S
e
r
c
o
G
r
o
u
p
p
l
c
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
1
8
Annual Report
and Accounts
2018
Contents
Strategic Report
03 Highlights
04 At a glance
06 Chairman’s statement
09 Key Performance Indicators
12 Our Market
15 Our Business Model
16 Our performance framework and
strategic priorities
Strategy implementation
18
20 Chief Executive’s Review
28 Divisional Reviews
34
Finance review
52 Risk Management
54
64 Viability statement
66 Corporate Responsibility
Principal Risks and Uncertainties
Corporate Governance
84 Board of Directors
86 Chairman’s governance overview
89 Board and Governance
91 Group Risk Committee Report
94 Audit Committee Report
100 Nomination Committee Report
102 Corporate Responsibility
Committee Report
104 Code compliance
106 Remuneration Report -
implementation
126 Remuneration report - policy
summary
132 Directors’ Report
138 Directors’ Responsibility Statement
Financial Statements
Independent Auditor’s Report
140
151 Consolidated Income Statement
Consolidated Statement of
152
Comprehensive Income
Consolidated Statement of
Changes in Equity
153
Serco Group plc is a leading provider of public
services. Our purpose is to be a trusted partner
of governments, delivering superb services that
transform outcomes and make a positive
difference to our fellow citizens.
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 the UK, Europe, North America, Asia Pacific
and the Middle East.
20+
COUNTRIES
500+
CONTRACTS
154 Consolidated Balance Sheet
155
156
Consolidated Cash Flow Statement
Notes to the Consolidated
Financial Statements
222 Company Balance Sheet
223
Company Statement of Changes in
Equity
Notes to the Company Financial
Statements
224
228 Appendix: List of Subsidiaries
231
Appendix: Supplementary
Information
232 Shareholder Information
233 Useful Contacts
50,000+
EMPLOYEES
For more and the latest information please
visit our website at: www.serco.com
Strategic Report
Highlights
Revenue
£2,837m
2017: £2,951m
Order Book
£12.0bn
2017: £10.7bn
Underlying Trading Profit
Reported Operating Profit
£93.1m
2017: £69.3m
£80.5m
2017: £21.1m
Underlying EPS, diluted
Reported EPS, diluted
5.21p
2017: 3.36p
Free Cash Flow
£25.0m
2017: (£6.7m)
P.15
SEE PAGE
FOR MORE
INFORMATION
ON OUR BUSINESS
5.99p
2017: (0.76p)
Employee Engagement
67 points
2017: 56%
(see KPIs on page 11 for change of definition)
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
03
At a glance
What we do
Serco delivers services to governments and other institutions who serve the
public or protect vital national interests.
Serco’s roots go back to 1929, and in 1988 the Group 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.
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 provide 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, often looking after some of
the most vulnerable and disadvantaged in society and
helping to keep nations safe.
Our core sectors
Our business is focused across five core sectors, with revenue in 2018 of £2,837m or,
including our share of joint ventures and associates to reflect our total scale in each
sector, of £3,212m.
Defence
Justice &
Immigration
Transport
Health
Citizen Services
£947m
£550m
£548m
£398m
£769m
Base and
operational
support
Engineering,
management
and information
services
Nuclear, space
and maritime
services
Custodial
services
Immigration
detention
services
Detainee
transport and
monitoring
Key services
Rail, ferry and
cycle operations
Road traffic
management
Air traffic control
Integrated
facilities
management
Pathology and
non-clinical
support services
Patient
administration
and contact
Contact centres
and case
management
Middle, back
office and IT
services
Employment and
skills services
04
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Where we operate
Serco’s operations are across four geographic regions:
Americas
£646m
UK & Europe
£1,674m
Middle East
£342m
Asia Pacific
£550m
Revenue in 2018 (including share of joint ventures and associates).
Our business mix
Serco’s revenue by sector and geographic division:
Revenue by Sector
Revenue by Division
24%
17%
20%
11%
52%
12%
30%
17%
17%
Total revenue £3,212m
Total revenue £3,212m
Defence
Transport
Justice & Imigration
Health
Citizen Services
Americas
Middle East
UK & Europe
Asia Pacific
See page
for more
information on
our business
P.15
Revenue in 2018 (including share of joint ventures and associates).
Annual Report and Accounts 2018
Serco Group plc
|
05
Chairman’s Statement
Sir Roy Gardner
Chairman
2018 has been a defining year of
progress in delivering Serco’s
turnaround, and marks an inflection
point for our business. We are moving
through the ‘Transform’ stage to the
‘Grow’ stage as planned, whilst also
taking the opportunity to shape
markets and make acquisitions.
We have stabilised revenue, and, after several
years of decline, in 2018 we substantially
increased profits, generated positive free cash
flow and maintained a strong balance sheet.
Improving service delivery for our customers
and operational performance has also been
pleasing, including driving further cost
efficiencies and excellent progress in
expanding the value of our contract order
book. Effective risk management and
governance also remains at the heart of
securing our future success.
2018 Highlights
• Underlying Trading Profit of £93m,
an increase of 34%.
• Order intake of £2.9bn, a book-to-bill
ratio of over 100%.
• Two acquisitions completed and
integrated during the year.
• Strong balance sheet, with reduced
leverage and refinancing completed.
• Positive engagement in the public debate
regarding public services provision.
• Further development of the Board,
governance and effectiveness.
• After a defining year of progress in 2018,
positive outlook for 2019 and beyond.
Serco’s purpose 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 approach to achieving this is
through aspiring to be the best-managed company in our
sector, and 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. We have done well in 2018 against these
objectives. I am proud of the work we do and of the progress
being made.
Delivering our plan
In 2015, following an operating loss of £1.3bn in 2014 and major
issues with our largest customer, new management set out a
three-stage plan for Serco: Stabilise, Transform, Grow.
Stabilisation was largely completed in 2015 with the recruitment
of a new management team, recapitalisation of the business
and delivery of a corporate renewal programme.
Transformation then started in earnest, and will continue
through 2019 while also ensuring it is embedded as ‘business
as usual’. 2018 has marked the start of delivering the third
phase – Growth – with Underlying Trading Profit increasing for
the first time in five years.
I am pleased to report that in 2018 we made progress on a
number of fronts. First, we had another year of very strong
order intake, at £2.9bn. This represents a book-to-bill ratio – the
intake value of contracts we add to the order book compared
to how much revenue we are billing our customers – of over
100%, repeating a similar achievement in 2017. Our closing
order book now stands at £12.0bn – the highest level since
2013. The strong order intake underlines the progress we have
made developing our customer propositions and business
development skills. It also reflects the benefit of the balance of
our business internationally and proof of our geographic reach,
with around 80% of our intake in 2018 coming from customers
outside the UK, the second successive year our order intake has
been very largely from markets outside the UK.
06
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Secondly, we have delivered significant growth in Underlying
Trading Profit which increased by 34% from £69.3m to £93.1m,
an outcome considerably better than our initial guidance of
around £80m. Revenue reduced 4% to £2,837m, but was
broadly flat on an organic constant currency basis in the second
half of the year. The profit improvement includes a strong
operating performance together with good progress on
transformation savings and other cost efficiencies, notably from
merging the UK operations into a single entity, as well as
further reducing our other central support costs.
Thirdly, Serco executed two acquisitions during the year,
buying a small US business specialising in the repair and
maintenance of complex naval radio and radar systems, and
buying from the liquidator of Carillion plc six contracts to
provide facilities management services to the NHS; the
acquisition of these contracts added £700m to our order book.
The fact that we were able to execute these two acquisitions
underlines the progress we have made over the last few years.
Fourthly, net debt at the end of the year was £188m, also better
than our guidance at the start of the year. There is a much-
reduced need for debt in the business, and to that end we
successfully refinanced our Revolving Credit Facility during
the year and with the terms and conditions substantially
unchanged.
Finally, following the collapse of Carillion in January 2018 and
the well-publicised difficulties of other suppliers in the sector,
we engaged energetically in the public debate around the
provision of public services by private companies. In last year’s
Annual Report, we proposed “Four Principles” for the
governance of public sector outsourcing. Shortly after, the UK
Government established a process to review the way it
interacts with private service providers. This has been a very
constructive process, run by the Cabinet Office and involving
the supply side as well. Our Four Principles have provided, we
believe, an important contribution to the development of
policy, as well as playing a part in moderating the tone of public
debate and establishing Serco as a thoughtful contributor to
the debate including appearing multiple times in front of
Parliamentary Committees. I am also delighted to mark the
re-launch of the Serco Institute as a platform on which those
interested in the delivery of public services can put forward
their ideas.
You can read more about all of these points in the Chief
Executive’s Review on pages 20 to 27.
Looking ahead
As we look ahead to 2019, we expect Underlying Trading Profit
to grow further to be approximately £105m, on revenues
increasing to £2.9-3.0bn. 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
2019 we expect that further margin and profit progress will be
driven largely by transformation savings, together with the start
of revenue growth from new and expanding contracts.
Looking beyond 2019, the rate of margin improvement
and profit growth will increasingly depend on our ability to
grow revenues, and the recent increase in our order book
and some very large contract wins since the start of 2019 give
us confidence that we can do so. The Strategy Review
announced in March 2015 set out a long-term ambition that the
business could grow in line with a market which had historically
grown at 5-7% a year and had enabled peers to achieve
margins of 5-6%. Our plan for increasing margin – which at its
lowest was 2.3% in 2017 when Underlying Trading Profit was
£69.3m – was predicated on three factors: 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
profitable revenues whilst keeping overheads constant or
reducing them further.
We remain on track with our plan to reduce costs. With regard
to reducing the losses on OCP contracts, the recent award of
the asylum seeker accommodation contracts will give a major
boost as we move from significant losses under the old
programme to new contracts that are expected to be
profitable. However, demand in the UK, which is our largest
market, is growing more slowly than its former trend rate, if at
all, which we believe is largely as a result of Brexit being a
distraction to Government having the normal amount of
parliamentary time to progress other agendas such as public
service development. Recent research we have done indicates
that across all our segments and geographies, the current
blended rate of growth is around 2-3%, largely as a result of the
slowdown in the UK market. Given the fact that just under half
our sales are in the UK, we see little likelihood that blended
rates of growth across our markets will increase much beyond
this in the immediate future, unless Brexit itself stimulates
significant additional demand. Longer term, we see no reason
why market growth rates should not revert to the historic levels
of growth we foresaw in our 2015 Strategy Review, particularly
given the enduring pressures on governments to relentlessly
improve value for money and the quality of service provision,
which we believe are also attractive structural growth drivers
for increased use of private sector delivery through
outsourcing.
Notwithstanding a weaker outlook for market growth, we still
believe in the longer term that we will be able to achieve our
margin target of 5% and hopefully beyond. Even quite small
levels of revenue growth will have a noticeable effect on
margins if we can keep overheads flat or reducing. Unless
unforeseen headwinds or contract losses occur, we expect
Serco’s revenue growth to shift to being ahead of the market
given the improvement in our order intake. The recent wins of
the AASC asylum seekers contract – at £1.9bn the largest
contract we have ever been awarded – and National Garrison
Health Services in Australia support our confidence of
achieving 3-4% revenue growth in 2019. The benefit of these
two contracts into the following year, along with other previous
wins that become operational that year such as Clarence
Correctional Centre (formerly known as Grafton) and the
Australian icebreaker vessel, lead us to expect revenue growth
to improve to around 5% in 2020.
Annual Report and Accounts 2018
Serco Group plc
|
07
Chairman’s Statement continued
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.
In November, Mike Clasper, Senior Independent Non-
Executive Director, notified the Board of his intention to
stand down with effect from 31 December 2018. John Rishton,
who was appointed as a Non-Executive Director in 2016,
assumed the role of Senior Independent Director and joined
the Nomination Committee from 1 January 2019. Kirsty
Bashforth, who was appointed as a Non-Executive Director
of Serco in 2017, has replaced Mike as Chair of the Corporate
Responsibility Committee. I would like to thank Mike for his
support as the Senior Independent Director and, on behalf of
the Board, for the extensive contribution he has made to the
Company since joining in early 2014, a period during which the
Board of Serco has had to deal with significant challenges.
I would also like to welcome John to the role of Senior
Independent Director, a position for which his immense
experience makes him well qualified.
I was delighted to welcome Eric Born, who joined the Board as
a Non-Executive Director and a member of the Audit and
Corporate Responsibility Committees on 1 January 2019.
Eric has considerable international, strategic and operational
experience and will add to the strength and breadth of the
Board. The background and experience of each Director are
detailed in the Directors’ Report on pages 84 to 85 and details
of the selection process to the appointments are set out in the
Nomination Committee Report on page 100.
