tool to evaluate and benchmark our safety culture.
Our CR in action
We celebrated ‘Zero Harm Week’ across our Divisions
in October in support of our Group objective to
improve health and safety engagement by promoting
a culture of health, safety and wellbeing.
In the UK, we have won several Royal Society for the
Prevention of Accidents Gold Awards in 2017, including
at RAF Fylingdales and Forth Valley Royal Hospital.
We have driven continuous improvement in health and
safety across our businesses, including new tools and
training in Serco Americas to reduce risks and improve
safety management in air traffic control and naval
engineering, and new tools in Serco AsPac to improve
roadside welfare safeguards for our road safety
camera operators.
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Strategic ReportSerco Group plc Annual Report and Accounts 2017 Inclusive workplace
Our business thrives because of our talented and diverse
workforce, which we seek out, nurture and empower.
We recognise, however, that we must continually
challenge ourselves to ensure diversity and inclusion
are embedded in our culture and ways of working.
Diversity and Inclusion (D&I) is prioritised in both our
People Policy and Strategy. We strive to promote equality
of opportunity and create an inclusive and enabling
environment in which all our people are treated fairly and
with respect, dignity and zero tolerance for any form of
discrimination. We prioritise proactive management and
regular analysis of our workforce diversity, seeking to
attract, develop and retain employees from the broadest
possible talent pool.
Our approach to D&I recognises that achievement of
our overall goals needs to take account of business
maturity, regional variations and local legislation.
Implementation of our strategy therefore takes place
at three levels:
• Group sets policy and the broad framework to ensure
consistency of approach, as well as providing clarity
on key areas of focus.
• Each Division maintains a D&I strategy aligned to the
overall Group framework with priorities appropriate
to their geographies, sectors, employee base and
local legislation. Progress is reported through normal
business review and governance frameworks.
• A further level of focus is appropriate for some
Business Units or contracts within a Division, e.g.
in businesses of a particular size, in particular
geographies, or according to local customer
specifications.
Following the launch of our refreshed approach to
D&I in Q4 2016, we have been establishing regular
monitoring and reporting of progress and delivery of
targets at each level (Group/Division/Business Unit or
Contract), whilst continuing our work towards achieving
a minimum of 25% females in leadership roles by 2020,
focusing in particular on improving gender balance in
senior recruitment and our talent pipeline.
We have also established D&I as a standing agenda
item for our Quarterly Talent Reviews (attended by
the Group Human Resources Director (HRD) and
Divisional Chief Executive Officers (CEOs) and HRDs),
ensuring relevant actions are delivered and risks
managed; incorporated D&I demographics into our
employee engagement survey, as appropriate by
Division, expanding options for gender identity, sexual
orientation and disability; developed and launched an
Unconscious Bias e-learning programme; and continued
to introduce, build and promote Divisional councils,
committees, working groups and networks in support of
strategy delivery.
In the UK, we have completed preparations for
reporting pay gap information annually from April 2018,
as required by the Equality Act 2010. We are committed
to ensuring that all our employees are treated fairly, with
dignity, and with an equality of opportunity throughout
their careers with Serco. Measuring, understanding
and reporting our Gender Pay Gap is a welcome and
important step in this journey.
We have undertaken extensive analysis of what is
behind our current median gender pay gap of 12.9% so
that we can identify real opportunities to reduce this.
This figure reflects the average paid to men and women
across our UK businesses. It is not a comparison of pay
rates for men and women doing work of equal value.
The primary cause of the gender pay gap within Serco
is the demography of our UK employee population, in
which we currently have an imbalance in the number
of men and women at the various levels within the
organisational structure. We have fewer women than
men in more senior positions and typically people
in more senior positions receive the highest pay and
bonus pay. This impacts the hourly pay and the bonus
pay figures.
Complementing our strategic D&I focus on leadership
gender, our analysis shows that an equal gender
distribution at our manager level and above would
reduce the overall pay gap to well below UK averages.
Our CR in action
In the UK, we have joined the Stonewall Diversity
Champion programme and launched a network for
LGBT+ employees and allies, sponsored by our UK
& Europe CEO; established a disability network and
signed up to the UK government’s Disability Confident
initiative; and our Serco Inspiring Women network
has partnered with Everywoman, the world's largest
network and learning and development platform for
women in business.
In Americas, our Women at Serco Americas network
has launched a learning programme designed
to empower diversity through development of
communication capability.
In Australia, we have received an Employer Support
Award from the Defence Reserves Support Council.
We have been awarded Platinum membership of the
National Program for Emiratization by the United Arab
Emirates Ministry of Human Resources & Emiratization.
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Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Employee engagement and development
Contributing to communities
We are committed to fostering professional
development and positive working environments that
enable our people to be highly engaged, capable,
passionate about public service, and motivated to
achieve personal success.
We regularly review and strive to improve levels of
employee engagement and performance, including the
development of their skills to meet current and future
business needs and addressing any behaviour identified
as negatively impacting engagement. We provide
relevant training and development where necessary to
enable individuals to perform their duties within role.
In 2017, we have achieved improvements in overall
employee engagement whilst incrementally
strengthening priority engagement drivers identified
by our 2016 results (connection to Serco, taking action
on employee feedback, recognition and resources).
We have sustained momentum in building leadership
engagement whilst also focussing on our people
managers, prioritising contract managers; rolled our
‘Engagement Insights’ tool out beyond our leadership
population, enabling immediate feedback and support
for all employees completing our survey online; and
launched a Steering Committee to improve engagement
across our Group Functions and Corporate Shared
Services, chaired by the Group Chief Financial Officer.
We have continued working to enhance and embed
our core development programmes, including our
Management Programme, designed in partnership
with Oxford Saïd Business School to develop a cadre
of managers aligned to driving our performance and
strategy. A further 118 of our global management
population have completed the programme in 2017,
bringing the cumulative total to 208.
Our CR in action
We have been named one of 'Atlantic Canada's
Top Employers' for 2017.
We have contributed to the improvement of
healthcare service outcomes at Acacia Prison,
Australia, by increasing employee engagement.
Our Learning and Development Team, Dubai Metro
and Tram, have won both the Middle East Centre of
Excellence and International Centre of the Year Lion
Awards from City and Guilds.
We have led the development and deployment
of the new Chartered Manager Degree
Apprenticeship in partnership with the University
of Wolverhampton.
Through our business operations we contribute to local
employment, small-medium enterprises, communities
and economies. Beyond this, we encourage, facilitate,
and proactively drive community initiatives and
charitable giving both from colleagues and from the
Serco Foundation.
We strive to work closely with communities to make a
positive difference and partner with local governments
in order to best contribute to local economies; employ
people from our local communities where possible;
encourage and participate in charitable activity
that aligns with our Values; and ensure small firms,
voluntary and community organisations, and social
enterprises are actively encouraged to be members
of Serco’s supply chain.
In 2017, we enabled and facilitated efforts in
fundraising and support for local communities across
our businesses through our Divisional sponsorship
programmes as well as other partnering with local
governments, social enterprises and charity; continued
to prioritise recruitment from local communities
where appropriate; and continued seeking to expand
and enrich the diversity of our supplier base through
engagement with small and medium-sized suppliers
across our businesses. We have also been preparing
to relaunch the independent Serco Foundation with a
new strategy centred on deploying funds to charitable
partners focused on innovation to improve public
service outcomes for citizens.
Our CR in action
We have continued to prioritise and facilitate
recruitment from local communities where
appropriate, including for our facilities management
contract at the new NHS Dumfries and Galloway Royal
Infirmary, UK, which opened in December 2017.
We have supported a variety of local and regional
education and work experience initiatives across our
businesses, including hosting educational site visits
from schools at the Palm Jumeirah Monorail and Dubai
Metro in the UAE.
Through our corporate sponsorship of the Armed
Services YMCA annual ‘Hearts for Heroes’ event, we
enable combat-wounded US Military servicemen in
California and Virginia to engage in therapy respite.
In Grafton, New South Wales, we have partnered with
the national charity Midnight Basketball Australia to
help provide for the welfare of young people from the
local community.
74
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Protecting the environment
We are committed to limiting the impact our operations
have on the environment through more sustainable
business practice.
We strive to promote a commitment to the environment
based on active and caring leadership and mutual trust,
innovation and pride; actively encourage input from
employees and others to build sustainable solutions;
identify and assess the environmental hazards, impacts
and risks that arise from our activities and services,
investigating incidents and monitoring performance
and systems; and regularly review, learn and identify
opportunities for continual improvement.
We work to minimise adverse environmental impact
through the implementation of environmental
management systems that are proportional to each
contract, aligned to customer specification and
contractual requirements, and underpinned by our
Group Standard Operating Procedure for Health,
Safety and the Environment.
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 work on our customers’
premises and are not in direct control of environmental
impacts. In such cases we work collaboratively with our
customers on environmental issues.
Where we have control, activities are managed locally,
covering 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.
In 2017 we benchmarked our approach to climate
change via the globally-recognised annual Carbon
Disclosure Project (CDP) climate change questionnaire,
achieving a score of B (of all participating companies
23.3% scored A, 24.4% scored B and 52.3% scored C or
D, while within our sector 22% scored A, 21.6% scored B
and 56.4% scored C or D). We have also undertaken an
initial Scope 3 carbon emissions assessment to identify
priority areas in our indirect carbon emissions and
investigated the Science Based Target methodology to
inform future carbon target setting.
Our CR in action
In New Zealand, we are partnering with Auckland
Council and the New Zealand Department of
Corrections to help plant one million trees in the
region over three years.
We have helped to transform waste management at
New York University, Abu Dhabi, by developing and
implementing a new solution and working with our
customer to educate university faculty and students.
We helped develop and now operate the Sentinels Data
Access System for the European Space Agency, helping
to monitor and measure how the Earth is affected by
natural events and the underlying human contributions.
In the UK, we have helped Hertfordshire County
Council achieve significant improvements in energy
efficiency, equating to over £1m to date.
We have conducted a range of local and central
environmental initiatives across our businesses,
including joining the Adopt-a-Highway litter removal
programme and renovating/re-using offices and
furniture across contracts in Serco Americas.
Fair competition
We compete legally, fairly and ethically, making sure
we promote competition in business, protect our
customers’ interests and avoid situations that may,
or may appear to, create a conflict of interest.
We strive to ensure we do not abuse any dominant
market position we have, obtain competitive intelligence
through improper means, or enter into any agreements,
arrangements or concerted business practices which
appreciably prevent, restrict or distort competition. We
are committed to engaging with competitors and trade
associations with appropriate caution.
In 2017, we have reviewed and refreshed training for
managers, and developed a conflicts of interest register
with approvals and action workflows. These will be
launched across the business in 2018.
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Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Our CR in action
We are helping to drive improved supplier behaviour
around human rights in the Middle East through
the enhancements we have been making to our due
diligence and supplier onboarding process.
We have continued seeking to expand and enrich the
diversity of our supplier base through engagement
with small and medium-sized suppliers across
our businesses, including joining Supply Nation
in Australia to improve our access to Indigenous
businesses, and maintaining our Supplier Network
Portal in the US to improve our access to small and
minority-owned businesses.
In the UK, we engaged a small cross-section of
our key suppliers in a trial to test and refine our new
SRM supplier relationship management solution,
selecting participants from a range of categories
and lengths of relationship with Serco and working
closely with them to baseline relationships, establish
consistent governance and identify opportunities
for improvement.
Responsible relationships
We build honest, respectful and transparent
relationships with customers, partners and suppliers
who share our ethical standards and who follow
regulatory compliance.
We seek to work only with customers, partners
and suppliers who respect our Values and meet
our standards of business conduct and ethics. We
complete legal, ethical and human rights due diligence
on proposed key third parties and conduct ongoing
monitoring throughout the lifetime of the relationship;
conduct robust needs analysis and establish a clear
management structure for all third party arrangements
considered necessary to meet contract requirements,
(including joint ventures, strategic partnerships or
consortium arrangements); apply robust supplier
sourcing and selection criteria; and monitor supplier
performance to inform relationship management and
identify opportunities for improvement.
In 2017, we continued embedding our newly enhanced
third party due diligence processes and commenced
ongoing monitoring; refreshed our Supplier Code of
Conduct and updated components in our supplier
governance to meet modern slavery and human
trafficking requirements, including the strengthening
of contract terms; and engaged Anti-Slavery
International to help us better understand related
risks in our supply chain.
We have also worked to improve management of risk
across our supply chain in our UK & Europe, Middle
East and AsPac Divisions by implementing enhanced
supplier onboarding (incorporating latest ABC and
ethical due diligence requirements) and piloting a new
supplier relationship management (SRM) programme
in the UK, developed to deliver ongoing performance
and innovation improvements with key suppliers.
76
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Duty of care
Quality service delivery
At the heart of the design and delivery of our services,
we place the health, safety and wellbeing of our service
users and citizens.
We draw on our international best practice, cross-sector
experience and our ability to innovate in order to help
governments raise standards of public service.
We strive to prioritise, protect and promote the health,
safety and wellbeing of the recipients of our services,
whether they are those for whom we are directly
responsible, such as individuals in our prisons or
travelling on our transport, or those who are the direct
beneficiaries of our services, such as patients in the
hospitals that we clean. We design and deliver services
in ways that focus on the needs and experiences of
service users as well as service-related outcomes; and
work to ensure that service users are treated at all times
with consideration, courtesy, compassion and respect,
and that every provision and interaction exemplifies our
value of Care.
Specific duty of care objectives are defined, managed
and delivered at contract level, monitored by relevant
business units. More broadly, our commitment to
duty of care informs Divisional and sector-specific
business strategies, overseen by Divisional Executive
Management Teams and/or our sector Centres of
Excellence (CoEs).
It is also a defining factor for activity across our CR
framework, for example: improving our Speak Up
system makes it easier for employees to report potential
risks to service users, while improving the engagement
levels of service user-facing employees contributes to
a better service experience for service users.
Our CR in action
In the UK, we have received praise for advances
in the reduction of prison violence, in reports by
HM Chief Inspector of Prisons and the Independent
Monitoring Board.
In Australia, we have contributed to a national study
aiming to reduce healthcare associated infections
through enhanced cleaning practices.
In the US, we helped citizens affected by the worst
hurricane season on record gain more time to enrol
for Medicaid and Medicare in 2018.
In Saudi Arabia, our colleague, Miko Baay, received a
Global Pulse Award for helping to rescue 270 stranded
train passengers on his day off.
Providing reliable and high quality products and
services that meet customer and service user needs
is important to us. To the best of our abilities, aligned
to helping customers achieve value for money, we
seek to deliver services that are as high quality
as possible and subject to appropriate focus on
continuous improvement.
We work closely with our customers, striving to
anticipate, understand and meet their needs and
expectations; deploy quality systems that deliver
excellent service usability for service recipients; invest in
public service research and development and innovate
quickly and proactively, testing new ways of doing
things and improving continuously throughout the
lifetime of our contracts; develop scalable, customisable
solutions; and transfer best practice and experience
internationally and cross-sector.
In 2017, we have further developed our CoEs in Justice
& Immigration, Healthcare and Transport to build
differentiated capabilities, strengthen our sector
propositions and maximise the benefits of our cross-
regional experience; and planned the re-launch of
the Serco Institute, which will be deployed to provide
research for the improvement of public services.
Our CR in action
Our customer rated our service at the Space-Based
Infrared System in Colorado, USA, ‘exceptional’ for the
second year in a row.
At Wandoo Reintegration Facility, Western Australia,
the Office of the Inspector of Custodial Services
reported our Offender Management Model to be
“the best in the state”.
Our transport contracts in Dubai have been
recognised externally for the highest level quality
of customer service by The International Customer
Service Institute.
Our collaboration with the UK Ministry of Defence
to introduce the latest generation of tug to the UK
enabled the successful arrival of HMS Queen Elizabeth
into Portsmouth in August 2017.
77
Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Our CR in action
This year saw the public release of our Veterans Affairs
Pressure Ulcer Resource (VAPUR) mobile app, to
support outpatient US Veterans and their care givers
in the treatment of their wounds.
Our partnership to maintain open spaces for the
public with the City of Melbourne, Australia, has been
recognised with the international Green Flag Award
for Melbourne Gardens.
In the Middle East, we have continued our partnership
with Road Safety UAE to improve road safety
awareness for our people and the wider United
Arab Emirates community.
In Billesley, UK, we have helped to improve local
engagement in sport and fitness by 600% by driving
awareness, access and affordability for children
and adults.
Social outcomes
We aim to enhance social outcomes by designing
and delivering frontline public services that make
a real difference to people’s lives.
We believe that the provision of public services
around the world – for us, for our customers and for
society – requires commitment to a social as well as a
commercial contract. We strive to maintain our public
service ethos and aspiration to do the best for citizens,
not only for our customers. Aligned to our ambition
for quality service delivery, we design citizen-centred
public service solutions whilst maintaining a focus on
delivering particularly complex and transformational
services that are critical to the functioning of society.
In 2017, we have continued to enable the achievement
of enhanced social outcomes through consistent, well-
managed and continuously improving frontline services.
For example:
• Justice: We have helped to safeguard society and
reduce reoffending through the provision of prison
management, police support and prisoner escorting
services.
• Immigration: We have helped to protect borders and
manage immigration through the provision of border
control, detention centre and asylum seeker housing
and welfare services.
• Citizen Services: We have contributed to local
community wellbeing through the provision of leisure
facilities and waste management services.
• Health: We have helped to enhance patient
experiences and maintain safer environments
in hospitals through the provision of facilities
management services.
• Defence: We have contributed to the protection
of national and international security through the
provision of critical support services to defence
organisations.
• Transport: We have helped to facilitate national
travel, enabling local and regional economies and
societies to function through the provision of air,
sea, road and rail services.
78
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Value for public money
Shareholder returns
We focus on creating long-term, sustainable value –
protecting the interests of our owners alongside those
of our employees, customers and communities in which
we operate.
We believe that in a free market system, and in
the long-term, the preservation and growth of the
business and the maximisation of shareholder value
automatically coincide, even if there is some short-term
divergence. Delivering sustainable, profitable growth is
therefore central to appropriate delivery of shareholder
returns, and our performance framework is structured
accordingly. We will realise this by executing our
strategy to achieve our purpose of becoming a trusted
partner of governments, delivering superb public
services, that transform outcomes and make a positive
difference for our fellow citizens.
For 2017, we have delivered Underlying Trading Profit at
the top end of the guidance we gave at the start of the
year, and we expect profits to grow strongly over the
next two years. Beyond 2019, our long-term ambitions
for margins and revenue growth – as originally
expressed with our Strategy Review announced in
2015 – remain intact, but the timing of achieving these
continues to be subject to seeing improvements in the
trading conditions across our markets. In the meantime
we continue to deliver against our plans and make good
progress against our strategy.
For more information and our progress and performance
in 2017, as well as our guidance and outlook, see:
Strategic report: Key Performance Indicators, page 18
Strategic report: Chief Executive’s Review, page 32.
Along with quality of delivery, we aspire to greater
efficiency in public services and in enabling
governments to deliver better for less.
We are committed to enabling governments to achieve
the best value for money for the public services we
deliver. To deliver efficiency to our customers, we
strive to manage our business with commercial rigour;
innovate at both the contract and corporate level; fully
utilise our economies of scale and our international,
transferable expertise; and drive a cost-effective
supply chain.
In 2017, we have renewed our focus on innovation
through our CoEs and made significant progress
towards ensuring that our operating costs are as
efficient as possible, including work undertaken on
our operating model and overhead costs, from which
we expect to realise benefits in forthcoming years.
The decision to merge our two UK-based Divisions
was the first step in this project.
Our CR in action
We have worked with our customers to reduce costs
across our businesses, including at the Palm Jumeirah
Monorail in Dubai and United Arab Emirates
University in Al Ain where we have helped to create
financial savings through improved energy, water and
waste efficiency.
Our highway services contract with Peterborough City
Council was named Contract Management Initiative
of the Year 2017/18 at the GO Awards, which celebrate
excellence in public procurement across the UK public
sector, after saving £1.8m for local taxpayers.
Our non-clinical services at Fiona Stanley Hospital
have helped the Western Australian government
achieve $550m in savings.
In the US, we have helped service users and our
customer to save and reduce tax-penalty exemption
application costs through service improvement at the
Centers for Medicare and Medicaid Services.
79
Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Transparency
Managed risk
In order to achieve our strategic and business
objectives, protect our stakeholder interests and
maximise our returns, we seek to identify, manage
and mitigate our exposure to risks through robust
procedures and controls throughout the organisation.
We support informed risk-taking that promotes
business growth and success whilst recognising
the risks associated with key decisions, and embed
systematic, structured and timely risk management in
our organisational processes, linked to achievement of
our objectives. We strive for early line of sight regarding
increases in threat or exposure, and maintain a robust
control environment that reduces negative impacts to
our business performance.
For more information and our progress and performance
in 2017, see:
Strategic report: Principal risks and uncertainties, page 20
Directors’ report: Group Risk Committee Report,
page 93.
With investors, as with customers, we seek long term
relationships based on transparency, honesty and
clarity. We are therefore committed to open and regular
engagement with our shareholders.
We strive to maintain open, meaningful dialogue with
all our shareholders, and use a variety of communication
means to update investors on performance and gain
insight into shareholder views, including ensuring that
Board members and the wider senior management
team are available to address shareholder questions
and views at our Annual General Meeting. We seek
to provide meaningful insight into our results and
prospects; have management information systems
that enable efficient and effective internal and external
reporting; and base our approach to executive
remuneration on a clear rationale in which the alignment
of interests are recognisable and understandable.
In 2017, we delivered our annual schedule of external
reporting and shareholder engagement, including
additional trading and contract news updates to ensure
transparency of performance and around 200 meetings
with institutional investors. We have hosted an extensive
Capital Markets Event, featuring in particular the
Justice & Immigration and Defence sectors as well as
Transformation updates; and been recognised for our
commitment to transparency with a ‘Most Honoured
Companies’ award from Institutional Investor.
80
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Our areas of focus in 2018
In addition to delivering standard schedules of activity across our CR framework, our areas of focus in 2018
will include:
Our corporate responsibility framework and governance
• Embedding our new CR framework in our approach to CR from both the Group and Divisional perspectives;
• examining stakeholder priorities and expectations across our principal areas of responsibility in greater detail; and
• exploring opportunities for richer CR performance measurement.
Behaving with integrity and treating people with respect
• Developing a condensed Code of Conduct for temporary workers;
• completing the review of ABC 'adequate procedures' in our Divisions; and
• applying elements of the UK ABC assessment toolkit across other Divisions to drive benefit and value.
Our people
• Developing a 'just' health and safety culture framework for adoption across the business and deploying the HSL Safety
Climate tool globally;
• replicating the global aviation safety forum in other safety critical areas, completing a formal review of our online
incident management tool and working to improve reporting of 'near miss' incidents;
• continuing our work to improve the gender balance of our leadership team by attracting more women into senior roles,
supporting their development and providing more career progression opportunities for women; and
• developing our understanding of ethnicity as a strategic D&I focus in our different geographies.
Our world
• Finalising development of a new environmental strategy to consolidate performance to date and refocus our activities
to address priority environmental issues by taking a broader lifecycle approach to our environmental impacts;
• launching our refreshed fair competition training and new conflicts of interest register across the business;
• improving guidance on ethical and human rights due diligence for new geography/market entry and selection and
appointment of partners;
• deploying our new SRM solution whilst applying our enhanced onboarding to existing suppliers and exploring
opportunities to address Tier 2 suppliers in high risk areas; and
• relaunching the Serco Foundation and the Serco Institute.
81
Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Corporate responsibility Key Performance Indicators
2013
2014
2015
2016
2017
v 2017
Var % Notes
2016
Behaving with integrity and
treating people with respect
Viewpoint Ethics and Integrity Index
%
66
Upheld cases of corrupt behaviour
Number
Upheld cases of human rights violations
Number
Speak Up cases:
Investigated
Corrective action taken
Disciplinary action taken against one
or more individuals involved in a case
Dismissal of one or more individuals
involved in a case
Closed within three months
Our people
Employee engagement and development:
Employee engagement
People manager engagement
Leadership engagement
Viewpoint Learning & Development
Index
Inclusive workplace:
Viewpoint D&I Index
Female Directors
Female senior managers
Female employees
People with disabilities
Age profile:
16-24
25-40
41-54
55-64
65+
Undisclosed
Staff turnover
Proportion of days lost to sickness
Safe and healthy operations:
Viewpoint Safety Index
Lost Time Incident Frequency Rate
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
%
Per 1m hours
worked
0
0
–
–
–
–
–
42
49
51
44
67
16.7
14.8
40.9
0.2
10.2
33.9
28.9
13.4
2.3
11.3
31.5
2.8
71
5.12
70
0
0
95
56
15
9
70
51
58
51
44
75
30.0
16.2
44.4
0.7
10.2
35.2
29.8
14.6
2.4
7.8
31.0
3.3
70
4.81
69
0
0
96
63
24
6
48
53
59
55
46
67
30.0
16.7
42.6
1.3
9.5
35.9
29.2
14.9
2.3
8.2
32.8
3.2
71
5.79
69
0
0
97
53
16
6
64
54
62
72
48
69
22.2
17.1
41.9
1.2
9.1
35.7
29.2
15.6
2.6
7.8
33.8
3.2
73
4.98
69
0
0
90
42
9
5
89
56
65
71*
49
70
30.0
21.7
41.6
1.0
8.7
38.8
31.4
17.9
3.1
0.1*
30.6
3.1
75
3.93
1
2
* 3
1
4
1
4
* 5
0
0
0
-7
-11
-7
–
–
–
-7.3
-20.8
-43.8
-1
-16.7
25
39.1
2
3
-1
1
1
7.8
4.6
-0.3
-0.2
-0.4
3.1
2.2
2.3
0.5
7.7
3.2
0.1
3.7
4.8
-1.4
2.1
1.4
35.1
26.9
-0.7
-16.7
-4.4
8.7
7.5
14.7
19.2
98.7
9.5
3.1
2
2.7
1
1.05
21.08
Lost Time Incident Severity Rate
%
Major Incident Frequency Rate
Physical Assault Frequency Rate
Per 1m hours
worked
Per 1m hours
worked
Serious Physical Assault Frequency Rate Per 1m hours
Prosecutions
Fines paid
worked
Number
£’000
18.90
0.25
17.53
0.33
19.10
0.34
16.08
15.57
0.51
3.17
0.27
0.30
-0.03
-11.11
5.11
7.04
7.19
6.92*
8.64
-1.72
-24.71
–
0
0
0.38
0.49
0.93
1.40*
-0.47
-50.54
0
50
1*
200
0
0
0
116*
0
116
–
–
* 6
* 7
* 8
* 9
82
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Our world
Protecting the environment:
2013
2014
2015
2016
2017
v 2017
Var % Notes
2016
10
Carbon dioxide equivalent –
Total Group (Scope 1+2)
Tonnes CO2
equivalent
398,519
343,717 298,986 291,883 253,655
38,228
13.1
Electricity
Gas
Petrol
Diesel
Fuel oil
Specialist marine fuel
Fugitive emissions
Headcount Intensity (Scope 1+2)
Scope 1 – Combustion of fuels and
operation of facilities
Scope 2 – Grid electricity purchased
for own use (location based)
%
%
%
%
%
%
%
tCO2e/FTE
Number
53
12
1
7
8
19
0
54
12
0
7
7
20
0
46
9
0
9
2
34
0
37
10
1
10
1
40
0
7.27
6.32
5.16
5.98
31*
10
1
9
2
46*
0
5.56
-6
0
0
-1
1
6
0
0.42
187,217
173,441
162,198
182,819
174,289
8,530
-16.2
* 11
–
–
-10.0
100.0
15.0
* 12
–
7.0
4.7
Number
211,302
170,276 136,789 109,064
79,366
29,698
27.2
Scope 2 – Grid electricity purchased
for own use (market based)
Number
Scope 3 – Business travel
Headcount Intensity (Scope 3)
Carbon Disclosure Project
Prosecutions
Fines paid
Enforcement notices
Fair competition:
Upheld cases of anti-competitive
behaviour
Responsible relationships:
Third party due diligence screening
Number
tCO2e/FTE
Score
Number
£’000
Number
Number
Third parties validated
Third parties pending review
Third parties disqualified
Number
Number
Number
Notes:
–
–
–
–
–
–
–
–
–
92%
97%
99%
0
0
0
0
–
–
–
0
0
0
0
–
–
–
0
0
0
0
–
–
–
–
–
–
B
0
0
0
0
–
–
–
70,629
7,621
0.17
B
0
0
0
0
28,066
1,143
3*
–
–
–
–
0
0
0
0
–
–
–
–
–
–
–
–
–
–
–
–
–
13
14
15
16
* 17
The performance analysis is based on data reported as at 21 February 2018. Additional data may arise after this date. Where this occurs, numbers will
be corrected in the following year’s table.
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.
Current workforce KPI 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.
Historical Viewpoint Index data has been adjusted to reflect modifications to Index calculation methodology in 2017. An index comprises one or more related
questions that cover a specific area of analysis. Scores are generated based on the % of survey respondents who ‘agree’ or ‘strongly agree’ to all questions
within an Index.
2.
Where anonymous cases provide insufficient information, we are unable to investigate.
3.
We have maintained a healthy overall engagement profile and leadership engagement has remained stable while we have focused on improving employee
and people manager engagement.
4.
Inclusive workplace and age figures are representative only of employees for whom relevant data is available.
5. Reduction reflects improvements in data availability resulting from new D&I strategy and focus on developing clear and robust data.
6.
Slight adjustment in rate due to late capture of incidents on reporting system.
7.
Data includes incidents of spitting/potting as serious assaults in line with UK reporting requirements. When these are excluded the comparable rate is 0.88,
a 5% improvement on 2016.
8.
Relates to an incident in 2011.
9.
Dubai Metro: February 2017 (500,000AED) public hazard relating to escalator maintenance by a sub-contractor – fine paid by sub-contractor and revised work
instructions implemented; August 2017 (100,000AED) unsafe lifting operations relating to glass movement in station – revised work instructions implemented.
83
Financial StatementsDirectors’ ReportStrategic Report Corporate Responsibility continued
Corporate responsibility Key Performance Indicators continued
10. Our reporting year for greenhouse gas emissions is one quarter behind our financial year, namely 1 Oct 2016 to 30 Sept 2017. 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 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%.
11. Sale of our private sector offshore BPO business (10,630,000 kgCO2e in environmental reporting year 2015/16); ASPAC basis of estimation reduced
due to loss of contracts (c.5,000,000 kgCO2e); Hong Kong Cross Harbour Tunnel contract ended Q4 2016 (c.4,000,000 kgCO2e); Leisure reductions
(c.2,500,000 kgCO2e); Scatsta – responsibility for paying electricity contract returned to client in 2016 (c.500,000 kgCO2e); UK conversion factor down 15%.
12. Increased proportionally due to electricity reductions.
13. Expanded scope of measurement in 2017, market based measurement uses conversion factors from suppliers where available and is a metric asked for
in the CDP submission.
14. Expanded scope of measurement in 2017, includes air, rail, private car, hire car and hotel stays.
15. New scoring mechanism introduced in 2015.
16. 2017 numbers reflect implementation of new third party due diligence screening. All current and legacy suppliers and customers have been processed
in 2017 – a total of 35,850 organisations.
17. An additional 6,634 organisations were disqualified because they are no longer used by Serco or there is a gap of two years or more in the relationship.
Health, Safety & Environment Targets 2018
Key Performance Indicator
Viewpoint Safety Index
Major Incident Frequency Rate
Lost Time Incident Frequency Rate
Serious Physical Assault Frequency Rate
Physical Assault Frequency Rate
2018 Performance Target
>75%
Maintain at 2017 baseline
Maintain <4
-10% against 2017 baseline
Maintain at 2017 baseline
Headcount Intensity (Scope 1+2) tonnes CO2 equivalent
-3% against 2017 baseline
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Secretary
21 February 2018
84
Strategic ReportSerco Group plc Annual Report and Accounts 2017 Strategic Report
Directors’ Report
Financial Statements
Directors’ Report
Corporate
Governance Report
Board of
Directors
Chairman's
Governance Overview
Board and
Governance
Group Risk
Committee Report
Audit
Committee Report
Nomination
Committee Report
Corporate Responsibility
Committee Report
Compliance with the UK
Corporate Governance Code
Remuneration
Report
Directors'
Report
Directors'
Responsibility Statement
86
86
88
91
93
96
102
105
108
110
144
150
85
Corporate Governance Report
Board of Directors
Sir Roy Gardner
Chairman
Rupert Soames
Group Chief Executive
Angus Cockburn
Group Chief Financial
Officer
Edward J. Casey, Jr
Group Chief Operating
Officer
Mike Clasper CBE
Non-Executive Director
and Senior Independent
Director
A N
CR
E GR
A N
CR
E GR
A N
CR
E GR
A N
CR
E GR
A N
CR
E GR
Appointed to the Board:
June 2015 (Chair since July
2015)
Appointed to the Board:
May 2014
Appointed to the Board:
October 2014
Appointed to the Board:
October 2013 as Acting
Chief Executive Officer.
Group Chief Operating
Officer from May 2014. Ed
retired from the Board on 31
December 2017.
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
Appointed to the Board:
March 2014. Mike
was a member of the
Remuneration Committee
until December 2017.
Key skills and experience:
Previous roles have included
Group Chief Executive
of BAA plc, Chairman of
Her Majesty's Revenue
and Customs, Chairman
of Which? Limited, Senior
Independent Director of
ITV plc and President of the
Chartered Management
Institute
MA in Engineering from
Cambridge University
Honorary Doctorate from
Sunderland University
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
Key skills and experience:
Previously Chief Executive
at Aggreko plc, and Chief
Executive of Misys plc
Banking and Securities
Division
Rupert was also
previously 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
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
Sir Roy was also previously
Chairman of the Advisory Board
of the Energy Futures Lab
at Imperial College London,
Chairman of the Apprenticeship
Ambassadors Network,
Chairman of Mainstream
Renewable Power Limited and
Senior Adviser to Credit Suisse
Fellow of the Chartered
Association of Certified
Accountants, the Royal
Aeronautical Society, the
Royal Society of Arts and the
City and Guilds Institute
Honorary Doctorate from
Thames Valley University
Current External
Commitments:
Senior Independent Director
of Mainstream Renewable
Power Limited
Senior Independent Director
of William Hill plc
Current External
Commitments:
None
Current External
Commitments:
Senior Independent
Director and a member of
the Audit, Remuneration
and Nomination
Committees of GKN plc
Current External
Commitments:
None
Key (Red highlight denotes Chair)
A
N
R
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
86
Serco Group plc Annual Report and Accounts 2017
Current External
Commitments:
Chairman of Coats Group
plc and BIOSS International
Limited
Trustee of the Chartered
Management Institute
Governor of the Royal
Shakespeare Company
Advisory Board Member for
Arora International
Directors' Report Other Board Members
Ralph D. Crosby, Jr was a Non-Executive Director until his retirement from the Board on 1 July 2017.
Angie Risley was a Non-Executive Director and a member of the following Committees until her retirement from the Board on 15 September 2017:
Nomination Committee, Remuneration Committee and the Corporate Responsibility Committee.
Rachel Lomax
Non-Executive Director
John Rishton
Non-Executive Director
Lynne Peacock
Non-Executive Director
Ian El-Mokadem
Non-Executive Director
Kirsty Bashforth
Non-Executive Director
A N
CR
E GR
A N
CR
E GR
A N
CR
E GR
A N
CR
E GR
A N
CR
E GR
Appointed to the Board:
March 2014
Appointed to the Board:
September 2016
Appointed to the Board:
1 July 2017
Appointed to the Board:
1 July 2017
Appointed to the Board:
15 September 2017
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
Key skills and experience:
Rachel has deep experience
of government and
economic policy. Rachel's
previous appointments
include Deputy Governor,
Monetary Stability, Bank
of England, and a member
of the Monetary Policy
Committee, Permanent
Secretary in the Department
for Transport, Department
for Work and Pensions and
the Welsh Office, and senior
posts at the Cabinet Office,
HM Treasury and World Bank
Rachel was also previously
Senior Independent Director
and Chair of the Conduct
and Values Committee at
HSBC Holdings plc and a
Trustee/Board Member of
Imperial College, London
Key skills and experience:
Lynne is a Non-Executive
Director of Standard Life
Aberdeen plc and a member
of its Nomination and
Governance Committees,
and Non-Executive Chair
of Standard Life Assurance
Limited. Lynne is also a
Non-Executive Director
and Senior Independent
Director, Chair of the
Remuneration Committee
and member of the Audit,
Risk and Nomination
Committees of Nationwide
Building Society
Previously she was Chief
Executive of National
Australia Bank Limited's UK
businesses, Chief Executive
Officer of Woolwich plc and
a Non-Executive Director
and Chair of the Audit
Committee of Scottish
Water
Key skills and experience:
Ian became the Chief
Executive Officer of V.Group
Limited in October 2017.
Prior to joining V.Group, Ian
was Chief Executive Officer
of Exova Group plc and,
before that, he was Group
Managing Director, UK &
Ireland of Compass Group
plc, where he was also a
member of the Group’s
Executive Committee. Ian’s
earlier career included
positions with Centrica plc
and the global management
consultancy, Accenture
Key skills and experience:
Kirsty was a senior executive
at BP plc having spent over
24 years with the company
in a variety of commercial
roles, including Group
Head of Organisational
Effectiveness, where she
led BP’s global agenda
on culture, diversity and
change management.
Subsequently, Kirsty
has been running her
own corporate advisory
business, QuayFive Limited,
since 2015
Current External
Commitments:
Non-Executive Director of
Heathrow Airport Holdings
Limited
Current External
Commitments:
Non-Executive Director
and Chair of the Audit
Committee of Unilever plc
Current External
Commitments:
Non-Executive Chair of
Standard Life Assurance
Limited
Current External
Commitments:
Chief Executive Officer
of V.Group Limited
Director of SETL
Development Limited
Governor of the Ditchley
Foundation
Member of the Board of
Breugel
Non-Executive Director and
Chairman-Elect of the Audit
Committee of Informa plc
Non-Executive Director
at Associated British Ports
Non-Executive Director
and a member of the
Nomination and Governance
Committees of Standard Life
Aberdeen Plc
Senior Independent
Director, Chair of the
Remuneration Committee
and member of the Audit,
Risk and Nomination
Committees of Nationwide
Building Society
Current External
Commitments:
Non-Executive Director
and a member of the
Nomination, Remuneration,
Risk Management and Audit,
and Safety, Health and
Environment Committees of
Kier Group plc
Governor of Leeds Beckett
University and Ashville
College
Director of QuayFive Limited
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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
2017. Further information on how the Company
complied with the UK Corporate Governance
Code during 2017 is set out on pages 108
and 109.