We have continued in 2018 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 and contracts based on their size or
risk profile, as well as meeting regularly with senior management
responsible for the delivery of the Company’s key operations
and for the development of new business. Board members
often visit contracts and meet with members of the wider
management team, and Non-Executives participate in our
Oxford University Serco Management training course, which is
attended by around 30 managers and runs four times a year.
Dividends
The Board is not recommending the payment of a dividend in
respect of the 2018 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 judges it prudent to do so, in
assessing whether we should resume dividend payments in
respect of 2018, we are mindful of the fact that 2019 is the last
year of significant outflows of cash related to OCPs and
operating exceptional costs, which together will mean that
net debt is likely to increase again 2019, albeit modestly. The
Board will continue to keep the dividend policy under careful
and regular consideration as we progress with completing
the transformation stage and driving forward with the growth
stage of our strategy.
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 complete and
embed the transformation of the business and position it for
long-term success in its 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 have made excellent progress in recent years turning the
business around from its nadir in 2014, and I am delighted to
report that in 2018 Serco is now growing its profits, has vastly
improved its operational delivery, has a growing order book, a
strong balance sheet, and has re-established its reputation with
its customers.
I would like to thank all colleagues in the business for their
efforts in achieving a very successful 2018, and for their
continued support in helping Serco to be a superb provider
of public services that we can all be proud of.
I am pleased to report that we have fully complied with the
provisions of the UK Corporate Governance Code during 2018.
This has included conducting an externally-led Board
evaluation, which was deferred in 2017 given that three new
Non-Executive Directors had joined that year, and so was
carried out later in 2018.
Sir Roy Gardner
Chairman
20 February 2019
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, including
recommendations from the Board evaluation, are set out in our
Corporate Governance Report on pages 83 to 138, as well as
the Committee reports.
08
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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 2018. Aside from adding an
additional KPI (order book), we have made no changes in
2018 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 detailed definitions and reconciliations of 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 66 to 82. 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.
completion of further transformation, has
potential in the longer term to deliver revenue
growth of 5%+ and trading margins of 5%+.
Performance
The outcome was a significant improvement
over the £80m we expected at the start of the
year. The increase on 2017 was driven by a
strong operating performance, good progress
on transformation savings and the benefit
of some non-recurring trading items. The
underlying margin rose from 2.3% to 3.3%.
Performance
The increase reflects the strong UTP
performance as described, together with
the benefit of a lower underlying effective
tax rate driven by the improvement in
and mix of the Group’s profitability.
Serco Group plc
|
09
1. Underlying Trading Profit (UTP)
2018
£93.1m
2017
£69.3m
2016
£82.1m
2015
£95.9m
2014
£113.2m
1. Underlying Trading Profit (UTP)
2018
£93.1m
£69.3m
2017
2. Underlying Earnings Per Share (EPS),
2016
diluted
2015
£82.1m
£95.9m
2018
2014
5.21p
£113.2m
2017
3.36p
2016
4.06p
2015
3.44p
4.73p
2014
2. Underlying Earnings Per Share (EPS),
diluted
2018
5.21p
3.36p
2017
3. Free Cash Flow (FCF)
2016
4.06p
£25.0m
2015
2018
2014
2017
3.44p
4.73p
(£6.7m)
2016
(£33.0m)
2015
(£35.5m)
2014
£62.2m
3. Free Cash Flow (FCF)
2018
£25.0m
2017
(£6.7m)
2018
0.41
7. Major incident frequency rate, per 1m
hours worked
Definition
Trading Profit is defined as IFRS Operating
Profit excluding amortisation of intangibles
arising on acquisition as well as exceptional
items. 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),
and other material one-time items as set out
in the Finance Review on pages 34 to 51.
2014
7. Major incident frequency rate, per 1m
hours worked
0.33
0.34
0.27
0.33
2015
2016
2017
2018
2017
0.41
0.33
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 15 that
the delivery of strategic success, after the
8. Employee engagement
0.34
67 points
0.27
0.33
56%
2014
2015
2016
2017
2018
2016
54%
53%
2018
51%
67 points
2015
Definition
2014
Underlying EPS reflects the Underlying
8. Employee engagement
Trading Profit measure after deducting
pre-exceptional net finance costs 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,
including the potential dilutive effect of
share options, in accordance with IFRS.
56%
2017
6. Order book
54%
2016
51%
£10.7bn
53%
£12.0bn
2014
2017
2015
2018
2016
£9.9bn
2014
2015
£10.0bn
£11.6bn
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.
6. Order book
£10.7bn
£12.0bn
2017
2018
5. Pipeline of larger new bid opportunities
2016
(£33.0m)
2015
2018
2014
2017
(£35.5m)
£5.3bn
£4.4bn
£62.2m
2016
£9.9bn
2015
£10.0bn
2014
£11.6bn
Annual Report and Accounts 2018
2016
£8.4bn
5. Pipeline of larger new bid opportunities
2018
£5.3bn
4. Underlying Return on Invested Capital
4. Underlying Return on Invested Capital
2015
£6.5bn
2014
£5bn
(ROIC)
£4.4bn
2017
2016
2018
2015
2017
2014
2016
£8.4bn
13.1%
£6.5bn
9.6%
£5bn
10.7%
2015
11.1%
2014
11.3%
(ROIC)
2018
13.1%
2017
9.6%
2016
10.7%
2015
11.1%
2014
11.3%
1. Underlying Trading Profit (UTP)
7. Major incident frequency rate, per 1m
hours worked
7. Major incident frequency rate, per 1m
2018
0.41
hours worked
2018
£93.1m
1. Underlying Trading Profit (UTP)
2017
£69.3m
2018
2016
£93.1m
£82.1m
2017
2015
£69.3m
£95.9m
2016
2014
£82.1m
£113.2m
2015
£95.9m
2014
£113.2m
2017
0.33
2018
2016
0.41
0.27
2017
2015
0.33
0.34
2016
2014
0.27
0.33
2015
0.34
2014
0.33
2. Underlying Earnings Per Share (EPS),
diluted
8. Employee engagement
5.21p
2. Underlying Earnings Per Share (EPS),
2018
diluted
2017
3.36p
67 points
2018
8. Employee engagement
2017
56%
2017
2015
Key Performance Indicators continued
3.36p
3.44p
56%
53%
2017
2015
2018
2016
67 points
54%
2016
2014
54%
51%
2018
2016
5.21p
4.06p
2016
2014
4.06p
4.73p
2015
3.44p
2014
4.73p
2015
53%
2014
51%
3. Free Cash Flow (FCF)
6. Order book
£25.0m
2018
3. Free Cash Flow (FCF)
2017
1. Underlying Trading Profit (UTP)
2018
2016
(£6.7m)
£25.0m
(£33.0m)
2017
2015
2018
(£6.7m)
(£35.5m)
£93.1m
2016
2014
2017
(£33.0m)
£69.3m
£62.2m
2015
2016
2014
2015
(£35.5m)
£82.1m
£95.9m
£62.2m
2014
£113.2m
5. Pipeline of larger new bid opportunities
£5.3bn
2018
5. Pipeline of larger new bid opportunities
2017
2. Underlying Earnings Per Share (EPS),
2018
diluted
2016
£4.4bn
£5.3bn
£8.4bn
£4.4bn
£6.5bn
5.21p
£8.4bn
£5bn
3.36p
£6.5bn
4.06p
£5bn
3.44p
2017
2015
2018
2016
2014
2017
2015
2016
2014
2015
4. Underlying Return on Invested Capital
(ROIC)
4.73p
2014
13.1%
4. Underlying Return on Invested Capital
2018
(ROIC)
9.6%
2017
2018
2016
13.1%
10.7%
3. Free Cash Flow (FCF)
2017
2015
9.6%
11.1%
£25.0m
2016
2014
2018
2015
2017
2014
2016
10.7%
11.3%
11.1%
(£6.7m)
11.3%
(£33.0m)
2015
(£35.5m)
2014
£62.2m
5. Pipeline of larger new bid opportunities
2018
£5.3bn
2017
£4.4bn
2016
£8.4bn
2015
£6.5bn
2014
£5bn
4. Underlying Return on Invested Capital
(ROIC)
2018
13.1%
2017
9.6%
2016
10.7%
2015
11.1%
2014
11.3%
2018
2016
£12.0bn
£9.9bn
7. Major incident frequency rate, per 1m
hours worked
Definition
£12.0bn
2018
6. Order book
Free Cash Flow is the net cash flow from
£10.7bn
2017
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.
£9.9bn
0.41
£11.6bn
£10.0bn
0.33
£10.7bn
£10.0bn
2017
2015
2016
2014
2015
2018
2017
2014
£11.6bn
0.27
2014
0.34
0.33
2016
Relevance to strategy
FCF is a further reflection on how ‘sustainable’
2015
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
8. Employee engagement
returns, and ‘executing brilliantly’ should
include appropriate management of
our working capital cash flow cycles.
67 points
2018
2017
56%
54%
2014
53%
51%
2016
Definition
2015
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; contract assets, trade and
other receivables; and inventories. Invested
capital liabilities are contract liabilities,
trade and other payables. 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.
6. Order book
£11.6bn
£10.0bn
£10.7bn
£12.0bn
£9.9bn
2014
2015
2016
2017
2018
Definition
The estimated aggregate value at the
end of the reporting period of new bid
opportunities with Annual Contract Value
(ACV) of at least £10m and which we expect
to bid and to be adjudicated within a
rolling 24-month timeframe. It does not
include re-bids or extensions of existing
business, and the Total Contract Value
(TCV) of individual opportunities is capped
at £1bn; 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 a key area of
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 progress
in the third and final stage of our strategy
implementation – the ‘Grow’ stage.
Performance
The improvement includes that from increased
UTP together with reduced outflows related
to loss-making contracts subject to OCPs
as reflected in the lower rate of provision
utilisation. The working capital outflow at
£22m was similar to the prior year, and the
Group has not utilised any factoring or other
working capital facilities during 2018.
Relevance to strategy
ROIC measures how efficiently the Group uses
its capital to generate returns from its assets.
To be a sufficiently ‘profitable and sustainable’
business, a return must be achieved that is
appropriately above a cost of capital hurdle
reflective of the typical returns required by our
weighting of the use of equity and debt capital.
Performance
The improvement in ROIC reflects both
the increase UTP as described, as well
as slightly lower invested capital largely
resulting from the normalisation of average
working capital balances. We expect further
growth in ROIC to be driven by additional
improvement in profit margin from successfully
completing and embedding the ‘Transform’
stage and making continued progress
with the ‘Grow’ phase of our strategy.
Performance
The pipeline at 31 December 2018 had
increased by a net £0.9bn on the position
a year earlier, reflecting a greater value of
opportunities entering the pipeline versus
those coming out. In January and February
2019, Serco has already won the two largest
opportunities that were in the pipeline –
AASC in the UK and NGHS in Australia.
Removing these opportunities from the
£5.3bn pipeline as at 31 December 2018
would reduce it down to around £3.6bn. As
we have previously stated, a lower pipeline is
not a matter of undue concern, particularly
when this is driven by a strong order intake,
together with the ability for us to also improve
profitability through rebid opportunities or
where we can add to our order book through
acquisitions as evidenced with the Carillion
health facilities management contracts.
10
| Serco Group plc
Annual Report and Accounts 2018
1. Underlying Trading Profit (UTP)
7. Major incident frequency rate, per 1m
hours worked
2018
0.41
2017
0.33
2016
0.27
2015
0.34
2014
0.33
2. Underlying Earnings Per Share (EPS),
8. Employee engagement
2018
67 points
2017
56%
2016
54%
2015
53%
2014
51%
6. Order book
2018
£12.0bn
2017
£10.7bn
2016
£9.9bn
2015
£10.0bn
2014
£11.6bn
5. Pipeline of larger new bid opportunities
1. Underlying Trading Profit (UTP)
7. Major incident frequency rate, per 1m
hours worked
4. Underlying Return on Invested Capital
2018
0.41
2017
0.33
2018
£93.1m
2017
£69.3m
2016
£82.1m
2015
£95.9m
2014
£113.2m
diluted
2018
5.21p
2017
3.36p
2016
4.06p
2015
3.44p
2014
4.73p
3. Free Cash Flow (FCF)
2018
£25.0m
2017
(£6.7m)
2016
(£33.0m)
2015
(£35.5m)
2014
£62.2m
2018
£5.3bn
2017
£4.4bn
2016
£8.4bn
2015
£6.5bn
2014
£5bn
2018
£93.1m
2017
£69.3m
(ROIC)
2016
£82.1m
2014
2017
9.6%
£113.2m
2018
2016
£93.1m
10.7%
2017
2015
£69.3m
11.1%
2016
2014
£82.1m
11.3%
2015
£95.9m
2018
5.21p
2017
3.36p
2016
4.06p
2015
3.44p
diluted
2014
4.73p
2018
5.21p
2017
3.36p
2016
4.06p
2015
3.44p
2016
0.27
7. Major incident frequency rate, per 1m
hours worked
0.34
2015
2014
0.33
2018
0.41
2017
0.33
2016
0.27
2015
0.34
8. Employee engagement
0.33
2014
2018
67 points
2017
56%
2016
54%
2015
53%
8. Employee engagement
2014
51%
2018
67 points
2017
56%
2016
54%
2015
53%
6. Order book
2014
51%
2018
£12.0bn
2017
£10.7bn
2016
£9.9bn
2015
£10.0bn
6. Order book
2014
£11.6bn
2018
£12.0bn
2017
£10.7bn
2016
£9.9bn
2015
£10.0bn
2014
£11.6bn
2018
13.1%
2015
£95.9m
1. Underlying Trading Profit (UTP)
2. Underlying Earnings Per Share (EPS),
2014
diluted
£113.2m
2. Underlying Earnings Per Share (EPS),
3. Free Cash Flow (FCF)
2014
4.73p
2018
£25.0m
2017
(£6.7m)
2016
(£33.0m)
2015
3. Free Cash Flow (FCF)
(£35.5m)
2014
2018
£62.2m
£25.0m
2017
(£6.7m)
2016
(£33.0m)
2015
(£35.5m)
5. Pipeline of larger new bid opportunities
£62.2m
2014
2015
£6.5bn
5. Pipeline of larger new bid opportunities
4. Underlying Return on Invested Capital
£8.4bn
2016
2018
£5.3bn
2017
£4.4bn
2016
£8.4bn
2014
£5bn
2018
£5.3bn
2017
£4.4bn
(ROIC)
2015
£6.5bn
2014
£5bn
13.1%
2018
2017
9.6%
2016
10.7%
2015
11.1%
(ROIC)
2014
11.3%
2018
13.1%
2017
9.6%
2016
10.7%
2015
11.1%
2014
11.3%
4. Underlying Return on Invested Capital
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Definition
The order book reflects the estimated value
of future revenue based on all existing signed
contracts, excluding Serco’s share of joint
ventures and associates. It excludes contracts
at the preferred bidder stage and excludes
the award of new Multiple Award Contracts
(MACs) or IDIQ contract or framework vehicles,
where Serco cannot estimate with sufficient
certainty its expected future value of specific
task orders that may be issued under the IDIQ
or MAC; in these situations the value of any
task order is recognised within the order book
when subsequently won. In 2018, the definition
was aligned with IFRS15 disclosures of the
future revenue expected to be recognised
from the remaining performance obligations
on existing contractual arrangements. This
excludes unsigned extension periods, but
the £12.0bn would be £13.0bn if option
periods in our US business were included.
Relevance to strategy
The order book reflects progress with
‘winning good business’ including retaining
existing work through extensions or rebids,
and as a store of future value it is a key
measure to ensure the Group is ‘profitable
and sustainable’. The value of how much
is added to the order book compared
to how much revenue we are billing our
customers – the book-to-bill ratio – is
key to achieving long term growth.
Performance
With an order intake of £2.9bn there has been
growth in the order book through another
year of a book-to-bill ratio of over 100%. This
was further enhanced by adding £0.7bn to the
order book with the acquisition of the Carillion
health facilities management contracts. The
AASC and NGHS wins in early 2019 will
add a further £2.5bn to the order book.
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
Across some 90 million hours worked in 2018
there were 37 major incidents reported.
This resulted in a frequency rate of 0.41
per 1 million hours worked which is 24%
up on 2017 and exceeds our target which
was set at maintaining the 2017 baseline.
This indicator has been impacted by
increasing numbers of physical assaults
and particularly serious physical assaults
within our Justice & Immigration business.
The importance of a safety culture is a
key area of focus for the Group and hence
why tough targets are set. This and the
range of initiatives being implemented
to address the situation are covered in
the Corporate Responsibility Report.
Definition
We use a specialist third party provider
to run Viewpoint, our global employee
engagement survey. The survey covers all
employees, excluding our joint ventures,
and measures engagement in two key areas:
how happy employees are working at Serco,
and their intention to recommend Serco to
others. Our engagement score incorporates
all employees’ perceptions and shows the
overall average view of these two areas
when we survey. In 2018, our methodology
for calculating employee engagement
changed, aligned to our new provider.
Pre-2018, engagement results represent the
proportion of engaged employees expressed
as a percentage. As of 2018, engagement
scores represent the average response,
with a maximum potential score of 100.
It is not possible to adjust all our historic
data to restate to the new methodology.
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.
Under the new scoring methodology, a
score of 70 points or above is our target
for 2020, which aligns with the global
cross-sector benchmark provided by the
specialist third party provider of our survey.
Performance
The 2018 Viewpoint survey was based on some
28,000 employees responding, representing a
response rate of over 70% which is considered
very strong versus the benchmark from the
specialist third party provider of the survey.
While the scoring methodology has changed
as described above, analysis performed by
the provider indicates that the engagement
level was broadly stable on the previous year’s
score which was already the highest since we
started measuring engagement in 2011. The
Viewpoint results are cascaded throughout the
organisation and detailed plans of activity put
in place to focus on areas highlighted by the
detailed scoring analysis and the comments
raised. In addition to completing the survey
questions, some 29,052 individual comments
were submitted, which is considered to be
very positive reflection of the culture of
openness and care of our employees.
Annual Report and Accounts 2018
Serco Group plc
|
11
Our Market
We believe that fundamental drivers will continue to increase demand
for our services.
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, Continental Europe, North America,
Asia Pacific and the Middle East.
out entirely by private contractors. Today, in the UK, frontline
medical services by the National Health Service, which is
widely perceived as a nationalised service, is largely provided
by privately-owned businesses called General Practitioner
Practices, the vast majority of whom are employed by private
partnerships and companies rather than by the state. Some
of the most sensitive and secret defence work, such as
developing and supporting strategic nuclear weapons,
is carried out by private companies.
Government as a purchaser of public services
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 governments by being a bridge between
the drive, energy and innovation of the private sector, and
the very specific requirements of public services.
The private sector as a supplier of public services
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
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,
and some history
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 sometimes 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.
Having government as your customer also means that you are
exposed to the ever-changing political weather. In essence,
this is no different from any other market where fashion,
technology and economic conditions impact demand, but
governments can change their policies and priorities with
lightning speed. For nearly thirty years between 1980 and
2010, Serco grew rapidly as the market for outsourcing public
services developed around the world. Inspired by
Thatcherism and the policies of President Reagan,
privatisation and outsourcing became popular in many
countries and drove rapid growth of an industry that had
barely existed before. Suppliers became highly profitable
and skilled at extracting value from government contacts.
As the global financial crisis of 2008 took hold, governments
began to urgently seek ways of reducing costs, and the
private sector, now representing a significant proportion of
government expenditure, became the object of close
12
| Serco Group plc
Annual Report and Accounts 2018
“The challenge facing governments worldwide can,
like our strategy, be simply expressed: to deliver more,
and better, for less.”
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
government attention. Following the ending of the war in
Afghanistan, military expenditure was sharply reduced,
particularly in the US. 2010 saw in the UK the election of the
Conservative-Liberal Democrat Coalition, with an avowed
intent of reducing the deficit, and as a statement of intent
demanded rebates of hundreds of millions of pounds from
contractors; more importantly, the UK Government
strengthened its commercial teams and procurement
practices and set about transferring as much risk as it could
to the private sector. It appeared to be a conclusion of UK
Government that if risk transfer was a benefit to them of
outsourcing, surely the more risk you could force suppliers to
take, the better. In the US, “Lowest Price, Technically
Acceptable” was increasingly used instead of an approach of
overall “Best Value” as a tender evaluation methodology.
Whilst these sorts of shifts in demand and in the relative
power of customers and suppliers are common to all markets,
the difference in dealing with government is the fact that
government is a monopoly purchaser; only governments buy
prisons, or weaponry, or care of asylum seekers, so when they
change their direction it can have very profound impacts on
their supply chain.
The story of the last five years in the UK has been one of
acute difficulty for the outsourcing industry. Over-supply,
highly-aggressive behaviour by both government and
suppliers, and the ill-advised transfer of risks that often
private companies had no way to mitigate or manage has led
to the near-destruction of a once thriving industry, as
multiple companies have suffered huge losses on
government contracts. As a consequence, the UK
Government is now faced by a much more wary, and less
vibrant, supply chain. Having discovered to its joy that it
could attract new international competition into the market
because barriers to entry seemed low, it has subsequently
discovered to its potential dismay that the barriers to exit
were low as well.
Having swung too far in favour of contractors, the balance
of power in the public services market in the UK swung
too far back to government after 2010; it is, we believe,
now beginning to work its way back towards a more balanced
and sustainable position. Such is the way of all markets as
they mature, and we believe that if governments and their
suppliers recognise the consequences of their past excesses
and work co-operatively it should become possible to anchor
the balance of power between customer and supplier in
a place which delivers value for money for taxpayers,
high quality and reliable services to users, innovation
and improving efficiency, as well as the fair returns to
suppliers which will in turn ensure that government has
choice from a vibrant supply chain containing companies
both large and small.
money and the quality of service provision. This pressure
comes from what we call the ‘Four Forces’ comprising:
• the unavoidable 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; and
• the unwillingness of voters and corporate taxpayers
to countenance tax increases.
The third reason why the market for government services is
attractive is because of its enduring nature compared to
other markets. All around us, we see markets being disrupted
and long-established business models being obliterated.
Publishing, transport, retailing, energy, entertainment,
computing, agriculture – it is hard to find industries which are
not being fundamentally challenged by technology. We live
in a world where it has become possible for the largest
retailer to own no shops, the fastest-growing taxi service to
own no vehicles, the largest social network to own no
content, and the largest provider of overnight
accommodation to own no property.
Whilst many areas of government will benefit from the ability
to manage massive data and will find new ways to interact
with citizens, we believe that there will be a continuing and
enduring need for the kind of frontline services we provide.
We are confident that in thirty years’ time, sick people will still
go to hospitals, and when there they will have their rooms
cleaned and food served predominantly by humans. That
when people break the law they will be sent to prison where
custody officers will look after them; and that complex
defence infrastructure such as near-space radar will still be
maintained predominantly by human beings, who will need to
be security cleared, again by other human beings. The bank
teller or lorry driver or shop assistant may be rightly fearful
that technology will disintermediate their role, but a prison
custody officer or hospital porter can sleep soundly in the
knowledge that his or her skills will be required for years to
come.
Finally, although in their own country a government can wield
the power of a monopoly purchaser, every country has a
government, and with an international footprint together with
a range of service offerings, agile suppliers can move to
where the demand is and where they can get a fair return for
the risk they take on. In a market with low barriers to both
entry and exit, suppliers can move, but governments cannot.
Drivers of demand
Notwithstanding the difficulties in the UK market, the
business of providing services to government is attractive
in the long term for a number of reasons. First, in many areas
of public service provision, private companies, properly
managed, can deliver services of higher quality and lower
cost than governments can themselves. Secondly,
governments will continue to face relentless pressure to
deliver more and better public services, at lower cost, and
that this will lead them to focus relentlessly on value for
We believe that the long-term pressures to deliver value-for-
money, increasing demand for public 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. The challenge facing governments worldwide can,
like our strategy, be simply expressed: to deliver more, and
better, for less, and they cannot do this without the support
of the private sector. Technology will have a profound impact
on the delivery of government services, but many frontline
services will still need the social and emotional skills that only
Annual Report and Accounts 2018
Serco Group plc
|
13
Our Market continued
humans provide, and we believe the principal method of
delivery of many government services will remain people
for years to come. And the employment of people in the
reliable delivery of public services is what we do, and we
do it very well.
Benefits of sector breadth and geographic reach
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.
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.
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.
A large and growing market
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 2014, and again 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.
In terms of market growth, in 2018 we carried out further work
to assess the rate of growth in our specific sectors and
geographies. When we last did this, in 2014, we concluded
that the blended rate of growth of our mix of businesses had
been running at 5-7%. Largely as a function of the weighting
of our revenues to the UK – some 40% of the total Group –
and the well-publicised travails of our home market, caused
both by Brexit and the issues in government supplier
relations described above, we now think that market growth
is likely to be running at around 2-3% as a weighted average
across our markets. We see little likelihood that blended
rates of growth across our markets will increase much beyond
this in the immediate future, with much dependent on the
nature of the UK Government post-Brexit, though Brexit itself
may stimulate additional demand. We see no reason to
believe, however, that in the longer term that the rate of
market growth might not revert to the previous levels of 5%+.