Dear Shareholder
On behalf of the Board, I am pleased to present the
Corporate Governance Report for the year ended
31 December 2017. The Board believes that good
governance is key to the long-term success of the
Group and is committed to achieving high standards
of governance.
In addition, Angie Risley notified the Board of her
intention to step down with effect from 15 September.
Angie joined the Board in April 2011 and in May
2012 was appointed as Chair of the Remuneration
Committee. I would like to thank both Ralph and Angie
for their valuable contributions since joining the Board
in 2011.
As in previous years, we report against the UK
Corporate Governance Code (the 'Code') issued by
the Financial Reporting Council ('FRC'). During 2017,
we have fully complied with the provisions of the
Code, with the exception of provision B.6.2 concerning
external evaluation of the Board.
Effectiveness
In 2016, we committed to undertake an external
evaluation of the Board and its Committees during 2017.
In the latter half of 2017, we appointed three new Non-
Executive Directors and, in view of this, the Board agreed
to defer its external evaluation until 2018 to provide
opportunity for our new Board members to settle into
their new roles. This year, the Board conducted an
internal Board evaluation with support from the Group
General Counsel and Company Secretary, taking into
account the recommendations from the 2016 review
and changes in the Code. A summary of the findings
are set out on page 92.
Changes in the Board
The Board continued to review Board composition
and succession planning with assistance from the
Nomination Committee. In July 2017, Ralph Crosby
stepped down from the Board. A considered selection
process to appoint a successor to Ralph was undertaken
and led to the appointment of both Lynne Peacock and
Ian El-Mokadem in July.
Upon Angie’s departure, Lynne succeeded Angie as
Chair of the Remuneration Committee owing to her
extensive experience of chairing other Remuneration
Committees elsewhere. Following a further selection
process, Kirsty Bashforth joined the Board. Details of
the selection process in respect of all the new Non-
Executive Director appointments are contained in the
Nomination Committee Report on page 102. Each
of the new Non-Executive Directors bring valuable
experience and relevant skills to the Board.
Ed Casey, our Chief Operating Officer, retired from
the Board at the end of December following 12 years
of service at Serco. I would like to reiterate my sincere
thanks to Ed for his contribution to Serco and wish
him every success in the future. Following detailed
discussion, the Board agreed there would be no need
to find a successor for Ed and instead his role and
responsibilities would be best achieved and delivered
between Rupert, Angus and the other members of the
Executive Committee.
Contract site visits
The most recent additions to our Board have visited a
number of our contract sites as part of their induction
programme and have enjoyed the opportunity to
witness the excellent day-to-day service provided by
our contract teams. The visits have given our newest
Board members a deeper level of understanding of the
risks and opportunities faced by our contract teams on
a daily basis, together with the Group-wide challenges
regarding the scale and variety of our operations.
A number of our existing Non-Executive Directors
have also visited our contract sites during the year.
88
Serco Group plc Annual Report and Accounts 2017
Directors' Report Diversity
Further to our commitment to improve gender diversity
at the Board, I am pleased to report that we have
increased female representation on our Board from 22%
to 30% in 2017. At the same time, through the work of
the Nomination Committee, the Board reviewed and
updated its Board Diversity Policy, taking into account
the guidance of the Hampton-Alexander Review
and the Parker Review along with any other factors,
objectives and target dates. The Board is equally
committed to ensuring the development of gender and
ethnic diversity amongst Serco’s senior management
population and to that end will annually review its
recommendations on gender and ethnic diversity for
senior management roles.
Corporate Responsibility Framework
The Board has continued to refresh and strengthen
Serco’s corporate responsibility agenda through
development of a new corporate responsibility
framework – forming a foundation for how we conduct
our business whilst ensuring its relevance to our
strategy and governance. The new framework clearly
defines our principal areas of responsibility – structured
around our Values, purpose and key stakeholders – and
will help to guide action and behaviour whilst facilitating
measurement of our performance. For further
information, please refer to our corporate responsibility
update on page 69.
Shareholder engagement
The Board continued to engage in an open and
meaningful way with its shareholders during the course
of 2017. In particular, since her appointment as Chair
of the Remuneration Committee, Lynne Peacock has
met with each of our major shareholders, together with
a number of advisory bodies and other institutional
shareholders, to discuss our approach to Directors’
Remuneration and the new policy we have proposed to
shareholders from 2018 onwards, set out on pages 115
to 128. In addition, I attend the results announcements
in the City and meet many of our stakeholders. I hope
shareholders will take the opportunity to meet with
Board members at the 2018 AGM.
Sir Roy Gardner
Chairman
21 February 2018
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Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Chairman’s Governance Overview
What the Board has achieved in 2017
• Reviewed and challenged the strategy of the
Group and supported the Chief Executive and the
other Executive Directors in the Group’s strategic
development.
• Received, discussed and reviewed regular reports
from the Chief Executive, Chief Financial Officer and
Chief Operating Officer.
• Spent time with the Divisional management teams and
met regularly with senior management responsible
for the delivery of the Group’s key opportunities and
existing contracts, including a number of contract
visits in the UK.
• Received a number of operational deep dives from
across the divisions.
• Regularly reviewed financial performance.
• Reviewed the Operating Model and Finance
• Reviewed and agreed budgets.
Transformation plans.
• Focused on the ongoing performance of the Group.
• Reviewed employee engagement, as well as receiving
regular HR reports.
• Reviewed Health and Safety and risk reports.
• Reviewed and began to embed the Corporate
Responsibility Framework.
• Focused on further embedding the Corporate
Renewal Programme.
• Reviewed and challenged management on the progress
of the Group’s business development pipeline.
• Received regular legal and governance reports,
including diversity and governance developments and
received training as a Board.
• Focused on and reviewed a number of key individual
material bids and acquisitions over the year.
• Appointed three new Non-Executive Directors,
including a new Remuneration Committee Chair, and
re-allocated the duties of the Chief Operating Officer
following the resignation of Edward J. Casey, Jnr.
• Reviewed and challenged the Centres of Excellence.
• Ensured that the introduction of the Group Risk
Committee operated effectively to oversee and
strengthen the Company’s risk management processes
and continued to receive appropriate attention at
Board level.
• Considered succession planning both for the Board
and the senior management team.
• Reviewed the Gender Pay position.
• Reviewed and updated the Board Diversity Policy.
• Reviewed, challenged and refreshed the Tax and
Treasury Policy.
• A number of contract site visits were undertaken by
Non-Executive Directors.
• Engagement with the Company's stakeholders.
Board priorities for 2018
• Continue to assess and challenge the Group's strategy.
• Continue to drive improvements in Health and Safety
• Continue to support and challenge improvements in
contract execution and cost efficiency, together with
seeking to ensure the utilisation of capabilities across
the Group.
• Ongoing review and challenge of the bid pipeline
and new business opportunities, together with the
development of the Centres of Excellence.
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.
• To support and challenge management on embedding
the Group's transformation initiatives.
• Continued focus on enhancing risk management.
• Budget and financial performance reviews.
• Focus on Board and Senior Management succession
• Monitor changes to relevant legal, regulatory and
planning, including diversity.
governance areas.
• Implement an effective external Board evaluation
• Continue to oversee employee engagement.
process.
• Continued focus on governance developments and
• Further embedding of the Serco Values within the
training.
culture of the Group.
90
Serco Group plc Annual Report and Accounts 2017
Directors' Report Board and Governance
The Board has a comprehensive corporate governance framework with clearly defined
responsibilities and accountabilities to safeguard long-term shareholder value and
provides an effective platform to realise the Group's strategy.
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
Scheduled Board Meetings
Attendance
(eligibility) 1
Kirsty Bashforth 2
Edward J. Casey, Jr 3
Mike Clasper
Angus Cockburn
Ralph D. Crosby, Jr 4
Ian El-Mokadem 5
Sir Roy Gardner
Rachel Lomax
Lynne Peacock 6
John Rishton 7
Angie Risley 8
Rupert Soames
3(3)
8(8)
8(8)
8(8)
4(4)
4(4)
8(8)
8(8)
4(4)
7(8)
5(5)
8(8)
Notes:
1
2
The Board held eight formal meetings during 2017 and a meeting to
consider the strategic direction of the Group.
Kirsty Bashforth was appointed to the Board, the Remuneration
Committee and the Corporate Responsibility Committee on 15
September 2017.
3 Edward J. Casey, Jr stood down from the Board on 31 December 2017.
4
5
6
Ralph D. Crosby Jr stood down from the Board on 1 July 2017.
Ian El-Mokadem was appointed to the Board, the Group Risk Committee
and the Corporate Responsibility Committee on 1 July 2017.
Lynne Peacock was appointed to the Board, the Audit Committee and the
Remuneration Committee on 1 July 2017. She was later appointed as Chair
of the Remuneration Committee on 15 September 2017 and as a member
of the Nomination Committee on 1 November 2017.
7
John Rishton was unable to attend the September 2017 meeting due to an
unavoidable scheduling conflict.
8
Angie Risley stood down from the Board on 15 September 2017.
In addition to the above, Rupert Soames, Angus Cockburn and Ed Casey
attended all Executive Committee meetings held during 2017 and formed the
quorum of Investment Committee and Approvals and Allotment Committee
meetings as required. During the year, ten meetings of the Executive
Committee were held.
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Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Board and Governance continued
Board evaluation
Appointment, induction and training
An external evaluation of the Board and its Committees
was due to take place in 2017 however, as stated
on page 88, the Board determined that, due to the
number of new Non-Executive Directors appointed in
the latter half of 2017, it would be sensible to allow the
new Directors time to settle into their new roles before
arranging an external evaluation.
The Chairman is responsible for ensuring that an
appropriate induction is given to new Board members.
The induction programme is specifically tailored to the
needs of the incoming Director and includes circulation of
the Board policies and procedures, meetings with senior
management and contract site visits. During 2017, the
Directors received advice and training on the following:
The 2017 Board evaluation process was conducted
internally, led by the Chairman and facilitated by the
Group General Counsel and Company Secretary.
A comprehensive questionnaire evaluating the
performance of the Board and each of its Committees
was completed by all Directors. The evaluation covered a
number of areas including: Board structure, Committees
and their operation; induction and development;
interaction with the business; and risk management and
internal control. In addition, the Non-Executive Directors,
led by the Senior Independent Director, together with
views from the Executive Directors, conducted the
performance evaluation of the Chairman who was
found to be stewarding the Board effectively.
Following completion of the evaluation, the Board
discussed the outcome of the questionnaire in detail.
The results of the evaluation concluded that, overall,
good progress had been achieved in most areas
identified in previous evaluations and that the Board,
together with its Committees, had continued to work
effectively. However, the Board identified the following
areas of improvement to be considered in 2018:
• Provide new members of the Board with additional
background briefings ahead of discussions on
strategy at Board meetings;
• Arrange more discussion at Board meetings in relation
to medium and long term measures to be achieved
from the Group's strategy and to improve the content
of discussions focused on strategy and growth;
• Further discussion surrounding Executive succession
plans (in particular the role of the Chief Executive) and
ensuring the Board and its Committees continue to
work effectively following the departure of the Chief
Operating Officer;
• Review how the Board engage with shareholders; and,
• The Chairman, with the Group General Counsel
and Company Secretary, to re-evaluate the Board
training agenda.
In advance of the scheduled external evaluation of the
Board in 2018, a number of options and priorities will
be considered to support continued transparency and
best practice.
• Regulatory developments and changes to the
UK Listing Rules and Corporate Governance;
• Training on inside information, including the
Market Abuse Regulations (MAR) 2016;
• Anti-bribery and corruption;
• Money laundering;
• Crisis management; and,
• Update on new accounting standards
i.e. IFRS 9, 15 and 16.
External Directorships
The Company has adopted a policy which allows
the Executive Directors to accept directorships of
other quoted companies provided that they have
obtained the prior permission of the Chairman.
In accordance with the Code, no Executive Director
would be permitted to take on more than one Non-
Executive Directorship in a FTSE 100 company or
the Chairmanship of such a company.
During the year, Angus Cockburn held the position
of Non-Executive Director of GKN plc and was
appointed as Senior Independent Director of
GKN plc with effect from 20 February 2018.
Conflicts of interest
Every Director has a duty to avoid a conflict between
their personal interests and those of the Company.
The provisions of Section 175 of the Companies Act
2006 and the Company's Articles of Association
permit the Board to authorise situations identified by
a Director in which he or she has, or may have, a direct
or indirect interest that conflicts, or may conflict, with
the interests of the Company. The Board continues
to undertake regular reviews of the outside positions
and interests or arrangements with third parties held
by each Director and, were appropriate, to authorise
those situational conflicts following consideration.
Notwithstanding the above, each Director is aware
of their duty to notify the Board should there be
any material change to their positions or interests
during the year. Directors do not participate in Board
discussions or decisions which relate to any matter in
which they have, or may have, a conflict of interest.
92
Serco Group plc Annual Report and Accounts 2017
Directors' Report Group Risk Committee Report
2017 Scheduled Committee Meetings
Attendance
(eligibility)
• Include a new risk 'failure of business critical
partners, suppliers and sub-contractors';
Chairman
Rachel Lomax
Committee Members
Mike Clasper
Ian El-Mokadem1
John Rishton
1
Ian El-Mokadem joined the Board on 1 July 2017.
Dear Shareholder
4(4)
4(4)
2(2)
4(4)
• Separate 'failure to build reputation or act with
integrity' into two discrete risks;
• Combine the risk of 'contract non-compliance and
non-performance' with the risk of 'misreporting of
performance'; and
• Remove 'failure to attract and retain key resources
and skills fit for the future' as a principal risk.
This reflects the success of mitigation actions in
this area.
The Board continues to attach great importance to
improving risk management across the Group. The
Committee's aim in 2017 was to challenge Serco’s
capabilities for assessing and managing risk. In
particular, it has sought to understand and test
the extent to which the formal Risk Management
Framework ('RMF') has been effectively embedded
throughout the Group. To that end, it has received
and discussed presentations from each geographical
division describing how, in practice, they are
implementing the RMF and has sought to understand
how the Group’s principal risks are mapped to the
risks that are being actively managed at divisional
level. The Committee has also given in-depth
consideration to the Group’s principal risks focusing
in particular on the effectiveness of mitigating actions
and how any gap between the current risk status and
the Group’s risk appetite is being managed.
The Committee is taking a continuing interest
in the Group’s ongoing review of its exposure to
catastrophic risks and relevant mitigations.
In 2018, the Committee will continue to oversee the
Group's efforts to upgrade its risk management
capabilities and the way the RMF has been
embedded at divisional level. In its regular review
of principal risks, it intends to pay particular
attention to monitoring progress in constructing
and implementing effective risk mitigation plans.
I will be present at the 2018 AGM to answer any
questions from shareholders on this report and
the activities of the Committee.
Following a comprehensive review of the Group's
principal risks by the Executive Committee, the
Committee considered and agreed the Executive
Committee’s proposals to:
Rachel Lomax
Chair of the Group Risk Committee
21 February 2018
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Directors’ ReportFinancial StatementsStrategic Report Corporate Governance Report
Group Risk Committee Report continued
Committee’s responsibilities
Activities of the Committee during 2017
The Committee advises the Board on the Group’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 Group's risk
management framework, including the assessment
of the principal risks facing the Group and the action
being taken by management to mitigate risks that are
outside the Group's risk appetite;
• Challenging and advising the Board on the current
risk exposures of the Group 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 Group’s overall risk assessment processes that
inform the Board’s decision-making, ensuring both
qualitative and quantitative metrics are used; and
• Reviewing the Group’s capability to identify and
manage emerging risks, in conjunction with the other
Board Committees as appropriate.
The Terms of Reference were reviewed and amended
this year, materially to reflect the requirements of the UK
Corporate Governance Code and the ICSA Guidance
Note for Risk Committees (the 'ICSA Guidance Note').
The Terms of Reference for the Committee can be
found on our corporate website, www.serco.com
Membership and attendees
The Committee consists solely of independent Non-
Executive Directors. The Board considers that each
member of the Committee is independent within the
definition set out in the UK Corporate Governance
Code (the ‘Code’). Details of Committee membership
and attendance at meetings are provided on page 93.
Biographical details for each member of the Committee
are provided on pages 86 and 87. The Committee
met on four occasions during the year. All Committee
meetings are held in advance of Board meetings, with
the Committee Chair updating the Board directly on the
outcomes of each meeting. Meetings of the Committee
were attended by the Chairman of the Board, the
Chief Operating Officer, the Group General Counsel
and Company Secretary and the Group Risk and
Compliance Director.
During the year the Committee’s key activities included:
• Receiving updates regarding the Group’s principal
risks, detailing key changes and trends, and
emerging risks;
• Undertaking, as planned, an in-depth review of the
following risks: failure to grow profitably, failure to
attract and retain key resources and skills fit for the
future, major information security breach, contract
non-compliance and non-performance, and material
legal and regulatory compliance failure;
• Reviewing and refining the definition of a catastrophic
risk event to ensure the right level of understanding
of this risk and assign appropriate focus on risk
mitigation activities;
• Receiving presentations, as planned, from members
of the Serco UK Central Government, Serco Middle
East and Serco Asia Pacific Executive teams on their
Divisional Risk Management process. These included
a review on a safety critical event from Serco Middle
East, failure/perceived failure of a critical national
service from Serco UK Central Government and the
underperformance of contracts due to sub-contractor
management failures from Serco Asia Pacific; and
• On-going challenge and support of the Group
Risk and Compliance Director in his work plan for
improving, enhancing and embedding the risk
management framework.
Performance review
The Group Risk Committee’s performance was assessed
as part of the Board’s annual effectiveness review.
Following that review, the Committee concluded that
the Committee worked effectively with some areas
of improvement in relation to its remit and allowing
time for the Committee to report its deliberations to
the Board.
2018 priorities and focus
During 2018, the Committee will continue with a
focus on undertaking detailed deep-dive reviews
into other Group principal risks and meeting with the
Divisional teams. Attention will be on the progression
of mitigation actions and their effectiveness to drive
the Risk Management agenda.
We will continue the development of our Risk
Management Model, with a focus on refinements to
our Key Risk Indicators, Corporate Risk Management
Tool and the supporting policies and standards
and reporting.
94
Serco Group plc Annual Report and Accounts 2017
Directors' Report 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’).
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 Internal Audit activity which forms part of
the third line of defence.
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 2017 we
completed the annual SMS self-assessment process
for the third time to enable Contract Managers and
other Leaders across the Group to self-assess their
compliance with SMS requirements. Self-assessment
recipients are now working to address any gaps
identified, through the completion of action plans.
While SMS controls are designed to mitigate and
minimise business risks, these risks cannot be
completely eliminated. Consequently, while SMS
controls can provide reasonable assurance against
misstatement or loss, this cannot be absolute.
Roles and responsibilities – Functions, Divisions,
Business Units and Contracts within the Group are
responsible for identifying and managing risks in line
with SMS policy and standards and for 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 Group in assuring compliance with key
controls. There is a centrally mandated minimum
requirement for each Division to include in their
Compliance Assurance Plans, in order to address
principal risks, which include a minimum sample of
completed SMS self-assessments to be validated.
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, again providing
oversight, assurance and challenge to ensure the
Programme 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 Group, Internal Audit provides
an independent assessment of the design and
operating effectiveness of the Group'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 Group.
The first and second line of defence is reviewed and
challenged by the Executive Committee (and the
Board), which undertake a review of the Group Risk
Register and review individual risks as required.
The third line of defence is fully independent,
with review and challenge carried out by the Audit
Committee. 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, via the
Audit Committee.
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 2017 Annual Report
and Accounts.
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Audit Committee Report
2017 Scheduled Committee Meetings
Attendance
(eligibility)
Chairman
John Rishton
Committee Members
Mike Clasper
Rachel Lomax
Lynne Peacock1
5(5)
5(5)
5(5)
2(3)
1
Lynne Peacock was unable to attend the August 2017 Committee
Meeting due to an unavoidable scheduling conflict.
Dear Shareholder
I am pleased to present the Committee’s report for
the year ended 31 December 2017 following my first
full financial year as Chairman of the Committee.
The Audit Committee has a fundamental role to
play in reviewing, monitoring and challenging the
effectiveness of the Group’s financial reporting
and internal control processes. Details of the work
carried out by the Committee and in addressing
significant issues are reported to the Board as a
matter of course and are described in this report.
In 2017, the Committee has continued to focus
on the critical accounting judgements (especially
Onerous Contract Provisions (OCPs), tax and
pensions), the Finance Transformation programme,
financial controls, the use of Alternative Performance
Measures (APMs) and the reporting of exceptional
items. In 2018, the Committee will continue to
focus on the critical accounting judgements made
(including OCPs) and financial controls, support
the implementation of the Finance Transformation
programme and will review the impact of new
accounting standards, most notably IFRS 15 and
IFRS 16.
I will be present at the 2018 AGM to answer any
questions from shareholders on this report and
the activities of the Committee.
John Rishton
Chair of the Audit Committee
21 February 2018
Committee’s responsibilities
The Committee supports the Board in fulfilling its
responsibilities in respect of overseeing the Group’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.
The Terms of Reference for the Committee were
reviewed and amended this year to reflect the
requirements of the UK Corporate Governance Code
and the ICSA Guidance Note for Audit Committees.
The Terms of Reference can be found on our corporate
website www.serco.com
Membership and attendees
The Committee consists solely of Non-Executive
Directors. The Board considers that each member of the
Committee is independent within the definition set out
in the UK Corporate Governance Code (the ‘Code’) and
that, between them, the members of the Committee
bring strong international, service and public sector
expertise and experience which is highly relevant to
the Company. John Rishton is a Fellow of the Chartered
Institute of Management Accountants and has served
as Chief Executive and Chief Financial Officer of large
businesses, providing assurance to the Board that at
least one member of the Committee has recent and
relevant financial experience, as required by the Code.
Biographical details for each member of the Committee
are provided on pages 86 and 87.
The Committee met five times during the financial
year. Attendance at these meetings is set out above.
In addition to the members of the Committee, the
Chairman, the Chief Financial Officer, the Group
Financial Controller, the Head of Internal Audit, the
Group General Counsel and Company Secretary and
representatives of the Company’s External Auditor,
KPMG LLP, attended and received papers for each
meeting. The Committee retain time at the end of
each meeting to meet separately without management
present and invite the Head of Internal Audit and KPMG
LLP to attend for part of this session. The Committee
also meet privately with the Chief Financial Officer.
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Serco Group plc Annual Report and Accounts 2017
Directors' Report Performance review
The Audit Committee’s performance was assessed
as part of the Board’s annual effectiveness review.
In terms of enhancement to the Committee's overall
effectiveness, it was felt that the Committee worked
effectively but should reflect further on annual training
needs and continue to visit contracts to help improve
business understanding.
– 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.
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 2017 principally fell into three main areas:
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;
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;
• Receiving reports from Internal Audit on the audit
programme and resulting recommendations;
• In conjunction with the Group Risk Committee,
considering the level of alignment between the
Group's key risks and Internal Audit programme;
• Reviewing the proposed 2018 Internal Audit plan;
• Reviewing the adequacy of resources of the Internal
Audit function and considering and approving the
scope of the Internal Audit programme;
• Considering reports from the External Auditor on
their assessment of the control environment.
• Reviewing updates on accounting matters and new
External Auditor
accounting standards, including the new accounting
standards on financial instruments (IFRS 9), revenue
(IFRS 15) and leasing (IFRS 16);
• 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 in discharging
its responsibilities;
– 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
Group’s position and performance, business model
and strategy;
• Considering and approving the audit approach
and scope of the audit undertaken by KPMG LLP
as External Auditor and their fees;
• Agreeing reporting materiality thresholds;
• Reviewing reports on audit findings;
• Considering and approving letters of representation
issued to KPMG LLP; and
• Considering the independence of KPMG LLP 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.
• Making a recommendation to the Board on the
appointment of the External Auditor.
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Audit Committee Report continued
Financial controls and significant financial
judgements
The Group aims to have a strong and well 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.
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, the Group has not
been exposed to critical, severe or significant risk. The
Committee was also encouraged to note that where
weaknesses in the financial control framework were
identified they continued to be addressed.
Financial control risk is monitored through one of the
Group's Principal Risks, 'financial control failure'. The
Committee has reviewed this risk during 2017 and has
focused in particular on:
• The impact of the Group’s ongoing Finance
Transformation programme, with briefings received
at every Committee meeting on the progress of
the project;
• Updates to the risk mapping framework 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 function's first and second lines of defence.
During the year, the Financial Reporting Council ('FRC')
wrote to the Company in relation to the thematic
review of Alternative Performance Measures provided
in the Company’s annual report for the year ended 31
December 2016. No major financial reporting changes
were identified however, some clarified descriptions and
explanations have been included within the 2017 Annual
Report and Accounts to provide greater transparency in
relation to exceptional items, in particular the treatment
and disclosure of restructuring costs.
The FRC’s review only covered the specific disclosures
relating to this thematic review and provides no
assurance that the report and accounts are correct in
all material respects; the FRC’s role is not to verify the
information provided but to consider compliance with
reporting requirements.
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 & 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
Group's key contracts.
The Audit Committee gives particular focus to 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.
Finance Transformation Programme
Management has developed and
commenced implementation of the
Group’s Finance Transformation
programme. The new finance
operating model relies on a
new provider of finance function
outsourcing and greater leveraging
of centres of excellence using an
outsourced finance model.
The Committee was briefed on the new finance
operating model prior to implementation and has
been updated on performance against the plan
through the course of the year.
The Committee concluded that the
new finance operating model was
appropriate and progress was in line
with expectations.
Through its oversight of the Finance Transaction
programme the Committee considered the potential
risks associated with the new finance operating model
and challenged Management on the processes put in
place to mitigate those risks.
The Committee were satisfied that
Management has taken sufficient steps
to mitigate the risks associated with the
Finance Transformation programme.
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Serco Group plc Annual Report and Accounts 2017
Directors' Report Issue and Significance
How the Committee addressed this
Comments and Conclusion
Use of Alternative Performance Measures (APMs)
The Committee considered whether the
performance measures used by Management
provided a meaningful insight into the results of
the Company for its shareholders.
The Committee agreed with Management
that Underlying Trading Profit continued to
be a reasonable basis for the comparison of
the performance of the business.
The Committee reviewed the treatment of items
considered as being exceptional and requiring
separate disclosure.
The Committee also reviewed the proposed
disclosure of APMs in both the 2017 Half and Full
Year results and the 2017 Annual Report ahead of
their approval by the Board.
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
2017 results and the 2017 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.
The Committee were satisfied with the
approach taken by Management and with
the results of the impact assessment.
The impact of IFRS 9 and IFRS 15 is
disclosed within Note 2 of the Financial
Statements.
The Adoption of New Accounting Standards in 2018
The Committee challenged the approach
taken by Management and reviewed in detail
with Management and the External Auditor
the expected impact of the new accounting
standards.
Due to the significance of IFRS 15 the Committee
members took part in an IFRS 15 education
session held with the External Auditors and
senior members of the Group Finance team.
The Group’s performance measures
continue to include some metrics
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, material
charges and releases of other items
identified during the 2014 Contract &
Balance Sheet Review, together with
other significant non-trading items.
During the year, Management
performed an impact assessment
of the two new accounting
standards required to be adopted
with effect from 1 January 2018.
The new accounting standards
are IFRS 9 regarding Financial
instruments and IFRS 15 regarding
Revenue from contracts with
customers.
Neither accounting standard
is expected by Management
to fundamentally change the
presentation of the Group’s
previously published Financial
Statements, but a detailed
exercise was performed in order
to arrive at this 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, 2015 and 2016 Management
proposed impairment charges
and core to the assessment of the
value of goodwill is Management’s
estimate of future cash flows.
This estimate 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.
No impairment of goodwill has
been identified in 2017.
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.
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Audit Committee Report continued
Issue and Significance
How the Committee addressed this
Comments and Conclusion
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 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.
Following review, the Committee
concluded that the process followed was
appropriate and the resulting conclusions
reached and calculations performed were
appropriately balanced.
Viability Statement
During the course of 2017, the Committee, along with
the Board, has received general guidance from the
FRC on preparing annual reports for the 2017/2018
reporting season, including suggestions regarding
viability statements. The Committee has reviewed the
2017 Viability Statement in light of these comments and
have addressed more specifically the justification of the
time period over which the statement is based and the
sensitivity and scenario testing performed.
The Viability Statement is set out on page 30.
Independent assurance
The Group's Independent assurance structure is formed
of Internal Audit and External Audit.
Internal Audit
Internal Audit acts as a "third line of defence" providing
independent 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;
• Delivers an annual programme of risk-based internal
audits, reporting findings and recommendations
for management actions to improve governance,
risk management and controls to each Audit
Committee; and
• Reviews the annual Internal Audit programme
regularly throughout the year to ensure it remains
focused on key risks, recommending changes to the
Audit Committee for their approval.
Internal Audit gives particular regard to the ongoing
evaluation of the efficacy of the Group’s financial
controls and reporting processes. Internal Audit is
headed by the Group Head of Internal Audit who
reports functionally to the Chair of the Audit Committee
ensuring independence is maintained. Internal Audit
work with a co-sourced partner, PwC, to supplement
and enhance in-house skills and resources where
required. During 2017, Internal Audit has delivered a
full programme of audits making recommendations to
management for improvements to risk, governance and
controls. Reports have been discussed with the parts
of business they relate to and management actions
agreed have been tracked for progress. Key themes
and management action progress have been included
in regular written updates to the Audit Committee.
Internal audits may focus on individual contracts,
processes, functions or risk themes.
The 2018 Internal Audit programme will continue to
focus on the key risks across the business including
key risks around the Group's Finance Transformation
programme as it progresses.
External Auditor
The Audit Committee manages the relationship with
the Company’s External Auditor on behalf of the
Board. As a result of an external competitive tender
process, KPMG LLP were appointed by the Board as the
Company’s external auditor for the 2016/2017 audit, the
appointment being approved by shareholders at the
2017 AGM, and have served as the Company’s auditor
for one year. Since appointment, Stephen Wardell has
served as audit engagement partner. In 2017, Stephen
informed the Committee of his intention to retire from
KPMG LLP and John Luke will replace him as the new
audit partner in 2018. In accordance with the Audit
Practices Board Ethical Standard 3, 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.
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Serco Group plc Annual Report and Accounts 2017
Directors' Report 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. For the financial year ended 31 December 2017,
the non-audit fees paid to KPMG LLP were £0.1m (2016:
£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. £36k of fees related to advisory services which
had been engaged prior to KPMG LLP’s appointment
as auditors. 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 190.
The Committee regularly reviews the nature of non-
audit work performed by the External Auditor and the
volume of that work. 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.
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.
The Audit Committee keep the assessment of the
need to tender the auditor under ongoing review
and the Company confirms that it complied with the
provisions of the Competition & Markets Authority’s
2014 Order on mandatory use of competitive tender
processes and Audit Committee responsibilities.
The Committee evaluates the effectiveness of the
external audit annually, using feedback obtained from
management associated with audits undertaken in
Group Finance and in the Divisions and by assessing
the performance of the External Auditor against a
range of criteria including calibre of the audit team,
knowledge of the Group, and the quality of planning,
review, testing, feedback and reporting. The feedback
received was reviewed by management and reported
to the Committee. After taking these reports into
consideration, 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 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 LLP be re-appointed as
External Auditor of the Company at the next AGM in
May 2018 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 on our corporate website www.serco.com
The Independent Auditor’s report to shareholders is set
out on pages 152 to 157.
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Nomination Committee Report
2017 Scheduled Committee Meetings
Attendance
(eligibility)
Chairman
Sir Roy Gardner
Committee Members
Mike Clasper1
Lynne Peacock2
Angie Risley3
5(5)
4(5)
2(2)
2(3)
1 Mike Clasper was unable to attend the January 2017 meeting due to an
unavoidable scheduling conflict.
2
3
Lynne Peacock joined the Committee with effect 1 November 2017.
Angie Risley was unable to attend the June 2017 Committee Meeting
due to an unavoidable scheduling conflict and stepped down from the
Board with effect from 15 September 2017.
Dear Shareholder
The Committee led the process for Board
appointments and made recommendations to the
Board. In fulfilling this role, the Committee considered
the diversity of and evaluated the balance of skills,
experience, independence and knowledge on the
Board.
During the year, the Committee reviewed the voluntary
recommendations provided in the Hampton-Alexander
Review on Women in Leadership Positions and the
Parker Report into Ethnic Diversity and considered the
voluntary recommendations when reviewing the Board
Diversity Policy. Further details on our Board Diversity
Policy are provided below.
Following the decision by Ralph Crosby, Tamara
Ingram, and Angie Risley to stand down from the
Board, I together with the Nomination Committee,
continued to focus on refreshing the talent and
experience on the Board and the search for new
independent Non-Executive Directors which we
commenced in 2016. Following that process, it led
to the appointment of three new Non-Executive
Directors. I am pleased to welcome Lynne Peacock,
Ian El-Mokadem (appointed with effect from 1 July
2017) and Kirsty Bashforth (appointed with effect from
15 September 2017) to the Board. Lynne, Ian and Kirsty
are settling in to their roles and have made valuable
contributions to Board and Committee discussions.
Lynne Peacock chairs the Remuneration Committee
and is a member of the Audit and Nomination
Committees. Ian El-Mokadem is a member of the
Corporate Responsibility and Group Risk Committees
and Kirsty Bashforth is a member of the Remuneration
and Corporate Responsibility Committees. Further
information concerning this process is provided in my
report below.
I will be present at the 2018 AGM to answer any
questions from shareholders on this report and the
activities of the Committee.
Sir Roy Gardner
Chair of the Nomination Committee
21 February 2018
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Serco Group plc Annual Report and Accounts 2017
Directors' Report
Committee’s responsibilities
Activities of the Committee during 2017
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 30% (2016: 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 Non-Executive
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.
The Terms of Reference for the Committee were
reviewed and amended during the year to reflect
the requirements of the UK Corporate Governance
Code (the 'Code') and the ICSA Guidance Note for
Nomination Committees. The Terms of Reference can
be found on our corporate website www.serco.com
Membership and attendees
The Committee is comprised of solely independent
Non-Executive Directors. The Board considers that
each member of the Committee is independent within
the definition set out in the Code. The Committee
met on five occasions during the year and details of
Committee membership and attendance at meetings is
provided on page 102. Meetings of the Committee are
normally attended by the Chief Executive, the Group HR
Director and the Group General Counsel and Company
Secretary. Biographical details for each member of the
Committee are provided on pages 86 and 87.
During the year the Committee’s key activities included:
• The appointment of three new Non-Executive
Directors – The Committee concluded the search
for Non-Executive Directors commenced in 2016
following the resignation of Tamara Ingram and as
part of the ongoing succession planning process for
refreshing of the Board. Particular consideration was
given to succession planning for the Remuneration
Committee and for suitable candidates for succession
of the Chair of the Remuneration Committee. The
services of an external search consultant, Lygon
Group, were retained to assist in identifying potential
candidates. Lygon Group is independent and is
also a signatory to the Voluntary Code of Conduct
on Gender Diversity. The Committee agreed the
specification and reviewed the proposed candidates
against objective criteria (including diversity, ethnicity,
cultural, professional and educational backgrounds)
to ensure the selected candidates enhanced the skill
set and strengthened the diversity of thought and
experience on the Board. The Committee members
then conducted interviews with shortlisted candidates
before making recommendations to the Board.
Lynne Peacock, Ian El-Mokadem and Kirsty Bashforth
have all been through a comprehensive induction
programme including contract visits and meetings
with members of the Executive Committee and other
key senior managers in Serco and its advisers.
• The appointment of a new Remuneration Committee
Chair – During the search for new independent Non-
Executive Directors, the Committee gave particular
consideration to the search for, selection and
appointment of a suitable successor for the position
of Chair of the Remuneration Committee. The
Committee as a whole agreed the specification and
considered, after interviewing a number of candidates
from an agreed short list, that Lynne Peacock, being a
very experienced Chair of Remuneration Committees,
would be a suitable successor to Angie Risley and
unanimously recommended Lynne's appointment to
the Board.
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Nomination Committee Report continued
Gender diversity: Board
Male
Female
70%
30%
Gender diversity: senior management
Male
Female
90%
10%
• Developing the Board Diversity Policy – Serco
strongly supports the principle of boardroom
diversity and values the benefits that diversity of
thought can bring to its Board and throughout Serco
and believes that a mix of expertise, experience, skills
and backgrounds (including age, ethnicity, disability,
gender, sexual orientation, religion, belief, culture,
education and professional backgrounds) allows
Serco to deliver a great service that is valued by our
customers and meets the needs of those who use
the services we provide. Serco will always seek to
appoint board members and senior management on
merit against objective criteria, including diversity. In
developing the Board Diversity Policy, the Committee
considered the voluntary recommendations provided
in the Hampton-Alexander Review on Women in
Leadership Positions and the Parker Report into
Ethnic Diversity and recommended that the Board
commit to improving gender and ethnic diversity
on the Board and in the senior management roles
within Serco. The Nomination Committee will review
and assess the Board Diversity Policy annually and
recommend any revisions to the Board for approval.
Details of the Group's Gender Diversity Policy and
how we support development of female talent within
Serco are provided on page 73 of the 2017 Annual
Report. The Board Diversity Policy is available on
our corporate website, www.serco.com
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
however, it was felt that the Committee could improve
its role around the following areas: to review the content
of its annual agenda and training programme; further
enhance the recruitment process for appointing new
members of the Board and re-consider the format in
which updates are provided to the Board following
Committee meetings.
2018 priorities and focus
During 2018, the Committee will continue to focus on
succession planning both at the Board and amongst
senior management and continue to maintain the
diverse composition of the Board.
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Corporate Responsibility Committee Report
Attendance
(eligibility)
clarity in regards to corporate responsibility and its
alignment to corporate strategy and will be the focus
of future activities of the Committee.
2017 Scheduled Committee Meetings
Chairman
Mike Clasper
Committee Members
Sir Roy Gardner
Ian El-Mokadem1
Angie Risley2
Kirsty Bashforth3
Edward J. Casey Jr4
4(4)
4(4)
2(2)
2(2)
2(2)
4(4)
1
Ian El-Mokadem was appointed to the Committee on 1 July 2017.
2 Angie Risley resigned from the Committee on 15 September 2017.
3 Kirsty Bashforth was appointed to the Committee on 15 September 2017.
4 Edward Casey resigned from the Committee on 31 December 2017.
Dear Shareholder
This year has been a busy year for the Corporate
Responsibility Committee as we sought to align our
Corporate Responsibility Framework (CRF) with the
Group strategy and maintain engagement with the
business to better understand some specific areas of
safety and ethical risks.
During 2017, Serco’s CRF has been redefined to
better reflect the Group’s strategy, what matters to
us and the manner in which we conduct our business.
The CRF defines our key corporate responsibility
principles, reflects our inherent attitudes, guides our
future behaviours and facilitates the measurement
of our performance. The CRF is structured around
Serco's key stakeholder groups and has at its core
Our Values of Trust, Care, Innovation, and Pride
which are central to everything we do. Agreeing
the CRF is a significant step forward in providing
Alongside this, the Committee has engaged with
and received detailed briefings from Divisional
CEOs on specific areas around safety and ethical
risks. This included: the challenges faced by the
Justice & Immigration business in regard to physical
assaults and a range of positive initiatives being
implemented by the business; Saudi Railways
operations (with safety of the first passenger trains
being a priority); the Anti-Bribery and Corruption
toolkit trial in the UK; and, employee engagement
around our Values following refinements to the
culture index in our employee engagement survey,
Viewpoint. During 2018, the Committee will continue
to engage the business in all of these areas.
Finally, the year also witnessed a change in the
membership of the Committee with the appointment
of Ian El-Mokadem and Kirsty Bashforth. I would like
to thank Angie Risley, who stepped down when she
left the Board, for her valued contribution over a
number of years.
Mike Clasper
Senior Independent Director and Chair of the
Corporate Responsibility Committee
21 February 2018
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Corporate Responsibility Committee Report continued
Committee’s responsibilities
Membership and Attendees
The Committee is responsible for overseeing the
Group's approach on all aspects of Corporate
Responsibility. This includes the Group’s ethics and
business conduct; its treatment of its people; its
contribution to the communities in which its people
live and work; and its approach in managing its
relationships with customers and suppliers.
The Committee also reviews and scrutinises the
Group’s continued approach to Corporate Renewal
matters and also focuses on forward-looking corporate
responsibility matters.
The Board has agreed that the Committee’s focus will
continue to be on the following four criteria:
• Health and Safety – while overall Health and Safety
will remain a matter reserved by the Board, the
Committee is charged with considering the Group’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 Board.
• People – the Committee considers the Group’s policies
relating to its people and matters of relevance to its
management of people, such as the Viewpoint survey
and the Group’s Human Rights policy.
• Ethics – the Committee reviews Speak Up reports;
the Group’s 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.
• Corporate Responsibility Framework – the Committee
provides oversight, guidance and challenge on
the implementation of the Group’s Corporate
Responsibility Framework and considers related
policies and strategies on how the Group conducts its
business and guards its reputation, including matters
relating to human rights and slavery.
The Terms of Reference of the Committee were
reviewed and amended during the year to reflect
the requirements of the UK Corporate Governance
Code and to update the Committees reporting
responsibilities. The Terms of Reference can be found
on our corporate website, www.serco.com
The Committee is comprised of both Executive
and Non-Executive Directors. Details of Committee
membership and attendance at meetings are provided
on page 105. Biographical details for each member
of the Committee are provided on pages 86 and 87.
The Committee met on four occasions during the year.
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 2017
During the year, the Committee’s key activities included:
• Changes to Committee membership – The
Committee concluded the search for Non-Executive
Directors in 2017, and Ian El-Mokadem was appointed
to the Committee on 1 July 2017 and Kirsty Bashforth
was subsequently appointed to the Committee on
15 September 2017, following the resignation of
Angie Risley;
• The Committee reviewed and updated the Corporate
Responsibility Framework to ensure it reflected the
Group's public purpose and responsibilities;
• Health and Safety performance – the Committee
considered the Group’s Health and Safety
performance and reviewed health, safety and
environment reports at each of its meetings. This
included: lessons learnt and action plans from
particular incidents; an overview of HSE governance
and oversight; and specific initiatives to drive
continuous improvement such as zero harm week,
safety culture assessment and Just Culture;
• HSE Deep Dives – a series of deep analysis in the
following areas: serious physical assaults, with a
particular focus on UK Justice & Immigration; rail
safety, the management of Saudi Arabia Railways
where operations had expanded from running freight
trains to running passenger trains; and aviation safety
with a particular focus on operations within our FAA
contracts in the US;
• Ethics and Speak Up activities and performance –
the Committee reviewed reports detailing trends,
resolution times, investigation outcomes, lessons
learnt, implementation of the third party due
diligence process. In addition, the Committee also
considered the outcomes from the UK Anti-Bribery
and Corruption toolkit and the Gifts and Hospitality
and Conflicts of Interest registers;
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Serco Group plc Annual Report and Accounts 2017
Directors' Report • Corporate Renewal Programme – the Committee
continued to review and progress its Corporate
Renewal Programme including: the findings of the
annual SMS self-assessment process; implementation
and findings from compliance assurance; and ongoing
contract management performance and reporting;
• Received a briefing on the Culture Index included
within the Viewpoint engagement survey to monitor
the ongoing culture of the Group; and
• Anti-Bribery and Corruption – the Committee
reviewed the Anti-Bribery and Corruption procedures
across the Middle East and UK & Europe Divisions.
Performance review
During the year, the Committee was assessed as part
of the Board's annual effectiveness review. Following
that review, the Committee concluded that the
Committee was performing effectively however, it was
felt that the Committee should review the content of
its annual training programme, continue to consider
the remit of the Committee and re-consider the format
in which updates are provided to the Board following
Committee meetings.
2018 priorities and focus
During 2018, the Committee will continue to focus
on the embedding of the refreshed Corporate
Responsibility Framework and undertake detailed
deep-dive reviews into key areas within its remit to
ensure that the appropriate focus, control and rigour
remain in place throughout the Group.
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Compliance with the UK Corporate Governance Code
For the year ended 31 December 2017, the Company has complied fully with the UK Corporate Governance
Code with the exception of provision B.6.2. A copy of the Code can be found at www.frc.org.uk
The notes below are intended to assist with the evaluation of the Group’s compliance during 2017 and
forms part of 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 corporate website
www.serco.com
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 Board
meetings held during 2017 and the Directors’
attendance are shown on page 91.
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 on
our corporate website 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 Group 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 2017. 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 on our corporate
website 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
As at the date of this report, there are six Non-
Executive Directors, in addition to the Chairman
and two 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
Lynne Peacock and Ian El-Mokadem were
appointed as Non-Executive Directors on
1 July 2017. Kirsty Bashforth was appointed as
a Non-Executive Director on 15 September
2017. The appointment was led by the
Nomination Committee, who recommended
all three appointments to the Board. Further
details regarding the appointment process
are available in the report of the Nomination
Committee on page 102.
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.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 2017, 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 on our corporate website
www.serco.com. 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 2017, performance evaluations of the Board,
its Committees and individual Directors were
carried out internally. Further details of the
evaluation can be found on page 92.
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 2018.
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
Lynne Peacock, Ian El-Mokadem and Kirsty
Bashforth will stand for election at the 2018
AGM. The Directors unanimously recommend
the election/re-election of all Board members
at the 2018 AGM. Full biographical details for all
Directors can be found on pages 86 and 87.
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Serco Group plc Annual Report and Accounts 2017
Directors' Report C. Accountability
D. Remuneration
E. Relations with shareholders
D.1 The level and components
of remuneration
The Remuneration Report on pages 110 to 143
outlines the activities of the Committee during
2017 and sets out the 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 2017 (including salary, bonus and
share awards).
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 Group. 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 2017 there has been
active engagement with shareholders through
meetings, presentations and roadshows.
E.2 Constructive use of the AGM
The AGM will be held on Thursday 10 May 2018
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 on our corporate website
www.serco.com
The Remuneration Policy will be put to a
binding shareholder vote at the AGM in 2018
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 on
our corporate website www.serco.com and the
activities of the Committee are set out in the
Directors’ Remuneration Report on page 114.
No Director is involved in setting his or her
own remuneration.
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 page 150 with an explanation of the
Group’s strategy and business model together
with the relevant risks and performance metrics
set out on pages 13 to 29.
A further statement is provided on page 150
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 Group’s position and
performance, business model and strategy.
The Audit Committee report on pages 96 to
101 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 20 to 29. The Viability Statement on page
30 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 20 to 29 and 93 to 95.
C.3 Audit Committee and Auditors
The Audit Committee report on pages 96
to 101 sets out details of the composition of
the Committee, including the expertise of
members, and outlines how the Committee
discharged its responsibilities during 2017.
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
on our corporate website www.serco.com
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Report on Directors’ remuneration
Remuneration linked to transformation for growth
Our revised remuneration policy aligns directors’ reward with business
performance and delivery of our strategic priorities.
Dear Shareholders
As the new Chair of the Remuneration Committee and
on behalf of the Board, I am pleased to present my first
Directors’ Remuneration Report for Serco Group plc
for 2017.
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.
Context to the Committee’s decisions in the year
Since 2014 the business has been through a major
transformation, with the setting of a new business
strategy, a Rights Issue, disposal of several businesses,
rationalisation of the portfolio and mitigation of loss
making contracts. It is now a much stronger business,
with a solid balance sheet and a restored reputation
with customers.
Our overall remuneration framework has a number of
specific objectives. It is designed to focus on value
creation and share ownership to align the high calibre
executives who were appointed in 2014, with the
completion of the transformation and the delivery of
the outcomes committed to shareholders. There are
multiple considerations in the design of the overall
framework. First and foremost is to ensure long
term shareholder value creation and the Group’s
performance relative to sector peers. Second, is the
balance of short-term and long-term incentives. Third,
is the recognition of the Group performance and the
individual’s specific contribution to this, as well as the
level of reward available to employees in the wider
Group. Fourth, is to consider the precise numerical
results through the lenses of both what management
have contributed to what has been achieved and to
the way this has been done, specifically ensuring the
individuals embody the Serco Values of Trust, Care,
Innovation and Pride in the way they do business.
Summary of key decisions for 2017
• Confirmation of 2017 vesting of the 2014
• Assessment of performance for the 2015 Deferred
Performance Share Plan (PSP) elements which
vested at nil as neither the EPS nor the relative TSR
minimum performance requirements were met.
Bonus Plan (DBP) and 2015 PSP Awards with
performance periods ending in FY17 and vesting
in 2018.
• Determination of vesting of Recruitment Awards
granted to the CEO and CFO on joining Serco. The
relative TSR elements did not vest as the minimum
performance was not achieved. The Committee
assessed each Director’s performance against their
Strategic Objectives and determined that, in each
case, that element of the award should vest in full.
• Assessment of performance for the 2017 Annual
Bonus. It was determined that the CEO should
receive a bonus of 75.0% of maximum, the CFO a
bonus of 75.3% of maximum, and the COO a bonus
of 73.8% of maximum.
• Determination of awards granted in April 2017 under
the PSP and DBP Matching Share Awards granted in
May 2017.
• Determination of nil salary increase for the CEO and
CFO in 2018.
• Completion of a further review of Directors’
Remuneration in conjunction with major shareholders.
• Determination of arrangements in connection with
the cessation of employment of the COO from
31 December 2017. It was agreed that a bonus for
2017 would be paid on the normal date but that all
unvested share awards would lapse in full.
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Serco Group plc Annual Report and Accounts 2017
Directors' Report Linkage of variable pay outcomes to performance measured in FY17
KPI
Trading Profit
Revenue
Free Cash Flow
Relative TSR
Average ROIC
Aggregate EPS
Note:
1 At constant currency.
Plan
Annual Bonus
Annual Bonus
Annual Bonus
PSP
PSP
PSP & DBP
2017 performance
£70.8m1
2,832m1
(£6.7m)1
Below Median
11.9%
19.53p
2017 incentive outcome
Below Threshold
Between Threshold and Target
Between Target and Max
In 2017 the Executive Team delivered a trading result in line with expectations, as well as over £3bn of order intake
and a further improvement in employee engagement. The transformation of the business continues at pace and
significant improvements have been delivered in efficiency and competitiveness. There was unanimous support
for the decision to make awards to reflect the contribution that each member of the executive team has made to
strengthening the business and position it for success.
Rationale for the 2018 remuneration policy requiring approval at the 2018 AGM
At the 2017 AGM, shareholders overwhelmingly
supported the renewal of the current policy for a single
year with a view to the Remuneration Committee
undertaking a further review of policy during 2017.
This allowed the new policy presented here to be
aligned to the requirements of the third phase of
our strategy implementation which begins in 2018.
In undertaking the review the Committee took into
consideration what was appropriate for the business
as we move into the ‘enabling growth’ phase of
the business transformation, as well as considering
feedback from investors, best practice and market
practice, and the key principles of good corporate
governance. Our aim was to ensure remuneration
remains aligned with our key corporate goals and
shareholders’ expectations, and that it motivates
and compensates senior management fairly for their
contribution to the business.
As a result of the review, and following consultation with
our major shareholders, the Committee has made a
number of changes to the remuneration framework.
The removal of the Deferred Bonus Plan (DBP) Share
Matching Plan and revisions to the suite of performance
conditions for PSP awards will:
• more closely align executive remuneration with
that for sector peers by significantly reducing the
overall quantum for variable pay (from 500% to 375%
maximum opportunity for the CEO, with a similar
reduction for the CFO);
• deliver a reduction of 20% in total maximum pay
opportunity for the CEO and 19% for the CFO;
• strengthen alignment with the business strategy
through the balance of short and long term reward
and the choice of performance measures; and
• simplify our remuneration arrangements to one long-
term incentive plan.
This reduction in maximum earnings opportunity is being
made against the context of the fourth consecutive year
of no change to base pay for the CEO or CFO. With
the COO role not being replaced and the additional
responsibility being taken on at Executive Director level
by the CEO and CFO, the overall result is a significant
reduction in total cost of Executive Director pay. Serco is
fortunate to have not only a high calibre Executive team
but also one which understands the context in which we
operate and therefore support the changes.
PSP awards to be granted from 2018 onwards will
maintain the emphasis on the achievement of financial
metrics but permit up to 25% of the PSP to be linked
to key non-financial, strategic, KPIs that are clearly
aligned to our strategy and are crucial to the delivery of
sustainable growth. These KPIs will represent core areas
where achievement can be tested and evidence-based.
For 2018, the first year of operation, the Committee
has concluded that a weighting of 15% for strategic
measures and 85% for financial measures is appropriate.
A higher weighting of up to 25% may apply in future
years of operation.
The introduction of mandatory three year deferral into
shares of all bonus earned above 100% of salary (with
no matched opportunity) further reinforces the link
between reward and sustained long-term performance.
In line with the policy approved at the 2017 AGM, under
the 2018 remuneration policy all elements of variable
pay are subject to clawback provisions.
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Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Rationale for the 2018 remuneration policy requiring approval at the 2018 AGM continued
Finally, to ensure continued good governance of remuneration, we will introduce further “best practice” measures,
including the reduction of maximum pension contributions to 20% of salary for new Executive Directors.
Much thought was given to the balance of focus on short and long term delivery which are equally important to
the Group’s future success. A small increase in maximum opportunity under the short term incentive, combined
with the introduction with mandatory deferral into shares for a further three years of any bonus earned over 100%
of salary, strengthens the link between reward and achieving critical targets in the short term whilst maintaining a
focus on longer term, sustainable, growth.
The simplified pay structure
Performance
Share Plan
Vests subject to three year
EPS, ROIC, TSR and Strategic
Objectives conditions. Two year
post-vest holding period.
Compulsory
bonus deferral
Over 100% of salary mandatorily
deferred in shares for three years
Annual bonus
Up to 100% of salary
paid in cash immediately
Base salary
Chart is illustrative and is not to scale. Details of executive
director remuneration packages are on page 119. The full
Policy for approval at the 2018 AGM is on pages 120 to 129.
Year
1
2
3
4
5
How our simplified variable pay structure aligns to the core KPIs for 2018
Core KPIs
Non-financial
In-year non-financial objectives
Annual bonus
•
•
•
•
Financial
Trading Profit
Revenue
Free Cash Flow
Relative TSR
Average ROIC
Aggregate EPS
Growth-aligned strategic objectives
Shareholders’ approval is requested for the revised Remuneration Policy.
Concluding comments
PSP
•
•
•
•
On behalf of my colleagues on the Committee, we appreciate the input we have received from shareholders and
representatives of institutional investors, whose comments have shaped the refresh of our Policy. The Committee
believe that the recommended changes will ensure our arrangements are appropriate given the context in which
Serco operates as a trusted partner of government; that our highly effective executive management team are
rewarded for completing the transformation and are incentivised to move forward to restoring growth, margins
and returns of the business.
On behalf of the Board
Lynne Peacock
Chair of the Remuneration Committee
21 February 2018
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Serco Group plc Annual Report and Accounts 2017
Directors' Report
The Remuneration Committee
The role of the Committee is to determine and recommend to the Board a fair and responsible remuneration
framework for ensuring that the executive management team are rewarded and incentivised appropriately for their
contribution to Group performance. The Committee’s primary focus is to ensure a clear link between reward and
performance. This means ensuring that the policy, structure and levels of remuneration for Executive Directors
reinforce the strategic aims of the business and are appropriate given the market context in which Serco operates.
The Committee’s composition, responsibilities and operation comply with the principles of good governance as set
out in the UK Corporate Governance Code, with the Listing Rules and with the Companies Act 2006. The Terms of
Reference of the Committee, a copy of which can be found on the Group’s website at www.serco.com/about/the-
board-and-governance, are reviewed annually to ensure that they remain appropriate. The Committee conducted
an annual assessment of its own performance in accordance with the annual effectiveness review of the Board.
Following that review, the Committee concluded that it is fully effective in respect of its Executive and Chairman
Remuneration duties with consideration being given as to how it may widen the scope to include a greater
understanding of employee benefits and to further collate employee views around pay and benefits at Serco.
Members of the Committee and attendees
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.
2017 Scheduled Committee Meetings
Chairman of the Remuneration Committee
Angie Risley1
Lynne Peacock2
Committee Members
Sir Roy Gardner3
Mike Clasper4
John Rishton5
Kirsty Bashforth6
Notes:
Attendance (eligibility)
4(4)
3(3)
3(5)
2(4)
5(5)
1(1)
1 Angie Risley resigned from the Board on 15 September 2017. Chair of the Remuneration Committee 14 May 2012 – 15 September 2017.
2
3
4
Lynne Peacock joined the Committee on 1 July 2017. Chair of the Remuneration Committee from 15 September 2017.
Sir Roy Gardner has been a Member of the Committee since 1 June 2015. He was unable to attend the September 2017 and December 2017 Committee
Meetings due to unavoidable scheduling conflicts.
Mike Clasper was a Member of the Committee from 1 August 2016 until 4 December 2017. Mike was unable to attend the May 2017 and September 2017
Committee Meetings due to unavoidable scheduling conflicts.
5
John Rishton has been a Member of the Committee since 13 September 2016.
6 Kirsty Bashforth has been a Member of the Committee since 15 September 2017.
Remuneration Committee
attendees during the year
Rupert Soames
Angus Cockburn
Geoff Lloyd until August 2017/
Anthony Kirby from October 2017
Tara Gonzalez
David Eveleigh
Elaine Richardson until May 2017
Chandrika Kher from May 2017
PricewaterhouseCoopers LLP
Position
CEO
CFO
Group HR Director
Group Reward Director
Group General Counsel
& Company Secretary
Deputy Company Secretary
Comments
Attended by invitation
Attended by invitation
Attends as an executive responsible for
advising on the People Strategy
Attends as an executive responsible for
advising on the Remuneration Policy
Attends as the secretary to the Committee
Attends as the secretary to the Committee
External advisor to the
Remuneration Committee
Attends as the independent advisors
to the Committee
No person is present during any discussion relating to their own remuneration arrangements.
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Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Summary of the Committee’s activities during the financial year
Meeting
Regular items
Ad hoc items
February
Considered feedback from the shareholder consultation on the
2016 Policy Review; 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 granted in
2014; set performance targets and objectives for 2017; review
the draft of the 2016 Remuneration Report.
Considered accelerated vesting of
PSP awards for death in service case;
considered Executive Committee terms
and conditions for new hires; reviewed
wider employee arrangements and
conditions across the Group.
May
Considered administrative changes to the PSP Rules and the
Share Dealing Code; considered basis for the Policy Review to
inform the revised Remuneration Policy; considered AGM voting
outcomes; reviewed the achievement of performance conditions
for the Recruitment Awards granted in 2014.
August
Considered the 2017 Policy Review and recommendations for a
new Remuneration Policy.
September Considered proposals for the revised Remuneration Policy;
reviewed the achievement of performance conditions for the
Recruitment Awards granted in 2014; considered the reporting
requirement of the UK Gender Pay Gap regulations.
December
Reviewed proposed approach to structure of the Remuneration
Report; reviewed its own Terms of Reference which were
amended to reflect the UK Corporate Governance Code and
the ICSA guidance note for effective remuneration committees;
reviewed the Committee’s annual programme of work.
Updates on Executive Committee
appointments and exits.
Considered amendments to the taxable
benefits received by NEDs.
Considered feedback from major
shareholders and investor advisory
bodies regarding proposed changes to
the Remuneration Policy.
Considered the detail of reporting under
the UK Gender Pay Gap regulations.
Considered the cessation of employment
arrangements for COO Ed Casey.
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 the Remuneration Policy;
• support in reviewing the Directors' Remuneration Report;
• informing the Committee on market practice and governance issues; and
• 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 the 2017 Policy Review and pay and benefits data.
Fees paid to PwC as advisers to the Committee during the year totalled £69,100. 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 remuneration 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.
114
Serco Group plc Annual Report and Accounts 2017
Directors' Report At a glance: implementation of the Remuneration Policy for 2018
The following charts illustrate the value that may be delivered to the Executive Directors under different
performance scenarios for the year ending 31 December 2018. Also shown, for comparison, is the actual value
delivered in the year ended 31 December 2017 (excluding the value received from Recruitment Awards vesting in
the year) along with a comparison of the value that could have been delivered under the previous policy.
Rupert Soames (£'000s)
2018 Policy
£2,732
31%
27%
42%
£4,326
39%
35%
26%
£1,138
100%
6,000
5,000
4,000
3,000
2,000
1,000
0
Previous Policy
£5,388
55%
£3,646
£2,944
40%
22%
38%
24%
21%
£1,138
100%
Minimum
Target
Maximum
Minimum
Target
Maximum
Fixed elements of remuneration
Annual variable
Multiple period variable
Angus Cockburn (£'000s)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2018 Policy
Previous Policy
£1,513
29%
26%
45%
£688
100%
£2,338
37%
33%
30%
£1,613
37%
20%
43%
£688
100%
£2,863
53%
23%
24%
Minimum
Target
Maximum
Minimum
Target
Maximum
Fixed elements of remuneration
Annual variable
Multiple period variable
43%
26%
31%
Actual Single
Figure (2017)
£1,618
27%
30%
42%
Actual Single
Figure (2017)
The scenarios in the above graphs are defined as follows:
• Fixed elements of remuneration
– Base salary as applicable from 1 April 2018
– Estimated value of benefits to be provided in 2018 in line with the Remuneration Policy
(based on the value of actual benefits provided in 2017)
– Pension contribution/cash supplement equal to 30% of salary
• Annual bonus 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 Performance Share Plan values reflect the
“face value” at grant of shares that could be received for target and maximum performance.
115
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Implementation of the Remuneration Policy for 2018 – Executive Directors
Element
CEO (Rupert Soames)
CFO (Angus Cockburn)
Base salary from
1 April 2018
£850,000
£500,000
Pension
30% of salary
30% of salary
Annual bonus
Max. 175% of salary
Max. 155% of salary
On-target 87.5% of salary
On-target 77.5% of salary
Compulsory three year deferral into Serco shares of bonus over 100% of salary
28% Trading Profit
28% Cash Flow
14% Revenue
30% in year Non-financial objectives
70% financial
30% non-financial
Maximum 200% of salary
Maximum 175% of salary
Awards granted under the PSP in 2018 will be subject to Group performance over a
three year period ending 31 December 2020:
For 2018, 85% of the award will be based on financial measures split equally between:
• 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
performance period.
• Relative TSR – Total Shareholder Return (TSR) when ranked relative to companies in
the FTSE250 (excluding investment trusts).
• Average ROIC – Pre-tax Return on Invested Capital (ROIC), measured as an average
over the performance period.
For 2018, the remaining 15% will be based on Strategic Objectives. Performance
targets for the awards granted in 2018 will be based on improvements in order book
and employee engagement, which are critical to delivering the business strategy over
the next three years. For 2018, the first year of operation of strategic objectives within
the PSP, the Committee has concluded that a weighting of 15% for strategic measures
and 85% for financial measures is an appropriate balance.
Vested shares from the PSP must be held for two years post vesting
(after payment of tax).
200% of salary
150% of salary
• Malus provisions and clawback provisions apply to PSP awards during the
three-year performance period prior to vesting and the two-year post-vesting
holding period respectively.
• Clawback provisions will apply to the annual bonus plan.
Annual bonus
measures1
Performance
Share Plan (PSP)
PSP measures2
Assessed over
the three year
performance period
Holding
requirement
Shareholding
guideline
Malus and
clawback
Notes:
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 strategic plans 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 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 to the extent that they
are not deemed commercially sensitive at that time. Full retrospective disclosure will be made of any details that are withheld once this information is no
longer deemed commercially sensitive by the Committee.
116
Serco Group plc Annual Report and Accounts 2017
Directors' Report Implementation of the Remuneration Policy for 2018 – Non-Executive Directors
Role
Element – Annual Board and Committee fees
Chairman
Senior Independent Director
Board fees
Audit Committee Chairmanship
Audit Committee Membership
Corporate Responsibility Committee Membership1
Group Risk Committee Chairmanship
Group Risk Committee Membership
Remuneration Committee Chairmanship
Remuneration Committee Membership
Element – travel allowance
Base fee to
apply from
1 April 2018
£
Base fee
1 April 2017
£
Percentage
change
250,000
250,000
No change
25,000
50,000
12,500
5,000
5,000
15,000
8,000
10,000
5,000
25,000
50,000
12,500
5,000
N/A
No change
No change
No change
No change
New fees
15,000
No change
8,000
No change
10,000
No change
5,000
No change
Allowance for travel to international meetings
5,000
5,000
No change
Note:
1
In line with the Policy approved at the 2017 AGM, a fee of £5,000 per annum will be introduced for Membership of the Corporate Responsibility Committee
to apply from 1 April 2018.
No additional fee is payable for Chair of the Corporate Responsibility Committee, or for the Chair or Membership
of the Nomination Committee. In addition, in 2017 no fees were payable for Membership of the Corporate
Responsibility Committee.
117
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Directors’ Remuneration Policy
For approval at the 2018 Annual General Meeting
The Directors’ Remuneration Policy (the Policy) will take legal effect from the conclusion of the 2018 Annual General
Meeting (AGM) subject to shareholder approval at the 2018 AGM.
As set out in the Chair’s Letter, as we move into the ‘enabling growth’ phase of the business transformation
the Committee has undertaken a complete review of Directors’ remuneration with a view to ensuring that the
Remuneration Policy is aligned to the strategic requirements of the business going forward. The Remuneration
Policy review also sought to simplify the overall remuneration of Directors’ and to address concerns from some
shareholders in connection with the long term incentive arrangements in particular.
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 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 approved at the 2017 AGM is displayed on the Company’s website,
in the investor area.
The provisions in the Directors’ Remuneration Policy as approved at the AGM in 2017 that relate to the Deferred
Bonus Plan will continue to apply to all awards made under this plan prior to the approval of the new Policy at the
AGM in 2018.
Remuneration Policy
Serco’s Remuneration Policy supports the achievement of the Group’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; and
• 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 balance of fixed to 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.
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Serco Group plc Annual Report and Accounts 2017
Directors' Report Features of the 2018 Remuneration Policy
The remuneration package for Executive Directors continues to consist of base salary, annual bonus, a long-
term share-based incentive, pension and other benefits. The Group’s policy remains to ensure that a significant
proportion of the package is related to performance, with the relevant performance measures aligned to the core
requirements of the Group’s forward-looking strategy. As set out in the Chair’s Letter, changes have been made
to ensure alignment with the Group’s strategy as we enter the enabling growth phase of the transformation; to
address areas of concern and deviations to current accepted remuneration practice; and to ensure the new policy
is fit for the future success of the business. A summary of the changes to the 2017 Policy (as approved at the 2017
AGM) is set out below:
Element in 2017
Executive Directors’ Policy
Changes made for 2018
Base Salary
No change but we have restated the purpose and operation of this element
for clarity.
Benefits
No change.
Annual Bonus
Changes made to the maximum opportunity under this element and to introduce
the compulsory deferral into shares of bonus earned over 100% of salary:
Deferred Bonus Plan
Performance
Share Plan
Pension
CEO – increased from 150% of salary to 175%
CFO – increased from 130% of salary to 155% of salary
The performance framework has been restated for clarity.
This element is no longer part of the Remuneration Policy for Executive Directors.
This results in a reduction in the total variable pay opportunity of 125% of salary
for the CEO (with a similar reduction for the CFO). The provisions of this element
will continue to apply to Executive Directors‘ in respect of awards granted under
this plan prior to approval of the 2018 Policy only (the last of which is anticipated
to vest in May 2021).
Formally rebalance the performance measures and introduction of Strategic
Objectives to the suite of performance measures enabling a more holistic
approach to ensuring reward is fully aligned to Company performance. Awards
granted in 2018 will vest based on 85% equally weighted between TSR, EPS,
ROIC and 15% on Strategic Objectives. The operation and other aspects of the
performance framework have been restated for clarity.
Reduction in the maximum opportunity for new Executive Directors' from a
maximum of 30% of salary to 20% of salary) and clarification of the operation
of this element.
Shareholding guideline
No change.
Element in 2017
Non-Executive Directors’ Policy
Changes made for 2018
Fees
No change.
Benefits and expenses
No change.
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Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Future policy table – Executive Directors
For the avoidance of doubt it is intended that the new Directors’ Remuneration Policy will apply in its entirety to all
payments made to Directors’ from the date of shareholder approval.
The following table sets out the proposed Executive Director Remuneration Policy to apply for three years following
shareholder approval at the 2018 AGM. The 2018 Policy for Non-Executive Directors‘ can be found on page 128 and the
table set out on page 124 provides further information of how pay policies are set for the broader employee population.
How the element supports
our strategic objectives
Operation
Opportunity
Performance
framework
Base Salary
To recognise an individual’s
experience, responsibility
and performance of the role,
and by providing the basis for
a competitive remuneration
package; to help recruit
and retain executives of the
necessary calibre to execute
Serco’s strategic objectives.
Review takes
account of individual
performance and
contribution to the
Company during
the year.
Whilst there is no prescribed,
formulaic maximum, 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.
Such cases would include
where there has been a
significant change in role size or
complexity which has resulted
in the salary falling below a
market competitive level given
the enhanced responsibilities of
the role.
Pay levels are designed to attract and
retain experienced, skilled executives
reflecting the skills and role of
the individual.
Base salaries are set by
reference to:
• the relevant experience and time in
role of the individual;
• individual performance;
• compensation of similarly situated
executives of companies in an
appropriate peer group; and
• the wider economic environment.
In some circumstances an executive
may start on a lower salary than would
be competitive in the market, with a
phased increase applying depending on
performance in role and individual ability.
Salaries are normally reviewed annually
and any changes are usually effective
from 1 April. Salary reviews take account
of the individual’s performance and
contribution to the Company during
the year.
Benefits
To provide a competitive
level of benefits.
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.
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.
None
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.
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Serco Group plc Annual Report and Accounts 2017
Directors' Report 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.
Compulsory deferral into
shares increases alignment
of the short term incentive
with shareholders.
Reward ongoing stewardship
and contribution to core
values.
Operation
Opportunity
Performance framework
Maximum bonus
opportunity is 175%
of salary for CEO
and 155% of salary
for other Directors.
This represents
the maximum
bonus payable for
exceptional/“stretch”
performance.
The Committee sets objectives
and their weightings 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 compulsory deferral
into shares vesting after three years
of any bonus earned over 100% of
salary. The Committee has discretion
to permit a dividend equivalent to
accrue during the vesting period.
Dividend equivalents are delivered to
participants in the form of additional
shares or cash to the extent that the
award vests.
Awards made to Executive Directors
are subject to malus and clawback
provisions. Further details are given
below.
Performance is assessed annually.
Both financial and non-financial
measures are used, with a weighting
of no less than 70% financial.
Financial measures are based on
the Company’s Key Performance
Indicators (KPIs) for the year such as
Trade Profit, Cash Flow and Revenue
and take into consideration analyst
consensus and the Company’s
forecasts. Non-financial measures
are based on personal performance
against key strategic objectives for
that year.
Given the direct link of the
performance measures and targets
to the Group’s strategic plan, the
details of these are deemed by the
Committee to be commercially
sensitive and therefore are not
disclosed in advance to shareholders.
However, the Committee commits
to full retrospective disclosure of
the performance measures, targets
and achievement of those targets
following the end of the performance
period and to the extent that this
information is no longer commercially
sensitive in respect of the non-
financial strategic objectives.
Awards for on-target performance are
50% of the maximum opportunity. At
minimum (threshold) performance the
award that may be received is 0% of
the maximum opportunity.
All bonus payments are ultimately
at the discretion of the Committee,
taking into consideration the
Director’s personal contribution
to business performance over
the relevant year and leadership
behaviours demonstrated in making
that contribution.
Performance conditions do not apply
to the deferred element.
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Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
How the element
supports our
strategic objectives
Operation
Opportunity
Performance framework
Performance Share Plan (PSP)
Recognises achievement
against the longer term
objectives linked to
the Group’s strategy
and aligns incentives
with shareholder value
creation.
Awards under the PSP are
usually made in the form
of nominal cost options or
conditional share awards,
but may also take the
form of nil-cost options or
market value share options.
Awards are normally
granted on an annual basis.
However, the Committee
will consider awards under
the PSP twice a year.
Awards will be subject to
performance conditions.
Awards are typically
settled in Ordinary Shares
however, at the discretion
of the Board awards may
be converted to a cash
equivalent based on the
value of the shares at the
vesting date (in cases
where due to local law it
is not possible to deliver
shares), or subject to
net settlement.
The Committee has
discretion to permit a
dividend equivalent
to accrue during the
vesting period. Dividend
equivalents are delivered
to participants in the form
of additional shares or
cash to the extent that the
award vests.
Shares are subject to a
two year post vesting
holding period. During
this time the shares must
be retained but are not
subject to forfeiture
provisions. Shares may
be sold in order to satisfy
tax or other liabilities as a
result of the vesting of the
award.
Awards made to Executive
Directors are subject
to malus and clawback
provisions. Further details
are given below.
Maximum
annual award
of up to 200%
of base salary
for the CEO
and 175%
for other
Directors.
Performance measures and weightings will be set by the
Committee at the start of the three year performance period
on the basis of the Group’s strategic plan. At least 75% of
the vesting of the LTIP is dependent on two or more financial
performance conditions chosen from:
• EPS
• TSR
• ROIC
The Remuneration Committee has discretion to introduce
additional financial measures aligned to the Group’s strategy.
In addition, up to 25% of the LTIP vesting maybe based on
the achievement of strategic measures. The Remuneration
Committee has discretion to restrict the vesting against the
non-financial element if, on assessment of the Company’s
performance as a whole including the financial performance, the
formulaic outcome of the non-financial measures is not reflective
of this.
• EPS for these purposes is EPS before exceptionals and is an
important measure of shareholder value which can also be
influenced by executive decision-making. EPS targets are set
in reference to analyst forecasts and Group business plans.
The Committee takes care to ensure that specific EPS targets
are suitably stretching.
• Relative TSR reflects our performance relative to other
companies in which investors could choose to invest. 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.
• Maintaining an attractive return on capital is core to our
business strategy therefore ROIC is included in the suite of
financial measures for the PSP. Pre-tax ROIC targets are set in
reference to analyst forecasts for cash flow and trade profit,
and Group business plans, and are inclusive of joint ventures
to more closely align management with shareholders.
• Strategic Objectives must be measurable and capable of
objective assessment. Strategic Objectives will be aligned to
the achievement of key milestones in the implementation of
the Group’s strategy. The specific Strategic Objectives will be
disclosed in the Annual Report on Remuneration following
the grant of an award but, due to the direct link of the
performance measures and targets to the Group’s strategic
plan, the details of these are deemed by the Committee to
be commercially sensitive and therefore are not disclosed in
advance to shareholders. However, the Committee commits
to full retrospective disclosure of the performance measures,
targets and achievement of those targets following the end
of the relevant performance period and to the extent that
this information is no longer commercially sensitive.
25% of the award vests for threshold performance rising on a
straight-line basis to full vesting for maximum performance.
The Committee (with input from the Audit and Group Risk
Committees as appropriate) considers Serco’s underlying
performance and external market reference points as well as
performance against the specific targets set in determining the
overall outcome of the PSP.
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Serco Group plc Annual Report and Accounts 2017
Directors' Report How the element
supports our strategic
objectives
Pension
To provide pension related
benefits to encourage
executives to build savings
for retirement.