14
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Our Business Model
We combine people, processes and technology in order to achieve our
purpose of delivering superb public 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 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’.
Our drivers:
Values…
Trust
Care
Innovation
Pride
Purpose…
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
What we do:
How we add value:
c ifi c
a
A sia P
s
e
Citizen Servic
h
t
l
a
e
H
t
s
a
E
e
l
d
d
M
i
A
m
eric
a
s
D
e
f
e
n
c
e
Superb
public
services
n
J u stice &
m igratio
I m
Transport
UK & E u r o p
e
Longer term deliverables…
Revenue growth
5%+
Trading margin
5%+
Employee engagement
70 points or above
Efficiency & commercial nous
Public service ethos
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
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.
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.
Annual Report and Accounts 2018
Serco Group plc
|
15
Our performance framework
and strategic priorities
We are great believers in succinctness and simplicity. Accordingly, we
have managed to fit our performance framework and strategic priorities
– of what might be considered a complex and diverse business – into a
single graphic that we use throughout the Serco.
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 longer term deliverables
Revenue growth
5%+
Trading margin
5%+
Employee engagement
70 points or above
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. Like the Business Model, therefore, it ends with our deliverables and starts 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, know 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.
16
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
common propositions in areas such as Justice & Immigration
and Health. Shared Services provide common functional and
processing support in areas such as IT, HR and finance to the
Divisions.
Our method – the strategic priorities to achieve
our aspiration
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 four strategic priorities 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 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
need to reduce our costs relative to revenues in the short
term and investing in systems and processes that will produce
sustainable benefits in the long term.
Our longer term deliverables
The tangible evidence of our success or otherwise will be a
return to former 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%.
Largely as a function of the weighting of our revenues to the
UK – some 40% of the total Group – and the well-publicised
travails of our home market, caused both by Brexit and the
issues in government supplier relations described above, we
now think that market growth is likely to be running at around
2-3% as a weighted average across our markets. We see little
likelihood that blended rates of growth across our markets
will increase much beyond this in the immediate future, with
much dependent on the nature of the UK Government
post-Brexit, though Brexit itself may stimulate significant
additional demand. We see no reason to believe, however,
that in the longer term this might not revert to the previous
levels of 5%+.
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 coexistence of 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
Organisationally 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;
98% 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, Legal Risk and
HR; the Group also manages Centres of Excellence (CoEs)
which provide focused expertise and support to the Divisions,
and enable sharing of best practice and the development of
Annual Report and Accounts 2018
Serco Group plc
|
17
Strategy implementation
In 2014 we identified three distinct phases in the implementation of our
strategy:
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%
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 upon 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 2019, and is 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 lower and certainly for the next few years
the market may well only be more likely to grow at a low
single-digit percentage rate, but our margins can still
increase as we transition from 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.
18
| Serco Group plc
Annual Report and Accounts 2018
• After three years of outflows, positive Free Cash Flow
was achieved in 2018. The outflows related to onerous
contracts have more than halved between 2015 and 2018,
while working capital and cash flow management has
also normalised.
Summary
We believe we have the right strategy for our business, and
every year since 2015 we have delivered results which have
been in line or ahead of our plan, which is no mean
achievement. So far, so good, and with Underlying Trading
Profit growing by 34% in 2018, and our strong order intake,
2018 feels like something of an inflection point for our
business. But the long-term test of the strategy will be our
ability to deliver further margin increases, together with
profitable revenue growth. The market is currently growing at
rates below historic trend, and we expect that in 2019 profit
growth will continue to come more from further cost
efficiency and operational progress than from any significant
increase in revenues. However, looking to 2020 and beyond,
the strong order intake in recent years which includes some
contracts such as Clarence Correctional Centre and the
Australian icebreaker vessel which will only start to contribute
operational revenues in 2020, as well as the award of some
£2.5bn of orders in January and February 2019, give us
confidence that we will be able to start to deliver increased
revenue growth in 2020, and that this should result in further
improvements in our margin towards our target level.
In summary, our plan seems to be working.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Transform: progress to date
Key achievements during our Transformation phase have
been:
• 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 underlying leverage
measure of Net Debt:EBITDA now stands at 1.2x, with
period-end net debt reduced from £745m at the end of
2013 to £188m at the end of 2018.
• 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 carried out, including 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 2018, 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 such
as those covering Health and Justice & Immigration, which
have been heavily involved in developing propositions to
support major bids such as Barts Health NHS Trust (won in
2016) and Clarance Correctional Centre (previously known
as Grafton prison) in Australia (won in 2017).
• Our order intake has grown very substantially, such that in
2017 and 2018 it was ahead of revenue, the first time since
2012 that book-to-bill had been greater than 100%; at the
end of 2018, our order book stood at £12.0bn.
Grow: progress to date
We are now making significant progress in growing the
business again, with key achievements being:
• After four years of decline, in the second half of 2018 the
Group achieved broadly flat organic revenue, with a return
to growth anticipated for 2019. Improving our win rates
and retention of work in our focused sectors and
geographies has been paramount to achieving this.
• Profits and margin grew significantly in 2018, and further
progress is expected in 2019. In particular this reflects the
success to date in reducing the businesses’ operating
costs; in 2018 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 more than £20m in 2018
in addition to the over £100m removed over the prior
three years of the Transformation stage, 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.
Annual Report and Accounts 2018
Serco Group plc
|
19
Chief Executive’s Review
Strong order intake gave us a book-to-bill ratio
of over 100% for the second year in a row, and
in addition the acquisition of the Carillion
health contracts contributed to our order book
growing to £12.0bn at the end of 2018, an
increase of around 20% since 2016. Also for
the second year in a row, and reflecting the
Group’s broad international footprint, 80% of
our order intake in 2018 came from outside the
UK. Our confidence has been further bolstered
by the signing in the first six weeks of 2019 of
two very large contracts: AASC – asylum
accommodation and support services in the
UK valued at £1.9bn, and NGHS – defence
healthcare provision in Australia valued
at £0.6bn.
We expect to deliver further progress in 2019,
with Revenue and Underlying Trading Profit
both expected to grow. Beyond 2019, and
consistent with our strategy announced in
2015, we believe we will able to continue to
improve our margins, with a target of achieving
5% or above in the longer term. In terms of
demand, we now believe that the weighted
growth rate across all our geographies and
sectors has slowed from the 5-7% seen in
2010-2014 to around 2-3% now; whilst demand
in some markets – for example US defence –
remains robust, conditions in the UK, which
represents about 40% of our revenues, are
weak and this is acting as a drag to aggregate
market growth. Despite this, our recent strong
order intake means that we believe we should
be able to outperform a weaker market in the
next few years, absent unforeseen headwinds
or major rebid losses. We expect Serco to
achieve revenue growth of 3-4% in 2019,
accelerating to around 5% in 2020 as contracts
such as Grafton, Icebreaker, AASC and NGHS
become fully operational.”
Rupert Soames
Chief Executive
“2018 marked an inflection point for
Serco. After several years of declining
revenues and profits, Underlying Trading
Profit at constant currency rose 40%,
Reported Operating Profit grew fourfold
and Revenue started to grow again in the
second half.
Underlying Earnings per Share (EPS) grew
by 63%, Reported EPS was positive for the
first time since 2013, and Free Cash Flow also
turned positive for the first time since 2014.
Our balance sheet remains strong, with Net
Debt : EBITDA for covenant purposes at 1.1x,
down from 1.4x in 2017; our pension schemes
are well funded; there was no use of working
capital finance facilities; we pay our suppliers
on average in 30 days and our customers pay
us on average in 29 days; and we have recently
successfully completed the refinancing of a
£250m banking facility committed to
December 2023, on terms similar to
previous arrangements.
20
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
2018 Highlights
• Revenue(1) at constant currency declined 5.6%
in the first half, but grew 2.5% in the second
half, resulting in a decline for the full year of
1.7%, comprising a 3.1% organic decline from
net contract attrition, partially offset by a
1.4% net contribution from acquisitions.
The adverse impact of currency in the full
year was £65m, or 2.2%, resulting in a 3.9%
decline in revenue at reported currency.
• Underlying Trading Profit(2) at constant
currency increased by 40% as a result of a
strong operating performance, further good
progress on transformation savings and other
cost efficiencies, as well as £10m of non
recurring trading items such as end-of-
contract settlements. There was an adverse
currency impact of £4.0m or 6%, resulting in a
34% increase at reported currency. Margin
increased by a percentage point to 3.3%
(2017: 2.3%). The improvement in performance
was widely spread, with all regional divisions
delivering double-digit percentage growth
in UTP and increases in margin.
• Reported Operating Profit increased nearly
fourfold, and includes a £23.6m net credit
from Contract & Balance Sheet Review items
(2017: net charge of £24.2m) offset by a net
charge for exceptional items of £31.9m
(2017: net charge of £19.6m), neither of which
are included in Underlying Trading Profit.
Onerous Contract Provisions (OCPs) are
ahead of our 2014 plan and the residual
liability now stands at £82m, down from £447m
in 2014 and £147m at the start of the year.
• Underlying EPS increased by 55%, reflecting
the growth in Underlying Trading Profit,
together with the benefit of the tax rate
reducing from 35% to 26%. Reported EPS,
which includes the after-tax impact of non-
underlying items as well as net exceptional
costs, stood at 5.99p (2017: loss per share
of 0.76p).
• After three years of outflows, Free Cash Flow(4)
turned positive at £25m.
• Net debt increased by £47m (2017: £32m),
as the positive Free Cash Flow was offset
by £19m of exceptional items, net acquisition
consideration of £31m and a £22m negative
net foreign exchange impact largely related
to our US$ denominated debt. However, the
growth in EBITDA resulted in underlying
leverage of 1.23x and of 1.06x for covenant
purposes, comfortably around the bottom
of our normal target range of 1-2x. During the
year we successfully refinanced our banking
facility on terms similar to those previously in
place, with a £250m Revolving Credit Facility
now committed until December 2023.
• Acquisitions: BTP Systems, acquired for £13m
in February 2018 with the intention of
deepening our satellite and radar capabilities,
is now fully integrated within our US defence
business. Six Carillion health facilities
management contracts in the UK, acquired for
£17m, have now been successfully transitioned
to our ownership and management.
• Order intake of £2.9bn, book-to-bill ratio over
100%; 80% of order intake was from customers
of our Americas, Middle East, AsPac and
continental European operations, with the
remaining 20% from the UK. 66% of the order
intake comprised existing work being rebid or
extended, and 34% was new business. The
largest award was the rebid of our US health
insurance eligibility contract valued at around
£700m, with over 40 other awards worth more
than £10m.
• Order book increased to £12.0bn, up from
£10.7bn a year earlier; the increase includes
the strong order intake together with £0.7bn
added via the acquisition of the Carillion
health facilities management contracts and
an adjustment to the definition to align with
IFRS15 future contractual revenue.
• Pipeline of larger new bid opportunities
increased by £0.9bn to £5.3bn at 31 December
2018; the £2.5bn of contract awards in January
and February 2019 for AASC and NGHS have
the effect of reducing the pipeline by £1.7bn.
• Revenue guidance for 2019 is increased from a
range of £2.8-£2.9bn to a range of £2.9-£3.0bn,
reflecting recent contract wins. Following an
encouraging start to the year, Underlying
Trading Profit is now expected to be
approximately £105m under IFRS16; this
represents the top end of the £95-100m
guidance range given at the Closed Period
Update issued on 13 December 2018,
together with a £5m increase as a result of
the adoption of IFRS16 (with an offsetting
£5m increase to Net Finance Costs). Net debt
at the end of 2019, excluding lease obligations
newly recognised under IFRS16, is expected
to be approximately £200m, equivalent to
covenant leverage of approximately 1.3x.
Annual Report and Accounts 2018
Serco Group plc
|
21
Chief Executive’s Review continued
How we performed
Year ended 31 December
Revenue(1)
Underlying Trading Profit (UTP)(2)
Reported Operating Profit (ie after exceptional items)(2)
Underlying Earnings Per Share (EPS), diluted(3)
Reported EPS (ie after exceptional items), diluted
Free Cash Flow(4)
Net Debt
Change at
reported
currency
(4%)
+34%
+282%
+55%
Change at
constant
currency
(2%)
+40%
+300%
+63%
2018
2017(5)
£2,836.8m
£2,950.9m
£93.1m
£80.5m
5.21p
5.99p
£25.0m
£188.0m
£69.3m
£21.1m
3.36p
(0.76p)
(£6.7m)
£141.1m
Notes to summary table of financial results:
1) Revenue is as defined under IFRS, which excludes Serco’s share of revenue of its joint ventures and associates. 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 2018 into Sterling at the average exchange rates for the prior year.
(2) Trading Profit is defined as IFRS Operating Profit excluding amortisation of intangibles arising on acquisition as well as exceptional items. 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) and other material one-time items.
A reconciliation of Underlying Trading Profit to Trading Profit and Reported Operating Profit is as follows:
Year ended 31 December
Underlying Trading Profit
Include: non-underlying items
Contract & Balance Sheet Review adjustments
Trading Profit
Amortisation of intangibles arising on acquisition
Operating Profit Before Exceptional Items
Operating Exceptional Items
Reported Operating Profit (after exceptional items)
2018
£m
93.1
23.6
116.7
(4.3)
112.4
(31.9)
80.5
2017
£m
69.3
(24.2)
45.1
(4.4)
40.7
(19.6)
21.1
(3) Underlying EPS reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs and related tax effects.
(4) Free Cash Flow is the net cash flow from operating activities before exceptional items as shown on the face of the Group’s Condensed 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.
(5) The results for the year ended 31 December 2017 have been restated for the adoption of IFRS15. The restatement to revenue is £2.7m from £2,953.6m
to £2,950.9m, and to Underlying Trading Profit is £0.5m from £69.8m to £69.3m. All references to prior year performance referred to in the Chief
Executive’s Review and the Divisional Reviews have been restated accordingly. Further details regarding the impact of the adoption of IFRS15 are
included in note 2 to the consolidated financial statements on pages 157 to 161.
Reconciliations and further detail of financial performance are included in the Finance Review on pages 34 to 51. This includes full definitions and
explanations of the purpose and usefulness of each non-IFRS Alternative Performance Measure (APM) used by the Group. The consolidated financial
statements and accompanying notes are on pages 139 to 227.
22
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Summary of financial performance
Revenue and Trading Profit
Reported Revenue declined 3.9% to £2,837m (2017: £2,951m);
this measure excludes Serco’s share of revenue from joint
ventures and associates of £375m (2017: £356m). Net currency
movements reduced revenue by £65m or 2.2%, whilst the net
revenue contribution from acquisitions added £43m or 1.4%.
At constant currency, the organic revenue decline was
therefore £92m or 3.1%; this decline was driven mainly by
contracts which were exited or lost on recompete in 2017,
including Glasgow ACCESS in the UK, the Armidale Class
Patrol Boats contract in Australia and the Western Australia
Court Security and Custodial Services contract. The effect of
these and other losses were offset partly by increased
revenues from a number of new contracts in the UK, US and
AsPac, and the impact of the BTP and Carillion healthcare
acquisitions. Importantly, after a 5.6% organic decline in
revenue in the first half of the year, revenues in the second
half were broadly flat on an organic basis and grew 2.5%
including the benefit of acquisitions.
Underlying Trading Profit increased by £23.8m or 34% to
£93.1m (2017: £69.3m); excluding the £4.0m net currency
impact, the increase was £27.8m or 40%. The improvement
reflected a strong operating performance together with
further good progress on transformation savings and other
cost efficiencies; these more than offset the impact of
contract attrition and the reduction in workload volumes on
some contracts, as well as some new contracts which were
mobilised and incurred start-up and transition costs. It is
particularly pleasing to note that all our regional divisions
delivered double-digit growth in UTP and improved their
margins as set out on page 28. Transformation has continued
to focus on driving efficiencies in central support functions
and overheads, with our reported administrative expenses
a net £20m lower than the prior year; this takes the total
cumulative reduction in the cost of overheads and central
support services since 2014 to over £120m. In addition, there
were a number of non-recurring trading items such as
end-of-contract settlements which contributed
approximately £10m to UTP. Reflecting the strong increase
in profits, the Underlying Trading Profit margin improved a
whole percentage point to 3.3% (2017: 2.3%).
Trading Profit was £116.7m (2017: £45.1m), £23.6m higher
than Underlying Trading Profit as a result of a net credit
of Contract & Balance Sheet Review and other material
one-time items, whereas in 2017 there was a £24.2m net
charge. 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 Onerous Contract Provisions (OCPs);
the £52m utilised in 2018 was lower than our expectations at
the start of the year and the £69m utilised in 2017. The closing
balance of OCPs now stands at £82m, compared to £147m at
the start of the year and the initial charge of £447m taken at
the end of 2014.
Reported Operating Profit and Exceptional Costs
Reported Operating Profit of £80.5m (2017: £21.1m) was
£36.2m lower than Trading Profit as a result of £4.3m (2017:
£4.4m) of amortisation of intangibles arising on acquisition
and operating exceptional costs of £31.9m (2017: £19.6m),
mainly comprising restructuring programme costs of £32.3m
(2017: £28.6m) related to the Transformation stage of our
strategy, including redundancy charges, asset impairments
and other incremental costs; they also included a £13.9m
exceptional profit from a settlement related to the disposal
of Serco GmbH in 2012, and a £9.6m exceptional charge
related to equalising Guaranteed Minimum Pension (GMP)
payments on pension schemes. Within reported net finance
costs there was a £7.5m exceptional profit related to the early
repayment of the vendor loan note issued on the disposal of
the Intelenet business in 2015. Together with an exceptional
tax credit of £2.1m (2017: charge of £5.0m), total net
exceptional costs were therefore £22.3m (2017: £24.6m).
Financing and pensions
Pre-exceptional net finance costs were £13.9m (2017: £11.2m),
with the increase driven principally by a lower credit related
to pension schemes. Average net debt was £51m higher than
the prior year, very similar to the £47m increase between the
start and the end of the year, though the impact on our
interest expense was largely offset by the effect of having
repaid some of our US private placement notes during the
year. Cash net interest paid was £18.1m (2017: £17.0m).
Serco’s pension schemes are in a strong funding position,
resulting in a balance sheet accounting surplus, before tax,
of £71m (2017: £26m) on scheme gross assets and gross
liabilities each of approximately £1.3bn. The net asset
position leads to a small net credit within net finance costs
of £0.8m (2017: £3.8m), which is lower than the prior year due
to 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 around half of all scheme
members, has the effect of fully removing longevity,
investment and accounting risks; the gross liability remains
recognised on our balance sheet, but there is an equal and
opposite insurance asset reflecting the perfect hedge
established by the annuity.
Tax
The underlying effective tax cost was £20.6m (2017: £20.2m),
representing an underlying effective rate of 26% (2017: 35%)
based upon £79.2m (2017: £58.1m) of Underlying Trading
Profit less 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 rate is lower
than the prior year reflecting the improvement in and mix of
the Group’s profitability, together with the net effect of US
tax reform; we expect the rate to continue to reduce over
the longer term as a result of further improvements in the
profitability of the UK business.
Annual Report and Accounts 2018
Serco Group plc
|
23
Chief Executive’s Review continued
The tax on non-underlying items was a net credit of £11.8m
(2017: £6.6m), which includes an additional £2.9m of deferred
tax asset in relation to UK losses to reflect the improved
forecast of UK taxable income. Total pre-exceptional tax
costs were £8.8m (2017: £13.6m). Cash net tax paid was
£10.6m (2017: £11.4m). Our reported 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.
Reported result for the year
The reported result for the year, as presented at the bottom
of the Group’s Consolidated Income Statement on page 151,
was a profit of £67.4m (2017: loss of £8.0m). This reflects:
Trading Profit of £116.7m (2017: £45.1m); amortisation of
intangibles arising on acquisition of £4.3m (2017: £4.4m);
pre-exceptional net finance costs of £13.9m (2017: £11.2m);
a non-cash fair value gain in 2017 of £0.7m (2018: nil);
pre-exceptional tax costs of £8.8m (2017: £13.6m); and total
net exceptional costs of £22.3m (2017: £24.6m).
Earnings Per Share (EPS)
Underlying EPS, which reflects the Underlying Trading Profit
measure after deducting pre-exceptional net finance costs
and related tax effects, increased by 55% to 5.21p
(2017: 3.36p). The improvement reflects the 34% increase
in Underlying Trading Profit at reported currency, and the
increase in net finance costs which was more than offset by
the lower tax rate; the weighted average number of shares
in issue, after the dilutive effect of share options, was broadly
unchanged at 1,125.4m (2017: 1,120.6m). Reported EPS,
which includes the impact of the other non-underlying
items and exceptional costs, was a profit per share of 5.99p
(2017: loss per share of 0.76p).
Cash Flow and Net Debt
Free Cash Flow was positive £25m (2017: negative £7m),
the first year of positive Free Cash Flow since 2014. Cash
generated from Underlying Trading Profit was partially offset
by the outflows related to loss-making contracts subject to
OCPs, principally the Caledonian Sleeper, COMPASS and
PECS contracts. These cash outflows were lower than the
prior year, as reflected in the lower rate of OCP utilisation
of £52m (2017: £69m). There was a working capital outflow
of £22m (2017: outflow of £14m); whilst the Company has a
working capital financing facility, it has not been drawn since
the first quarter of 2017. Average working capital days in the
year were broadly unchanged: the average credit period
taken by Serco’s customers is 29 days (2017: 23 days) and the
average credit period taken by Serco for our trade purchases
is 30 days (2017: 33 days), with 85% of UK supplier invoices
paid in under 30 days.
Closing net debt at 31 December 2018 increased to £188m
(2017: £141m); the increase of £47m includes the Free Cash
inflow of £25m, offset principally by three sources of outflow:
a £19m (2017: £33m) cash outflow related to exceptional
items; £31m net outflow for acquisitions (which includes
£17m for the Carillion health contracts and £13m for the BTP
Systems acquisitions); and a net adverse currency translation
effect of £22m, predominantly reflecting the Group’s US$
Private Placement debt. The closing net debt compares to
a daily average of £235m (2017: £184m) and a peak net debt
of £307m (2017: £243m), with the peak reflecting the timing
of acquisition outflows and the adverse currency impact.
At the closing balance sheet date, our leverage for debt
covenant purposes was 1.06x EBITDA (2017: 1.36x), which
compares with the covenant requirement to be less than 3.5x;
removing the benefit of the £23.6m of non-underlying items
within covenant EBITDA, underlying leverage is 1.23x and
remains therefore comfortably around the bottom of our
normal target range of 1-2x.
During the year we successfully refinanced our Bank facilities
on terms similar to those previously in place, with a £250m
Revolving Credit Facility now in place until December 2023.
Dividends
The Board is not recommending the payment of a dividend
in respect of the 2018 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 judges it prudent to do so,
in assessing whether we should resume dividend payments
in respect of 2018, we are mindful of the fact that 2019 is the
last year of significant outflows of cash related to OCPs and
operating exceptional costs, which together will mean that
net debt is likely to increase again 2019, albeit modestly. The
Board will continue to keep the dividend policy under careful
and regular consideration as we progress with completing
the transformation stage and driving forward with the growth
stage of 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.
24
| Serco Group plc
Annual Report and Accounts 2018
Contract awards, order book, rebids and pipeline
Contract awards
The Group’s order intake totalled £2.9bn during 2018,
representing a book-to-bill ratio of just over 100%; this is the
second year in succession that the book-to-bill ratio has been
positive. There were over 40 contract awards worth more
than £10m each, by far the largest of which was the rebid of
our health insurance eligibility support contract in the US for
the Center for Medicare & Medicaid Services (CMS) which is
estimated to be worth around £700m over the next five years.
Rebids and extensions of existing work together represented
66% of the total value signed, with the balancing 34%
represented by the value of new business won.
Other notable contract awards included, again in the US:
a sole-source contract vehicle to support Naval Electronic
Surveillance Systems (NESS); program management to the
United States Air Forces Central Command (AFCENT);
installation support for Close-In Weapons Systems (CIWS);
US Army global acquisition and logistics operations support;
and defence training support services. There was also a
single-award Indefinite Delivery/Indefinite Quantity (ID/IQ)
framework to support the Federal Emergency Management
Agency (FEMA), though only a very small initial value is
included within the awards value. In the UK, we received a
10-year extension supporting Peterborough County Council
with a range of frontline and back office services, an
18-month extension for the NorthLink Ferries service, and
a new award for environmental services with Hart and
Basingstoke councils. In AsPac, awards were dominated by
new contact centre services for Victoria Police, Australia’s
National Disability Insurance Scheme and the Department
of Human Services, together with a new contract to manage
road tunnels in Hong Kong. In the Middle East, we received
a letter of intent to extend our Dubai Metro operations for
a further two years, successfully rebid the MELABS defence
base logistics and support services contract and facilities
management support in Abu Dhabi, added new fire and
rescue services at King Fahd International Airport in
Dammam in Saudi Arabia, and extended our air traffic control
services contract in Iraq. In aggregate, around 80% of order
intake came from customers of our Americas, AsPac, Middle
East and continental European operations, with the
remaining 20% from the UK.