Shareholding Guideline
To support long-term
commitment to the
Company and the alignment
of employee interests with
those of shareholders.
Operation
Opportunity
Performance
framework
Executive Directors may participate in the
Group defined contribution pension plan (or
overseas Serco pension plan as appropriate).
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.
Employer pension contributions (or
the equivalent) and/or combined
with a cash supplement of up to 30%
of base salary.
None
The maximum employer pension
contribution (or the equivalent), and/
or combined with a cash supplement,
for new Executive Directors will be up
to 20% of base salary.
The Committee reviews the shareholding
guideline with the Policy review to ensure
the guidelines remain in line with market
and best practice.
The shareholding guidelines are
200% of salary for the CEO, and
150% of salary for other Executive
Directors.
None
The Committee has the discretion to
increase the shareholding guideline
of the Executive Directors.
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 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 guideline.
Malus and clawback
Malus and clawback provisions apply to awards under the annual bonus and PSP. 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
Deferred Bonus or PSP 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 and annual bonus. The clawback must be implemented within five years of the grant of the
relevant PSP award, and within two years in respect of bonus awards paid in cash, and five years from the grant date
for the portion of the bonus delivered in shares.
Use of discretion
The Committee will operate the annual bonus plan 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.
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Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Use of discretion continued
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 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 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 1,300 employees, including members of the Global
Leadership Team, are eligible for a bonus award under Serco Bonus Plan.
Performance Share Plan (PSP)
• Annual awards under the PSP are made to approximately 370 employees
in the Global Leadership Team.
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.
124
Serco Group plc Annual Report and Accounts 2017
Directors' Report Consideration of shareholder views
As set out in the Chair’s letter, we have consulted with our largest shareholders and received support and
helpful comments which have been taken into consideration in shaping the future policy presented to you here.
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.
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 aligns the remuneration package on recruitment with the
above Remuneration Policy incorporating all elements as set out above.
Base salary is set by the Committee taking into account all factors it considers relevant, including the Executive’s
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.
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. Any new Executive Director would be offered either a pension contribution and/or a
pension allowance equal to up to 20% of base salary.
As summarised below, the Remuneration Policy provides for a maximum combined total incentive under bonus and
PSP of 375% of salary in any one year.
Element of remuneration
Maximum variable pay:
Normally comprising:
• Annual bonus
• PSP
Note:
Maximum percentage of salary
375%
175%
200%
1 Maximum percentage of salary for annual bonus and PSP 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).
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.
125
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Approach to recruitment remuneration continued
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.
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. Under this policy the Committee may
at any time, with the agreement of a Director, alter aspects of their existing contracts so that they are in line with
the policy for new Directors.
Copies of the Executive Directors’ service contracts and Chairman and Non-Executive Directors’ 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 129.
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.
126
Serco Group plc Annual Report and Accounts 2017
Directors' Report
Provision for
Executive Directors
Detailed terms
Treatment of annual
bonus on termination
• 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 unless in exceptional circumstances (e.g. in the case of death of the
Executive) when the Committee determines to make the payment early.
• The Committee has discretion to reduce the entitlement of a ‘good leaver’
in line with performance and the circumstances of the termination.
• For new Executive Directors unvested deferred bonus share awards will lapse on
cessation of employment except for ‘good leavers’. ‘Bad leaver’ provisions will not
apply to the existing Executive Directors in respect of unvested deferred bonus
share awards on cessation of employment except in the event of termination
relating to misstatement of results, misconduct or poor performance.
Treatment of unvested
awards granted under
the PSP1
• 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. Awards vest on the
normal vesting date except in the case of the death of the participant when the
Committee may accelerated the vesting to the date of death.
• 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.
Change of control
• 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.
• Unvested PSP awards and unvested share awards in respect of deferred annual
bonus vest pro-rata for time and performance up to the date of change of control.
For existing Executive Directors the unvested share awards in respect of deferred
annual bonus will vest without time pro-rating.
Exercise of discretion
•
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.
Notes:
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 clawback
provisions would continue to apply in the event that such discretion were exercised.
127
Directors’ ReportFinancial StatementsStrategic Report
Remuneration Report continued
Service contracts and loss of office payments continued
Provision for NEDs
Detailed terms
Letters of appointment
• Appointed for initial three-year term.
• Appointment may be terminated on three months’ written notice.
• All Non-Executive Directors are subject to annual re-election.
Loss of office policy
• No compensation or other benefits are payable on early termination.
Remuneration Policy for the Chairman and Non-Executive Directors
How the element supports
our strategic objectives
Operation
Fees
To attract Non-Executive
Directors with the
necessary experience
and ability to make a
substantial contribution
to the Group’s affairs.
The fees of the Chairman are
determined and approved by
the Remuneration Committee
(excluding the 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 inter-continental travel.
In addition, all reasonable travel
and business related expenses
incurred in connection with
carrying out their duties are
reimbursed.
Benefits and expenses
Performance
framework
Non-Executive
Director fees are
not performance-
related.
Opportunity
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.
The maximum travel
allowance is £5,000 per
occasion requiring inter-
continental travel.
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 guideline.
128
Serco Group plc Annual Report and Accounts 2017
Directors' Report Dates of Directors’ service contracts/letters of appointment
Director
Rupert Soames
Angus Cockburn
Ed Casey1
Sir Roy Gardner
Angie Risley2
Ralph D. Crosby Jnr3
Mike Clasper
Rachel Lomax
John Rishton
Lynne Peacock
Ian El-Mokadem
Kirsty Bashforth
Notes:
Date of appointment to the Board
8 May 2014
27 October 2014
25 October 2013
1 June 2015
1 April 2011
30 June 2011
3 March 2014
3 March 2014
13 September 2016
1 July 2017
1 July 2017
15 September 2017
1 Ed Casey stepped down from the Board and left the Company on 31 December 2017.
2 Angie Risley stepped down from the Board and left the Company on 15 September 2017.
3 Ralph Crosby stepped down from the Board and left the Company on 1 July 2017.
All Directors are put forward annually for re-election at the AGM.
129
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Annual Report on Remuneration
The implementation of the Remuneration Policy for year ended 31 December 2017
The Remuneration Policy for the year ended 31 December 2017 was consistent with the policy approved by
shareholders at the AGM in 2017.
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 2017 for each
Executive Director, together with comparative figures for 2016. Details of NEDs’ fees are set out in the next section.
All figures in £
Salary
Taxable benefits1
Pension2
Rupert Soames
Angus Cockburn
Ed Casey5
2017
2016
2017
2016
2017
2016
850,000
850,000
500,000
500,000
826,717
771,552
33,126
24,258
37,624
40,310
106,887
102,541
255,000
255,000
150,000
150,000
243,210
228,376
Total Fixed Remuneration
1,138,126
1,129,258
687,624
690,310
1,176,814 1,102,469
Bonus3
956,505
1,049,325
489,580
530,075
912,287
926,440
Long Term Incentives4
1,710,294
37,983
580,968
30,559
–
–
Total Variable Remuneration
2,666,799 1,087,308 1,070,548
560,634
912,287
926,440
Total
Notes:
3,804,924 2,216,566
1,758,172 1,250,944
2,089,101 2,028,909
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 2017 benefits relate primarily to
his expatriate status, including costs of £87,489 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.
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.
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%, and Ed Casey by deferring 35.6%, of their 2016 bonuses via the purchase of Investment Shares.
Any deferral by Rupert and Angus of their 2017 bonuses, payable in 2018, will take place during 2018 and be reported in the 2018 DRR.
This is the estimated or actual value of Long-Term Incentives for which the performance period ended in the year. Also included is the gain on vesting of
Recruitment Awards vesting in 2017 for Rupert Soames and Angus Cockburn for which there were no performance conditions but which were not included
in the single figure value for the year of grant. These awards were granted in compensation for non-performance based awards forfeited by Rupert and
Angus on joining Serco, therefore no performance conditions applied to the vesting of these awards. The 2014 PSP Award, and the performance related
Recruitment Awards granted to Rupert and Angus, that were subject to TSR performance (for which the performance period ended 22 February 2017) did
not meet the minimum criteria and therefore these awards lapsed in full. Further details are provided on page 134.
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 2017 single figure USD 1 = GBP 0.77601. For the purpose of the 2016 single figure USD 1 = GBP 0.72672. The increase in the GBP value of
Ed Casey’s base salary and pension is due to the exchange rate difference between 2016 and 2017. His 2017 base salary and pension cash alternative were
unchanged from 2016 (salary USD 1,061,690 and cash alternative of USD 306,306), with a small reduction in his employer 401K contribution to USD 7,103 in
2017 (USD 7,950 in 2016). His 2017 bonus is USD 1,175,609 (USD 1,274,824 in 2016).
The annual base salaries of the Executive Directors for the year ended 31 December 2017 were:
Director
Rupert Soames
Angus Cockburn
Ed Casey
Base salary
£850,000
£500,000
USD 1,061,690
Effective Date
8 May 2014
27 October 2014
1 April 2014
Increase
N/A
N/A
N/A
Variable pay outcomes (audited information)
Performance-related annual bonus
For 2017, the Executive Director bonus was based on achieving a mix of financial and non-financial objectives which
were weighted 70:30 respectively. 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 2017 annual bonus were subject to an Underlying Trading Profit underpin (after adjustment for in-year
Onerous Contract Provisions (OCP) items) of £60.4m at constant currency rates.
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.
130
Serco Group plc Annual Report and Accounts 2017
Directors' Report Financial performance
Performance Measure
Revenue
Free Cash Flow
Trading Profit
Note:
1 At constant currency.
Weighting for 2017
(% maximum bonus
opportunity)
14%
28%
28%
Threshold
target
(£m)
£2,866
£(38.2)
£60.4
Maximum
target
(£m)
Actual
performance1
(£m)
£3,073
£(8.7)
£72.4
£2,832
£(6.7)
£70.8
Achievement
against measure
(% maximum
opportunity for
this measure)
0%
100%
94%
Non-financial performance
Weighting for 2017 (% maximum opportunity)
30%
Achievement against measure
(% maximum opportunity for this measure)
Overall 2017 bonus outcome
Total bonus payable as % of maximum
Bonus opportunity as % of salary
Bonus amount achieved as % of salary
Bonus amount earned
Rupert Soames
Angus Cockburn
69%
70%
Rupert Soames
Angus Cockburn
75.0%
150%
112.5%
£956,505
75.3%
130%
97.9%
Ed Casey
65%
Ed Casey
73.8%
150%
110.7%
£489,580
USD 1,175,609
For FY17, the Serco Bonus 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 at 94% and 100% of maximum respectively. The level of Revenue
achieved over the period was below threshold and as such none of this component of the bonus was awarded.
The financial bonus outcomes have been calculated after appropriate adjustments, which were agreed at the
beginning of the year as part of the target-setting process and in line with the approach disclosed in respect of
2016. 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.
The Company’s external auditors verified 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.
Trading Profit of £54.0m 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 early 2015, and the bonus outcome for
both 2015 and 2016 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 Committee has applied 2017 in a consistent manner the principles established in 2015 and 2016.
131
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Variable pay outcomes (audited information) continued
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 £6.8m reduction. The Committee then considers items to properly reflect
management effort and in-year operational performance. The Committee has concluded that a total of £23.6m
should be added to Trading Profit in constant currency to arrive at a calculation of Trading Profit for bonus purposes
in 2017; this compares with the £20.9m which was subtracted from Trading Profit in 2016. The main difference
between the two years is that in 2016 there was an £11.8m net credit to Trading Profit related to Onerous Contract
Provisions charges and releases which were excluded from Trading Profit for bonus purposes, whilst in 2017 there
was a debit of £19.5m similarly excluded.
For the purposes of comparison the table below sets out the adjustments made by the Committee between
Trading Profit and Trading Profit for bonus purposes in 2015, 2016 and 2017.
£’m
Trading profit
Constant currency adjustment
Trading profit at constant currency
Adjustment for bonus purposes
Trading profit for bonus purposes
Underlying Trading Profit at constant currency
2017
54.0
(6.8)
47.2
23.6
70.8
63.4
2016
100.3
(5.7)
94.6
(20.9)
73.7
73.4
2015
137.6
7.7
145.3
(32.9)
112.4
95.9
Non-Financial Performance
Rupert Soames
Rupert’s objectives included:
•
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
relationships.
• Supporting the Chairman to
ensure the effective working
of the Board.
The Committee deemed performance to be very strong. Rupert has continued to
show highly effective and visible leadership throughout 2017 and over the course
of the last 12 months has delivered significant further progress in implementing
the strategy and transformation. The Group signed contracts with a total value
of £3.4bn during the year delivering a strong performance with the largest order
intake since 2012. Over 30 contract awards were worth more than £10m each
and the large value of the new business won resulted in this being approximately
70% of the total value signed, with the balance represented by secured
extensions or re-bids of existing work. The Committee continue to monitor the
successful embedding of values through the annual employee engagement
survey “Viewpoint” which has shown the fourth successive year of improvement;
engagement 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 continue to be first class. Based on Rupert’s
achievement the Committee has awarded an above target but below maximum
performance for the non-financial element relating to these objectives.
132
Serco Group plc Annual Report and Accounts 2017
Directors' Report Angus Cockburn
Angus’s objectives included:
•
Improving Business
Development performance
to rebuild the pipeline, with
focus on both new business
wins and total wins including
re-competes and extensions.
• The development of a new
Finance Operating Model.
•
Improving the effectiveness
and efficiency of the finance
function through the Global
Finance Transformation with
a number of key milestones
agreed at the start of the
year which built on progress
made in the previous year.
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 and
embed Risk Management
process and work to embed
as part of our operational
approach to running the
business.
• Continue to strengthen
“zero harm” HS&E culture
and implement necessary
changes to effect change.
Deliver consistent measures
across the Group, and
achieve targeted reduction
in accident rates.
Note:
The Committee deemed Angus’s performance to be very strong against all
objectives. With profits at top end of expectations we set out some 15 months
ago, net debt lower than we expected, fully funded pension schemes, and
strong order intake, Angus made a critical contribution to delivering a solid
performance in 2017 in a difficult market. Contract and Balance Sheet Onerous
Contract Provision liability now stands at £168m, down from £220m in 2016 and
£447m in 2014. Significant work has been undertaken to stress-test the Group’s
financial plan against key sensitivities within the Group’s principal risks. The
Global Finance Transformation has gathered pace and significant improvements
have been made against the key milestones agreed at the start of the year.
In terms of the Transformation Plan, operating costs reduced in proportion to
the scale of revenue reduction; further shared services and overhead savings
of around £20m were achieved, taking total overhead savings over the last three
years to over £100m. Based on Angus’s achievement the Committee has awarded
an above target but below maximum performance for the non-financial element
relating to these objectives.
The Committee deemed Ed’s performance to be very strong. Ed made a
significant positive impact on the development of the pipeline with £3bn of
pipeline opportunities added over the course of 2017. The acquisition of BTP
Systems was completed for USD 20m, bringing deep skills in defence satellite
communication and radar engineering technical services, together with a
pipeline of USD 200m. Significantly improved risk management processes
and consistently improved reporting to the Group Risk Committee. In 2017
the policies relating to safe and healthy operations were reviewed and
strengthened Group Standards with definitions of safety critical risks. Ed
continued to build our health and safety focus across the Group; examples
include in the UK, several Royal Society for the Prevention of Accidents Gold
Awards won in 2017, including at RAF Fylingdales and Forth Valley Royal
Hospital. Continuous improvement has been driven in health and safety
across our businesses, including new tools and training in Serco Americas
to reduce risks and improve safety management in air traffic control and
naval engineering, and new tools in Serco AsPac to improve roadside welfare
safeguards for our road safety camera operators. Based on Ed’s achievement
the Committee has awarded an above target but below maximum
performance for the non-financial element relating to these objectives.
1
Rupert Soames and Angus Cockburn are entitled to participate in the Deferred Bonus Plan (the DBP) in 2018, up to a maximum of 50% of the bonus
determined in respect of 2017 performance. Ed Casey is unable to participate following the cessation of his employment on 31 December 2017.
133
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Performance Share Plan (PSP)
The LTI amount included in the 2017 single total figure of remuneration includes the element of the 2014
Performance Share Plan (PSP) awards subject to TSR performance in the period to the announcement of the
Company’s 2016 results on 22 February 2017, and the elements of the 2015 PSP awards subject to EPS and ROIC
performance in the period to 31 December 2017. The awards granted to Rupert Soames and Angus Cockburn
were in the form of nominal cost options. Ed Casey’s awards are in the form of conditional share awards.
The performance assessment and vesting outcome for each award is as follows:
Award
Performance condition
2014 PSP
Relative TSR1
2015 PSP
Adjusted EPS
2015 PSP
Average pre-tax ROIC
Notes:
Relative
weighting
Threshold2 –
25% vesting
Maximum –
100% vesting
1/3
1/3
1/3
Median
ranking
Upper
Quartile ranking
10.3p
8.4%
12.5p
10.2%
Actual
Below
Median
19.53p
11.9%
Percentage of
max. achieved
0%
100%
100%
1
The Company’s TSR performance was assessed relative to the constituents of the FTSE 250, excluding investment trusts, over the period starting on the
27 June 2014 and ending on 22 February 2017 with the announcement of the Company’s results for the 2016 financial year.
2
In all cases 25% of the award vests at threshold performance, rising on a straight-line basis to 100% vesting at maximum performance.
Executive
Director
Award
Date
of grant
No. of shares
awarded
No. of shares
vesting
Vesting date
Share price
at vest
Value
of vesting
Rupert
Soames
Angus
Cockburn
2014 PSP (TSR)
27 June 2014
192,1321
–
27 June 2017
£1.159
£0
2015 PSP (EPS)
29 May 2015
2015 PSP (ROIC)
29 May 2015
413,928
413,927
413,928
413,927
29 May 2018
29 May 2018
£1.05522
£1.05522
£428,486
£428,485
2014 PSP (TSR)
31 October 2014
121,7461
–
31 October 2017
£1.166
£0
2015 PSP (EPS)
29 May 2015
2015 PSP (ROIC)
29 May 2015
Ed Casey
2014 PSP (TSR)
27 June 2014
2015 PSP (EPS)
29 May 2015
2015 PSP (ROIC)
29 May 2015
Notes:
213,051
213,050
141,1161
294,829
294,829
213,051
213,050
29 May 2018
29 May 2018
£1.05522
£1.05522
£220,544
£220,543
–
–
–
27 June 2017
£1.159
29 May 2018
29 May 2018
£1.05522
£1.05522
£0
£03
£03
1 The number of shares under award was adjusted on the Rights Issue in 2015. These are the adjusted number of shares awarded.
2 As these awards are still to vest at the time of reporting the share price used is the Q4 average closing share price to 31 December 2017.
3
Ed Casey’s unvested awards lapsed in full on his cessation of employment therefore the value in connection with his 2015 PSP awards with a
performance period ending in 2017 is £nil.
Deferred Bonus Plan (DBP)
The performance period for the 2015 Deferred Bonus Plan (DBP) Matching Share Award (a conditional share
award) wholly subject to EPS performance ended on 31 December 2017. 25% of this award vested for threshold
performance of an Adjusted EPS of 10.3p rising on a straight-line basis to 100% vesting for at or above maximum
performance of an Adjusted EPS of 12.5p. The Adjusted EPS for the period was measured as 19.53p therefore the
2015 DBP Matching Share Award will vest in full.
Executive
Director
Date of grant
No. of shares
awarded
No. of shares
vesting
Vesting date
Share price
at vest
Value of
vesting
Rupert Soames
29 May 2015
658,288
658,288
29 May 2018
£1.05521
£694,606
Note:
1 As these awards are still to vest at the time of reporting the share price used is the Q4 average closing share price to 31 December 2017.
134
Serco Group plc Annual Report and Accounts 2017
Directors' Report Recruitment Awards
The 2017 LTI value includes the elements of the Recruitment Awards (in the form of nominal cost options) with
performance periods ending in the relevant year which were granted in 2014 to Rupert Soames and Angus
Cockburn in respect of unvested performance awards forfeited on joining Serco. These elements of the
Recruitment Awards were (i) subject to relative TSR performance in the period to the announcement of the
Company’s 2016 results on 22 February 2017 (40% of the award), and (ii) Strategic Objective performance (20% of
the award) in the period ending 27 June 2017 (in respect of Rupert’s award) and 31 October 2017 (in respect of
Angus’s award). The remaining 40% of these awards is subject to an Absolute Share Price performance condition for
which the performance period will end in 2018.
For the TSR element, 25% of the award would vest for median ranking compared to the comparator group rising on
a straight-line basis to 100% vesting for upper quartile or better ranking when compared to the comparator group.
The comparator group for the TSR performance was the constituents of the FTSE 250 excluding investment trusts.
The relative TSR performance assessed was below median and therefore this element lapsed in full.
The Remuneration Committee made the following assessment of performance against the Strategic Objectives and
determined that in both cases the award should vest in full.
Executive Director
Strategic Objectives set
Assessment of performance
Rupert Soames
Rupert’s objectives focused on:
• Significant progress has been made in improving cash
•
Improving cash conversion;
•
Implementing transparent KPI
reporting;
• Development of strong
management talent within the
finance function; and
•
Improving operating margin.
Angus Cockburn Angus’s objectives focused on:
•
Implementing the Company’s
corporate plan;
• Rebuilding the Senior
Management Team;
conversion and minimising net debt.
• Rupert has ensured that the Company now has a
comprehensive management accounts pack and has
been instrumental in introducing standardised and
transparent Divisional reports.
• The Finance function has been transformed with the
recruitment of Angus Cockburn, whom Rupert has
supported in the recruitment of additional core talent
into this team.
• Since the year of grant (2014) there has been a
significant improvement in operating margin.
Based on Rupert’s achievement the Committee determined
that 100% of this award should vest.
• Angus has been central to the development and
implementation of our corporate plan, and most
specifically around the Rights Issue, the assessment of
the write-downs and provisions in November 2014, and
the subsequent implementation of an effective reporting
process.
•
Improving cash conversion; and
•
Improving operating margin.
• Angus has completely overhauled the Finance Team,
including the recruitment of a number of high-class
individuals, transforming it into an effective global team.
• Since the year of grant (2014) there has been a significant
improvement in operating margin.
Based on Angus’s achievement the Committee determined
that 100% of this award should vest.
135
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Recruitment Awards continued
Executive
Director
Performance condition
and relative weighting
Date
of grant
No. of shares
Awarded1
No. of shares
vesting
Vesting date
Share price
at vest
Value
at vest
TSR (40%)
Strategic Objectives (20%)
27 June 2014
TSR (40%)
Strategic Objectives (20%)
31 October 2014
153,953
76,977
112,714
56,356
–
76,977
–
56,356
27 June 2017
£1.192
31 October 2017
£1.166
£0
£90,232
£0
£64,584
Rupert
Soames
Angus
Cockburn
Note:
1 The number of shares under award was adjusted on the Rights Issue in 2015. These are the adjusted number of shares awarded.
Also included is the value of Recruitment Awards in the form of conditional share awards granted in 2014 to
Rupert and Angus in respect of unvested awards forfeited on joining Serco that were not subject to performance
conditions. These awards vested in full in 2017 and were not previously included in the single figure value for the
year of grant.
Executive
Director
Date
of grant
No. of shares
Awarded1
No. of shares
vesting
Vesting date
Share price
at vest
Value
at vest
Rupert Soames
27 June 2014
58,988
58,988
10 April 2017
£1.161
£68,485
Angus Cockburn
31 October 2014
39,849
25,899
39,849
25,899
10 April 2017
18 April 2017
£1.161
£1.121
£46,265
£29,033
Note:
1 The number of shares under award was adjusted on the Rights Issue in 2015. These are the adjusted number of shares awarded.
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) (£)
Allowances10 (£)
Taxable benefits11 (£)
Total (£)
2017
2016
2017
2016
2017
2016
2017
2016
Sir Roy Gardner1
250,000
250,000
Mike Clasper2
92,603
90,083
–
–
–
–
1,688
21,600
251,688
271,600
–
–
92,603
90,083
Ralph D. Crosby Jnr3
25,000
50,000
25,000
30,000
10,229
8,954
60,229
88,954
Rachel Lomax4
Angie Risley5
John Rishton6
Ian El-Mokadem7
Lynne Peacock8
Kirsty Bashforth9
70,000
70,000
42,619
60,000
73,227
19,583
29,000
31,468
16,151
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,468
–
–
426
–
–
–
–
–
–
70,000
70,000
42,619
60,000
76,695
19,583
29,000
31,468
16,577
–
–
–
Total
630,068
539,667
25,000
30,000
15,811
30,554
670,879
600,220
136
Serco Group plc Annual Report and Accounts 2017
Directors' Report Single Figure – Non-Executive Directors' remuneration (audited information) continued
Notes:
1
2
3
4
5
6
7
8
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
(until 4 December 2017), Nomination and Group Risk Committees.
Ralph Crosby stepped down from the Board on 1 July 2017.
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. She stepped
down from the Board on 15 September 2017.
John Rishton is Chairman of the Audit Committee and a Member of the Remuneration Committee and Group Risk Committees.
Ian El-Mokadem joined the Board on 1 July 2017 and is a Member of the Group Risk and Corporate Responsibilities Committees.
Lynne Peacock joined the Board on 1 July 2017 and is Chairman of Remuneration Committee and a Member of the Audit Committee.
9 Kirsty Bashforth joined the Board on 15 September 2017 and is a Member of the Remuneration and Corporate Responsibility Committees.
10 Up to £5,000 is payable for each occasion that requires inter-continental travel outside of the director’s country of residence.
11
Taxable benefits in 2016 and 2017 relate to reimbursed taxable travel and subsistence business expenses. Sir Roy Gardner also received secretarial services
in 2016 of £21,600.
Performance graph and table
This graph shows the value as at 31 December 2017, of a £100 investment in Serco on 31 December 2008 compared
with £100 invested in the FTSE250 index on the same date. It has been assumed that all dividends paid have been
reinvested. The TSR level shown at 31 December each year is the average of the closing daily TSR levels for the 30-
day period up to and including that date. The Company chose the FTSE250 index as the comparator for this graph
as Serco has been a constituent of that index throughout the period.
Serco Performance Graph
450
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
Dec 2017
Serco
FTSE 250 Index
137
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
CEO’s pay in last nine financial years
Year ended
31 December
2009
2010
2011
2012
2013
2014
2015
2016
2017
Group CEO
Christopher Hyman
Christopher Hyman
Christopher Hyman
Christopher Hyman
Christopher Hyman
Ed Casey
Ed Casey
Rupert Soames
Rupert Soames
Rupert Soames
Rupert Soames
CEO single figure
remuneration (£)
Annual bonus outcome
(as % of maximum
opportunity)
LTI vesting outcome
(as % of maximum
opportunity)
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
3,804,924
90%
91%
81%
72%
N/A
74%
71%
0%
87%
82%
75%
295%
169%
80%
64%
0%
0%
0%
N/A
100%
24%
91%
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 21,000 of the 42,700
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
Notes:
Salary
0%
1.28%1
Benefits2
37%
(5%)
Bonus3
(9%)
(18%)
1
2
3
This represents the average pay increase for all UK employees that was applied in the 2017 annual pay review cycle.
The nature of benefits provided to the CEO and to employees in 2017 compared to 2016 remains the same. The percentage change represents a reduction in
the cost to the Company of the benefits over the period. The increase in the CEO’s taxable benefit value (with the increase equivalent to 1% of salary) relates
to taxable travel which was provided in line with the approved Remuneration Policy.
The bonus element is shown for those employees eligible for such payments. The figures shown here relate to a calculation of the bonus earned, but not yet
paid, related to performance in 2017 compared to the 2016 bonuses paid in April 2017. The reduction in the average employee bonus is due to the different
performance outcomes at Divisional and Business Unit levels compared to 2016 which impacts the bonuses for the comparator population.
138
Serco Group plc Annual Report and Accounts 2017
Directors' Report 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
2017 vs 2016
0%
2017
nil
2016
nil
Overall expenditure on wages and salaries
(0.2%)
£1,513.6m
£1,517.2m
Dividend per share, and overall expenditure on wages and salaries have the same meaning as in the Notes to the
Group Financial Statements.
Pensions (audited information)
As at 31 December 2017, 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)
The Committee determined that Ed Casey would not receive any additional payments on the termination of his
employment. In recognition of his contribution to the Company throughout the whole performance year the
Committee determined that he would remain entitled to receive his 2017 Annual Bonus as disclosed in the single
figure table and accompanying notes, which will be paid in March 2018. All unvested share awards lapsed in full on
cessation of employment. In line with his expatriate arrangement Ed will receive UK and US tax return assistance for
the final year of his assignment. No further payments will be made.
Payments to Past Directors (audited information)
No payments were made in the year to past Directors.
139
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
Awards made in 2017
Performance Share Plan (PSP) (audited information)
In 2017 the Executive Directors received awards equivalent to 200% of salary for the CEO and COO and 175% of
salary 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 as measured over the three year
performance period ending 31 December 2019.
Performance Measure Weighting of Measure
Performance Target
Aggregate EPS
1/3rd
Relative TSR
1/3rd
Average ROIC
1/3rd
Statutory Earnings Per Share (EPS) before exceptional items (adjusted
to reflect tax paid on a cash basis) of 13.5p (threshold, 25% vesting) to
16.5p (maximum, 100% vesting), measured as an aggregate over the
three-year performance period.
Total Shareholder Return (TSR) of median (threshold, 25% vesting)
to upper quartile (maximum, 100% vesting) when ranked relative to
companies in the FTSE250 (excluding investment trusts), measured
over the three year performance period.
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.
The structure for vesting is the same for all measures, with straight-line vesting between threshold and maximum,
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 (ie performance period plus holding period) to a minimum of five years. Pre-vesting malus and post-vesting
clawback is also applicable to these awards.
Type of
interest
awarded1
Nominal
cost option
Nominal
cost option
Conditional
share award
Directors
Rupert
Soames
Angus
Cockburn
Ed
Casey4
Notes:
Basis
of award
(% salary)
Market price
at award
(p)2
Face value
(£)3
Grant date
Percentage
vesting at
threshold
performance
Number
of shares
200%
06 April 2017
113.00
1,700,000
25%
1,504,424
175%
06 April 2017
113.00
875,000
25%
774,336
175%
06 April 2017
113.00
1,500,761
25%
1,328,107
Performance
period end
date
31 December
2019
31 December
2019
31 December
2019
1
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.
2 Closing share price on 5 April 2017.
3 Calculated using the closing share price on the trading day immediately prior to the grant date.
4 All unvested PSP awards for Ed Casey lapsed on the cessation of his employment.
140
Serco Group plc Annual Report and Accounts 2017
Directors' Report Deferred Bonus Plan (DBP) (audited information)
The table below summarises the Matching Share Awards granted to Executive Directors’ in 2017 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 2017 vest subject
to Aggregate EPS over the three year performance period ending 31 December 2019. 25% of the Matching Share
Award will vest for threshold performance (Aggregate EPS of 13.5p), rising on a straight-line basis to 100% vesting
for maximum performance (Aggregate EPS of 16.5p 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
Face value
(£)1
123%
106%
84%
09 May 2017
1,049,323
09 May 2017
09 May 2017
530,073
693,837
Percentage
vesting at
threshold
performance
25%
25%
25%
Number
of shares
Performance
period end date
873,926
31 December 2019
441,470
31 December 2019
577,860
31 December 2019
Directors
Rupert Soames
Angus Cockburn
Ed Casey4
Notes:
1
2
The face value has been determined using the share price on 8 May 2017 of 120.07p per share (being the price paid by the Directors to acquire their
Investment Shares in connection with this award of DBP Matching Shares). This share price was used to determine the number of shares granted under the
Matching Share Award.
The Investment Shares that Ed Casey invested into the DBP in respect of 2016 bonus earned will be released to him. The Matching Share Award lapsed in full
on cessation of his employment.
Pre-vesting malus and post-vesting clawback is applicable to these awards.
Statement of voting at the general meeting
At the previous AGMs, votes on the Remuneration Report were cast as follows:
2016 Remuneration Policy
For %
Number
93.39%
Against %
Number
6.61%
736,257,238
52,086,742
2016 Annual Report on Remuneration
96.30%
3.70%
2015 Annual Report on Remuneration
96.68%
3.32%
759,195,936
29,155,876
814,337,337
27,947,300
2014 Annual Report on Remuneration
2013 Annual Report on Remuneration
2013 Remuneration Policy
2012 Remuneration Report
2011 Remuneration Report
Note:
98.87%
760,294,709
99.61%
367,080,126
98.08%
358,418,242
95.82%
1.13%
8,671,241
0.39%
1,442,674
1.92%
7,033,412
4.18%
346,071,397
15,084,901
93.72%
6.28%
351,474,463
23,547,217
Withheld %
Number1
N/A%
29,512
N/A%
21,680
N/A
610,006
N/A
24,080
N/A
2,302,116
N/A
5,373,262
N/A
5,923,160
N/A
8,299,355
1 A 'Vote Withheld' is not a vote in law and is not counted in the calculation of the proportion of votes 'For' or 'Against' a Resolution.
141
Directors’ ReportFinancial StatementsStrategic Report Remuneration Report continued
External appointments
The Board believes that the Group can benefit from its Executive Directors holding appropriate Non-Executive
Directorships of companies or independent bodies. Such appointments are subject to the approval of the Board.
Fees are retained by the Executive Director concerned.
During the year Angus Cockburn served as a Non-Executive Director of GKN plc. Fees payable in the year were
£63,000. Since the end of the year, Angus has been appointed (with effect from 20 February 2018) as the Senior
Independent Director of GKN plc following which, in addition to his Non-Executive Director fees, he will receive
additional fees of £10,000 per annum for this additional responsibility.
No other fee-paying external positions were held by the Executive Directors during the year ending
31 December 2017.
Directors’ shareholding and share interests (audited information)
Current shareholdings are summarised in the table below. Shares are valued for shareholding guideline
purposes at the year-end price, which was 98.90p per share at 29 December 2017 (being the last trading
day of the financial year).
Executive Directors
Share
ownership
requirements
(% of salary)2
200%
150%
150%
Name
Rupert Soames
Angus Cockburn
Ed Casey1
Notes:
Number of
shares owned
outright (including
connected persons)
at 31 December
2017 (or date of
cessation)3
Shares
Share options6
Value
invested4
(£)
Subject to
performance
conditions5
Subject to
performance
conditions7
Exercised
during the
year8
Total share
interests at 31
December 2017
(or date of
cessation)3
1,368,417 2,070,653
2,686,754
4,958,268
76,977
9,013,439
516,926
604,684
1,030,059
2,619,823
56,356
4,166,808
283,965
571,648
4,370,912
–
–
4,654,877
1
All of Ed Casey’s interests in shares subject to performance conditions were unvested at the point of cessation of employment on 31 December 2017 and
were lapsed in full as of this date.
2 The CEO, Rupert Soames, and CFO, Angus Cockburn, are expected to have met their shareholding guidelines during the course of 2018.
3
4
5
6
7
8
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period 1 January 2018 and the date of this report.
Based on the share price at the point of acquisition of each tranche of shares held outright at 31 December 2017 by the Executive Director and/or their
connected persons.
Includes awards made to Ed Casey under the Performance Share Plan and awards made to Rupert Soames, Angus Cockburn and Ed Casey under the
Deferred Bonus Plan. All awards are in the form of conditional share awards. There are no interests in the form of conditional share awards that are not
subject to performance conditions.
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.
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.
Rupert Soames and Angus Cockburn exercised vested options in respect of their Recruitment Awards that were subject to Strategic Objective performance
conditions for which the performance period ended, and vesting occurred, in the year.
142
Serco Group plc Annual Report and Accounts 2017
Directors' Report Non-Executive Directors
Non-Executive Directors do not participate in any share-based incentives and do not hold any interests in shares
other than shares owned outright.
Name
Sir Roy Gardner
Mike Clasper
Ralph D. Crosby Jnr
Rachel Lomax
Angie Risley
John Rishton
Ian El-Mokadem
Lynne Peacock
Kirsty Bashforth
Notes:
Number of shares owned
outright (including connected
persons) at 31 December 2017
(or date of resignation)1
75,000
56,000
–
40,000
20,508
43,086
50,000
15,000
–
1
2
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period 1 January 2018 and the date of this report.
Non-Executive Directors do not have shareholding guidelines and there are no interests in shares held by Non-Executive Directors where the individual
does not own those shares outright.
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 2017, 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 9,864,986 and 8,728,497 ordinary shares at 1 January 2017 and 31 December 2017 respectively.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Secretary
21 February 2018
143
Directors’ ReportFinancial StatementsStrategic Report Directors' Report
Annual Report and Accounts
Authority for the purchase of shares
The Directors present the Annual Report and Accounts
of the Group for the year ended 31 December 2017.
Comparative figures used in this report are for the year
ended 31 December 2016 unless otherwise stated.
The Corporate Governance Report, including the
Remuneration Report, set out on pages 86 to 143,
forms part of the Directors’ Report.
The Chairman’s Statement on pages 6 to 8 and the Chief
Executive's Review and Divisional Reviews on pages
32 to 49 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 2017, 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
2018 or close of business on 30 June 2018.
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.
As at the date of this report authority granted at the
Company’s AGM in May 2017 remains in force, as set out
in the 2017 Notice of Meeting which is available on our
corporate website www.serco.com
Dividends
No interim dividend was paid in respect of the
2017 financial year (2016: nil). The Directors’ do not
recommend a final dividend to be paid for 2017 (2016: nil).
Directors’
The current members of the Board together with
biographical details of each Director are set out on
pages 86 and 87.
On 24 May 2017, the Company announced that Ralph
Crosby, Jr would retire as Non-Executive Director of the
Company with effect from 1 July 2017. Lynne Peacock
and Ian El-Mokadem were appointed as Non-Executive
Directors of the Company with effect from 1 July 2017.