The largest losses of bids for new work were the Defence Fire
& Risk Management Organisation (DFRMO) tender in the UK,
and two bids in the US - maintenance and logistics support
for Solid State Phased Array Radar Systems (SSPARS) and
Navy C5ISR kitting and cabling work (CIKC). In regard to
DFRMO, our legal challenge to the award is still in process.
Of existing work, the largest loss was our support of air traffic
control services in Bahrain, though the annual revenue was
less than 0.5% of the Group overall.
Win rates by volume for the year were around 50% for new
bids and 90% for rebids and extensions. Win rate by value
was around 25% for new work and around 93% for securing
existing work.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
In the first six weeks of 2019 we signed two major contracts:
in the UK we won our largest ever contract, being £1.9bn
over 10 years for AASC (providing asylum accommodation
and support services) and £0.6bn for NGHS (providing health
services to the Australian Defence Force working as a
sub-contractor to Bupa).
Order book
The Group’s order book is an estimated £12.0bn at the end
of 2018, up by £1.3bn versus £10.7bn at the start of the year,
and by £2.1bn from the level at the end of 2016. The increase
includes the strong order intake and the £0.7bn added to
the order book as a result of the transfers of the six UK health
facilities management contracts from Carillion. It also
includes the change in definition to align with the IFRS15
disclosures of the future revenue expected to be recognised
from the remaining performance obligations on existing
contractual arrangements. It is worth noting that this
excludes unsigned extension periods; however, the £12.0bn
would be £13.0bn if option periods in our US business were
included; as option periods have always tended to be
exercised in our US business, we do include these in our
assessment of order intake, as was the case with the value
of the CMS contract as noted in the above section on
contract awards.
There is £2.4bn of revenue secured in the order book for
2019, equivalent to around 80% visibility of our £2.9-3.0bn
revenue guidance.
Rebids
As we look ahead over the next three years through to the
end of 2021, 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 £1.2bn in aggregate or
around 40% of the Group’s 2019 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); at the start of 2018
the three-year forward rebid value was £1.4bn. Contracts that
could potentially end at some point before the conclusion
of 2019 have aggregate annual revenue of over £400m, the
largest of which are the Australian immigration services and
NorthLink Ferries operations. In 2020, the annual value of
contracts due for extension or re-compete is currently less
than £400m, with our work under a US Navy installation
framework (GIC) and the Prisoner Escorting Services (PECS)
in the UK being the largest contracts anticipated to become
due in that year.
Annual Report and Accounts 2018
Serco Group plc
|
25
Chief Executive’s Review continued
Pipeline
Our measure of Pipeline is probably more narrowly defined
than is common in our industry; it was originally designed as
an indicator of future growth and focuses on bids for new
business only. As a consequence, on average over the last
five years less than half of our achieved order intake has come
from the Pipeline. It measures only opportunities for new
business that have an estimated Annual Contract Value (ACV)
of at least £10m, and which we expect to bid and to be
awarded within a rolling 24-month timeframe; we cap the
Total Contract Value (TCV) of individual opportunities at
£1bn, to attenuate the impact of single large opportunities;
the definition does not include rebids and extension
opportunities; and in the case of framework, or call-off,
contracts such as ‘ID/IQ’ (Indefinite Delivery / Indefinite
Quantity contracts which are common in the US) we only
take the individual task orders into account. It is thus 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.
On this definition our Pipeline stood at £4.4bn at the
beginning of 2018. Around £3.7bn has come out of the
Pipeline due to wins and losses, together with the net effect
of a small number of removals due to opportunities no longer
meeting our definition, and value changes. A number of new
opportunities matured to the stage where they meet our
Pipeline definition, adding in aggregate £4.6bn over the
course of the year. As a result, the Pipeline increased to
stand at £5.3bn at 31 December 2018, which consists of
around 30 bids that have an ACV averaging approximately
£30m and a contract length averaging around six years.
As we have noted before, 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 2019 to date, Serco has already won the
two largest opportunities in its Pipeline – AASC in the UK
and NGHS in Australia, valued at £2.5bn in aggregate.
Removing these opportunities from the £5.3bn Pipeline as
at 31 December 2018 would reduce it by £1.7bn to around
£3.6bn; the reason why the Pipeline will not drop by the full
amount of orders won is that part of AASC was a rebid of
an existing region.
Guidance for 2019
At our Closed Period Update on 13 December 2018, we
provided 2019 guidance for revenue of £2.8-2.9bn and
Underlying Trading Profit (UTP) of £95-100m. Reflecting
recent contract wins, namely the AASC asylum support
services contracts in the UK and the NGHS defence health
contract in Australia, we now believe that 2019 revenues will
be higher, and in the £2.9-3.0bn range. Those contract wins
are expected to have a negligible effect on profitability in
2019 due to mobilisation and transition costs, but in 2020
and thereafter we expect those contracts to be materially
positive to both profitability and cash flow.
As previously stated in our December 2018 update, 2019
will not benefit from the £10m of non-recurring trading items
such as end-of-contract settlements that contributed to the
very strong profit growth delivered in 2018. However, profit
growth and margin progress are still anticipated in 2019, in
line with current market consensus. Whilst there are declines
in some contracts, most notably MELABS in the Middle East
division, these are expected to be offset by strong growth
in the profits delivered by our UK Healthcare business as
a consequence of the full-year effect of our acquisition of
six Carillion health contracts and other contracts coming
out of transition, together with the benefit of further
cost efficiencies.
Following an encouraging start to the year, and adjusting for
the adoption of IFRS16, our guidance for UTP in 2019 is now
approximately £105m. This represents the top end of the
range provided with our December 2018 update, together
with an additional increase of £5m to take account of the new
IFRS16 accounting standard for leases which is effective for
the Group from 1 January 2019. IFRS16 results in the previous
operating lease expense which was fully charged to UTP
being split into: a depreciation charge of a newly recognised
‘right of use’ lease asset, with the depreciation being charged
to UTP over the life of the lease calculated on a ‘straight-line’
basis; and secondly an ‘interest cost’ element of a newly
recognised lease liability which will be charged to Net
Finance Costs (NFC), but with this being calculated on a
’reducing balance’ basis. In 2019, the increases to UTP and
NFC are estimated to each be around £5m and therefore
broadly net out. For all new leases they will fully net out over
the life of each lease, though the interest cost will be higher
in the early years of a lease and lower in the later years; this
will therefore have a noticeable effect on the accounting for
the thousands of property leases on the AASC contract in
2020, which will be its first full year of operation.
Previous guidance for NFC was for these to increase in 2019,
principally as a result of an approximate £3m net reduction
in investment revenue following the early repayment in
October 2018 of the vendor loan note issued on our disposal
of Intelenet in 2015. Together with the impact of IFRS16
described above, our NFC guidance is updated to
approximately £20m. The interest cost associated with lease
liabilities that are newly recognised under IFRS16 may prove
to be volatile, particularly given the effect of the length of
property leases which may not be known in advance.
Importantly, whilst the NFC impact may be volatile from
year-to-year both at individual lease and at aggregate level
across the whole book of lease commitments, cashflows
will follow the terms of the underlying leases, and will
generally be smooth over the life of a lease.
The Group’s underlying effective tax rate is expected to
reduce to below 25% in 2019 as a result of improving
profitability in the UK business. Exceptional restructuring
costs are expected to be approximately £20m as we
implement the final steps of the Group’s transformation
stage of our strategic plan implementation. The weighted
average number of shares for diluted EPS is expected to
be approximately 1,145m. Further background to these
areas is included in the Finance Review.
26
| Serco Group plc
Annual Report and Accounts 2018
With regard to Free Cash Flow, having turned positive in 2018
after three years of outflows, it is expected to be broadly
similar in 2019, with the lack of non-recurring credits within
2018’s FCF being offset by improved profitability and lower
OCP utilisation in 2019. After the cash cost of exceptional
items and a smaller acquisition-related payment, the overall
movement in Net Debt is expected to be a modest outflow,
resulting in closing net debt before the effect of IFRS16 (and
therefore comparable to the opening position of £188m) of
approximately £200m. IFRS16 has no cash flow impact, with
reclassifications between operating and financing cash flows
fully netting out over the life of a lease, nor is there any
covenant impact, as the Group’s financing facilities will
continue to be calculated under the prior standard, IAS17.
Guiding to net debt excluding lease obligations newly
recognised with IFRS16 is therefore considered both more
insightful and consistent with the covenant measure for the
Group’s financing facilities. Underlying leverage is expected
to be approximately 1.3x EBITDA at the end of 2019,
compared with 1.2x at the end of 2018.
As we remind people every year, there remains a wide range
of potential outcomes reflecting the sensitivity of our profits
to even small changes in revenues and costs. A key sensitivity
is the movement of currency rates during the year, with our
guidance based upon recent currency rates prevailing
throughout 2019, which, given opposite movements in the
US dollar and Australian dollar against sterling, currently
implies a broadly neutral impact when compared to the
average rates for 2018.
Outlook beyond 2019
When we set out our strategy in early 2015, we noted that for
our mix of geographies and market sectors, the market grew
by about 5-7% in the four years to 2014, with competitors
achieving margins of 5-6%. It was our stated ambition for
Serco to match market growth and industry margins in the
longer term. Since then, market conditions have become
less favourable in the UK, our largest market, and this has
acted as a drag on our updated estimate of the weighted
average rate of market growth.
Despite this we still believe that the Four Forces (relentlessly
increasing demand for public services; expectations of higher
service quality; structural fiscal deficits; electoral resistance
to tax increases) will continue to encourage governments to
seek innovative ways to deliver more services, of higher
quality, and at lower cost (what we call ‘More and Better for
Less’). So, in the longer term, average annual market growth
of 5%+ seems to us achievable. However, at the moment, we
believe that the current weighted average rate of growth
across all our geographies and sectors is currently running
lower than that at 2-3%, in large part because of the difficult
conditions in the UK, which represents some 40% of our
revenues. It is not possible to forecast with any certainty how
demand in the UK market will evolve during and after Brexit;
the possible outcomes range from a rapid increase in
demand, through to a gradual decline and where they will
actually fall is unknowable, but we are inclined to believe
that the risk to our business is weighted slightly to the upside.
There is more commentary on our views on the UK market
on pages 29 to 30.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
In this more uncertain outlook for market growth, a number
of factors favour Serco and give us confidence that over the
next few years, and absent unforeseen headwinds or losses
on major rebids, we should be able to grow our revenues
faster than the underlying market; we think that 2019 will see
revenue growth of 3-4%, and that revenue growth will
accelerate to around 5% in 2020 as contracts such as Grafton,
Icebreaker, AASC and NGHS become fully operational.
The reasons we believe that we can grow faster than the
market are, first, because although the UK Government’s
appetite for new projects has been reduced, frontline
services of the type we provide tend to be non-discretionary
and critical in nature; a government may decide whether it
wants to invest in a major new outsourcing project, and can
more or less speed up or slow down such projects at will. It
cannot, however, suddenly decide it does not want to house
20,000 asylum seekers, or move its ships and submarines, or
clean its hospitals. Our core competence in providing vital,
frontline, people-enabled services, having been regarded as
somewhat “below the salt”, is now, we believe, an important
asset. Second, our order intake in the last two years has been
strong, and our order book – up around 20% since 2016 and
about to be further blessed with £2.5bn of orders received in
the first six weeks of 2019 – will underpin growth in our
revenues over the next few years as those large new contracts
become fully operational.
In terms of our ambition of achieving margins of at least 5%
over the longer term, we believe that this is still achievable
by a combination of contract and overhead cost efficiency,
running off OCP contracts and the conversion of some of
them into profitable contracts (of which AASC is a shining
example), and revenue growth.
Summary
We have referenced in previous Annual Reports the maxim
of the Prussian military strategist Helmuth von Moltke the
Elder that “no strategy ever survives first contact with the
enemy”. A more contemporary version of this maxim comes
from the boxer Mike Tyson who said: “Everyone’s got a plan
until they get punched in the mouth”. As strategies age, the
more punches events land upon them. Our own strategy,
launched in 2015, is surviving well against the battering of
events, including an unforeseen blow in the form of Brexit
and its impact on the UK market. Notwithstanding this punch,
we still think we can deliver on our objective of 5% revenue
growth and margins working their way up to 5%, and
hopefully beyond.
Rupert Soames
Group Chief Executive
20 February 2019
Serco – and proud of it.
Annual Report and Accounts 2018
Serco Group plc
|
27
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. 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).
Year ended 31 December 2018
Revenue
Change
Change at constant currency
Organic change at constant currency
Underlying Trading Profit/(Loss)
Change
Change at constant currency
Margin
Change
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
1,300.7
(2%)
(2%)
(4%)
39.2
+12%
+12%
645.6
(6%)
(3%)
(5%)
45.7
+26%
+30%
548.2
(5%)
0%
(1%)
26.8
+20%
+27%
342.3
(3%)
+1%
+1%
21.5
+24%
+30%
3.0%
+40bps
7.1%
+180bps
4.9%
+100bps
6.3%
+140bps
Contract & Balance Sheet Review adjustments
Trading Profit/(Loss)
Amortisation of intangibles arising on acquisition
Operating profit/(loss) before exceptionals
12.4
51.6
(0.5)
51.1
(2.5)
43.2
(3.2)
40.0
13.7
40.5
(0.6)
39.9
–
21.5
–
21.5
Corporate
costs
£m
–
(40.1)
(4%)
(4%)
n/a
–
(40.1)
–
(40.1)
Total
£m
2,836.8
(4%)
(2%)
(3%)
93.1
+34%
+40%
3.3%
+100bps
23.6
116.7
(4.3)
112.4
Year ended 31 December 2017
Revenue
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Corporate
costs
£m
Total
£m
1,331.5
689.3
577.5
352.6
–
2,950.9
Underlying Trading Profit/(Loss)
34.9
36.4
22.3
17.3
(41.6)
69.3
Margin
2.6%
5.3%
3.9%
4.9%
n/a
2.3%
Contract & Balance Sheet Review adjustments
Trading Profit/(Loss)
Amortisation of intangibles arising on acquisition
Operating profit/(loss) before exceptionals
(39.0)
(4.1)
–
(4.1)
3.4
39.8
(3.0)
36.8
11.4
33.7
(1.4)
32.3
–
17.3
–
17.3
–
(41.6)
–
(41.6)
(24.2)
45.1
(4.4)
40.7
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 34 to 51. This includes full definitions and
explanations of the purpose of each non-IFRS Alternative Performance Measure (APM) used by the Group. The consolidated
financial statements and accompanying notes are on pages 139 to 221.
28
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
UK & Europe
Serco’s UK & Europe division supports public service delivery
across all five of the Group’s chosen sectors: our Justice &
Immigration business provides a wide range of services to
support the safeguarding of society and the reduction of
reoffending, from prison management through to housing and
welfare services for asylum seekers; in Defence, we are trusted
to deliver critical support services and operate highly sensitive
facilities of national strategic importance; 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 and European institutions. Serco’s operations in the UK
represent approximately 41% of the Group’s reported revenue,
and those across the rest of Europe approximately 5%.
Revenue for 2018 was £1,300.7m (2017: £1,331.5m), a decline of
2%. Reported Revenue excludes that from our joint venture
and associate holdings which largely comprise the operations
of AWE and Merseyrail. At constant currency, the decline in
Revenue was also 2%, or £33m. The net contribution from
acquisitions, driven by the transfer of the Carillion health
facilities management contracts, was £23m or 2%, therefore
the organic decline was £56m or 4%. The Glasgow ACCESS
operations which transferred at the end of 2017 had a £57m
impact and therefore accounted for virtually all of the organic
decline; some other smaller contracts ending as well as some
areas of reduced project work or volumes, such as the London
Cycle Hire Scheme and the Child Maintenance Group,
extended the level of revenue reduction. These were offset by
new contract growth, in particular annualising 2017’s start of
hospital facility management services for Barts Health NHS
Trust and University Hospital Southampton NHS Foundation
Trust, as well as from the new Skills Support for the Workforce
(SSW) contracts.
Underlying Trading Profit was £39.2m (2017: £34.9m),
representing an implied margin of 3.0% (2017: 2.6%). Trading
Profit includes the profit contribution (from which interest and
tax have already been deducted) of joint ventures and
associates; if the £374m (2017: £350m) proportional share of
revenue from joint ventures and associates was also included
and if the £5.7m (2017: £7.1m) share of interest and tax cost was
excluded, the overall divisional margin would have been 2.7%
(2017: 2.5%). The joint venture and associate profit contribution
was modestly ahead at £28.1m (2017: £26.3m). The further
improvement in Underlying Trading Profit included the benefit
of transformation and cost efficiency programmes in the
division as well as some improvement in the profitability of
certain contracts moving out of their transition stages, with
these more than offsetting the impact of other contract
attrition and the investment required to mobilise and transition
the Carillion contracts.
Within Underlying Trading Profit there was a reduced rate of
OCP utilisation at £47m (2017: £55m), which served to offset the
Division’s loss-making operations, principally the Caledonian
Sleeper, COMPASS asylum seeker support services, Prisoner
Escort & Custody Services (PECS) and Lincolnshire Country
Council contracts. Contract & Balance Sheet Review and
other material one-time items resulted in a £12.4m net credit
(2017: £39.0m net charge) to Trading Profit which increased
sharply to £51.6m (2017: loss of £4.1m).
46% of Group revenue
£1,300.7m (2017: £1,331.5m)
The UK & Europe division represented around £0.7bn or 25%
of the Group’s order intake. The two largest awards were a
£105m ten-year contract extension for frontline and back office
services to Peterborough City Council, and a £104m 18-month
contract extension to continue managing and operating the
NorthLink Ferries service for Transport Scotland. The largest
new contract was an eight-year joint award for environmental
services for Hart District Council and Basingstoke & Deane
Borough Council. Other notable awards in the year included
successfully rebidding with BAE Systems our repair and
maintenance contract for Command Support Air Transport
(CSAT) aircraft operated out of RAF Northolt by 32 (The Royal)
Squadron, rebidding and adding new areas of support for the
European Commission Directorate General for Informatics;
expanding our contact centre services for the DWP, launching
a new cycle hire scheme for Transport for Edinburgh, fire and
rescue services for the construction phase of Hinkley Point C
nuclear power station, and extending our support services for
the European Organisation for Nuclear Research (CERN).
The signing of the Asylum Accommodation and Support
Services Contracts (AASC) in January 2019 is very significant
for the division, and indeed for the Group. AASC supersedes
the current COMPASS contracts which have been incurring
annual losses (offset in the P&L by the utilisation of the OCP)
of around £15-20m for the last four years. Under the new AASC
contracts, we did not retain the Scotland & Northern Ireland
region, but gained the much larger Midlands region, whilst
retaining our “home” region of the North West; as a
consequence we will now be the largest provider of asylum
seeker accommodation in the UK. Given our past experience,
we also bid the regions at prices which we believe should allow
us to make a fair return; we expect the new contract to deliver
revenues of around £150m in the initial year, as against the
current COMPASS run-rate of around £70m.
Of existing work where an extension or rebid will be required
at some point before the end of 2021, there are over 20
contracts with annual revenue of over £5m within the UK &
Europe division; in aggregate, these represent approximately
20% of the current level of annual revenue for the division.
The largest of these are the NorthLink Ferries contract that
was extended to 31 October 2019 and is now being rebid for
the next six-year term; in 2020, the current PECS contract ends
assuming a final extension option is not exercised by the
customer; and in 2021, our strategic partnership contract
supporting Hertfordshire County Council.
The rebid profile and the new bid pipeline have both reduced
with the successful outcome of our bidding for AASC. Other
opportunities in the new bid pipeline include several
environmental services and health facilities management
tenders, and a smaller number of other opportunities to
support various defence, Citizen Services and Justice
operations. We expect to add to our pipeline in 2019 those
opportunities that will be competed for under the recently
launched prison operator services framework.
Conditions in the UK market are highly uncertain as a result
of Brexit, which is an overlay of immense complexity and
distraction on top of what were already significant challenges
to Departments as a result of Government efforts to reduce
the structural deficit, whilst increasing spending on the NHS.
Annual Report and Accounts 2018
Serco Group plc
|
29
Divisional Reviews continued
UK & Europe continued
As we predicted eighteen months ago, the Government and
the Civil Service have now come to be focused upon the
challenges of negotiating and preparing for Brexit, and
this has had the effect of reducing their appetite for new
outsourcing and transformation projects. However,
Government is still proceeding with procurements of
non-discretionary services as existing arrangements
come to an end. Examples of this include AASC and
the upcoming PECS rebid.
In terms of the likely direct impact of Brexit upon our business
– we are facing the same fog of uncertainty as every other
business in the UK. It is certain that “taking back control” will
require more people working for or on behalf of Government
to do the taking back and the controlling; already 20,000
additional civil servants have been recruited into Central
Government, and one would expect over time that the
numerous additional regulatory functions will require some
sort of support. We neither export nor import to any
significant degree, therefore we are not exposed directly to
the border issues that worry other businesses, although we
are mindful that we will need to maintain continuity of supplies
to the 5,000 prisoners we are responsible for, and indeed the
7 million patients cared for each year in the 18 NHS hospitals
that Serco supports. In terms of the balance of risks, we think
they are marginally balanced to the upside. In the short term
there is a small possibility that there could be an upturn in
demand if Government needs help quickly; on the downside,
we think it unlikely that there will be any precipitous drop in
demand as a result of Brexit. As far as our business in Europe
is concerned, which accounts for about 5% of Group revenue,
the vast majority of this is supplied via our wholly-owned
EU-resident companies, and therefore should be largely
unaffected. Finally, of our UK employees, only 6% are
continental EU nationals, so whilst there might be an indirect
effect of labour shortages, the direct effect should be limited.
As well as the challenges of Brexit, the Government has been
wrestling with the fallout from the collapse of Carillion in early
2018, which has been accompanied by other major contractors
becoming distressed and having to raise equity or refinance
their debt. There has been a recognition by Government that it
can neither abjure all responsibility for, nor ignore, its supply
chain becoming so seriously distressed. Nor can it be blind to
liquidity issues amongst outsourcers as banks become
increasingly reluctant to support the sector.
In this difficult environment, Serco has worked hard to be a
helpful and constructive partner of Government. We have
publicly stated our admiration for the way they managed the
liquidation of Carillion. We have published ideas to improve
the working of the market in the form of Four Principles.
These principles cover: greater Transparency in regard to
the make-or-buy decision-making process for Government
services, as well as publishing operational and financial key
performance indicators so that taxpayers could see the quality
of service they were receiving; Security of Supply, including
the lodging of ‘Living Wills’; Orderly Exit provisions, for both
the Government and suppliers; and Fairness, including codes
of conduct for both Government and suppliers.
In the middle of 2018, the Cabinet Office set up a joint
Government / Industry group to improve the working of the
public services market; Serco has been deeply engaged in this
process which resulted in the publication in February 2019 of
an ‘Outsourcing Playbook’ along with a comprehensive set of
guidance notes. This sets out the ground rules for suppliers
and Government departments for the outsourcing of public
services. It also reiterates the value that Government sees in
having private companies and third sector organisations
being able to provide services. The Minsters responsible,
David Lidington and Oliver Dowden, have been highly
supportive of the role of the private sector, and forthright in
stating their belief that the role of Government should be to
procure services that deliver high quality, resilience and value
for money for the taxpayer and service user, and be agnostic
and even-handed as to whether this is achieved through the
public or private sectors. This approach is all that a strong
and healthy private sector should reasonably hope for; if we
cannot deliver better innovation, value and quality than the
public sector, then we don’t deserve the taxpayer’s shilling.
We think that the publication of the Playbook, which reflects
many of the ideas we put forward in our Four Principles, is an
important and positive development.
Government has always been keen to emphasise that it wants
to attract new suppliers, and that the barriers to entry into
its supply chain are low; they are now seeing that, for both
suppliers and their lenders, the barriers to exit are low as well.
They are also seeing that a distressed supply base can be
as much of a problem for customers as it is for suppliers.
The effectiveness of the new Playbook in modifying some of
the damaging behaviours of the past, by both Government
and suppliers, should be decisive in maintaining a competitive,
innovative and capable supply chain which Government
can have at its behest to deliver high quality, resilient and
cost-effective public services. The challenge will be ensuring
Government departments comply with the good intentions
of Ministers and the policy documents of the Cabinet Office.
In order to ensure the Playbook works in practice, we hope
that the principle of “comply or explain”, which has been so
effective in promoting good practice in the world of public
company governance, will be used to encourage compliance.