On appointment, Lynne Peacock became a member of
the Audit, Remuneration and Nomination Committees
and Ian El-Mokadem became a member of the Group
Risk and Corporate Responsibility Committees. On 4
July 2017, the Company announced that Angie Risley
would also be retiring from her position as Non-
Executive Director with effect from 15 September
2017. Lynne Peacock was appointed as Chair of the
Remuneration Committee on 15 September 2017 and
was appointed a member of the Nomination Committee
on 1 November 2017. Kirsty Bashforth subsequently
joined the Board as a Non-Executive Director with
effect from 15 September 2017. She became a member
of the Remuneration and Corporate Responsibility
Committees on appointment. On 20 October, it
was announced that Ed Casey, would retire as Chief
Operating Officer with effect from 31 December 2017.
As in previous years, and in accordance with the UK
Corporate Governance Code, all other Directors’ will
stand for annual re-election at the AGM in May 2018.
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.
144
Serco Group plc Annual Report and Accounts 2017
Directors' Report Details of the Directors’ interests in the ordinary shares
and options over the ordinary shares of the Company
as at 31 December 2017 are set out in the Directors’
Remuneration Report on pages 142 and 143. Between
1 January 2018 and the date of this report there were
no changes in the Directors' interests in ordinary shares
and options over ordinary shares.
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. These
include the following countries: Abu Dhabi, Bahrain,
Belgium, Dubai, France, Germany, Greenland,
Guam, Iraq, Italy, Luxembourg, Qatar, Singapore
and South Africa.
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 if the Company is subject to a
change of control:
Material contracts
• New Grafton Correctional Centre: On 14 June 2017,
NorthernPathways Project Trust (of which Serco
Australia Pty Limited is a member) entered into a
Project Deed with the Australian State of New South
Wales to design, construct and operate a new build
prison named the New Grafton Correctional Centre.
The prison is expected to become operational in
2020. Also, on 14 June 2017, Serco Australia Pty
Limited entered into an operator sub-contract with
NorthernPathways. The operator sub-contract will
expire 20 years from the date of acceptance of the
completed New Grafton Correctional Centre by the
State. Both the project deed and the operator sub-
contract contain change of control provisions that
provide that any change of control to an unrelated
third-party that has not been approved by the State
of New South Wales would be a major default.
A major default under either the project deed
or operator sub-contract, if not cured, could result
in a termination of that contract.
• 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 entire
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.
145
Directors’ ReportFinancial StatementsStrategic Report Directors' Report continued
• 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 Exchanges implemented
to provide affordable health insurance and insurance
affordability programmes. 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).
Financing facilities
• Revolving credit facility: the Company has a
£480,000,000 revolving credit facility dated 28 March
2012 (amended and restated 12 March 2015) with
the Bank of America Securities Limited, Barclays
Bank PLC, Commonwealth Bank of Australia, Credit
Agricole Corporate and Investment Bank, DBS
Bank Limited, HSBC Bank PLC, J.P. Morgan Limited,
Lloyds TSB Bank PLC, The Bank of Tokyo-Mitsubishi
UFJ Limited and The Royal Bank of Scotland PLC as
mandated lead arrangers, and Barclays Bank PLC
as Facility Agent. The facility provides funds for
general corporate and working capital purposes,
and bonds to support the Group’s business needs.
The facility agreement provides that in the event of a
change of control of the Company each lender may,
within a certain period, call for the prepayment of
the amounts owed to it and cancel its commitments
under the facility.
• US notes: the Company has notes outstanding
under three US Private Placement Note Purchase
Agreements (the ‘USPP Agreements’) dated 9 May
2011, 20 October 2011 and 13 May 2013, respectively.
The total amount of the notes outstanding under
the three USPP Agreements was $352,192,038 at 31
December 2017, 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 Thursday
10 May 2018 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 207 to 212.
Employment policies
The Board is committed to maintaining a working
environment where staff are individually valued and
recognised. Group companies and Divisions operate
within a framework of human resources policies,
practices and regulations appropriate to their own
market sector and country of operation, whilst subject
to Group-wide policies and principles.
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.
146
Serco Group plc Annual Report and Accounts 2017
Directors' Report 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.
Employee 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
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 69 to 84.
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 2017, we spent £1.7m on R&D on IT-related
projects, compared to £3.6m in 2016.
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 2017 regarding political donations be renewed.
Details will be included in the Notice of AGM.
Within the US business there exists a Political
Action Committee (PAC), which is funded entirely
by employees and their spouses. The Serco PAC
and its contributions are administered in strict
accordance with regulatory requirements. Employee
contributions are entirely voluntary and no pressure
is placed on employees to participate. Under US law,
an employee-funded PAC must bear the name of the
employing company.
Financial statements
At the date of this report, as far as each Director is
aware, there is no relevant audit information of which
the Group’s 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 2016 Notice of Annual General Meeting.
As a result of this tender process KPMG LLP 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 LLP for the 2018 financial
year will be subject to shareholder approval at the next
AGM in May 2018. Further details are set out in the
Notice of Meeting sent to shareholders.
147
Directors’ ReportFinancial StatementsStrategic Report Directors' Report continued
Going concern
In assessing the basis of preparation of the financial statements for the year ended 31 December 2017, 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 £261m of US private placement notes. As at 31 December 2017, the Group had £741m of committed
credit facilities and committed headroom of £588m.
Assessment of going concern
The Directors have undertaken a rigorous assessment of going concern and liquidity taking into account financial
forecasts. In order to satisfy ourselves that we have adequate resources for the future, the Directors have reviewed
the Group’s existing debt levels, the committed funding and liquidity positions under our debt covenants, and our
ability to generate cash from trading activities.
Review period
In undertaking this review the Directors have considered the business plans which provide financial projections for
the foreseeable future. For the purposes of this review, we consider that to be the period ending 30 June 2019. The
Directors have also reviewed the principal risks considered on pages 20 to 29 of the Strategic Report and taken
account of the results of sensitivity testing.
Assessment
The Directors have a reasonable expectation that the Company and the Group will be able to operate within the
level of available facilities and cash for the foreseeable future and accordingly believe that it is appropriate to
prepare the financial statements on a going concern basis.
Interests in voting rights
At 31 December 2017, 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:
Notifying person
Azvalor Asset Management S.G.I.I.C., S.A
Blackrock Inc
FIL Limited
Lancaster Investment Management LLP
Majedie Asset Management Limited
Marathon Asset Management LLP
MSD Partners, L.P.
Orbis Group
Tameside MBC re: Greater Manchester Pension Fund
UBS Asset Management (Traditional and IFS), UBS Group AG
Notes:
Number
of shares
(millions) at date
of notification
% held
at date of
notification
54.9
34.8
5.5
45.3
85.6
73.2
0.2
73.4
70.0
56.0
58.3
109.9
54.5
34.1
55.3
5.00
3.17
0.50
4.12
7.79
6.66
0.01
6.67
6.37
5.09
5.31
10.0
4.96
3.11
5.04
Nature
of holding
Direct
Indirect
Securities Lending
Contract for
Difference
Total
Indirect
Stock Loan
Total
Swap
Direct
Indirect
Indirect
Indirect
Direct
Indirect
Between 1 January 2018 and the date of this report, the Company has been advised of the following changes of interests in shares:
–
on 25 January 2018 UBS Asset Management (Traditional and IFS), UBS Group AG notified that their interest in voting rights had fallen below the
notifiable threshold.
148
Serco Group plc Annual Report and Accounts 2017
Directors' Report 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 144
Page 144
Pages 86 and 87
Pages 145 and 146
Page 74
Pages 69 to 84
Page 145
Page 92
Page 150
Page 156
Page 73 and 104
Pages 36 and 144
Page 147
Page 73
Pages 207 to 212
Page 9 to 17
Pages 148 and 163
Page 83
Pages 152 to 157
Pages 122 to 140
Page 147
Page 144
Page 108
Page 147
Page 144
Page 144
Pages 20 to 29 and 95
Page 144
Pages 145 and 146
Page 224
Page 148
Pages 108 and 109
Pages 4 to 84
Page 30 to 31
Page 144
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
Group General Counsel and Company Secretary
21 February 2018
149
Directors’ ReportFinancial StatementsStrategic Report Directors' Responsibility Statement
The Directors are responsible for preparing the
Annual Report and the Group and Company financial
statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare Group
and Company 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 as
adopted by the European Union ('IFRSs as adopted
by the EU') and applicable law, and have elected
to prepare the Company financial statements in
accordance with UK accounting standards, including
FRS 101, Reduced Disclosure Framework. Under
company law the Directors must not approve the
financial statements unless they are satisfied that they
give a true and fair view of the state of affairs of the
Group and Company and of their profit or loss for
that period.
In preparing each of the Group and Company financial
statements, the Directors are required to:
• select suitable accounting policies and then apply
them consistently;
• make judgements and estimates that are reasonable,
relevant, reliable and prudent;
• for the Group financial statements, state whether
they have been prepared in accordance with IFRSs as
adopted by the EU;
• for the Company financial statements, state whether
applicable UK accounting statements have been
followed, subject to any material departures disclosed
and explained in the Company financial statements;
• assess the Group and Company's ability to continue
as a going concern, disclosing, as applicable, matters
related to going concern; and
• use the going concern basis of accounting unless they
either intend to liquidate the Group or the Company
or to cease operations, or have no realistic alternative
but to do so.
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 its
financial statements comply with the Companies Act
2006. They are responsible for such internal controls as
they determine is necessary to enable the preparation
of the financial statements that are free from material
misstatement, whether due to fraud or error, and
have general responsibility for taking such steps as
are reasonably open to them to safeguard the assets
of the Group and to prevent and detect fraud and
other irregularities.
Under applicable law and regulations, the Directors
are also responsible for preparing a Strategic Report,
Directors' Report, Directors' Remuneration Report and
Governance Statement that complies with that law and
those regulations.
The Directors are responsible for the maintenance and
integrity of the corporate and financial information
included on the Company’s website. Legislation in
the UK governing the preparation and dissemination
of financial statements may differ from legislation in
other jurisdictions.
Responsibility statement of the Directors in respect
of the Annual Report and Accounts
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance
with the applicable set of accounting standards, give
a true and fair view of the assets, liabilities, financial
position and profit or loss of the Company and the
undertakings included in the consolidation taken as
a whole; and
• the 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.
We consider, the Annual Report and Accounts, 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.
By order of the Board
Rupert Soames
Angus Cockburn
Group Chief
Executive
21 February 2018
Group Chief
Financial Officer
150
Serco Group plc Annual Report and Accounts 2017
Directors' Report
Strategic Report
Directors’ Report
Financial Statements
Financial Statements
Independent
Auditor’s Report
Consolidated
Income Statement
Consolidated Statement
of Comprehensive Income
Consolidated Statement
of Changes in Equity
Consolidated
Balance Sheet
Consolidated Cash
Flow Statement
Notes to the Consolidated
Financial Statements
Company
Balance Sheet
Notes to the Company
Financial Statements
Appendix: List
of Subsidiaries
Appendix:
Supplementary Information
Shareholder
Information
Useful
Contacts
152
158
159
160
161
162
163
228
230
234
237
238
239
151
Independent Auditor’s Report
to the members of Serco Group plc
Our opinion is unmodified
Basis for opinion
Key audit matters: our assessment
of risks of material misstatement
We have audited the financial statements of Serco Group Plc (“the Company”) for the
year ended 31 December 2017 which comprise the Consolidated Income Statement, the
Consolidated Statement of Comprehensive Income, the Consolidated and Company
Statement of Changes in Equity, the Consolidated and Company Balance Sheet, the
Consolidated Cash Flow Statement, and the related notes, including the accounting policies
in Note 2.
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 2017 and of the Group’s profit 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.
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs
(UK)”) and applicable law. Our responsibilities are described below. We believe that the audit
evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit
opinion is consistent with our report to the audit committee.
We were appointed as auditor by the directors on 27 May 2016. The period of total
uninterrupted engagement is for the 2 financial years ended 31 December 2017. We have
fulfilled our ethical responsibilities under, and we remain independent of the Group in
accordance with, UK ethical requirements including the FRC Ethical Standard as applied to
listed public interest entities. No non-audit services prohibited by that standard were provided.
Key audit matters are those matters that, in our professional judgment, were of most
significance in the audit of the financial statements and include the most significant assessed
risks of material misstatement (whether or not due to fraud) identified by us, including those
which had the greatest effect on: the overall audit strategy; the allocation of resources in the
audit; and directing the efforts of the engagement team. We summarise below the key audit
matters (unchanged from 2016), in decreasing order of audit significance, in arriving at our
audit opinion above, together with our key audit procedures to address those matters and,
as required for public interest entities, our results from those procedures. These matters
were addressed, and our results are based on procedures undertaken, in the context of, and
solely for the purpose of, our audit of the financial statements as a whole, and in forming our
opinion thereon, and consequently are incidental to that opinion, and we do not provide a
separate opinion on these matters.
152
Serco Group plc Annual Report and Accounts 2017
Financial Statements Revenue and margin recognition
Revenue £2,953.6m (2016: £3,011.0m), operating profit £30.0m (2016: £42.2m) and Onerous Contract Provisions of £168.2m
(2016: £220.2m)
Assessment of risk vs. prior year: Unchanged
Refer to page 98 (Audit Committee Report), page 168 and 174 (accounting policy), page 176 (key judgements)
and page 205 (provisions note in the financial statements)
The risk
Our response
Subjective estimate
Our audit procedures included the following:
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 of those contracts.
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.
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:
• Assessing policy application: 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 the specific method used to Group policy
• Independent reperformance: Where percentage of completion is used, we re-calculated
the stage of completion on the basis of actual costs and latest cost forecasts to inform our
assessment of the appropriate amount of revenue and profit to recognise and compared this
to the amounts recorded by the Group
• Accounting analysis: We assessed whether the revenue recognition methodology applied
was consistent with accounting standards. We also inspected accounting papers prepared
by the Group to understand the support provided in respect of key contract judgements and
onerous contract provisions
• Tests of details: 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
• Site visits: We visited key contract locations and attended a sample of monthly Divisional
and Business Unit Performance Reviews used to assess business performance 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:
• Benchmarking assumptions: 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
• Our sector experience: 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
• Historical comparisons: We compared the contract forecasts to historic and in year
performance to assess the historical accuracy of the forecasts
• Tests of details: We assessed the mathematical accuracy of the models used to forecast
contract revenues and costs
• Independent reperformance: 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:
• Assessing application: We assessed whether these had been recognised in accordance with
the Group’s accounting policy and relevant accounting standards
• Comparing valuations: We inspected actual and forecast contractual cash flows and profits
to assess whether these supported the carrying value of the assets
• Historical comparisons: We inspected the underlying contracts to inform our assessment of the
forecast cash flows, and compared actual cash flows to forecasts to assess reasonableness
• Independent reperformance: We compared the amortisation period with the duration of the
contract and checked that the amortisation had been calculated correctly
Assessing transparency: We also assessed whether the Group’s disclosures about the estimates
and judgements applied reflected the risks related to revenue and margin recognition.
Our results
The results of our testing were satisfactory and we considered the revenue and margin
recognised, and the level of onerous contract provisioning, to be acceptable.
153
Financial StatementsStrategic ReportDirectors’ Report Independent Auditor’s Report continued
to the members of Serco Group plc only
Recoverability of group goodwill and of parent’s investment in subsidiaries
Group: £551.3m (2016: £577.9m); Parent company: £2,010.5m (2016: £2,001.3m)
Assessment of risk vs. prior year: Unchanged
Refer to page 99 (Audit Committee Report), page 170 (accounting policy), page 176 (key judgements)
and page 196 (Goodwill note in the financial statements)
The Risk
Our response
Forecast-based valuation
Our procedures included the following:
Goodwill in the group and the carrying amount of
the parent company’s investments in subsidiaries
are significant and at risk of irrecoverability due to
uncertainty regarding contract attrition and new
contract wins and extension rates, and the impact
of the Group’s transformation programme to
reduce operating costs.
The estimated recoverable amount of these
balances is subjective due to the inherent
uncertainty involved in forecasting and discounting
future cash flows.
In the year ended 31 December 2016, the Health
and Americas cash generating units presented the
lowest headroom, and as a result the carrying value
of goodwill for these CGUs may be particularly
sensitive to a deterioration in the divisions’
projections or an increase in discount rate.
• Benchmarking assumptions: With the assistance of our valuation specialists,
we challenged the growth rate and discount rate for each CGU used in the
value in use calculation by comparing the Group’s assumptions to external data.
We challenged forecast assumptions around new contract wins or extensions,
contract attrition, cost reductions and the allocation of central costs.
• Historical comparisons: We compared the forecast cash flows against budgets
and historic actual performance to test for historic accuracy.
• Sensitivity analysis: We tested the sensitivity of the impairment calculation to
changes in the underlying assumptions to inform our assessment of the significant
assumptions.
• Comparing valuations: We considered whether the forecast cash flow
assumptions used in the value in use 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. The value in use derived was compared to the appropriate
goodwill and investments carrying value to identify any impairment.
• Assessing transparency: We also assessed whether the Group’s and parent
Company’s disclosures about the sensitivity of outcomes reflected the risks
inherent in the valuation of goodwill and investment in subsidiaries.
Our results:
We found the group’s assessment of the recoverable amount of goodwill in the group
and the parent company’s investment in subsidiaries to be acceptable.
Retirement benefit surplus £41.8m (2016: £150.4m)
Assessment of risk vs. prior year: unchanged
Refer to page 100 (Audit Committee Report), page 172 (accounting policy), page 177 (key judgements) and page 212 (Retirement benefit
schemes note in the financial statements)
The Risk
Subjective valuation
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.
Accounting treatment
As the Group’s main defined benefit scheme is in
a net surplus of £41.8 million at 31 December 2017
(2016: £150.4m), judgement is required to determine
if it is appropriate to recognise an asset.
The application of specific accounting treatments
in respect of transactions undertaken in the period,
including the impact of curtailments, settlements
and the purchase of a bulk annuity insurance
policy require careful analysis with regards to the
application of IAS 19.
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 response
Our procedures in respect of the SPLAS included the following:
• Tests of details: We performed procedures to test the 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.
• Benchmarking assumptions: 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.
• Accounting analysis: 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 have also considered the
application of accounting standards with regards to specific changes in the
scheme during the period, including the effect of curtailments.
• Accounting analysis: We have also considered the application of accounting
standards with regards to specific changes in the scheme during the period,
including the effect of curtailments.
Assessing principles: 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.
• Assessing transparency: We assessed the Group’s disclosure in respect of the
sensitivity of the surplus to changes in the key assumptions.
Our results
We found the valuation of the retirement benefit surplus to be acceptable.
154
Serco Group plc Annual Report and Accounts 2017
Financial Statements Our application of materiality
and an overview of the scope
of our audit
We have nothing to report
on going concern
We have nothing to report
on the other information in
the Annual Report
Materiality
Materiality for the group financial statements as a whole was set at £5 million (2016: £5
million), determined with reference to a normalised benchmark of Group Profit Before Tax and
Exceptional Items taking into account historic financial performance and the Group’s current
profit margins in light of the Group’s ongoing Strategy Review. This represents 12.9% (2016:
5.8%) of Group Profit Before Tax and Exceptional Items of £38.7 million (2016: £85.9 million)
and 0.2% (2016: 0.2%) of Group Revenue of 2,953.6 million (2016: £3,011 million).
Materiality for the parent company financial statements as a whole was set at £4.5 million
(2016: £4.5 million), determined with reference to a benchmark of company total assets, of
which it represents 0.2% (2016: 0.2%).
We agreed to report to the Audit Committee any corrected or uncorrected identified
misstatements exceeding £0.25 million (2016: £0.25 million), in addition to other identified
misstatements that warranted reporting on qualitative grounds.
Scope of our audit
Of the group’s 8 (2016: 9) reporting components, we subjected 6 (2016: 7) to full scope audits
for group purposes.
These 6 (2016: 7) components represent approximately 99.8% (2016: 98.6%) of the Group’s
Revenue, 99.4% (2016: 98.7%) of Group profit before tax and 98.4% (2016: 99.1%) of Group
total assets.
The Group audit team instructed component auditors as to the significant areas to be
covered, including the relevant risks detailed above and the information to be reported back.
The Group team approved component materiality levels, which ranged from £2.0 million to
£3.6 million (2016: £2.0 million to £3.6 million) having regard to the mix of size and risk profile
of the Group across the components. The work on 4 of the 6 components (2016: 5 of the 7
components) was performed by component auditors and the rest, including the audit of the
parent company, was performed by the Group team. The Group team visited all (2016: all)
component locations to assess the audit risk and strategy. Video and telephone conference
meetings were also held with these component auditors. At these visits, the findings reported
to the Group team were discussed in more detail, and any further work required by the Group
team was then performed by the component auditor.
We are required to report to you if:
• we have anything material to add or draw attention to in relation to the directors’
statement in Note 2 to the financial statements on the use of the going concern basis of
accounting with no material uncertainties that may cast significant doubt over the Group
and Company’s use of that basis for a period of at least twelve months from the date of
approval of the financial statements; or
• the related statement under the Listing Rules set out on page 148 is materially inconsistent
with our audit knowledge.
We have nothing to report in these respects.
The directors are responsible for the other information presented in the Annual Report
together with the financial statements. Our opinion on the financial statements does not
cover the other information and, accordingly, we do not express an audit opinion or, except
as explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based
on our financial statements audit work, the information therein is materially misstated or
inconsistent with the financial statements or our audit knowledge. Based solely on that work
we have not identified material misstatements in the other information.
Strategic report and directors’ report
Based solely on our work on the other information:
• we have not identified material misstatements in the strategic report and the directors’ report;
• in our opinion the information given in those reports for the financial year is consistent with
the financial statements; and
• in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration Report to be audited has been
properly prepared in accordance with the Companies Act 2006.
155
Financial StatementsStrategic ReportDirectors’ Report Independent Auditor’s Report continued
to the members of Serco Group plc only
We have nothing to report
on the other information in
the Annual Report continued
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing
material to add or draw attention to in relation to:
• the directors’ confirmation within the Viability Statement on page 30 that they have carried
out a robust assessment of the principal risks facing the Group, including those that would
threaten its business model, future performance, solvency and liquidity;
• the Principal Risks and Uncertainties disclosures describing these risks and explaining how
they are being managed and mitigated; and
• the directors’ explanation in the Viability Statement of how they have assessed the
prospects of the Group, over what period they have done so and why they considered
that period to be appropriate, and their statement as to whether they have a reasonable
expectation that the Group will be able to continue in operation and meet its liabilities as
they fall due over the period of their assessment, including any related disclosures drawing
attention to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the Viability Statement. We have nothing to
report in this respect.
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired
during our financial statements 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 section of the annual report describing the work of the Audit Committee does not
appropriately address matters communicated by us to the Audit Committee.
We are required to report to you if the Corporate Governance Report does not properly
disclose a departure from the eleven provisions of the UK Corporate Governance Code
specified by the Listing Rules for our review.
We have nothing to report in these respects.
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.
We have nothing to report in these respects.
We have nothing to report in respect
of the matters on which we are
required to report by exception
Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 150, the directors are responsible
for: the preparation of the financial statements including being satisfied that they give a true
and fair view; such internal control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or
error; assessing the Group and parent Company’s ability to continue as a going concern,
disclosing, as applicable, matters related to going concern; and using the going concern
basis of accounting unless they either intend to liquidate the Group or the parent Company
or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or other irregularities
(see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance
is a high level of assurance, but does not guarantee that an audit conducted in accordance
with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can
arise from fraud, other irregularities or error and are considered material if, individually or in
aggregate, they could reasonably be expected to influence the economic decisions of users
taken on the basis of the financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at
www.frc.org.uk/auditorsresponsibilities
156
Serco Group plc Annual Report and Accounts 2017
Financial Statements Respective responsibilities continued
Irregularities – ability to detect
Our audit aimed to detect non-compliance with relevant laws and regulations (irregularities)
that could have a material effect on the financial statements. In planning and performing our
audit, we considered the impact of laws and regulations in the specific area of anti-bribery
and corruption, recognising the Governmental nature of many of the group’s customers.
We identified these areas through discussion with the directors and other management (as
required by auditing standards), from our sector experience, and from inspection of the
group’s regulatory, licensing and legal correspondence. In addition we had regard to laws and
regulations in other areas including financial reporting, and company and taxation legislation.
We considered the extent of compliance with those laws and regulations that directly affect
the financial statements, being anti-bribery and corruption as part of our procedures on the
related financial statement items. For the remaining laws and regulations, we made enquiries
of directors and other management (as required by auditing standards), and inspected
correspondence with regulatory and licensing authorities, as well as legal correspondence.
We communicated identified laws and regulations throughout our team and remained alert
to any indications of non-compliance throughout the audit. This included communication
from the group to component audit teams of relevant laws and regulations identified at group
level, with a request to report on any indications of potential existence of irregularities in
these areas, or other areas directly identified by the component team.
As with any audit, there remained a higher risk of non-detection of irregularities, as these
may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal controls.
This report is made solely to the Company’s members, as a body, in accordance with Chapter
3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we
might state to the Company’s members those matters we are required to state to them in
an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone other than the Company and the Company’s
members, as a body, for our audit work, for this report, or for the opinions we have formed.
The purpose of our audit work and to
whom we owe our responsibilities
Stephen Wardell
(Senior Statutory Auditor) for and
on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square,
London, E14 5GL
21 February 2018
157
Financial StatementsStrategic ReportDirectors’ Report 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 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
Operating profit before exceptional items
Investment revenue
Finance costs
Total net finance costs
Other gains
Profit before tax
Tax on profit before exceptional items
Exceptional tax
Tax charge
Profit for the year from continuing operations
Loss for the year from discontinued operations
Profit/(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
2017
£m
2,953.6
(2,704.7)
248.9
(222.2)
0.3
(19.9)
(4.4)
(246.2)
27.3
30.0
49.6
7.6
(19.2)
(11.6)
0.7
19.1
(14.0)
(5.0)
(19.0)
0.1
–
0.1
(0.2)
0.3
(0.02p)
(0.02p)
–
–
(0.02p)
(0.02p)
2016
(restated*)
£m
3,011.0
(2,724.6)
286.4
(216.2)
2.9
(59.2)
(5.1)
(277.6)
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)
Note
10
9
11
7
14
15
8
16
16
4
18
18
18
18
18
18
* Costs included within cost of sales and general and administrative expenses have been reallocated, resulting in a restatement. See Note 2.
158
Serco Group plc Annual Report and Accounts 2017
Financial Statements Consolidated Statement of Comprehensive Income
For the year ended 31 December
Profit/(loss) for the year
Other comprehensive income for the year:
Items that will not be reclassified subsequently to profit or loss:
Net actuarial (loss)/gain on defined benefit pension schemes*
Actuarial (loss)/gain 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 (loss)/gain on translation of foreign operations**
Fair value (loss)/gain on cash flow hedges during the year**
Tax relating to items that may be reclassified
Share of other comprehensive income in joint ventures and associates
Total other comprehensive income for the year
Total comprehensive income 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
2017
£m
0.1
(106.5)
(0.6)
18.1
0.9
(14.6)
(0.2)
–
–
(102.9)
(102.8)
(102.9)
0.1
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
159
Financial StatementsStrategic ReportDirectors’ Report
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 2016
22.0
327.9
0.1
68.5
(101.3)
80.9
(59.8)
(57.7)
280.6
1.5
Total comprehensive
income for the year
Shares transferred
to option holders
on exercise of share
options
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
–
–
–
397.4
(0.5)
1.4
At 1 January 2017
22.0
327.9
0.1
83.1
(91.1)
82.9
(52.1)
24.6
Total comprehensive
income for the year
Shares transferred
to option holders
on exercise of share
options
Expense in relation to
share based payments
Change in non-
controlling interest
–
–
–
–
–
–
–
–
–
–
–
–
0.6
(89.0)
–
–
(14.5)
(102.9)
0.1
–
–
–
–
–
–
(6.0)
6.0
11.4
–
–
–
–
–
–
–
11.4
–
–
–
(0.2)
At 31 December 2017
22.0
327.9
0.1
83.7
(180.1)
88.3
(46.1)
10.1
305.9
1.3
160
Serco Group plc Annual Report and Accounts 2017
Financial Statements 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
Total assets
Current liabilities
Trade and other payables
Derivative financial instruments
Current tax liabilities
Provisions
Obligations under finance leases
Loans
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 2017
£m
At 31 December 2016
£m
Note
19
20
21
7
23
32
17
33
22
23
25
32
26
32
29
27
28
26
17
29
27
28
33
34
35
551.3
66.7
65.2
14.3
57.3
3.7
55.0
41.8
855.3
17.4
506.5
11.2
112.1
10.3
657.5
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
1,512.8
1,764.6
(462.9)
(1.1)
(25.3)
(148.5)
(8.5)
(31.8)
(678.1)
(28.7)
(20.4)
(211.5)
(11.7)
(239.7)
(15.5)
(527.5)
(524.5)
(0.6)
(25.9)
(172.3)
(12.3)
(9.7)
(745.3)
(16.8)
(30.5)
(249.4)
(15.9)
(290.2)
(17.7)
(620.5)
(1,205.6)
307.2
(1,365.8)
398.8
22.0
327.9
0.1
83.7
(180.1)
88.3
(46.1)
10.1
305.9
1.3
307.2
22.0
327.9
0.1
83.1
(91.1)
82.9
(52.1)
24.6
397.4
1.4
398.8
The financial statements were approved by the Board of Directors on 21 February 2018 and signed on its behalf by:
Rupert Soames
Group Chief Executive
Angus Cockburn
Group Chief Financial Officer
161
Financial StatementsStrategic ReportDirectors’ Report
Consolidated Cash Flow Statement
For the year ended 31 December
Net cash inflow/(outflow) from operating activities before exceptional items
Exceptional items
Net cash outflow from operating activities
Investing activities
Interest received
Increase/(decrease) in security deposits
Dividends received from joint ventures and associates
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of intangible assets
Net cash (outflow)/inflow on disposal of subsidiaries and operations
Acquisition of subsidiaries, net of cash acquired
Proceeds from loans receivable
Purchase of other intangible assets
Purchase of property, plant and equipment
Net cash (outflow)/inflow from investing activities
Note
39
9
8
Financing activities
Interest paid
Exceptional finance costs paid
Capitalised finance costs paid
Repayment of loans
Decrease in loans to joint ventures and associates
Capital element of finance lease repayments
Cash movements on hedging instruments
Net cash outflow from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Net exchange (loss)/gain
Cash reclassified to assets held for sale
Cash and cash equivalents at end of year
25
2017
£m
16.7
(32.5)
(15.8)
0.5
0.2
28.2
1.5
0.1
(7.1)
1.5
0.6
(18.4)
(17.8)
(10.7)
(17.5)
–
–
(3.8)
–
(12.6)
(2.5)
(36.4)
(62.9)
177.8
(2.8)
–
112.1
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
162
Serco Group plc Annual Report and Accounts 2017
Financial Statements 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 152 to 239 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.
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.
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 2017, 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, which indicate sufficient capacity
in our financing facilities and associated covenants to support the Group. 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 and working capital requirements. The Group’s current principal debt
facilities at the year-end comprised a £480m revolving credit facility, and £261m of US private placement notes. As at 31 December 2017,
the Group had £741m of committed credit facilities and committed headroom of £588m.
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 2019. The Directors have also reviewed the principal risks
considered on pages 20 to 29 of the Strategic Report and taken account of the results of sensitivity testing.
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Financial StatementsStrategic ReportDirectors’ Report 2. Significant accounting policies continued
Prior year restatement
The Group has undergone a programme of work on its financial data structures to appropriately allocate and charge costs to the
relevant divisions and between cost of sales and administrative expenses. As a result of the activities performed in this area, the Group’s
classification of cost items in the income statement has changed. The prior periods’ results have been restated to reflect the cost items
identified which should have been reallocated in 2016.
Cost of sales are considered to be the direct costs of operating ongoing contracts. This includes the unavoidable costs of servicing
contracts and all costs that a contract would incur purely on its own without a parent company, regardless of how those services are
delivered within the wider Group, such as IT or Human Resource management services provided centrally.
The impact on the relevant line items in the consolidated income statement for the year ended 31 December 2016 is as follows:
Impact on consolidated income statement
Cost of sales
Gross profit
General and administrative expenses
Year ended
31 December 2016
as previously stated
£m
(2,767.6)
243.4
(173.2)
Adjustment
£m
43.0
43.0
(43.0)
Year ended
31 December 2016
as restated
£m
(2,724.6)
286.4
(216.2)
Adoption of new and revised standards
None of the changes to IFRS that became effective in the current reporting period have had a significant impact on the Group’s
financial statements.
New standards and interpretations not applied: IFRS15 Revenue from Contracts with Customers
IFRS15 Revenue from Contracts with Customers (effective 1 January 2018), provides a single, principles-based five step model to be
applied to all sales contracts, based on the transfer of control of goods and services to customers. It replaces existing revenue recognition
guidance for goods, services and construction contracts currently included in IAS11 Construction Contracts and IAS18 Revenue.
Under the transition rules IFRS15 will be applied retrospectively to the prior period in accordance with IAS8 Accounting policies, changes
in accounting estimates and errors, subject to the following expedients:
• contracts completed prior to 1 January 2018 and that begin and end within the same annual reporting period will not be restated;
• for contracts that have variable consideration and which have completed prior to 1 January 2018, the revenues recognised will reflect the
actual outcome, rather than being estimated and trued up; and
• the disclosures required for comparative periods in respect of amount of revenue allocated to the remaining performance obligations
and an explanation of when that amount is expected to be recognised will not be made.
The cumulative effect of initially applying the standard will be shown as an adjustment to brought forward retained earnings as at
1 January 2017.
Below is set out the expected revenue recognition policy under IFRS15 together with the estimated impact of adopting the standard.
Revenue recognition: Repeat service based contracts
The majority of the Group’s contracts are repeat service based contracts where value is transferred to the customer over time as the core
services are delivered and therefore in most cases revenue will be recognised on the output basis, with revenue linked to the deliverables
provided to the customer. Where any price step downs are required in a contract accounted for under the output basis and output is not
decreasing, revenue will require deferral from initial years to subsequent years in order for revenue to be recognised on a consistent basis.
There are some contracts where a separate performance obligation has been identified for services where the pattern of delivery differs to
the core services and are capable of being distinct. In these instances, where the transfer of control is most closely aligned to our efforts
in delivering the service, then the input method is used to measure progress, and revenue is recognised in direct proportion to costs
incurred. Where deemed appropriate, the Group will utilise the practical expedient within IFRS15, allowing revenue to be recognised at
the amount which the Group has the right to invoice, where that amount corresponds directly with the value to the customer of the Group’s
performance completed to date.
Under IFRS15, unless upfront fees received from customers including transition payments can be clearly attributable to a distinct service
the customer is obtaining, then such payments do not constitute a separate performance obligation and instead are deferred and spread
over the life of the core services.
Any changes to the enforceable rights and obligations with customers and/or an update to the transaction price will not be recognised as
revenue until there is evidence of customer agreement in line with the Group’s policies.
Any variable amounts will only be recognised where it is highly probable that a significant reversal will not occur.
164
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued Where the Group is required to assess whether it is acting as principal or as an agent in respect of goods or services procured for
customers, the Group is acting as principal if it is in control of a good or a service prior to transferring to the customer and an agent
where it is arranging for those goods or services to be provided to the customer without obtaining control.
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. When control of such a
deliverable is passed onto the customer at the final stage of a contract, the recognition of revenue is delayed until control has been
passed. However, where the customer has control over the life of the deliverable or where the Group has a legally enforceable right to
remuneration for the work completed to date, or at milestone periods, revenue will be recognised in line with the associated transfer of
control or milestone dates.
Revenue recognition: Other
Sales of goods are recognised when goods are delivered and title has passed.
Interest income is accrued for 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.
Contract costs
Bid costs are capitalised only when they relate directly to a contract and are incremental to securing the contract. Any costs which would
have been incurred whether or not the contract is actually won are not considered to be capitalised bid costs.
Contract costs are charged to the income statement as incurred, including the necessary accrual for costs which have not yet been
invoiced, unless the expense relates to a specific time frame covering future periods.
Contract costs can only be capitalised when the expenditure meets all of the following three criteria and are not within the scope of
another accounting standard, such as inventories, intangible assets, or property, plant and equipment:
• The costs relate directly to a contract. These include: direct labour, being the salaries and wages of employees providing the promised
services to the customer; direct materials such as supplies used in providing the promised services to a customer; and other costs that
are incurred only because an entity entered into the contract, such as payments to subcontractors.
• The costs generate or enhance the resources used in satisfying performance obligations in the future. For initial contract costs capitalised,
such costs only fall into one of the following two categories: the mobilisation of contract staff, being the costs of moving existing contract
staff to other Group locations; or directly incremental costs incurred in meeting contractual obligations incurred prior to contract delivery,
which are required to ensure a proper handover from the previous contractor. Redundancy costs are never capitalised.
• The costs are expected to be recovered, i.e. the contract is expected to be profitable after amortising the capitalised costs.
Estimated impact of the adoption of IFRS15
The estimated impact for the Group of adopting IFRS15 is as follows:
Revenue
Underlying Trading Profit
Operating profit before exceptional items
Profit before tax
Tax
Profit after tax
Year ended
31 December 2017
as reported
£m
2,953.6
69.8
49.6
19.1
(19.0)
0.1
Adjustment
£m
Year ended
31 December 2017
as restated
£m
(3.0)
(0.3)
(8.7)
(8.7)
0.4
(8.3)
2,950.6
69.5
40.9
10.4
(18.6)
(8.2)
Retained earnings at 1 January 2017 as reported
Adjustment to retained earnings before the impact of onerous contract provisions
Impact of onerous contract provisions
Retained earnings at 1 January 2017 as restated
As at 1 January 2017
£m
83.1
(54.5)
21.7
50.3
The Group will continue to work to design, implement and refine procedures to apply the new requirements of IFRS15 and to finalise
accounting policy choices, including in its subsidiaries and joint ventures. As a result of this ongoing work, it is possible that there may
be some changes to the impact above prior to the 30 June 2018 results being issued. However, at this time these are not expected to
be significant.
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Financial StatementsStrategic ReportDirectors’ Report 2. Significant accounting policies continued
New standards and interpretations not applied: IFRS15 Revenue from Contracts with Customers continued
Estimated impact of the adoption of IFRS 15 continued
The total adjustment to the opening balance of the Group’s equity at 1 January 2017 is a decrease of £32.8m. The principal components of
the estimated adjustment are as follows:
• A decrease of £14.4m due to revenues being recognised at a constant amount over the life of the contract where the level of services
provided is broadly consistent.
• A decrease of £11.4m due to a change in the basis of measuring progress for asset maintenance and replacement services, including dry
docking. Where the resources used to fulfil the performance obligations best depicts how control is passed to the customer, the input
method of accounting has been applied.
• A decrease of £6.8m due to upfront fees and transition payments being deferred and spread in line with delivery of the core services.
The following table details the specific areas impacted as a result of the adoption of IFRS15 and cross-referenced below the table are
Serco’s policies in adopting the requirements of the standard:
Impact on retained earnings as at 1 January 2017 and the consolidated
income statement for the year ended 31 December 2017
Retained earnings
£m
Under current accounting standards
IFRS15 adjustments:
(i) Upfront fees
(ii) Transition, transformation and other mobilisation activities
(iii) Asset maintenance and replacement, including vessel dry docking
(iv) Percentage of completion accounting
(v) Pass through revenues and procurement arrangements
(vi) Consideration payable to a customer
(vii) Variable pricing
(viii) OCP charges and releases
Adjusted under IFRS15
83.1
(2.6)
(4.2)
(11.4)
(0.2)
–
–
(14.4)
–
50.3
Operating profit
before exceptional
items
£m
49.6
0.8
(3.0)
(0.8)
0.1
–
(0.4)
3.0
(8.4)
40.9
Revenue
£m
2,953.6
0.9
2.1
1.3
0.5
(12.6)
(0.5)
5.3
–
2,950.6
(i)
(ii)
(iii)
(iv)
(v)
Upfront fees. For some contracts, the Group receives non-refundable amounts at the start of the contract to cover initial costs. Under
IFRS15, unless upfront fees are attributable to a good or a service the customer is in control of, such fees do not constitute a separate
performance obligation and instead are allocated to the performance obligations of the contract, therefore being spread over the
life of the other services. In some instances such upfront fees were recognised as revenue under IAS18 but are deferred under IFRS15.
Upfront payments are analysed to determine whether they constitute a material financing arrangement under IFRS15.
Transition, transformation and other mobilisation activities. Transition activities which are administrative in nature are not treated as
separate performance obligations. Transition and transformation activities which are more than administrative in nature are assessed
to determine whether they form a separate performance obligation. Where it can be demonstrated that the transition activities
benefit the customer without future activities being provided then the transition phase is accounted for as a separate performance
obligation under the contract and revenue recognised accordingly. Where it is concluded that the transformation, transition or
mobilisation activity does not form a separate performance obligation under the contract, any payments received from the customer
are allocated to the performance obligations of the contract and recognised over the life of the other services. In some instances
revenue recognised under IAS18 is deferred under IFRS15.
Asset maintenance and replacement, including vessel dry docking. In many of the contracts the Group enters into, the provision
of maintenance and replacement services are capable of being distinct and therefore these have been accounted for as separate
performance obligations. The input method of accounting is used to reflect the pattern of delivery to the customer and the
enhancement of customer owned assets. In some instances the output method of accounting is used due to the ongoing repetitive
nature and frequency of the services. Adopting IFRS15 will result in the deferral of revenue recognised under IAS18 on certain
contracts.
Percentage of completion accounting. Changes to the Group’s current accounting policy arise when the percentage of completion
model under IAS11 is replaced by the output method of accounting. The output method is used where the customer simultaneously
receives and consumes the benefits in direct proportion to the deliverable performed rather than the level of expense incurred to
date.
Pass through revenues and procurement arrangements. A pass through arrangement is where goods or services are provided by
a third party, but sourced by the Group on behalf of the customer. In this instance, the Group does not recognise revenue for the
amount received from the customer as compensation of the cost of the good or service but rather only the margin element (if any) is
recorded as revenue. Recognition of such revenues under IFRS15 is linked directly to whether the Group has control of the deliverable
prior to transfer rather than an assessment of the risks and rewards associated with the services as was the case under IAS18. For
certain procurement arrangements the Group does not have control prior to transfer, but does have a level of risk associated with the
activity, and therefore these arrangements are not recognised on a net basis instead of the gross basis under IAS18.
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Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued
(vi)
(vii)
Consideration payable to a customer. Under IFRS15 all amounts payable to a customer (including all payments to the customer and
all reductions to amounts paid by the customer) are recorded as a reduction in revenue. In 2017, an element of reductions have been
recorded as costs.
Variable pricing. It is not uncommon in outsourcing arrangements for the payment terms to be set to decline over the future periods
(i.e. a 5% reduction in fees is built into years five to six, 6% reduction in years seven to eight and so on). However, where revenue
recognition under IFSR15 is based on the output method and the service remains consistent over the contract life, the reduction in
the amounts paid by the customer should not be reflected in declining revenues, even if this was appropriate under IAS18. As a result,
revenue recognised in prior years for certain contracts will be deferred under IFRS15.
(viii) OCP charges and releases. Where an adjustment is required by IFRS15 and the relevant contract is loss making, the deferral of
revenue from prior years can result in a decrease in the level of OCP needed under IFRS15, as future losses will reduce by the level
of deferred revenue. During the year one contract recorded a release against the OCP balance held under current accounting
standards. As a result of IFRS15, revenues on this contract have been deferred, reducing the opening OCP balance, increasing
deferred revenue and therefore the release of the relevant OCP balance is lower under IFRS15.
In addition to the areas where a financial impact has been identified as a result of adoption of IFRS15 as identified above, there are certain
accounting policies which are new or change existing policies applied by the Group and may have an impact on the future financial
performance of the Group. The policies in these areas to be adopted by the Group are set out below:
(ix)
(x)
(xi)
Contract variations. Contract modifications such as change orders, variations, change notices and amendments could be approved in
writing, by oral agreement or implied by customary business practices. Under IFRS15 contract modifications are changes in the scope
or price (or both) of a contract that is approved by the parties to the contract. If the parties to the contract have not approved a contract
modification, revenue should be recognised in accordance with the existing contractual terms and associated cash payments are
deferred until the contract modification is approved. The judgements historically applied have been consistent with this policy.
Variable revenues requiring estimation. IFRS15 provides clear guidance on variable income unlike IAS18 and two areas may be impacted
as a result. First, if the consideration paid by a customer includes a variable amount requiring judgement, it is only recognised where it is
highly probable that a significant reversal will not occur. Second, service penalties or any claims made by us against the customer which
must be recognised in revenue unless it is highly probable that they will not result in future settlement. However, judgements taken
historically are consistent with the requirements of IFRS15 and there is no impact of these changes on the Group.
Capitalised redundancy costs. Under certain contracts there is an obligation to make redundancies and the Group is compensated
for these costs. Historically, the Group may have recognised revenues as and when the customer makes payments or the Group
may have capitalised the expense to match with payments being made in the future. Under IFRS15, all redundancy costs must be
expensed in the period they are incurred and revenue is not recognised on these redundancy transactions, with any cash payments
deferred over the contract in line with the other services being delivered. No adjustment was required in respect of this difference.
(xii) Licence income. Where the Group receives income for software licences and maintenance services provided through ongoing
support and operational functionality, this licence revenue is recognised over the period when the maintenance obligation exists.
There are currently no significant licencing arrangements entered into by the Group with its customers which are impacted by IFRS15.
(xiii) Extension periods granted or other options. Providing the option for a customer to obtain extension periods or other services may
lead to a separate performance obligation where a material right exists. If a separate performance obligation exists then there would
be an allocation of the transaction price from the original contract in addition to any revenues earned through the option period. A
separate performance obligation exists for options under a contract if both of the following conditions are met. First, if the customer
is unable to obtain the right to acquire the additional goods or services on the same or similar terms without entering into the original
contract (for example they cannot get the option without first entering into the main contract, which would be the case for any
extension period). Second, the option does not simply give the customer the right to acquire additional goods or services at a price
that reflects the stand alone selling price for those goods or services (for example if the pricing of the option is consistent with what
the pricing would have been in any case there is no separate PO, as the customer gains no incremental benefit from the existence of
the option). No differences were noted under IFRS15 in this area.
(xiv) Work in progress. Revenue is only recognised when control is passed to a customer and therefore where revenue is recognised over
time no work in progress is created unlike under current accounting standards. None of the contracts with revenues recognised over
time have work in progress balances.
(xv)
Significant financing component. Where the timing of payments agreed with the customer provides either party with a significant
benefit of financing (either explicitly or implicitly), the associated asset/liability is adjusted for the time value of money and an interest
charge or income is recognised and a corresponding offset in revenue. The Group’s policy under IFRS15 is to consider “significant” to
be greater than 5% of the total transaction price of the contractual arrangement and no such arrangements are in place.
(xvi) Non-cash consideration. If a customer contributes goods or services (for example, materials, equipment or labour) to facilitate the
fulfilment of the contract, the Group assesses whether control is obtained for those contributed goods or services. If the Group
obtains control of the contributed goods or services, then the estimated fair value of these would be recognised as revenue. No such
transactions have been noted.
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Financial StatementsStrategic ReportDirectors’ Report
2. Significant accounting policies continued
Other new standards and interpretations not applied
At the date of authorisation of these financial statements, the following changes to IFRS have not been applied but could potentially have a
significant impact:
(i)
IFRS9 Financial Instruments has been endorsed by the EU and will be effective from 1 January 2018.
This standard replaces IAS39 and introduces new requirements for classifying and measuring financial instruments and puts in place
a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities
when hedging financial and non-financial risk exposures.
The impact of IFRS9 on the regular trading activities of the Group is expected to be immaterial. The key areas of focus for the Group
under IFRS9 are:
• External loan receivables, including those from equity accounted entities.
• Debt refinancing not accounted for as a significant modification under IAS39.
• Expected credit losses being recognised on trade debtors and contract assets recognised under IFRS15.
• Intercompany loan recoverability.
IFRS9 replaces the ‘incurred loss’ model in IAS39 with an ‘expected credit loss’ model. The new model applies to financial assets that
are not measured at FVTPL (fair value through profit and loss), including loans, lease and trade receivables, debt securities, contract
assets under IFRS15 and specified financial guarantees and loan commitments issued. It does not apply to equity investments.
Under the expected credit loss model, the Group is required to calculate the allowance for credit losses by considering on a
discounted basis the cash shortfalls it would incur in various default scenarios for prescribed future periods and multiplying the
shortfalls by the probability of each scenario occurring. The allowance is the sum of these probability weighted outcomes. Because
every loan and receivable carries with it some risk of default, it is expected that every such asset has a loss attached to it from the
moment of its origination.
The financial assets held on the balance sheet have been reviewed in order to determine whether any loss is required to be recorded
based on these expected credit losses. However, given the fact that the Group’s customers are governments it is unlikely that there
will be a default as a result of credit risk and any provision for bad debts is more likely to be related to a contractual dispute. In most
cases, each amount receivable has specific risk attached to recoverability which is most likely based on the services provided under
the terms of the contract and, given the majority of receivables are backed by organisations with a sovereign credit rating, a general
view on recoverability based on the counterparty credit risk could be misleading.
(ii)
IFRS16 Leases is pending EU endorsement, which is expected prior to the effective date of 1 January 2019.
The standard replaces IAS17 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 IFRS15 is adopted. The quantitative impact of the adoption of IFRS16 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 willing 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 IFRS2 Share based Payment,
leasing transactions that are within the scope of IAS17 Leases, or the calculation of net realisable value under IAS2 Inventories or value in
use under IAS36 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.
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Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued
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.
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 IAS18 Revenue and IAS11 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.
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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 IFRS3 (2008)
Business Combinations are recognised at their fair value at the acquisition date, except where a different treatment is mandated
by another standard.
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.
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.
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Financial StatementsNotes to the Consolidated Financial Statements continued 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
2.5%
Short leasehold assets
The higher of 10% or the rate produced by the lease term
Machinery
Motor vehicles
Furniture
Office equipment
Leased equipment
15% – 20%
10% – 50%
10%
20% – 33%
The higher of the rate produced by the lease term or useful life
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds and the
carrying amount of the asset and is recognised in the income statement. Given that there is limited history of material gains or losses on
disposal of fixed assets, the level of judgement involved in determining the depreciation rates is not considered to be significant.
Asset impairment
The Group reviews the carrying amounts of its tangible and intangible assets (including goodwill) at each reporting period, together with
any other assets under the scope of IAS36 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.
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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
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.
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.
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Financial StatementsNotes to the Consolidated Financial Statements continued Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are deferred in
equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts accumulated in equity are
reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line of the income statement as the
recognised hedged item.
Hedge accounting is discontinued when the Group de-designates the hedging relationship, the hedging instrument expires or is sold,
terminated, exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in
equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss.
Tax
The tax expense represents the sum of current tax expense and deferred tax expense.
Current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement
because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never
taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by
the balance sheet date.
Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between the tax bases of assets
and liabilities and their carrying amounts for accounting purposes.
Deferred tax 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.
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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 and therefore historic levels of default are relatively low and as a
result the risks associated with this judgement are not considered to be significant.
When a trade receivable is expected to be uncollectible, it is written off against the allowance for doubtful debts. Subsequent recoveries
of amounts previously provided for or written off are credited against administrative expenses.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and balances with banks and similar institutions, which are readily convertible to known
amounts of cash and which are subject to insignificant changes in value and have a maturity of three months or less from the date of
acquisition. This definition is also used for the consolidated cash flow statement.
Leases
Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the
lessee. All other leases are classified as operating leases.
Assets held under finance leases are recognised as assets of the Group at fair value or, if lower, at the present value of minimum lease
payments determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance
lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a
constant rate of interest on the remaining balance of the liability. Finance charges are charged directly to the income statement, unless
they are directly attributable to a qualifying asset, in which case they are capitalised in accordance with the Group’s general policy on
borrowing costs (see below).
Total rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the
relevant lease.
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 to fulfil the Group's unavoidable contract obligations. 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.
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Financial StatementsNotes to the Consolidated Financial Statements continued 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.
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 cost items within cost of sales and administrative expenses 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
IAS1 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 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 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.
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3. Critical accounting judgements and key sources of estimation uncertainty continued
Provisions for onerous contracts
Determining the carrying value of onerous contract provisions requires assumptions and complex judgements to be made about the
future performance of the Group’s contracts. 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.
Due to the level of uncertainty and combination of variables associated with those estimates there is a significant risk that there could be
material adjustment to the carrying amounts of onerous contract provisions within the next financial year.
Major sources of uncertainty which could result in a material adjustment within the next financial year are:
• The ability of the company to maintain or improve operational performance to ensure costs or performance related penalties are in line
with expected levels.
• Volume driven revenue and costs being within the expected ranges.
• The outcome of matters dependent on the behaviour of the customer, such as a decision to extend a contract where it has the unilateral
right to do so.
• The outcome of open claims made by or against a customer regarding contractual performance.
• The ability of suppliers to deliver their contractual obligations on time and on budget.
In the current year material revisions have been made to historic provisions, which have led to a charge to contract provisions of £62.0m,
including £0.5m in relation to new provisions, and releases of £43.4m. Further details are provided in the Finance Review within the
Strategic Report. 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 future range of possible outcomes in respect of those assumptions and significant judgements made to determine the carrying value
of onerous contracts could result in either a material increase or decrease in the value of onerous contract provisions in the next financial
year. The extent to which actual results differ from estimates made at the reporting date depends on the combined outcome and timing of
a large number of variables associated with performance across multiple contracts.
The individual provisions are discounted where the impact is assessed to be significant. 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 0.72% and 1.95%.
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. This was a critical matter in our assessment of the group’s
going concern and viability statements and in considering the necessary disclosure of contingent liabilities in Note 31.
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.
We seek to 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 IAS36 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.
However, no impairment of goodwill was noted in the year ended 31 December 2017.
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Financial StatementsNotes to the Consolidated Financial Statements continued 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. Recognition has been based on forecast future taxable profits.
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 outflow, but on resolution, to the extent this differs from the liability
held, this will be reflected through the tax charge/(credit) for that period. 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.
On the basis of the currently available information, the Group does not anticipate a material change to the estimated liability in the
short term.
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.
In accounting for the defined benefit schemes, the Group has applied the following principles:
• The asset recognised for the Serco Pension and Life Assurance Scheme 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.
• Pension annuity assets are remeasured to fair value at each reporting date based on the share of the defined benefit obligation covered
by the insurance contract.
177
Financial StatementsStrategic ReportDirectors’ Report 4. Discontinued operations
The Global Services division, representing private sector BPO operations, was classified as a discontinued operation in 2015 and 2016.
The most significant part of this business was disposed in 2015, and the 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 were sold or exited in 2016 with the exception of one business consisting of a single contract, where disposal was completed
in July 2017. Total revenues for the remaining operations were £5.4m and the loss before exceptional items was £0.6m up to the point of
disposal, therefore the results have been included in continuing operations in 2017 on the grounds of materiality. The final contract was
sold with no profit or loss on disposal, with a net cash outflow of £0.5m.
The results of the discontinued operations were as follows:
For the year ended 31 December
Revenue
Expenses
Operating loss before exceptional items
Exceptional loss on disposal of subsidiaries and operations
Other exceptional operating items
Operating loss
Exceptional finance costs
Loss before tax
Tax charge on loss before 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)
(18.0)
(18.1)
0.1
Included above are items classified as exceptional as they are considered to be material 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 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)
In 2016 a charge of £1.1m arose in discontinued operations in relation to the restructuring programme resulting from the Strategy Review.
This included redundancy payments, provisions and other charges relating to the exit of the UK private sector BPO business, external
advisory fees and other incremental costs.
A charge of £13.7m arose in 2016 in relation to the movement in the value of indemnities provided on business disposals made in previous
years. These relate to changes in exchange rates where indemnities were provided in foreign currencies and increases to provisions for
interest and penalties on any indemnities. There were no changes in the value of these indemnities in 2017.
A charge of £0.4m was incurred in 2016 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 were treated as exceptional finance costs as they were directly linked to the
restructuring resulting from the Strategy Review.
178
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 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
2016
£m
5.5
–
5.5
12.5
(11.4)
6.6
5. Segmental information
The Group’s operating segments reflecting the information reported to the Board in 2017 under IFRS8 Operating Segments are as set
out below.
Reportable segments
Operating segments
UK & Europe
Americas
AsPac
Middle East
Corporate
Services for sectors including Citizen Services, Defence, Health, Justice & Immigration and
Transport delivered to UK Government, UK devolved authorities and other public sector customers
in the UK and Europe;
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;
Services for sectors including Defence, Justice & Immigration, Transport, Health and Citizen Services
in the Asia Pacific region including Australia, New Zealand and Hong Kong;
Services for sectors including Defence, Transport and Health in the Middle East region; and
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.
During the year two existing divisions, UK Central Government and UK & Europe Local & Regional Government, were merged to form the
new UK & Europe division (UK&E) with the management team structure and responsibilities altered to match the segment. This note has been
adjusted to reflect the impact of this, which has been to add together the results of the two former divisions in the comparative period.
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in Note 2.
Geographic information
Year ended 31 December
United Kingdom
United States
Australia
Middle East
Other countries
Total
Revenue
2017
£m
1,185.2
623.6
559.3
351.9
235.3
2,953.6
Non-current
assets*
2017
£m
340.3
273.3
143.2
18.0
21.7
796.5
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
* Non-current assets exclude financial instruments, deferred tax assets and loans to joint ventures and associates
Revenues from external customers are attributed to individual countries on the basis of the location of the customer.
179
Financial StatementsStrategic ReportDirectors’ Report 5. Segmental information continued
Information about major customers
The Group has four major governmental customers which each represent more than 10% of Group revenues. The customers’ revenues
were £1,102.9m for the UK Government within the UK & Europe segment, £569.7m for the US Government within the Americas segment,
£522.1m for the Australian Government within the AsPac segment and £238.4m for the Government of the United Arab Emirates within the
Middle East segment.
In 2016 the Group had three major governmental customers which each represented more than 10% of Group revenues. The customers’
revenues were £1,233.7m for the UK Government within the UK & Europe segment, £623.1m for the US Government within the Americas
segment and £581.4m for the Australian Government within the AsPac segment.
The following is an analysis of the Group’s revenue, results, assets and liabilities by reportable segment:
Year ended 31 December 2017
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
Other gains
Profit before tax
Tax charge
Tax on exceptional items
Profit for the year from continuing operations
UK&E
£m
Americas
£m
1,334.7
688.0
AsPac
£m
579.0
Middle
East
£m
351.9
Corporate
£m
Total
£m
–
2,953.6
4.5
–
4.5
0.3
11.9
16.7
39.8
35.1
16.2
(41.6)
54.0
(3.0)
36.8
–
(0.3)
36.5
(1.4)
33.7
–
(7.4)
26.3
–
16.2
–
0.1
16.3
–
(41.6)
–
(24.2)
(65.8)
(4.4)
49.6
0.3
(19.9)
30.0
7.6
(19.2)
0.7
19.1
(14.0)
(5.0)
0.1
*
Trading profit/(loss) is defined as operating profit/(loss) before exceptional items and amortisation and impairment of intangible assets arising on acquisition.
** Exceptional items incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business.
180
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued
Year ended 31 December 2017
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
Exceptional impairment and write down of intangible
assets arising on acquisition
Amortisation of other intangible assets
Exceptional impairment 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
UK&E
£m
Americas
£m
AsPac
£m
Middle
East
£m
Corporate
£m
Total
£m
26.6
(14.0)
0.1
(13.9)
–
–
(1.1)
–
(1.1)
13.5
445.9
459.4
–
(3.2)
–
(3.2)
(3.0)
–
(1.5)
–
(4.5)
–
391.3
391.3
0.8
(4.9)
–
(4.9)
(1.4)
(6.1)
(4.8)
–
(12.3)
0.4
223.4
223.8
–
(0.8)
–
(0.1)
(1.4)
–
(0.8)
(1.4)
–
–
(13.8)
(2.8)
(16.6)
–
–
(0.2)
–
(0.2)
0.4
112.0
112.4
27.3
(24.3)
0.1
(24.2)
(4.4)
(6.1)
(21.4)
(2.8)
(34.7)
–
14.3
133.2
133.2
1,305.8
1,320.1
192.7
1,512.8
(368.5)
(128.6)
(148.5)
(80.7)
(142.0)
(868.3)
(337.3)
(1,205.6)
***
The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group, including defined
benefit pension schemes and corporate intangible assets.
181
Financial StatementsStrategic ReportDirectors’ Report
5. Segmental information continued
Year ended 31 December 2016 (restated***)
Revenue
Result
UK&E
£m
Americas
£m
AsPac
£m
Middle
East
£m
Corporate
£m
Total
£m
1,375.1
691.4
619.7
324.8
–
3,011.0
Trading profit/(loss) from continuing operations*
84.5
6.4
34.2
18.8
(40.3)
103.6
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
Profit before tax
Tax charge
Tax on exceptional items
Profit for the year from continuing operations
(0.3)
84.2
4.4
(25.9)
62.7
(2.8)
3.6
–
–
3.6
(2.0)
32.2
0.4
(0.9)
31.7
–
–
18.8
(40.3)
–
–
18.8
(1.9)
(32.4)
(74.6)
(5.1)
98.5
2.9
(59.2)
42.2
9.3
(21.9)
29.6
(15.8)
3.1
16.9
*
Trading profit/(loss) is defined as operating (loss)/profit before exceptional items and amortisation and impairment of intangible assets arising on acquisition.
**
Exceptional items incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business.
*** During the year two existing divisions, UK Central Government and UK & Europe Local & Regional Government, were merged to form the new UK & Europe
division. This note has been adjusted to reflect the impact of this, which has been to add together the results of the two former divisions.
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, including assets held for sale
Consolidated total assets
Segment liabilities
Segment liabilities****
Unallocated liabilities, including liabilities held for sale
Consolidated total liabilities
31.3
(15.0)
(0.3)
(15.3)
(0.3)
–
(0.6)
(0.9)
12.3
467.0
479.3
–
(3.1)
–
(3.1)
(2.8)
–
(1.5)
(4.3)
2.0
(4.5)
(0.4)
(4.9)
(1.3)
(0.7)
(3.3)
(5.3)
–
(0.9)
–
0.1
(1.3)
–
(0.9)
(1.3)
–
–
(0.7)
(0.7)
–
–
(15.7)
(15.7)
33.4
(24.8)
(0.7)
(25.5)
(4.4)
(0.7)
(21.8)
(26.9)
–
1.7
428.8
428.8
252.1
253.8
0.4
108.7
109.1
–
14.4
228.6
228.6
1,485.2
1,499.6
265.0
1,764.6
(442.9)
(140.7)
(182.8)
(79.3)
(139.7)
(985.4)
(380.4)
(1,365.8)
**** The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group, including defined benefit pension
schemes and corporate intangible assets.
182
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 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
2017
100%
100%
100%
2017
24.5%
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 234 to 236 which form part of the financial statements.
7. Joint ventures and associates
AWE Management Limited (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 or prior year. Dividends of £17.1m (2016: £19.6m),
£7.3m (2016: £7.3m) and £1.8m (2016: £10.0m) 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 2017
Summarised financial information
Revenue
Operating profit
Net investment revenue/(finance costs)
Income tax charge
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)
£m
MSHCL
(100% of
results)
£m
NRHL
(100% of
results)
£m
Group
portion of
material joint
ventures and
associates*
£m
Group portion
of other
joint venture
arrangements
and associates*
£m
951.8
155.7
90.8
0.2
(19.2)
72.2
–
72.2
665.6
197.3
(179.0)
(664.3)
19.6
24.5%
4.8
17.8
(0.2)
(3.9)
13.7
2.0
15.7
8.7
43.5
(37.0)
(1.6)
13.6
0.3
3.8
–
(0.5)
3.3
–
3.3
–
5.2
(2.0)
–
3.2
50.0%
50.0%
6.8
1.6
311.2
33.0
(0.1)
(6.9)
26.0
1.0
27.0
167.5
72.7
(63.4)
(163.5)
13.3
–
13.3
45.5
1.4
–
(0.1)
1.3
(0.1)
1.2
2.2
14.5
(13.0)
(2.7)
1.0
–
1.0
*
Total results of the entity multiplied by the respective proportion of Group ownership.
Total
£m
356.7
34.4
(0.1)
(7.0)
27.3
0.9
28.2
169.7
87.2
(76.4)
(166.2)
14.3
–
14.3
183
Financial StatementsStrategic ReportDirectors’ Report 7. Joint ventures and associates continued
31 December 2017 continued
AWEML
(100% of
results)
£m
MSHCL
(100% of
results)
£m
NRHL
(100% of
results)
£m
Cash and cash equivalents
77.2
33.6
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
(8.3)
–
–
0.2
–
(1.9)
–
(2.2)
0.1
(0.3)
6.0
0.1
–
–
–
–
*
Total results of the entity multiplied by the respective proportion of Group ownership.
Group
portion of
material joint
ventures and
associates*
£m
Group portion
of other
joint venture
arrangements
and associates*
£m
38.7
2.5
Total
£m
41.2
(2.9)
–
(1.1)
0.1
(0.2)
(0.6)
(3.5)
(2.7)
(1.4)
–
–
(2.7)
(2.5)
0.1
(0.2)
The financial statements of MSHCL are for a period which is different from that of the Group, being for the 52 week period ended
6 January 2018 (2016: 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 NRHL franchise ended on 31 March 2016, with the
results reflected in year ended 31 December 2017 reflecting the ongoing post contract negotiations.
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: 2017
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
2.2%
2.2%
2.6%
22.9
25.2
£m
(2,233.3)
1,569.1
(664.2)
–
–
664.2
–
3.1%
2.2%
2.5%
N/A
N/A
£m
(304.4)
193.9
(110.5)
44.2
66.3
–
–
* 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.
184
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 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)
£m
968.1
MSHCL
(100% of
results)
£m
150.3
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
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
Group
portion of
material joint
ventures and
associates*
£m
Group portion
of other
joint venture
arrangements
and associates*
£m
NRHL
(100% of
results)
£m
132.7
13.2
0.1
(3.4)
9.9
0.8
10.7
–
14.2
(10.7)
–
3.5
50%
1.8
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
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.
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
AWEML
(100% of
results)
£m
72.4
(7.0)
–
–
0.2
–
MSHCL
(100% of
results)
£m
21.1
(2.3)
(0.6)
(2.3)
–
(1.3)
Group
portion of
material joint
ventures and
associates*
£m
Group portion
of other
joint venture
arrangements
and associates*
£m
NRHL
(100% of
results)
£m
14.5
(0.5)
–
(1.7)
0.1
–
35.4
(3.1)
(0.3)
(2.1)
0.2
(0.6)
4.7
(0.9)
(3.0)
(1.0)
–
(0.1)
*
Total results of the entity multiplied by the respective proportion of Group ownership.
Key disclosures with respect of the defined benefit pension schemes of material joint ventures and associates:
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
Total
£m
40.1
(4.0)
(3.3)
(3.1)
0.2
(0.7)
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
AWEML
£m
(2,556.0)
1,460.9
(1,095.1)
–
–
1,095.1
–
2.3%
2.3%
2.7%
N/A
N/A
MSHCL
£m
(275.7)
171.1
(104.6)
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.
185
Financial StatementsStrategic ReportDirectors’ Report 8. Acquisitions
On 26 January 2018, the Group acquired 100% of the issued share capital of BTP Systems, LLC, for consideration of US Dollar $20.5m in cash.
Further details on this post year-end transaction are provided in Note 40.
The Group signed a revised Business Purchase Agreement (BPA) on 13 February 2018 with the Special Managers and Provisional Liquidators
acting on behalf of the relevant Carillion plc subsidiaries to acquire a portfolio of selected UK health facilities management contracts. The
portfolio has annual revenues of approximately £90m and a weighted average remaining term of 14 years. Upon the receipt by the Special
Managers and Provisional Liquidators of the requisite third party consents, each individual contract will be transferred to Serco on a cash-free,
debt-free basis, with the consideration to be paid in instalments and to be satisfied using Serco’s existing financing facilities. If all the contracts
are transferred to Serco under the revised BPA process, the total consideration payable would be £29.7m. The consideration payable is lower
than the amount of £47.7m announced on 13 December 2017 in respect of substantially the same contracts that were subject to the initial
BPA signed with Carillion plc at that date. The change in consideration reflects the Group’s re-evaluation of potential liabilities, indemnities,
warranties and the additional working capital investment required as a result of Carillion’s liquidation. The financial effects of this transaction
have not been recognised at 31 December 2017. As consents are required for each individual contract to be transferred and therefore acquired,
at the time the financial statements were authorised for issue no legal transfer or control of assets had taken place and so no disclosures have
been made in respect of the assets and liabilities being acquired. The fair values of the assets and liabilities will be determined at the date when
contracts are acquired. It is also not yet possible to provide detailed information about each class of acquired receivables and any contingent
liabilities in respect of the acquired contracts.
On 24 August 2017 the Group acquired 50% of the issued share capital of Serco Sodexo Defence Services Pty Ltd (SSDS) for £1.6m, obtaining
full control. SSDS was previously a 50% owned joint venture accounted for on an equity accounting basis. The business has a contract with the
Australian Defence Forces Joint Logistics Command relating to the operation of the Defence Forces national clothing stores and strengthens
the financial performance of the AsPac division. As a result of the increase in ownership from 50% to 100% the Group fair valued the existing 50%
shareholding held at £0.2m, with the resulting uplift in value of £0.7m being recorded in Other gains, outside of operating results. The amounts
recognised in respect of the identifiable assets acquired and the liabilities assumed are as set out in the table below:
Intangible assets, excluding goodwill
Trade and other receivables
Deferred tax assets
Cash and cash equivalents
Trade and other payables
Provisions
Acquisition date fair value of consideration transferred
Satisfied by:
Cash
Deferred consideration
Total consideration
Provisional
fair value
£m
0.9
1.6
1.0
3.1
(3.3)
(1.7)
1.6
0.4
1.2
1.6
The net cash inflow as a result of the acquisition was £2.7m, being £3.1m cash acquired less £0.4m consideration paid.
No acquisition related costs were incurred.
The additional stake in SSDS contributed £3.8m and £0.7m to operating profit before exceptional items in the period from acquisition to
31 December 2017. Had the acquisition taken place on 1 January 2017 Group revenue and operating profit before exceptional items for
the year would have increased by £4.2m and £0.6m respectively, taking total Group revenue to £2,957.8m and total Group operating profit
before exceptional items to £50.2m.
Cash payments were made in the year relating to historic acquisitions. The total impact of acquisitions in the year to the Group’s cash flow
position was as follows:
Cash and cash equivalents in SSDS
Cash payments in respect of SSDS consideration
Deferred consideration paid in respect of Anglia Support Partnership
Net cash inflow arising on acquisitions in the year
£m
3.1
(0.4)
(1.2)
1.5
186
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 9. Disposals
A summary of the disposals taking place in the year ended 31 December 2017 were as follows:
Disposal of Service Glasgow LLP
Disposal of final remaining UK onshore private sector BPO contract
Impact of historic transactions
Profit/(loss) on
disposal £m
Cash flow £m
–
–
0.3
0.3
(6.7)
(0.5)
0.1
(7.1)
There were no disposals of continuing operations in 2016, the profit on disposal of £2.9m related to transactions completing in prior years.
In December 2017 the Group’s interest in Service Glasgow LLP was disposed of, resulting in a net cash outflow of £6.7m with no profit or
loss on disposal. Further details are provided below.
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Provisions
Net assets disposed
No profit or loss was made on the disposal:
Consideration
Less:
Net assets disposed
Non-controlling interests disposed of
Income statement impact of disposal
The net cash inflow arising on disposal of discontinued operations and the impact on Net Debt is as follows:
Consideration
Less:
Deferred consideration
Cash and cash equivalents disposed
Net cash flow on disposal and movement in Net Debt
10. Revenue
An analysis of the Group’s revenue is as follows:
Service
Glasgow LLP
£m
0.9
4.7
6.7
(9.9)
(0.5)
1.9
Service
Glasgow LLP
£m
1.6
(1.9)
0.3
–
Service
Glasgow LLP
£m
1.6
(1.6)
(6.7)
(6.7)
Year ended 31 December
Revenue from service contracts, being revenue as disclosed in the consolidated
income statement
Investment revenue (Note 14)
Operating lease income
Total revenue as defined in IAS18
2017
£m
2016
£m
2,953.6
3,011.0
7.6
2.4
9.3
0.8
2,963.6
3,021.1
187
Financial StatementsStrategic ReportDirectors’ Report 11. Exceptional items
Exceptional items are items of financial performance that are outside normal operations and are material to the results of the Group either
by virtue of size or nature. As such, the items set out below require separate disclosure on the face of the income statement to assist in the
understanding of the underlying performance of the Group.
Exceptional items arising on discontinued operations are disclosed on the face of the income statement within the loss attributable to
discontinued operations, of which there are none in 2017 (2016: charge of £3.4m), whereas 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 in 2016 can be seen in Note 4.
Exceptional gain on disposal of subsidiaries and operations
The exceptional net gain 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 venture and related loan balances
Impairment of AsPac customer lists
Other exceptional operating items
2017
£m
–
(28.6)
–
(0.4)
0.4
10.3
4.5
(6.1)
(19.9)
2016
£m
(17.8)
(17.2)
(0.1)
(0.1)
0.6
(10.7)
(13.9)
–
(59.2)
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.
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 in 2017 has identified no other impairment of goodwill.
The Group is incurring costs in relation to restructuring programmes resulting from the Strategy Review. These costs include redundancy
payments, provisions, external advisory fees and other incremental costs, including in 2017 £2.8m of intangible asset impairment (2016:
£nil). Due to the nature and scale of the impact of the transformation phase of the Strategy Review the incremental costs associated with
this programme are considered to be exceptional. Costs associated with the restructuring programme resulting from the Strategy Review
must meet the following criteria: that they are directly linked to the implementation of the Strategy Review; they are incremental costs as a
result of the activity; and they are non-business as usual costs. In 2017, a charge of £28.6m (2016: £17.2m) arose in relation to the restructuring
programme resulting from the Strategy Review. The Strategy Review is discussed in more detail in the Strategic Report on page 16.
Non-exceptional restructuring charges are incurred by the business as part of normal operational activity, which in the year totalled £11.1m
(2016: £6.7m). We expect restructuring costs of approximately £35m to be incurred in 2018 which will be treated as exceptional.
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 £nil (2016: £0.1m).
In 2017, there were exceptional costs totalling £0.4m (2016: £0.1m) associated with the UK Government reviews and the programme of
Corporate Renewal. These costs were treated as exceptional when the matter first arose and consistent treatment is applied in 2017.
In 2017 there were releases of provisions of £0.4m (2016: £0.6m) which were previously charged through exceptional items in relation to the
exit of the UK Frontline Clinical Health contracts.
188
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued An exceptional charge of £10.7m arose in 2016 in respect of the bulk transfer of a number of employees that are being transferred from
the Serco Pension and Life Assurance Scheme (SPLAS) to the Principal Civil Service Pension Scheme. This transfer was legally agreed 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. In 2017 a new agreement was reached with the UK Government to transfer out the scheme members on
an individual basis and the 2016 legal and commercial arrangements were cancelled by consent of all parties. As a result of the changes,
the impact of the transfer was treated as an experience gain adjustment through other comprehensive income and the majority of the
provision made in 2016 was reversed, resulting in a £10.3m credit to exceptional items.
In 2016 a review of a joint venture’s cash flow projections led to the impairment of certain equity interests and associated receivables
balances, totalling £13.9m. The impairment was outside of the normal course of business and of a significant value, and was therefore
considered to be an exceptional item. In the year ended 31 December 2017 payments of £4.5m were received against the impaired loan.
The likelihood of further receivables remains uncertain.
As a result of contracts coming to the end of their natural lives and no significant new contracts being awarded by the customer, the remaining
customer relationship intangible assets of the DMS Maritime Pty Limited business acquired in 2012 were impaired, totalling £6.1m.
Tax impact of above items
Exceptional tax for the year was a tax charge of £5.0m (2016: £3.1m credit) comprising a £2.3m credit on exceptional items within operating
profit and a £7.3m charge in respect of other exceptional tax items.
Exceptional costs of £19.6m only gave rise to a credit of £2.3m, as the majority of these costs were incurred in the UK where they only
impact our unrecognised deferred tax in relation to losses.
The other exceptional tax items relate to two matters, the first is the impact on tax of the pension buy-in disclosed in Note 33 which led to a
£95.0m reduction in the IFRS valuation of the Group’s defined benefit pension schemes and consequently a deferred tax charge to the income
statement of £16.1m. Movements in the valuation of the Group’s defined benefit pension schemes and the associated deferred tax impact are
reported in the Statement of Comprehensive Income (SOCI) and do not flow through the income statement, therefore do not impact profit
before tax or the tax charge. However, the net amount of deferred tax recognised in the balance sheet relates to both the pension accounting
and other timing differences, such as recoverable losses. As the net deferred tax balance sheet position is at the level supported by future
profit forecasts, the decrease in the deferred tax liability associated with the pension scheme (with the benefit reported in the SOCI) leads to
a corresponding decrease in the deferred tax asset to match the future profit forecasts. Such a reduction in the deferred tax asset therefore
leads to a charge to tax in the income statement. Where deferred tax charges or releases are the result of movements in the pension scheme
valuations rather than trading activity, these are excluded from the calculation of tax on underlying profit and the underlying effective tax rate,
with the prior periods being restated to reflect this. These amounted to £1.9m for 2017 (2016: £nil).
The second element is a credit of £8.8m related to legislative changes in the UK and the US which have impacted the value of deferred
tax held on the balance sheet. There is a reduction in the deferred tax liability that is held in connection with our US operations of £12.5m,
as future US tax liabilities are expected to crystallise at lower US tax rates. The fall in future expected US rates is primarily due to the
enactment of the Tax Cuts & Jobs Act in December 2017 which reduces the corporate income tax rate in the US from 35% to 21% effective
from 1 January 2018. In addition, there was a change in UK tax law in 2017. This UK change will reduce the quantum of loss brought forward
that can be used to offset taxable profits arising in a year, and will also enable losses carried forward in one company to be used to offset
profits in another. The combined impact of these UK law changes results in a tax charge of £3.7m.
12. Operating profit
Operating profit is stated after charging/(crediting):
Year ended 31 December
Research and development costs
Exceptional goodwill impairment (Note 11)
Exceptional impairment of intangible assets
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 on disposal of subsidiaries and operations (Note 9)
Staff costs (Note 13)
Allowance for doubtful debts charged/(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)
2017
£m
1.7
–
8.9
0.2
0.3
24.2
4.4
21.4
(0.3)
1,525.0
0.7
1.2
(0.2)
99.6
(2.4)
2016
£m
3.6
17.8
–
0.4
0.8
25.5
5.1
21.8
(2.9)
1,526.8
(0.1)
0.7
(0.6)
99.5
(0.8)
189
Financial StatementsStrategic ReportDirectors’ Report 12. Operating profit continued
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
2017
£m
1.0
0.2
1.2
0.1
–
–
0.1
0.2
2016
£m
0.8
0.5
1.3
0.2
0.1
0.2
0.3
0.8
The 2016 non-audit fees represent those paid to the current Auditor subsequent to appointment in May 2016. 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 101. No services were provided pursuant to contingent fee arrangements.
13. Staff costs
The average number of persons employed by the Company (including Executive Directors) was:
Year ended 31 December
UK & Europe
Americas
AsPac
Middle East
Unallocated
2017
number
21,222
7,421
8,739
4,428
954
42,764
2016
number
(restated*)
20,931
8,459
9,514
4,347
946
44,197
* Headcount reported in the prior year has been restated from providing full time equivalent data to the monthly average number of persons employed at
each month end.
The average number of persons employed includes all permanent employees and those with fixed term contracts. It excludes self
employed contractors and other casual workers.
190
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued Aggregate remuneration of all employees based on the average number of employees reported above was:
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
2017
£m
1,326.5
102.9
84.2
1,513.6
11.4
1,525.0
2017
£m
2.6
3.8
1.2
7.6
2017
£m
1.3
14.0
3.0
1.3
19.6
(0.4)
19.2
2016
£m
1,332.3
100.3
84.6
1,517.2
9.7
1,526.9
2016
£m
3.6
4.7
1.0
9.3
2016
£m
1.6
15.6
3.5
2.4
23.1
(1.2)
21.9
191
Financial StatementsStrategic ReportDirectors’ Report 16. Tax
16 (a) Income tax recognised in the income statement
Year ended 31 December
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 2017
£m
Exceptional
items 2017
£m
Total 2017
£m
Before
exceptional
items 2016
£m
Exceptional
items 2016
£m
Total 2016
£m
14.6
(0.8)
2.1
(1.9)
14.0
(2.3)
–
7.3
–
5.0
12.3
(0.8)
9.4
(1.9)
19.0
12.1
3.6
1.2
(1.1)
15.8
(1.3)
–
(1.8)
–
(3.1)
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 before tax
Tax calculated at a rate of 19.25% (2016: 20.00%)
Expenses not deductible for tax purposes*
UK unprovided deferred tax**
Other unprovided deferred tax
Effect of the use of unrecognised tax losses
Impact of changes in statutory tax rates on
current income tax
Change in deferred tax as a result of
legislative changes
Overseas rate differences
Other non-taxable income
Adjustments in respect of prior years
Adjustments in respect of deferred tax on
pensions
Adjustments in respect of equity accounted
investments
Tax charge
Before
exceptional
items 2017
£m
Exceptional
items 2017
£m
Total 2017
£m
Before
exceptional
items 2016
£m
Exceptional
items 2016
£m
Total 2016
£m
38.7
7.5
5.9
(4.6)
2.3
(1.2)
1.3
–
9.6
(0.9)
(2.9)
2.2
(5.2)
14.0
(19.6)
(3.8)
0.3
2.9
0.1
(0.5)
(2.2)
(8.8)
(0.8)
(0.5)
-
19.1
3.7
6.2
(1.7)
2.4
(1.7)
(0.9)
(8.8)
8.8
(1.4)
(2.9)
18.3
20.5
-
5.0
(5.2)
19.0
85.9
17.1
5.7
(3.9)
0.3
(3.1)
–
–
4.6
(0.7)
2.5
–
(6.7)
15.8
(56.3)
(11.2)
9.2
–
1.0
–
–
–
–
(0.4)
–
(1.7)
–
(3.1)
29.6
5.9
14.9
(3.9)
1.3
(3.1)
–
–
4.6
(1.1)
2.5
(1.7)
(6.7)
12.7
*
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 for the year is based on the blended UK statutory rate of corporation tax for the period of 19.25% (2016: 20.00%).
Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
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
192
Serco Group plc Annual Report and Accounts 2017
2017
£m
–
18.1
18.1
2016
£m
–
(1.7)
(1.7)
Financial StatementsNotes to the Consolidated Financial Statements continued 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 charge/(credit)
Items recognised in equity and in other comprehensive income
Arising on acquisition of subsidiary
Exchange differences
At 31 December – asset
The movement in deferred tax assets and liabilities during the year was as follows:
2017
£m
(20.3)
7.6
(18.1)
(1.0)
(2.8)
(34.6)
2016
£m
(19.9)
(2.0)
1.7
–
(0.1)
(20.3)
Temporary
differences
on assets/
intangibles
£m
Share based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
Tax
losses
£m
Other
temporary
differences
£m
OCPs
£m
Total
£m
At 1 January 2017
36.5
(12.0)
17.6
(17.8)
(10.3)
(34.3)
(20.3)
(Credited)/charged to income statement
(Note 16a)
Items recognised in equity and in other
comprehensive income (Note 16b)
Arising on acquisition of subsidiary
Exchange differences
At 31 December 2017
(6.7)
–
(0.1)
(3.9)
25.8
0.3
–
(0.9)
0.4
(12.2)
2.8
9.2
(8.4)
10.4
7.6
(18.1)
–
0.2
2.5
–
–
0.7
(7.9)
–
–
–
–
–
(0.2)
(18.1)
(1.0)
(2.8)
(18.7)
(24.1)
(34.6)
Of the amount charged to the income statement, £0.1m (2016: credit of £0.3m) has been taken to cost of sales in respect of the
R&D Expenditure credit. Other temporary differences include a deferred tax asset of £nil in respect of derivative financial instruments
(2016: £0.1m).
The movement in deferred tax assets and liabilities during the previous year was as follows:
Temporary
differences
on assets/
intangibles
£m
Share based
payment and
employee
benefits £m
Retirement
benefit
schemes
£m
OCPs
£m
Tax
losses
£m
Other
temporary
differences
£m
17.8
(28.3)
(10.8)
(15.7)
Total
£m
(19.9)
At 1 January 2016
(Credited)/charged to income statement
(Note 16a)
Items recognised in equity and in other
comprehensive income (Note 16b)
Exchange differences
At 31 December 2016
26.8
0.9
–
8.8
36.5
(9.7)
(0.5)
–
(1.8)
(12.0)
(1.5)
14.7
0.6
(16.2)
(2.0)
1.7
(0.4)
17.6
–
(4.2)
–
(0.1)
–
(2.4)
1.7
(0.1)
(17.8)
(10.3)
(34.3)
(20.3)
193
Financial StatementsStrategic ReportDirectors’ Report 17. Deferred tax continued
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
2017
£m
20.4
(55.0)
(34.6)
2016
£m
30.5
(50.8)
(20.3)
As at the balance sheet date, the UK has a potential deferred tax asset of £177m (2016: £147m) available for offset against future profits. A
deferred tax asset has currently been recognised of £17.4m. Recognition has been based on forecast future taxable profits. No deferred
tax asset has been recognised in respect of the remaining asset (net £160m) based on current forecasts; additional asset recognition is
contingent on further improvement in the UK profit forecast. In the summer of 2016, UK Government announced a reduction in the UK
corporation tax rate from 20% to 19% effective from April 2017. Further measures enacted during 2016 cut the rate further from April 2020
to 17%. These measures have reduced the UK 2017 current tax credit and will reduce the Group's future current tax charge accordingly.
The deferred tax balance at 31 December 2017 has been calculated reflecting these rates. In addition, the fall in the future expected US
tax rates due to the enactment of the Tax Cuts & Jobs Act in December 2017 has generated a £12.5m deferred tax credit in 2017 due to the
calculation of the US deferred tax liability at 31 December 2017 using these reduced rates.
Losses of £0.1m (2016: £0.1m) expire within 5 years, losses of £0.1m (2016 £0.2m) expire within 6–10 years, losses of £4.1m (2016 £8.6m) expire
within 20 years and losses of £998.4m (2016 £884.6m) may be carried forward indefinitely.
18. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been calculated in accordance with IAS33 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
2017
millions
1,089.7
44.9
1,134.6
2016
millions
1,088.3
37.3
1,125.6
At 31 December 2017 options over 236,616 (2016: 246,818) 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.
Due to the loss making position of the combined continuing and discontinued operations in 2016 and for continuing in 2017, the dilutive
impact has not been separately disclosed for those measures of profitability.
194
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued Earnings per share for continuing and discontinued operations
Basic EPS
Earnings
2017
£m
Per share
amount 2017
pence
Earnings
2016
£m
Per share
amount 2016
pence
Earnings for the purpose of basic EPS
(0.2)
(0.02)
(1.2)
(0.11)
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 for continuing operations
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 discontinued
Basic EPS
Earnings for the purpose of basic EPS
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS
Add back exceptional items
Earnings excluding exceptional operating items for the purpose of basic EPS
(0.2)
19.6
5.0
24.4
(0.02)
1.80
0.46
2.24
(1.2)
70.9
(3.1)
66.6
(0.11)
6.51
(0.28)
6.12
Earnings
2017
£m
Per share
amount 2017
pence
Earnings
2016
£m
Per share
amount 2016
pence
(0.2)
–
(0.2)
(0.2)
19.6
5.0
24.4
(0.02)
–
(0.02)
(0.02)
1.80
0.46
2.24
16.9
–
16.9
16.9
56.3
(3.1)
70.1
1.55
(0.05)
1.50
1.55
5.17
(0.28)
6.44
Earnings
2017
£m
Per share
amount 2017
pence
Earnings
2016
£m
Per share
amount 2016
pence
–
–
–
–
–
–
–
–
(18.1)
(1.66)
(18.1)
14.6
(3.5)
(1.66)
1.34
(0.32)
195
Financial StatementsStrategic ReportDirectors’ Report
19. Goodwill
At 1 January 2016
Exchange differences
Acquisitions
Impairment (exceptional)
At 1 January 2017
Exchange differences
At 31 December 2017
Cost
£m
799.1
109.6
17.8
–
926.5
(48.5)
878.0
Accumulated
impairment losses
£m
Carrying amount
£m
(289.2)
(41.6)
–
(17.8)
(348.6)
21.9
(326.7)
509.9
68.0
17.8
(17.8)
577.9
(26.6)
551.3
Movements in the balance since the prior year-end can be seen as follows:
UK & Europe
Justice & Immigration
Health
Direct Services & Europe
Americas
AsPac
Middle East
Goodwill
balance
1 January
2017
£m
Additions
2017
£m
Exchange
differences
2017
£m
Impairment
2017
£m
Goodwill
balance
31 December
2017
£m
Headroom on
impairment
analysis 2017
£m
Headroom on
impairment
analysis 2016
£m
49.6
60.6
66.5
277.9
112.4
10.9
577.9
–
–
–
–
–
–
–
–
–
0.8
(24.9)
(1.6)
(0.9)
(26.6)
–
–
–
–
–
–
–
49.6
60.6
67.3
253.0
110.8
10.0
551.3
127.4
19.4
71.5
151.8
231.6
145.6
747.3
126.3
3.2
99.0
66.5
203.2
114.7
612.9
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 key assumptions applied in the impairment review are set out below:
UK & Europe
Justice & Immigration
Health
Direct Services & Europe
Americas
AsPac
Middle East
*
Restated based on rates applied in impairment testing in the prior year.
Discount rate
2017
%
10.4
10.4
11.7
10.5
9.7
10.8
Discount rate
2016*
%
11.2
11.2
12.5
12.3
11.2
10.7
Terminal growth
rates 2017
%
Terminal growth
rates 2016
%
2.0
2.0
2.0
2.4
2.4
2.5
2.0
2.0
2.0
2.4
2.4
2.2
196
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued Discount rate
Pre-tax discount rates, derived from the Group’s post-tax weighted average cost of capital have been used in discounting the projected cash
flows. These rates are reviewed annually with external advisers and are adjusted for risks specific to the market in which the CGU operates.
Short-term growth rates
The annual impairment test is performed immediately prior to the year end, based initially on five year cash flow forecasts approved by
senior management. Short-term revenue growth rates used in each CGU five year plan are based on internal data regarding our current
contracted position, the pipeline of opportunities and forecast growth for the relevant market.
Short-term profitability and cash conversion is based on our historic experiences and a level of judgement is applied to expected changes
in both. Where businesses have been poor performers in recent history, turnaround has only been assumed where a detailed and
achievable plan is in place and all forecasts include cash flows relating to contracts where onerous contract provisions have been made.
Terminal growth rates
The calculations include a terminal value based on the projections for the fifth year of the short-term plan, with a growth rate assumption
applied which extrapolates the business into perpetuity. The terminal growth rates are based on long-term inflation rates of the
geographic market in which the CGUs operate and therefore do not exceed the average long-term growth rates forecast for the individual
markets. These are provided by external sources.
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption, 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
where a 1% increase in discount rates and a 1% decrease in terminal growth rates would result in an impairment of £4.2m. The breakeven
point of Health goodwill impairment is a 0.8% increase in discount rate combined with a 0.8% decrease in terminal growth rate. A reduction
of £2.0m in the terminal year cash flows for the Health CGU would lead to the recoverable amount no longer exceeding the carrying value.
Any additional reduction in terminal year cash flows would result in an impairment of the goodwill of this CGU.
197
Financial StatementsStrategic ReportDirectors’ Report 20. Other intangible assets
Cost
At 1 January 2017
Arising on acquisition
Eliminated on disposal
Additions from internal development
Additions from external acquisition
Disposals
Reclassification from/(to) other intangible asset categories
Reclassification to property, plant and equipment
Research and development expenditure credit
Exchange differences
At 31 December 2017
Accumulated amortisation and impairment
At 1 January 2017
Arising on acquisition
Eliminated on disposal
Impairment charge
Amortisation charge – internal development
Amortisation charge – external
Disposals
Reclassification to property, plant and equipment
Exchange differences
At 31 December 2017
Net book value
At 31 December 2017
Acquisition related
Customer
relationships
£m
Licences and
franchises
£m
Software
and IT
£m
Other
Internally
generated
development
expenditure
£m
Total
£m
67.6
0.9
–
–
–
–
–
–
–
(3.4)
65.1
50.4
–
–
6.1
–
4.4
–
–
(2.4)
58.5
0.3
120.6
55.7
244.2
–
–
–
–
0.9
(1.2)
9.9
7.6
(0.1)
(13.4)
–
–
–
–
0.2
0.3
–
–
–
–
–
(0.1)
–
(0.1)
0.1
0.2
0.4
–
(2.2)
122.8
71.6
0.9
(1.1)
2.8
11.8
3.9
(13.0)
0.4
(1.5)
75.8
–
–
0.9
–
(0.1)
(0.2)
–
0.7
(0.4)
56.6
1.8
(1.2)
10.8
7.6
(13.6)
–
0.4
0.7
(6.0)
244.7
38.3
160.6
–
–
–
5.7
–
(0.1)
–
(0.3)
43.6
0.9
(1.1)
8.9
17.5
8.3
(13.2)
0.4
(4.3)
178.0
6.6
0.1
47.0
13.0
66.7
198
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued Acquisition related
Customer
relationships
£m
Licences and
franchises
£m
Software
and IT
£m
Other
Internally
generated
development
expenditure
£m
1.0
–
(0.7)
0.1
(0.1)
–
–
0.3
0.9
–
–
–
(0.7)
0.1
–
0.3
110.2
14.0
(12.9)
–
3.3
–
6.0
120.6
62.9
–
17.0
–
(12.0)
–
3.7
71.6
59.1
1.1
(2.6)
–
(3.5)
(0.2)
1.8
55.7
35.5
–
4.8
–
(2.6)
–
0.6
38.3
Total
£m
222.2
15.1
(16.2)
6.3
–
(0.2)
17.0
244.2
132.4
0.7
21.8
4.4
(15.3)
6.3
10.3
160.6
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
51.9
–
–
6.2
0.3
–
9.2
67.6
33.1
0.7
–
4.4
–
6.2
6.0
50.4
17.2
–
49.0
17.4
83.6
Included in Software and IT and other internally generated development expenditure is an amount of £6.1m (2016: £8.7m) in respect of
leased intangibles.
Customer relationships are amortised over the average length of contracts acquired. The Group is carrying £6.6m (2016: £17.2m) 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 (2016: £4.4m).
The net book value of internally generated intangible assets as at 31 December 2017 was approximately £13.0m (2016: £17.4m) in
development expenditure and £34.3m (2016: £36.9m) in software and IT.
199
Financial StatementsStrategic ReportDirectors’ Report 21. Property, plant and equipment
Freehold
land and
buildings
£m
Short-
leasehold
assets
£m
Machinery, motor
vehicles, furniture
and equipment
£m
Cost
At 1 January 2017
Arising on acquisition
Additions
Reclassification to other intangible assets
Disposals
Exchange differences
At 31 December 2017
Accumulated depreciation and impairment
At 1 January 2017
Arising on acquisition
Charge for the year – impairment
Charge for the year – depreciation
Reclassification to other intangible assets
Disposals
Exchange differences
At 31 December 2017
Net book value
At 31 December 2017
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 to held for sale assets
Disposals
Exchange differences
At 31 December 2016
Net book value
At 31 December 2016
Total
£m
245.6
0.4
23.3
(0.4)
(33.1)
(3.3)
232.5
176.3
0.4
(0.1)
24.3
(0.4)
(30.7)
(2.5)
167.3
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
209.2
0.4
20.8
–
(30.6)
(2.2)
197.6
151.0
0.4
(0.1)
20.9
–
(29.7)
(1.7)
140.8
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
4.0
–
0.5
–
–
0.1
4.6
2.5
–
–
0.2
–
–
–
2.7
1.9
32.4
–
2.0
(0.4)
(2.5)
(1.2)
30.3
22.8
–
–
3.2
(0.4)
(1.0)
(0.8)
23.8
6.5
4.0
–
–
–
–
4.0
2.3
–
0.2
–
–
–
2.5
1.5
29.8
1.8
0.9
(3.2)
3.1
32.4
20.7
–
3.0
(0.2)
(2.9)
2.2
22.8
9.6
56.8
65.2
Freehold
land and
buildings
£m
Short-
leasehold
assets
£m
Machinery, motor
vehicles, furniture
and equipment
£m
58.2
69.3
The carrying amount of the Group’s Machinery, motor vehicles, furniture and equipment includes an amount of £23.4m (2016: £27.9m)
in respect of assets held under finance leases.
The carrying amount of the Group’s Short-leasehold assets includes an amount of £0.1m (2016: £0.2m) in respect of assets held under
finance leases.
200
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 22. Inventories
Service spares
Parts awaiting installation
Work in progress
23. Trade and other receivables
Trade and other receivables: Non-current
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
2017
£m
13.0
1.9
2.5
17.4
2017
£m
25.7
10.0
21.6
57.3
2017
£m
188.8
213.3
49.8
–
0.6
–
0.3
53.7
506.5
2016
£m
17.0
1.0
4.4
22.4
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
Total trade and other receivables held by the Group at 31 December 2017 amount to £563.8m (2016: £587.9m).
The Group has a receivables financing facility of £30.0m (2016: £30.0m), which was un-utilised at 31 December 2017 (31 December 2016:
£7.7m utilised). The unwinding of the facility by £7.7m in 2017 is reflected through a negative working capital movement in the year.
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 (2016: 23 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, £54.1m
is due from agencies of the UK Government, the Group’s largest customer, £33.1m from the Australian Government, £47.9m from the
Government of the United Arab Emirates, and £13.8m 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 2016, £71.4m 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 2017, a total of £1.6m (2016: £2.8m) of trade receivables held by the Group were considered to be impaired.
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 2017 (2016: £3.6m).
201
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
2017
£m
144.3
29.6
8.2
8.7
1.6
(3.6)
188.8
2016
£m
143.0
34.2
4.0
12.4
2.8
(3.6)
192.8
Of the total overdue trade receivable balance, 38% (2016: 53.2%) relates to the UK, US or Australian governments, and a further 38% (2016:
15.7%) relates to the government of the United Arab Emirates. The total allowance for doubtful debts is greater than the assets identified
as impaired due to provision being made for partial impairment of balances held within one of the ageing categories.
Movements on the Group allowance for doubtful debts
At 1 January
Net charges and releases to income statement
Utilised
Exchange differences
At 31 December
2017
£m
3.6
0.7
(0.5)
(0.2)
3.6
2016
£m
11.3
(0.1)
(8.2)
0.6
3.6
Included in the current other receivables balance is a further £10.2m (2016: £19.2m) due from agencies of the UK Government.
Contingent assets of £5.5m (2016: £5.6m) are held within current other receivables in relation to insurance claims where it is probable that
the Group will receive future payments.
Also included within current other receivables are capitalised bid costs of £6.2m (2016: £7.8m) and phase in costs of £13.8m (2016: £13.8m)
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:
Capitalised bid and phase in costs
At 1 January
Additions
Amortisation
Exchange differences
At 31 December
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 2017, the Group had £nil (2016: £nil) of contract retentions held by customers.
2017
£m
21.6
5.0
(6.5)
(0.1)
20.0
2017
£m
–
(13.6)
(13.6)
153.5
(167.1)
(13.6)
2016
£m
28.6
4.7
(13.8)
2.1
21.6
2016
£m
2.7
(10.0)
(7.3)
226.3
(233.6)
(7.3)
202
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 25. Cash and cash equivalents
Customer advance payments*
Other cash and short-term deposits
Total cash and cash equivalents
Sterling
2017
£m
Other
currencies
2017
£m
–
79.6
79.6
0.2
32.3
32.5
Total
2017
£m
0.2
111.9
112.1
Sterling
2016
£m
–
149.4
149.4
Other
currencies
2016
£m
1.0
27.4
28.4
Total
2016
£m
1.0
176.8
177.8
* Customer advance payments totalling £0.2m (2016: £1.0m) are encumbered cash balances.
Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and
other short-term highly liquid investments with a maturity of three months or less.
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 33 days (2016: 32 days).
Trade and other payables: Non-current
Other payables
Total trade and other payables held by the Group at 31 December 2017 amount to £491.6m (2016: £541.3m).
27. Obligations under finance leases
2017
£m
78.4
71.1
259.1
54.3
462.9
2017
£m
28.7
2016
£m
84.7
92.9
292.2
54.7
524.5
2016
£m
16.8
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
2017
£m
Present value of
minimum lease
payments
2017
£m
Minimum lease
payments
2016
£m
Present value of
minimum lease
payments
2016
£m
9.1
11.0
1.4
21.5
(1.3)
20.2
(8.5)
11.7
8.5
10.4
1.3
20.2
–
20.2
(8.5)
11.7
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
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.
203
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: 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 £nil (2016: £0.5m).
Total
2017
£m
31.8
19.7
105.0
89.3
245.8
(31.8)
25.7
239.7
Total
2016
£m
9.2
34.2
137.5
96.1
277.0
(9.7)
22.9
290.2
Other loans
Loan receivables
Carrying amount
2017
£m
Fair value
2017
£m
Carrying amount
2016
£m
271.5
(25.7)
245.8
263.1
(25.7)
237.4
299.9
(22.9)
277.0
Fair value
2016
£m
289.7
(22.9)
266.8
The fair values are based on cash flows discounted using a market rate appropriate to the loan. All loans are held at amortised cost.
Analysis of Net Debt
The analysis below provides a reconciliation between the opening and closing positions in the balance sheet for liabilities arising from
financing activities together with movements in cash loan receivables and derivatives relating to the items included in Net Debt. There
were no changes in fair value noted in either the current or prior year.
Loans payable
Obligations under finance leases
Liabilities arising from
financing activities
Cash and cash equivalents
Loan receivables
Derivatives relating to Net Debt
At 1
January
2017
£m
(299.9)
(28.2)
(328.1)
177.8
22.9
18.1
Cash
flow
£m
3.8
12.6
16.4
(57.3)
(0.6)
–
Net Debt
(109.3)
(41.5)
Reclassified
as held
for sale
£m
Acquisitions*
£m
Disposals
£m
Exchange
differences
£m
Non-cash
movements
£m
At 31
December
2017
£m
–
–
–
–
–
–
–
–
–
–
1.5
–
–
1.5
–
–
–
(7.1)
–
–
(7.1)
25.4
0.1
25.5
(2.8)
–
(5.3)
17.4
(0.8)
(4.7)
(271.5)
(20.2)
(5.5)
(291.7)
–
3.4
–
112.1
25.7
12.8
(2.1)
(141.1)
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
Loans payable
(381.9)
135.8
Obligations under finance leases
(43.8)
16.7
Liabilities arising from
financing activities
(425.7)
152.5
Cash and cash equivalents
323.6
(153.7)
Loan receivables
Derivatives relating to Net Debt
19.9
14.6
–
–
–
(0.2)
(0.2)
–
–
–
Net Debt
(67.6)
(1.2)
(0.2)
* Acquisitions represent the net cash/(debt) acquired on acquisition.
–
–
–
0.1
–
–
0.1
–
–
–
–
–
–
–
(52.8)
(0.4)
(1.0)
(0.5)
(299.9)
(28.2)
(53.2)
(1.5)
(328.1)
7.8
0.1
3.5
(41.8)
–
2.9
–
1.4
177.8
22.9
18.1
(109.3)
204
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 29. Provisions
At 1 January 2017
Arising on acquisition
Eliminated on disposal of subsidiary
Charged to income statement – exceptional
Charged to income statement – other
Released to income statement – exceptional
Released to income statement – other
Utilised during the year
Unwinding of discount
Exchange differences
At 31 December 2017
Analysed as:
Current
Non-current
Employee
related
£m
45.1
1.7
–
4.5
17.5
(0.9)
(4.9)
(4.9)
–
(2.4)
55.7
17.1
38.6
55.7
Property
£m
Contract
£m
15.2
220.2
Other
£m
141.2
–
(0.5)
0.1
8.6
(10.5)
(9.0)
(5.0)
–
(3.1)
Total
£m
421.7
1.7
(0.5)
7.3
90.5
(13.1)
(58.3)
(82.3)
1.3
(8.3)
–
–
–
62.0
(0.4)
(43.0)
(69.3)
1.3
(2.6)
168.2
121.8
360.0
68.0
100.2
168.2
59.0
62.8
121.8
148.5
211.5
360.0
–
–
2.7
2.4
(1.3)
(1.4)
(3.1)
–
(0.2)
14.3
4.4
9.9
14.3
Contract provisions relate to onerous contracts which will be utilised over the life of each individual contract, up to a maximum of 7 years
from the balance sheet date. The present value of the estimated future cash outflow 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 significant. 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. In 2017, additional charges have been made in respect of
future losses on a number of onerous contracts totalling £62.0m. This increase related to revisions to existing OCPs of £61.5m and a new
provision raised on one contract totalling £0.5m.
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 gratuity 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 outflow 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.
205
Financial StatementsStrategic ReportDirectors’ Report
30. Capital and other commitments
Capital expenditure contracted but not provided
Property, plant and equipment
Intangible assets
2017
£m
0.9
0.2
2016
£m
10.4
5.6
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
2017
£m
69.6
148.0
130.7
348.3
2016
£m
66.9
127.6
126.1
320.6
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 £4.3m (2016: £20.4m). The actual commitment outstanding at 31 December 2017 was £4.3m (2016: £17.9m).
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 2017
was £227.1m (2016: £252.1m).
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.
206
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 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.
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 2017 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.
The Group held the following financial instruments which fall within the scope of IAS39 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
Forward foreign exchange contracts
Loans and receivables
Loan receivables (Note 23)
Other investments (Note 23)
Carrying amount
(measurement basis)
Comparison
fair value
Carrying amount
(measurement basis)
Comparison
fair value
Amortised
cost 2017
£m
Fair value –
Level 2 2017
£m
Level 2
2017
£m
Amortised
cost 2016
£m
Fair value –
Level 2 2016
£m
Level 2 2016
£m
112.1
–
–
–
188.8
–
0.3
0.6
–
–
25.7
10.0
–
4.5
5.7
0.1
–
–
–
–
3.6
0.1
–
–
112.1
177.8
–
–
–
–
–
–
188.8
192.8
–
0.3
0.6
–
–
25.7
10.0
0.5
0.1
0.6
–
–
22.4
0.6
–
4.5
–
0.4
–
–
–
–
14.2
–
–
–
177.8
–
–
–
192.8
0.5
0.1
0.6
–
–
22.4
0.6
207
Financial StatementsStrategic ReportDirectors’ Report 32. Financial risk management continued
32 (a) Fair value of financial instruments continued
i) Hierarchy of fair value continued
Carrying amount
(measurement basis)
Comparison
fair value
Carrying amount
(measurement basis)
Comparison
fair value
Amortised
cost 2017
£m
Fair value -
Level 2 2017
£m
Level 2
2017
£m
Amortised
cost 2016
£m
Fair value –
Level 2 2016
£m
Level 2 2016
£m
Financial liabilities – current
Derivatives designated as FVTPL
Forward foreign exchange contracts
–
(1.1)
–
–
(0.6)
–
Financial liabilities at amortised cost
Trade payables (Note 26)
Loans (Note 28)
Obligations under finance leases (Note 27)
Financial liabilities – non-current
Derivative instruments in designated hedge
accounting relationships
(78.4)
(31.8)
(8.5)
–
–
–
(78.4)
(31.8)
(8.5)
(84.7)
(9.7)
(12.3)
Forward foreign exchange contracts
–
(0.1)
–
–
Financial liabilities at amortised cost
Loans (Note 28)
Obligations under finance leases (Note 27)
(239.7)
(11.7)
–
–
(231.3)
(11.7)
(290.2)
(15.9)
–
–
–
–
–
–
(84.7)
(9.7)
(12.3)
–
(280.1)
(15.9)
The Directors estimate that the carrying amounts of cash, trade receivables and trade payables approximate to their fair value due to the
short-term maturity of these instruments.
The fair values of loans and finance lease obligations are based on cash flows discounted using a rate based on the borrowing rate
associated with the liability.
The fair value of derivatives is calculated using a discounted cash flow approach applying discount factors derived from observable market
data to actual and estimated future cash flows. Credit risk is considered in the calculation of these fair values.
ii) Fair value of derivative financial instruments
The fair valuation of derivative financial instruments results in a net asset of £12.8m (2016: net assets of £18.5m) comprising non-current
assets of £3.7m (2016: £14.2m), current assets of £10.3m (2016: £4.9m), current liabilities of £1.1m (2016: £0.6m) and non-current liabilities of
£0.1m (2016: £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
(4.9)
(0.3)
(5.2)
–
(0.5)
(0.5)
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)
1 January 2017
£m
14.2
4.3
18.5
1 January 2016
£m
10.4
4.4
14.8
31 December 2017
£m
9.3
3.5
12.8
31 December 2016
£m
14.2
4.3
18.5
The fair value of financial liabilities at fair value through profit and loss is £1.1m (2016: £0.6m) 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.
208
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 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
2017
£m
480.0
Amount
2016
£m
480.0
Drawn
2017
£m
–
Drawn
2016
£m
–
Utilised for
bonding facility
2017
£m
Total facility
available
2017
£m
–
480.0
Utilised for
bonding facility
2016
£m
Total facility
available
2016
£m
–
480.0
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 £260.7m (2016: £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 (2016: £30.0m) of which £nil
(2016: £7.7m) 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 2017
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
78.4
8.5
31.8
12.3
897.8
(907.1)
121.7
–
5.6
20.7
22.4
22.1
(26.0)
44.8
–
4.8
131.0
20.6
–
–
156.4
–
1.3
89.4
1.2
–
–
91.9
Total
£m
78.4
20.2
272.9
56.5
919.9
(933.1)
414.8
209
Financial StatementsStrategic ReportDirectors’ Report 32. Financial risk management continued
32 (c) Liquidity risk continued
ii) Maturity of financial liabilities continued
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.
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
Total
£m
84.7
29.9
302.1
77.5
435.6
(454.3)
475.5
Gross cash flows in the table above relating to forward foreign exchange contracts total £875.5m (inflow) and £871.9m (outflow) on demand
or within one year and £4.7m (inflow) and £4.4m (outflow) between one and two years (2016: £394.6m (inflow) and £390.1m (outflow) on
demand or within one year and £nil (inflow) and £nil (outflow) between one and two years).
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 2017, 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 of fair value hedges, cash flow hedges or hedges of net investments
in foreign operations. Detail the Group’s accounting policies in relation to derivatives qualifying for hedge accounting under IAS39 can be
seen in Note 2.
At 31 December 2017, 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 2018
October 2019
2017 Receivable
2016 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
41.0
28.5
4.4
3.8
4.9
4.1
The Group also held a number of forward foreign exchange contracts designated as cash flow hedges. These derivatives are hedging highly
probable forecast foreign currency trade payments in the UK business. The net notional amounts are summarised by currency below:
Sterling
US Dollar
Euro
Indian Rupee
210
Serco Group plc Annual Report and Accounts 2017
2017
£m
(9.4)
0.6
–
9.2
2016
£m
(7.0)
3.2
4.2
–
Financial StatementsNotes to the Consolidated Financial Statements continued
All derivatives designated as cash flow hedges are highly effective and as at 31 December 2017 a net fair value loss of £0.7m (2016: £0.5m)
has been deferred in the hedging reserve. During the course of the year to 31 December 2017, £0.1m (2016: £3.4m) of fair value gains were
transferred to the hedging reserve and £0.2m (2016: £1.1m) reclassified to the consolidated income statement.
The Group has entered into a net investment hedge. This uses a portion of the USD denominated loans payable as a hedging instrument
against movements in the value of the assets and liabilities of Serco North America (Holdings), Inc. All loans payable are recorded at
amortised cost, and movements in value due to foreign exchange in the portion designated as hedging instruments are taken to reserves.
The value of loans used in the hedging relationship at 31 December 2017 was £151.8m (2016: £nil).
iv) Currency sensitivity
The Group’s currency exposures in respect of monetary items at 31 December 2017 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:
US Dollar
Euro
Indian Rupee
Pre-tax profits
gain/(loss)
Equity
gain/(loss)
Pre-tax profits
gain/(loss)
Equity
gain/(loss)
2017
£m
–
–
–
–
2017
£m
(0.1)
–
(1.0)
(1.1)
2016
£m
(0.1)
–
–
(0.1)
2016
£m
–
(0.5)
–
(0.5)
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
US Dollar loans
Other loans
Floating
rate
2017
£m
112.1
–
112.1
Floating
rate
2017
£m
–
12.2
12.2
Weighted
average
interest rate
2017
%
–
7.0
Weighted
average
interest rate
2017
%
5.2
–
Fixed
rate
2017
£m
–
25.7
25.7
Fixed
rate
2017
£m
260.7
–
260.7
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
Weighted
average
interest rate
2016
%
5.2
–
Fixed
rate
2016
£m
–
22.4
22.4
Fixed
rate
2016
£m
290.2
–
290.2
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 £20.2m (2016: £28.2m) 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 2017 of £1.0m (2016: £1.7m).
211
Financial StatementsStrategic ReportDirectors’ Report 32. Financial risk management continued
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 credit risk on loans receivable is relatively low. The balance is comprised
of a single loan, which was subject to a fair value assessment by an independent specialist in 2016. This assessment included the
determination of a synthetic credit rating of the issuer, using industry-standard methodology. We monitor the results and financial position
of the issuer on an annual basis to determine whether the risk of default has changed, and therefore whether the assumptions used in the
valuation remain appropriate.
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 2017, the Company has issued guarantees in respect of certain joint ventures and associates as per Note 31.
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
2017
£m
(112.1)
245.8
20.2
310.9
464.8
2016
£m
(177.8)
277.0
28.2
398.8
526.2
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 2018 are £7.1m (2017: £9.7m).
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 for funding
purposes. Pension obligations are valued separately for accounting and funding purposes and there is often a material difference between
these valuations. As at 31 December 2017 the estimated actuarial deficit of SPLAS was £33.7m (2016: £42.6m) based on the actuarial
assessment on the funding basis whereas the accounting valuation resulted in an asset of £41.8m. The primary reason a difference arises
is that pension scheme accounting requires the valuation to be performed on the basis of a best estimate whereas the funding valuation
used by the trustees makes more prudent assumptions. A revised schedule of contributions for SPLAS was agreed during the year, with
29% of pensionable salaries due to be paid from 1 November 2017 to 31 October 2018 and 28% from 1 November 2018 to 18 December
2022. An additional shortfall contribution of £1.0m is due by 30 April 2018 and four further payments of £0.5m payable at the end of each
April through to 2022.
212
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued The assets of funded schemes are held independently of the Group’s assets in separate trustee administered schemes. The trustees of each
pension scheme are required by law to act in the interest of the scheme 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 scheme. The Group’s major schemes are valued by
independent actuaries annually using the projected unit credit actuarial cost method for accounting purposes. This reflects service rendered
by employees to the dates of valuation and incorporates actuarial assumptions including: discount rates to determine 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 the different defined benefit schemes are not offset.
The schemes typically expose the Group to risks that impact the financial performance and position of the Group and may affect the
amount and timing of future cash flows. The key risks are set out below:
• Investment risk. The schemes hold assets with which to discharge the future liabilities of these schemes. Any decline in the value of
these investments directly impacts on the ability of the scheme to meet its commitments and could require the Group to fund this
shortfall in future years. As a result of the SPLAS’s investment strategy, which aims to reduce volatility risk by better matching assets to
liabilities, 45% of the scheme’s assets are annuity policies and 55% are Liability Driven Investments (LDIs). The annuity policies result in
an insurer funding the future benefit payments to the relevant members and therefore eliminate the risk of changes in the future value
of the benefits to the scheme. The main asset classes that make up the LDI investments are gilts and corporate bonds with inflation
and interest swap overlays and are therefore linked to the key drivers of the schemes’ liabilities. The value of these investments vary
in line with gilt yields, which has decreased from 2.65% p.a. to 2.53% p.a. during 2017 resulting in a decrease in these assets. SPLAS
previously identified an investment strategy consisting of Multi-Asset Absolute Return (MAAR), Buy and Maintain credit (B&M) and LDI.
SPLAS began to wind down its previous investment strategy in late 2016, with assets transferred to a passive LDI portfolio managed by
BlackRock, over the course of late 2016 and early 2017. This ensures that the scheme remains protected against changes to interest rates
and long term inflation expectations, with the funding level therefore being relatively stable. As explained in section (a) ii), in the first
half of 2017 the Trustee secured a buy-in of the majority of the pensioner members, resulting in a significant de-risking of the scheme’s
position, which has provided a secure match of that significant proportion of the scheme’s liabilities. Since the buy-in was completed
the scheme has been developing a revised investment strategy which will aim to invest in private debt instead of MAAR to enable the
scheme to reach full funding on the self sufficiency basis within an acceptable time period.
• Interest 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 a decrease in the bond interest rate will increase the scheme liability. This will be
partially offset by an increase in the return of the plan’s debt investments.
• Longevity risk. The present value of the defined benefit plan liability is calculated by reference to the best estimate of the mortality of
plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the
plan’s liability.
• Salary risk. The present value of the defined benefit scheme liability is calculated by reference to the future salaries of plan participants,
as such, an increase in the salary of the plan participants will increase the plan’s liability.
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 as defined by the contract and scheme rules. At rebid, any deficit or surplus
would be expected to transfer to the next contractor. At the start of these relevant contracts the Group recognised the defined benefit
obligation less the fair value of scheme assets with a corresponding amount recognised as an intangible asset. 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 initial term of the contracts with none remaining at the current or prior year end. Where the relevant scheme
has a deficit which is not required to be fully funded by Group an adjustment is made to limit the amount recognised in the Group’s
balance sheet by way of a ‘franchise adjustment’. 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 and 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 IAS19 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 the liabilities in relation to unfunded scheme amount
to £0.4m (2016: £0.2m). The unfunded scheme is the only non-UK scheme in which the Group participates. 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 a non-contract specific section of the RPS.
213
Financial StatementsStrategic ReportDirectors’ Report 33. Retirement benefit schemes continued
33 (a) Defined benefit schemes continued
ii) Events in the year
In June 2017 the Trustees of SPLAS entered into a bulk annuity purchase whereby an insurer will fund future benefit payments to the
relevant members, commonly referred to as a “buy-in”. The liability to pay the members remains with SPLAS and therefore the pension
scheme will continue to include the relevant pension liabilities. However, an insurance asset is held at fair value, which, in line with IAS19 for
qualifying insurance policies, is deemed to be equal to the present value of the related obligations. This removes the risk of longevity and
investment movements for this portion of the scheme on a funding basis, and also removes the accounting risk of movements in underlying
assumptions on the liabilities. Of the total remeasurements recognised in the statement of other comprehensive income in the year ended
31 December 2017 of £106.5m, £95.0m related to the revaluation of the assets and liabilities as a result of this transaction. Whilst the impact
substantially reduced the asset on an IAS19 valuation basis, on an actuarial basis the transaction decreased the deficit of the scheme by
approximately £12m. As a result of the transaction, the scheme also exited a longevity swap arrangement early, at a cost borne by the
scheme of £7.5m.
In 2016, certain active former members of SPLAS on a specific contract were transferred back to a Government backed pension scheme
they had previously been members of. This resulted in contribution savings due to lower rates required under the Government Serco
scheme and a curtailment gain of £1.9m was recognised in 2016. In 2017 certain of these deferred members transferred their accrued
benefits from SPLAS to the Government scheme. The arrangements for this process had been made by a planned transfer on a bulk
basis, which resulted in settlement accounting being applied in 2016 and an exceptional charge booked at the time. However, it was
subsequently agreed that the Government would allow the transfer of members on an individual basis and as the members are taking
an existing option to take an individual transfer out of the scheme, settlement accounting was no longer applicable following the
change of arrangements in 2017. The impact of the individuals transferring out is now treated as a change in actuarial assumptions and
impacts on reserves, not through the income statement. The remaining provision of £10.3m was therefore reversed through exceptional
items in 2017. The impact of the transfer resulted in a charge to other comprehensive income of £5.1m, included within the effect of
experience assumptions.
In November 2017 certain members of SPLAS agreed to transfer their active membership to defined contribution schemes and a
curtailment gain of £2.0m is recognised in the year in the Group’s income statement.
iii) 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
Contract
specific
2017
£m
Non-contract
specific
2017
£m
1.0
–
–
–
1.0
(0.4)
(0.1)
0.5
–
7.6
0.3
(2.0)
5.3
11.2
(41.4)
–
37.6
(3.8)
Total
2017
£m
8.6
0.3
(2.0)
5.3
12.2
(41.8)
(0.1)
38.1
(3.8)
214
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 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
Change in franchise adjustment
Change in members’ share
Actuarial losses on reimbursable rights
Total pension gain recognised in the SOCI
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
Change in franchise adjustment
Change in members’ share
Actuarial losses on reimbursable rights
Total pension gain recognised in the SOCI
Contract
specific
2017
£m
Non-contract
specific
2017
£m
Total
2017
£m
(39.7)
(41.8)
(81.5)
1.0
(31.6)
5.6
(50.7)
(41.4)
(92.1)
1.0
(21.3)
4.8
(107.6)
(106.5)
–
–
–
(0.2)
(0.4)
(0.6)
(107.6)
(107.1)
11.0
(0.4)
10.6
–
(10.3)
0.8
1.1
(0.2)
(0.4)
(0.6)
0.5
Contract
specific
2016
£m
Non-contract
specific
2016
£m
0.4
–
–
–
0.4
(0.1)
(0.1)
0.2
–
7.4
0.4
(1.9)
5.4
11.3
(49.0)
–
44.3
(4.7)
Contract
specific
2016
£m
Non-contract
specific
2016
£m
0.9
(0.2)
0.7
–
(3.5)
–
(2.8)
1.7
1.2
2.9
0.1
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)
Total
2016
£m
286.1
(49.2)
236.9
26.2
(282.8)
28.7
9.0
1.7
1.2
2.9
11.9
215
Financial StatementsStrategic ReportDirectors’ Report 33. Retirement benefit schemes continued
33 (a) Defined benefit schemes continued
iv) Balance sheet values
The assets and liabilities of the schemes at 31 December are:
Scheme assets at fair value
Equities
Bonds except LDIs
LDIs
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
Net retirement benefit asset
Deferred tax liabilities
Net retirement benefit asset (after tax)
Contract
specific 2017
£m
Non-contract
specific 2017
£m
9.9
2.9
–
0.2
1.6
2.8
–
17.4
(23.4)
(6.0)
3.6
2.4
–
–
–
–
–
–
46.3
20.8
709.8
–
–
3.2
587.5
1,367.6
(1,341.3)
26.3
–
–
26.3
(15.5)
41.8
26.3
(2.5)
23.8
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
Scheme assets at fair value
Equities
Bonds except LDIs
LDIs
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
Net retirement benefit asset
Deferred tax liabilities
Net retirement benefit asset (after tax)
Contract
specific 2016
£m
Non-contract
specific 2016
£m
3.3
0.7
–
–
0.6
1.2
–
5.8
(12.0)
(6.2)
3.7
2.5
–
–
–
–
–
–
43.3
20.2
1,390.6
72.4
–
4.2
20.0
1,550.7
(1,418.0)
132.7
–
–
132.7
(17.7)
150.4
132.7
(17.6)
115.1
Total
2017
£m
56.2
23.7
709.8
0.2
1.6
6.0
587.5
1,385.0
(1,364.7)
20.3
3.6
2.4
26.3
(15.5)
41.8
26.3
(2.5)
23.8
Total
2016
£m
46.6
20.9
1,390.6
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
132.7
(17.6)
115.1
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
The SPLAS Trust Deed gives the Group an unconditional right to a refund of surplus assets, assuming the full settlement of plan liabilities
in the event of a plan wind-up. As such, the Group recognises the surplus of scheme assets over liabilities on the balance sheet.
As required by IAS19, the Group has considered the extent to which the pension plan assets should be classified in accordance with the
fair value hierarchy of IFRS13. Virtually all equity and debt instruments have quoted prices in active markets. Annuity policies and property
assets can be classified as Level 3 instruments, and LDIs are classified as Level 2.
216
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued Changes in the fair value of scheme liabilities
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 1 January 2017
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
Settlement payments from plan assets
At 31 December 2017
Contract
specific
£m
Non-contract
specific
£m
Total
£m
7.7
0.4
0.3
–
–
0.2
0.1
(0.1)
–
3.4
–
–
1,188.7
1,196.4
7.4
–
0.4
0.5
44.3
–
(45.9)
(26.2)
279.4
(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)
12.0
1,418.0
1,430.0
1.0
0.4
–
0.1
0.5
0.1
(0.2)
–
10.3
(0.8)
–
–
7.6
–
0.3
0.5
37.6
–
(77.6)
(1.0)
21.3
(4.8)
(2.0)
(58.6)
8.6
0.4
0.3
0.6
38.1
0.1
(77.8)
(1.0)
31.6
(5.6)
(2.0)
(58.6)
23.4
1,341.3
1,364.7
217
Financial StatementsStrategic ReportDirectors’ Report 33. Retirement benefit schemes continued
33 (a) Defined benefit schemes continued
iv) Balance sheet values continued
Changes in the fair value of scheme assets
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 1 January 2017
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
Settlement payments from plan assets
At 31 December 2017
Changes in the franchise adjustment
At 1 January 2016
Interest on franchise adjustment
Taken to SOCI
At 1 January 2017
Interest on franchise adjustment
Taken to SOCI
At 31 December 2017
Contract
specific
£m
Non-contract
specific
£m
Total
£m
4.6
0.1
0.1
–
0.3
0.2
(0.1)
0.6
5.8
0.4
0.1
–
0.5
0.2
(0.2)
10.6
–
17.4
1,304.3
1,308.9
49.0
–
(5.4)
11.9
0.5
(45.9)
236.3
49.1
0.1
(5.4)
12.2
0.7
(46.0)
236.9
1,550.7
1,556.5
41.4
–
(5.3)
8.7
0.4
(77.6)
(92.1)
(58.6)
41.8
0.1
(5.3)
9.2
0.6
(77.8)
(81.5)
(58.6)
1,367.6
1,385.0
Total
£m
1.9
0.1
1.7
3.7
0.1
(0.2)
3.6
218
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued v) Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 92% of total liabilities and 94% of total assets of the defined benefit pension
scheme in which the Group participates. The significant actuarial assumptions with regards to the determination of the defined benefit
obligation are set out below.
The average duration of the benefit obligation at the end of the reporting period is 17.9 years (2016: 17.7 years).
Main assumptions
Rate of salary increases
2017
%
2.70
2016
%
2.80
Rate of increase in pensions in payment
2.30 (CPI) and 3.00 (RPI)
2.30 (CPI) and 3.30 (RPI)
Rate of increase in deferred pensions
2.30 (CPI) and 3.00 (RPI)
2.30 (CPI) and 3.30 (RPI)
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
2.20 (CPI) and 3.20 (RPI)
2.30 (CPI) and 3.30 (RPI)
2.50
2017
years
22.5
25.1
24.3
26.9
2.70
2016
years
22.5
25.0
24.2
26.9
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 2017 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
2017 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
2017
£m
(107.9)
122.0
83.4
(78.0)
3.6
(3.5)
41.6
2016
£m
(116.5)
132.5
106.1
(87.6)
7.8
(7.4)
44.2
Management acknowledges that the method used of presuming that all other assumptions remaining constant has inherent limitation
given that it is more likely for a combination of changes, but highlights the value of each individual risk and is therefore a suitable basis
for providing this analysis.
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 2017 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. The Group applies an equity risk premium of 4.6% (2016: 4.6%).
The overall expected return on assets is calculated as the weighted average of the expected returns for the principal asset categories held
by the scheme.
219
Financial StatementsStrategic ReportDirectors’ Report 33. Retirement benefit schemes continued
33 (b) Defined contribution schemes
The Group paid employer contributions of £75.0m (2016: £73.9m) 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.
34. Share capital
Issued and fully paid
2017
£m
Number
2017
millions
2016
£m
Number
2016
millions
1,098,564,237 (2016: 1,098,559,781) ordinary shares of 2p each at 1 January
22.0
1,098.6
22.0
1,098.6
Issued on the exercise of share options
–
–
–
–
1,098,564,237 (2016: 1,098,564,237) ordinary shares of 2p each at 31 December
22.0
1,098.6
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
2017
£m
327.9
2016
£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 2017, the ESOT held
8,728,497 (2016: 9,864,986) shares equal to 0.8% of the current allotted share capital (2016: 0.9%). The market value of shares held by the
ESOT as at 31 December 2017 was £8.6m (2016: £14.1m).
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 2016
Total comprehensive income for the year
At 1 January 2017
Total comprehensive income for the year
At 31 December 2017
Hedging
reserve
£m
Translation
reserve
£m
(2.8)
2.3
(0.5)
(0.2)
(0.7)
(54.9)
80.0
25.1
(14.3)
10.8
Total
£m
(57.7)
82.3
24.6
(14.5)
10.1
220
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued 37. Share based payment expense
The Group recognised the following expenses related to equity-settled share based payment transactions:
Performance Share Plan
Deferred Bonus Plan
2017
£m
9.9
1.5
11.4
2016
£m
8.9
0.8
9.7
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
Lapsed during the year
Outstanding at 31 December
Number of
options
2017
thousands
Weighted
average
exercise price
2017
£
Number of
options
2016
thousands
Weighted
average
exercise price
2016
£
93
–
93
4.16
–
4.16
187
(94)
93
3.77
3.39
4.16
Of these options, 92,540 (2016: 92,540) were exercisable at the end of the year, with a weighted average exercise price of £4.16 (2016: £4.16).
The options outstanding at 31 December 2017 had a weighted average contractual life of 0.87 years (2016: 1.87 years).
The exercise prices for options outstanding at 31 December 2017 ranged from £3.88 to £4.55 (2016: £3.88 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
£1.17 (2016: £1.13).
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.
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
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2017
thousands
Weighted
average
exercise price
2017
£
Number of
options
2016
thousands
Weighted
average
exercise price
2016
£
116
(24)
(92)
–
nil
nil
nil
nil
240
(54)
(70)
116
nil
nil
nil
nil
Of these options, nil (2016: 115,818) were exercisable at the end of the year. The options outstanding at 31 December 2017 had a weighted
average contractual life of nil years (2016: 0.65 years).
There were no new options granted under either LTIS or LTIP during the year.
221
Financial StatementsStrategic ReportDirectors’ Report 37. Share based payment expense continued
Performance Share Plan (PSP)
Under the PSP, eligible employees have been granted options with an exercise price of two pence. Awards vest after the performance
period of three 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
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2017
thousands
Weighted
average
exercise price
2017
£
Number of
options
2016
thousands
Weighted
average
exercise price
2016
£
34,485
15,936
(1,123)
(8,297)
41,001
0.02
0.02
0.02
0.02
0.02
23,771
18,419
(666)
(7,039)
34,485
0.02
0.02
0.02
0.02
0.02
Of these options, 1,040,066 (2016: 133,470) were exercisable at the end of the year. The options outstanding at 31 December 2017 had a
weighted average contractual life of 7.7 years (2016: 7.5 years).
In the year, ten grants were made, of which five were non-performance conditional share awards and two non-performance nominal share
awards. The remaining three 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.
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-Scholes Models used the following inputs::
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
2017
£1.161
£0.02
44.8%
3 years
0.184%
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 £0.99 (2016: £0.89).
222
Serco Group plc Annual Report and Accounts 2017
Financial StatementsNotes to the Consolidated Financial Statements continued Deferred Bonus Plan (DBP)
Under the DBP, eligible employees are entitled to use up to 50% of their earned annual bonus to purchase shares in the Group at market
price. Provided they remain in employment for this period, the shares are retained for that period and the 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
Lapsed during the year
Outstanding at 31 December
Number of
options
2017
thousands
Weighted
average
exercise price
2017
£
Number of
options
2016
thousands
Weighted
average
exercise price
2016
£
2,945
2,549
(600)
4,894
Nil
Nil
Nil
Nil
906
2,186
(147)
2,945
Nil
Nil
Nil
Nil
None of these options were exercisable at the end of the year (2016: none). The options outstanding at 31 December 2017 had a weighted
average contractual life of 1.6 years (2016: 2.1 years).
There were 2,549,262 new options granted under the Deferred Bonus Plan in the year, with 100% of the deferred bonus subject to the same
EPS performance conditions as the PSP.
The portion subject to EPS performance conditions was deemed to have a fair value equal to their face value less the present value of any
dividend payments not received over the vesting period.
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three years.
The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability,
exercise restrictions and behavioural considerations.
The assumptions for options granted during the year with EPS performance conditions are:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
The weighted average fair value of options granted under this scheme in the year is £1.20 (2016: £0.95).
2017
£1.20
Nil
43.9%
3 years
0.20%
223
Financial StatementsStrategic ReportDirectors’ Report Notes to the Consolidated Financial Statements continued
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
Lapsed during the year
Outstanding at 31 December
Number of
options
2017
thousands
Weighted
average
exercise price
2017
£
Number of
options
2016
thousands
Weighted
average
exercise price
2016
£
–
–
–
–
–
–
2,051
(2,051)
–
5.14
5.14
–
Of these options, none (2016: none) were exercisable at the end of the year. There were no outstanding options at 31 December 2017
(2016: none). 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
2017
£m
Current
outstanding at
31 December
2017
£m
Non-current
outstanding at
31 December
2017
£m
0.5
7.1
11.1
17.1
2.4
38.2
0.1
0.5
–
–
5.3
5.9
–
–
–
–
–
–
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).
224
Serco Group plc Annual Report and Accounts 2017
Financial Statements 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
–
–
–
–
–
–
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 IAS24 Related Party Disclosures:
Short-term employee benefits
Share based payment expense
2017
£m
12.5
6.2
18.7
2016
£m
11.9
4.7
16.6
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee
(2017: 23 individuals, 2016: 20 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
Gains on exercise of share options
2017
£m
5.5
6.3
0.1
11.9
2016
£m
5.6
5.6
–
11.2
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 110 to 112.
225
Financial StatementsStrategic ReportDirectors’ Report Notes to the Consolidated Financial Statements continued
39. Notes to the consolidated cash flow statement
Year ended 31 December
Operating profit for the year – continuing operations
Operating loss for the year – discontinued operations
Operating profit 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
Net cash (outflow)/inflow from operating activities
2017
Before
exceptional
items
£m
2017
Exceptional
items
£m
2016
Before
exceptional
items
£m
2016
Exceptional
items
£m
2017
Total
£m
30.0
–
(19.6)
–
(19.6)
30.0
–
–
–
–
8.9
–
–
–
–
(0.3)
–
–
–
(9.6)
–
(1.0)
(20.6)
–
4.5
(16.4)
(11.9)
(32.5)
–
–
(32.5)
(27.3)
11.4
–
–
8.9
(0.1)
–
24.3
25.8
(0.3)
0.3
0.3
(0.7)
(56.0)
0.1
(13.3)
16.7
3.7
12.6
(37.2)
(20.9)
(4.2)
(11.4)
(0.2)
(15.8)
98.5
(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
(87.9)
7.3
1.3
59.0
(84.0)
(23.7)
(16.4)
(5.6)
(0.4)
(22.4)
2016
Total
£m
42.2
(17.5)
24.7
(33.4)
9.7
17.8
(0.8)
0.3
0.7
0.7
24.8
26.2
(56.3)
(14.2)
(70.5)
–
–
17.8
(0.8)
0.3
–
–
–
–
(0.1)
(0.1)
–
–
–
(1.1)
–
16.1
(54.4)
–
13.9
0.6
14.5
(39.9)
–
–
0.4
0.8
0.2
(119.5)
0.4
(71.8)
(47.1)
1.3
72.9
(83.4)
(9.2)
(56.3)
(5.6)
(0.4)
(39.9)
(62.3)
49.6
–
49.6
(27.3)
11.4
–
–
–
(0.1)
–
24.3
25.8
–
0.3
0.3
(0.7)
(46.4)
0.1
(12.3)
37.3
3.7
8.1
(20.8)
(9.0)
28.3
(11.4)
(0.2)
16.7
Additions to property, plant and equipment during the year amounting to £4.7m (2016: £0.5m) were financed by new finance leases.
226
Serco Group plc Annual Report and Accounts 2017
Financial Statements 40. Post balance sheet events
On 26 January 2018, the Group acquired 100% of the issued share capital of BTP Systems, LLC (BTP), for consideration of US Dollar
$20.5m/£14.5m in cash. BTP provides satellite communications (SATCOM), radar modernization, operations and maintenance and
sustainment services that enable customers to extend the lives of existing systems and achieve phased upgrades with new technology
to enhance operational capability. BTP specializes in areas including obsolescence engineering, systems engineering services, test
equipment and design, and field engineering services, and maintains a near-field and compact antenna test range at their Ludlow, MA
headquarters. BTP's expertise spans shipboard and submarine SATCOM antenna systems, MILSTAR command post antennas and radar
antennas. No acquisition related costs were incurred. The acquisition is expected to increase the Group’s market share. The financial
results and impact of this transaction have not been recognised in these Consolidated Financial Statements, the operating results, assets
and liabilities will be recognised with effect from 26 January 2018.
Goodwill
Acquisition related intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Acquisition date fair value of consideration transferred
Provisional fair value
US Dollar
$m
Provisional
fair value
£m
13.6
4.4
0.4
0.5
2.3
1.7
(2.4)
20.5
9.6
3.1
0.3
0.4
1.6
1.2
(1.7)
14.5
The Group signed a revised Business Purchase Agreement (BPA) on 13 February 2018 with the Special Managers and Provisional
Liquidators acting on behalf of the relevant Carillion plc subsidiaries to acquire a portfolio of selected UK health facilities management
contracts. The portfolio has annual revenues of approximately £90m and a weighted average remaining term of 14 years. Upon the receipt
by the Special Managers and Provisional Liquidators of the requisite third party consents, each individual contract will be transferred to
Serco on a cash-free, debt-free basis, with the consideration to be paid in instalments and to be satisfied using Serco’s existing financing
facilities. If all the contracts are transferred to Serco under the revised BPA process, the total consideration payable would be £29.7m. The
consideration payable is lower than the amount of £47.7m announced on 13 December 2017 in respect of substantially the same contracts
that were subject to the initial BPA signed with Carillion plc at that date. The change in consideration reflects the Group’s re-evaluation of
potential liabilities, indemnities, warranties and the additional working capital investment required as a result of Carillion’s liquidation. The
financial effects of this transaction have not been recognised at 31 December 2017. As consents are required for each individual contract to
be transferred and therefore acquired, at the time the financial statements were authorised for issue, no legal transfer or control of assets
had taken place and so no disclosures have been made in respect of the assets and liabilities being acquired. The fair values of the assets
and liabilities will be determined at the date when contracts are acquired. It is also not yet possible to provide detailed information about
each class of acquired receivables and any contingent liabilities in respect of the acquired contracts.
227
Financial StatementsStrategic ReportDirectors’ Report 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
2017
£m
2016
£m
42
43
43
45
45
43
44
45
46
47
45
48
46
49
50
51
52
54
2,010.5
2,001.3
3.4
291.2
10.1
3.6
–
138.2
446.5
2,457.0
(50.9)
(31.8)
(3.5)
(0.2)
(1.0)
(87.4)
359.1
(227.6)
(1,106.0)
–
(41.1)
(1,374.7)
(1,462.1)
994.9
22.0
327.9
0.1
624.1
74.0
(46.1)
(7.1)
994.9
4.5
275.1
4.3
14.2
3.7
126.7
428.5
2,429.8
(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
The financial statements (registered number 02048608) were approved by the Board of Directors on 21 February 2018 and signed
on its behalf by:
Rupert Soames
Group Chief Executive
Angus Cockburn
Group Chief Financial Officer
228
Serco Group plc Annual Report and Accounts 2017
Financial Statements
Company Statement of Changes in Equity
At 1 January 2016
Total comprehensive income
for the year
Shares transferred to option
holders on exercise of share
options
Options over parent’s shares
awarded to employees
of subsidiaries
Expense in relation to share
based payments
Share
capital
£m
22.0
Share
premium
account
£m
327.9
–
–
–
–
–
–
–
–
Capital
redemption
reserve
£m
0.1
–
–
–
–
Total comprehensive income
for the year
Shares transferred to option
holders on exercise of
share options
Options over parent’s shares
awarded to employees
of subsidiaries
Expense in relation to share
based payments
–
–
–
–
–
–
–
–
–
–
–
–
Profit
and loss
account
£m
673.6
Share
based
payment
reserve
£m
66.3
Own
shares
reserve
£m
(59.8)
Hedging
and
translation
reserve
Total
shareholders’
equity
£m
7.9
£m
1,038.0
(39.8)
–
–
(21.8)
(61.6)
(9.7)
–
–
6.8
(2.9)
(7.7)
7.7
–
–
–
–
6.4
3.5
–
–
–
–
–
–
6.4
3.5
68.5
9.2
2.3
74.0
–
–
–
–
(6.0)
6.0
–
–
–
At 1 January 2017
22.0
327.9
0.1
633.8
(52.1)
(13.9)
986.3
At 31 December 2017
22.0
327.9
0.1
624.1
(46.1)
(7.1)
–
9.2
2.3
994.9
229
Financial StatementsStrategic ReportDirectors’ Report 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. The total loss for the year was £9.7m (2016: £39.8m), and loss in total
comprehensive income for the year was a loss of £2.9m (2016: loss of £61.6m).
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 2016
Options over parent’s shares awarded to employees of subsidiaries
At 1 January 2017
Options over parent’s shares awarded to employees of subsidiaries
At 31 December 2017
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
£m
1,994.9
6.4
2,001.3
9.2
2,010.5
% ownership
100%
2016
£m
3.7
4.5
8.2
2016
£m
275.1
2017
£m
–
3.4
3.4
2017
£m
291.2
230
Serco Group plc Annual Report and Accounts 2017
Financial Statements 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 2017
Released to income statement
Utilised
At 31 December 2017
Analysed as:
Current
Non-current
2017
£m
35.6
0.1
12.9
2.3
50.9
2017
£m
259.4
(31.8)
227.6
31.8
19.7
118.6
89.3
259.4
Other
£m
44.2
–
–
44.2
3.1
41.1
44.2
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
Total
£m
44.3
(0.1)
0.4
44.6
3.5
41.1
44.6
Employee
related
£m
0.1
(0.1)
0.4
0.4
0.4
–
0.4
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.
231
Financial StatementsStrategic ReportDirectors’ Report Notes to the Company Financial Statements continued
47. Derivative financial instruments
Currency swaps
Forward foreign exchange contracts
Analysed as:
Non-current
Current
Assets
2017
£m
Liabilities
2017
£m
Assets
2016
£m
Liabilities
2016
£m
9.3
4.4
13.7
3.6
10.1
13.7
–
(1.0)
(1.0)
–
(1.0)
(1.0)
14.2
4.3
18.5
14.2
4.3
18.5
–
(0.6)
(0.6)
–
(0.6)
(0.6)
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:
At 31 December
Depreciation in excess of capital allowances
Short-term timing differences
Losses
49. Called up share capital
Issued and fully paid
1,098,564,237 ordinary shares of 2p each at 1 January
and 31 December
2017
£m
22.0
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
51. Profit and loss account
At 1 January
Loss for the year
At 31 December
2017
£m
0.3
2.2
26.1
28.6
2016
£m
2016
£m
0.3
2.3
23.5
26.1
Number
2016
millions
Number
2017
millions
1,098.6
22.0
1,098.6
2017
£m
327.9
2017
£m
633.8
(9.7)
624.1
2016
£m
327.9
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. The total loss for the year was £9.7m (2016: £39.8m), and loss in total comprehensive income for the year was a loss of
£2.9m (2016: loss of £61.6m).
232
Serco Group plc Annual Report and Accounts 2017
Financial Statements 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
2017
£m
68.5
9.2
2.3
(6.0)
74.0
2016
£m
66.3
6.4
3.5
(7.7)
68.5
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 2017, the ESOT held
8,728,497 (2016: 9,864,986) shares equal to 0.8% of the current allotted share capital (2016: 0.9%). The market value of shares held by the
ESOT as at 31 December 2017 was £8.6m (2016: £14.1m).
54. Hedging and translation reserve
At 1 January
Fair value gain on cash flow hedges during the period
Net exchange gain/(loss) on translation of foreign operations
At 31 December
2017
£m
(13.9)
0.1
6.7
(7.1)
2016
£m
7.9
0.4
(22.2)
(13.9)
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 £4.3m (2016: £20.4m). The actual commitment outstanding at 31 December 2017 was £4.3m (2016: £17.9m).
Both 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 2017 was
£210.4m (2016: £234.3m).
The Company also provides parent company guarantees in respect of trading performance and/or recovery of liabilities owed to
customers by its subsidiaries. These are not expected to result in any material financial loss to the company.
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.
233
Financial StatementsStrategic ReportDirectors’ Report
Appendix: List of subsidiaries
Company name
Serco Group
interest
Registered office address
Aeradio Technical Services WLL4
49%
Headquarters Building, Building # 1605, Road # 5141, Askar # 951,
PO Box 26803 Manama, Kingdom of Bahrain
Antab Operations & Contracting LLC
60%
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%
Atomic Weapons Establishment, Aldermaston, Reading, Berkshire, RG7 4PR
United Kingdom
BAS-Serco Limited
CCM Software Services Ltd²
Conflucent Innovations LLC
Djurgardens Farjetrafik AB Sweden
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
10%
100%
49%
50%
100%
50%
50%
40%
49%
49%
JBI Properties Services Company LLC
49%
Khadamat Facilities Management LLC
49%
LOGTEC Inc.
Merseyrail Services Holding Company
Limited³
100%
50%
Northern Rail Holdings Limited³
50%
Clarendon House, 2 Church Street, Hamilton, HM11, Bermuda
135 Hillside, Greystones, Co Wicklow 216410, Ireland
5880 Innovation Drive, Dublin, OH 43016, United States
Svensksundsvagen 17, 111 49 Stockholm
Level 24, 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,
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
Northern Pathways Holding Pty Limited
10%
John Laing, Level 16, 15 Castlereagh St, Sydney NSW 2000, Australia
COMPASS SNI Limited
100%
Priority Properties North West Limited
100%
Serco (Jersey) Limited
Serco Australia Pty Limited³
Serco Belgium S.A
Serco Caledonian Sleepers Limited
Serco Canada Inc.
Serco Citizen Services Pty Ltd
Serco Corporate Services Limited
100%
100%
100%
100%
100%
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
13 Castle Street St Helier Jersey JE4 5UT, Jersey
Level 24, 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 24, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
United Kingdom
Serco Defence SA
100%
Avenue de Cortenbergh 60–1000 Brussels, Belgium
Serco Environmental Services Limited
100%
Serco Ferries (Guernsey) Crewing Limited 100%
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
234
Serco Group plc Annual Report and Accounts 2017
Financial Statements Serco Group
interest
Registered office address
Company name
Serco Ferries (HR) Limited
Serco Geografix Limited
Serco Gestion de Negocios SL
Serco Group (HK) Limited
Serco Group Consultants (Shanghai)
Company Limited²
Serco Group Pty Limited
Serco Holdings Limited¹
Serco Inc.³
Serco 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%
100%
100%
Serco Leisure Operating Limited
100%
Serco Limited³
100%
Serco Listening Company Limited
100%
Serco Luxembourg S.A.
Serco Nederland B.V.
Serco New Zealand (Asset Management
Services) Limited
Serco New Zealand Limited
100%
100%
100%
100%
Serco New Zealand Training Limited
100%
Serco North America (Holdings), Inc.
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
Calle Ayala, 13 1°Dr, 28001 Madrid, Spain
Suite No. 1, 11 F., 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 24, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
United Kingdom
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
Estera, 7 rue Robert Stúmper, 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
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 North America Limited
100%
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
United Kingdom
Serco Paisa Limited
Serco PIK Limited
Serco Pension Trustee Limited
Serco Projects LLC
50%
100%
100%
49%
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
235
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 Defence Clothing Pty Ltd
Serco Switzerland SA
Serco Traffic Camera Services (VIC)
Pty Limited
Serco-IAL Limited
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
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
Suite 1000, 1818 Library Street, Reston VA 20190, United States
29 Earlsfort Terrace, Dublin 2, Ireland
Via Sciadonna 24/26, 00044 Frascati (Roma), Italy
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
86 bis Route de Frontenex, 1208 Geneva, Switzerland
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook, Hampshire,
United Kingdom
VIAPATH Group LLP
33%
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 2017.
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.
236
Serco Group plc Annual Report and Accounts 2017
Financial Statements Appendix: Supplementary information
Five-year record (unaudited)
Adjusted Revenue
2017
£m
2016
£m
3,310.3
3,529
Less: Share of revenue of joint ventures and associates
(356.7)
(481)
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 profit/(loss)
Net finance costs
Exceptional finance costs
Other gains
Profit/(loss) before tax
Tax (charge)/credit
Profit/(loss) after tax
Recourse Net Debt
Net Debt
2,953.6
3,048
69.8
(15.8)
–
–
54.0
(4.4)
49.6
0.3
(19.9)
30.0
(11.6)
–
0.7
19.1
(19.0)
0.1
(141.1)
(141.1)
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
£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)
–
–
(632.1)
(23.7)
(655.8)
2.8
(5.4)
(190.3)
(656.1)
(54.9)
(31.9)
(32.8)
–
(1,317.3)
(36.7)
–
–
2013
£m
5,140
(856)
4,284
257.4
–
–
–
257.4
(21.4)
236.0
19.2
(109.7)
145.5
(37.2)
–
–
(119.6)
(1,354.0)
108.3
(33.5)
(153.1)
(82.2)
(82.2)
6.9
(1,347.1)
(642.7)
(642.7)
(9.9)
98.4
(725.1)
(745.4)
Pence
32.74
20.12
10.55
Earnings/(loss) per share before exceptional items
Basic (loss)/earnings per share
Dividend per share
Pence
Pence
Pence
Pence
2.24
(0.02)
–
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.
237
Financial StatementsStrategic ReportDirectors’ Report
Financial Statements
Shareholder Information
Our website
Our corporate website, www.serco.com, 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.
Managing your shares online
Shareholders can manage their holding online by registering to use
our shareholder portal at www.shareview.co.uk. This free 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.
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.
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
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 corporate
website at www.serco.com
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
3,381
2,272
445
378
120
47
71
24
6,738
50.18
33.72
6.60
5.61
1.78
0.70
1.05
0.36
100
Number
of shares
1,339,704
5,177,479
3,148,311
10,525,823
27,384,313
33,860,368
223,563,817
793,564,422
1,098,564,237
% of shares
0.12
0.47
0.29
0.96
2.49
3.08
20.35
72.24
100
238
Serco Group plc Annual Report and Accounts 2017
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.
Auditors
KPMG LLP Chartered Accountants
Serco’s registered office
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY
United Kingdom
Website
www.shareview.co.uk
Shareholders can securely send queries via the website
using the 'Help' section.
Telephone
+44 (0)1256 745 900
Email
investors@serco.com
Registered in England and Wales No. 2048608
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
www.adr.db.com
Email
db@amstock.com
Stockbrokers
JP Morgan Cazenove
Bank of America Merrill Lynch
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
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 20 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.
239
Financial StatementsStrategic ReportDirectors’ Report
www.serco.com
Serco Group plc
Serco House
16 Bartley Wood Business Park
Bartley Way, Hook
Hampshire, RG27 9UY
For general enquiries contact
T: +44 (0)1256 745900
E: generalenquiries@serco.com