We also hope that the Playbook will be incorporated into
formal Treasury guidance on procurement, and that
Cabinet Office and the National Audit Office will be given
the resources they need to be able to act as guardians of
its implementation.
Notwithstanding the fact that over 80% of our order intake in
the last two years has been from governments outside the UK,
the UK does still account for around 40% of our revenues, and
it is therefore in Serco’s interest, and it is our responsibility, to
support the work of the UK Government to ensure a vibrant
and successful supply base, and to defend the consensus that
the private sector has an important role to play in the delivery
of public services. We are encouraged by the new Playbook,
and are committed to being a leading player in the UK market
for public service delivery. We believe that we are well placed
to act in such a role given our credentials: deep capability and
experience in many areas of public service delivery; a strong
financial position; a track record of dealing fairly with suppliers,
employees and customers; a strong public service ethos and
commitment to social value; and a reputation for standing by
our contractual commitments, but being resolute in not
accepting risk that cannot either be mitigated or managed.
30
| Serco Group plc
Annual Report and Accounts 2018
23% of Group revenue
£645.6m (2017: £689.3m)
A new single-award Indefinite Delivery/Indefinite Quantity
(ID/IQ) contract to provide public technical assistance to
the Federal Emergency Management Agency (FEMA) was
awarded to Serco; while this has a potentially large ceiling
value of $600m over the next five years, only a very small initial
value for programme management is recognised in our value
of signed contracts and order book, as the workload will
ultimately be dictated by task orders issued in response
to declared major disasters and emergencies.
Of existing work where an extension or rebid will be required
at some point before the end of 2021, there are 13 contracts
with annual revenue of over £5m within the Americas division;
in aggregate, these represent around 35% of the current level
of annual revenue for the division, which is a significantly lower
proportion versus a year earlier now that the CMS and NESS
contracts were secured during 2018. There are few material
contracts with potential end dates in 2019. Those coming up
for rebid or extension in 2020 include the Global Installation
Contract covering areas of our defence ship modernisation
work, the Federal Aviation Administration’s (FAA) Contract
Tower (FCT) Program, and our operational support to Federal
Retirement Thrift Investment Board.
Our pipeline of major new bid opportunities due for decision
within the next 24 months includes a broad spread of defence
support functions, transport operations including air traffic
control support, and in areas of Citizen Services case
management and processing.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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 2018 was £645.6m (2017: £689.3m), a 6% reduction
in reported currency. In US dollars, the main currency for
operations of the division, revenue for the period was
equivalent to approximately US$860m (2017: US$890m).
The strengthening of Sterling reduced revenue by £23m or 3%;
the acquisition of BTP added 2% to revenue; the organic
change at constant currency was therefore a decline of 5%, or
£33m. Lower volumes of work and the new contract structure
of our CMS health insurance eligibility support contract drove
a £54m decline, with further impact of fewer task orders in
areas of ship modernisation work particularly in the first half
of the year. There was partial offset from growth related to the
new contract for supply chain management services for the
Defense Logistics Agency (DLA), and for Anti-Terrorism/Force
Protection (ATFP), Army base modernisation (IMCOM) and
Naval Electronic Surveillance Systems (NESS) services.
While there was the 5% organic decline for the year as a
whole, there was organic growth of 3% in the second half.
Underlying Trading Profit was £45.7m (2017: £36.4m),
representing a margin of 7.1% (2017: 5.3%). The benefit of
profitable growth from new contracts, the new structure of
the CMS contract and other cost efficiencies more than offset
the effect of lower ship modernisation work in the first half
of the year and the adverse currency movement of £1.6m.
Within Underlying Trading Profit there was negligible OCP
utilisation required to offset the loss-making Ontario Driver
Examination Services (DES) contract in 2018 (2017: £5m).
There was a £2.5m charge for Contract & Balance Sheet
Review adjustments (2017: £3.4m credit), after which
Trading Profit was therefore £43.2m (2017: £39.8m).
Americas represented around £1.3bn ($1.8bn) or 45% of
the Group’s order intake. The largest award was the rebid
of our health insurance eligibility support contract for the
US Department of Health and Human Services, Center for
Medicare & Medicaid Services (CMS), with an estimated total
value to Serco, subject to workload volumes, of approximately
$900m if all options of the five-year contract are exercised.
The second largest was a $232m sole-source contract vehicle
for Serco to continue supporting Naval Electronic Surveillance
Systems (NESS). Along with numerous defence equipment
modernisation task orders under our various ID/IQ
frameworks, other notable awards included: programme
management and technical support services to the United
States Air Forces Central Command (AFCENT); installation
support for Close-In Weapons Systems (CIWS) on US Navy,
Army and Coast Guard vessels; supporting the US Army
Sustainment Command (ASC) with global acquisition and
logistics operations support; and training support services
to the US Army Joint Munitions Command (JMC) and the
Defense Ammunition Center (DAC).
Annual Report and Accounts 2018
Serco Group plc
|
31
19% of Group revenue
£548.2m (2017: £577.5m)
The signing of the National Garrison Health Services (NGHS)
contract in February 2019 is an extremely important event for
our Australian business. Valued at around £560m over the
initial six-year term, under this contract we will work as a
sub-contractor to Bupa sourcing and managing more than
1,000 professional staff who will support the delivery of an
integrated health care system to over 80,000 Australian
Defence Force members and reservists, and we expect this
contract to make a noticeable contribution to revenues in
2019 and profits from 2020.
Of existing work where an extension or rebid will be required
at some point before the end of 2021, there are 14 contracts
with annual revenue of over £5m within the AsPac division; in
aggregate, these represent well 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 around 30% of current divisional revenue.
Also in 2019 our contract for South Queensland Correctional
Centre will require further extending or rebidding, along with
Traffic Camera Services in Victoria and some of our Hong
Kong transport management services. Others that will
require extending or rebidding in 2020 are the Australian Tax
Office framework contract, while Fiona Stanley Hospital and
Acacia Prison become potentially due in 2021.
As set out above, the largest opportunity in our pipeline of
major new bid opportunities at the start of the new year has
already been won – NGHS for the Australian Defence Force.
Others due for decision within the next 24 months include a
relatively broad spread across Defence support and in our
Justice & Immigration, Citizen Services, Transport and
Health sectors.
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 2018 was £548.2m (2017: £577.5m), a decline of
5%. In Australian dollars, the main currency for operations of
the division, revenue for the period was equivalent to
approximately A$980m, flat on the prior year. The
strengthening of Sterling reduced revenue by £31m or 5%;
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 1%, or £6m. This
net reduction included a £31m impact from the Armidale
Class Patrol Boats (ACPB) and Western Australia Court
Security & Custodial Services (WACSCS) contracts, both of
which ended in the first half of 2017, which was largely offset
by growth in our Citizen Services business which provides
contact centre and processing support services, and a small
increase in workload in Immigration Services. While there was
a small organic decline for the year as a whole, there was
organic growth of 10% in the second half.
Underlying Trading Profit was £26.8m (2017: £22.3m),
representing a margin of 4.9% (2017: 3.9%). There was
profitable growth from the new Citizen Services work, a
number of non-recurring commercial settlement benefits and
good progress on transformation savings and other cost
efficiencies; these more than offset other areas of margin
pressure and the adverse currency impact of £1.6m. Within
Underlying Trading Profit there was £5m of OCP utilisation
(2017: £9m), significantly reduced following the end of the
ACPB contract.
Contract & Balance Sheet Review adjustments resulted in a
£13.7m credit (2017: £11.4m), principally reflecting the release
of the remaining OCP balance on the ACPB contract
following the expiry of all warranty periods, together with the
successful recovery of an insurance claim related to one of
the ACPB vessels. After these credits, Trading Profit was
therefore £40.5m (2017: £33.7m).
AsPac represented around £0.5bn or 20% of the Group’s
order intake. The largest new award was to provide for
Victoria Police contact centre services for non-urgent
incidents. Other similar awards in our Citizen Services
business have included contact services for Australia’s
National Disability Insurance Scheme, and further expanding
operations supporting the Department of Human Services. In
Hong Kong, we won a new contract to manage, operate and
maintain two new tunnels that will form part of a major road
link project in the region.
32
| Serco Group plc
Annual Report and Accounts 2018
12% of Group revenue
£342.3m (2017: £352.6m)
Of existing work where an extension or rebid will be required
at some point before the end of 2021, there are 12 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 are a
number of smaller integrated facilities management
contracts due for rebid or extension during the course of
2019. From early 2020, our contracts for air navigation
services in both Dubai and Iraq become due, together with
the Saudi rail and a number of other operations. The
relatively high proportion of current annual revenue on a
cumulative three-year basis reflects that the Dubai Metro
contract is anticipated to become due again in
September 2021.
Our pipeline of major new bid opportunities in the region
reduced very significantly in 2017 following the outcome
of the light rail and tram bids. The current pipeline has
some other smaller opportunities in integrated facilities
management, and effort is ongoing to rebuild a stronger
pipeline across other sectors.
In April 2019, Phil Malem will become the divisional Chief
Executive Officer of Serco Middle East. Phil joins from Atkins,
one of the world’s leading design, engineering and project
management consultancies, where he was Managing Director
for its transportation and infrastructure business, Middle East
& Africa.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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 2018 was £342.3m (2017: £352.6m), a decrease of
3%. The strengthening of Sterling reduced revenue by £13m
or 4%; the organic change at constant currency was therefore
growth of 1%. The increase included some volume growth
of transport operations, with other expanding or new work,
such as the fire and rescue services in Saudi Arabia, broadly
offsetting other small areas of attrition or reductions in
scope or volumes.
Underlying Trading Profit was £21.5m (2017: £17.3m),
representing a margin of 6.3% (2017: 4.9%). The improvement
in profitability was due in large part to the non repeat of the
heavy costs of bidding the rail tenders experienced in the
prior year, together with some progress on other cost
efficiencies; the profitability of the MELABS contact was also
higher in its final year of the previous terms ahead of rebid;
these together more than offset other areas of margin
pressure, attrition and a £1.0m adverse currency movement.
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 latest or prior year, therefore no difference between
Underlying Trading Profit and Trading Profit.
The Middle East represented around £0.4bn or 15% of the
Group’s order intake. Included is a letter of intent from the
customer for Serco to continue operating the Dubai Metro
for a further two years through to September 2021. The
MELABS defence base logistics and support services
contract was successfully rebid, though as previously
described the new contract will significantly reduce the
Middle East division’s profitability in 2019; other existing work
secured included facilities management for Abu Dhabi
Global Market Square, and air navigation services and
training in Iraq; Serco was unsuccessful in its bid to continue
providing air navigation services in Bahrain. The largest new
contract was with Dammam Airports Company (DACO) for
the provision of fire and rescue services at King Fahd
International Airport (KFIA), the first Saudi airport to leverage
an international service provider’s expertise in firefighting
systems; other new contracts included integrated facilities
management for Aldar commercial properties in Abu Dhabi.
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
2018 reduced by 4% to £40.1m (2017: £41.6m).
Annual Report and Accounts 2018
Serco Group plc
|
33
Finance review
Angus Cockburn
Group Chief Financial Officer
Revenue of £2,837m declined 4% over the
full year, though grew in the second half.
Underlying Trading Profit of £93.1m
increased by 34% as a result of a strong
operating performance, further good
progress on transformation savings and
other cost efficiencies, as well as some
non-recurring trading items.
For the year ended
31 December 2018
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 / (loss) for the period
Minority interest
Earnings / (loss) per share – basic
(pence)
Earnings / (loss) per share – diluted
(pence)
Underlying
£m
2,836.8
(2,570.2)
266.6
(202.3)
28.8
93.1
3.3%
(13.9)
79.2
(20.6)
(26.0%)
58.6
0.0
5.36
5.21
Non
underlying
items
£m
–
23.6
23.6
–
–
23.6
–
23.6
8.7
32.3
–
Trading
£m
2,836.8
(2,546.6)
290.2
(202.3)
28.8
116.7
4.1%
(13.9)
102.8
(11.9)
(11.6%)
90.9
0.0
8.31
8.08
Amortisation
and
impairment of
intangibles
arising on
acquisition
£m
Statutory pre
exceptional
£m
Exceptional
items
£m
–
–
–
(31.9)
–
(31.9)
7.5
(24.4)
2.1
(22.3)
–
–
–
–
(4.3)
–
(4.3)
–
(4.3)
3.1
(1.2)
–
2,836.8
(2,546.6)
290.2
(206.6)
28.8
112.4
4.0%
(13.9)
98.5
(8.8)
(8.9%)
89.7
0.0
8.20
7.97
Statutory
£m
2,836.8
(2,546.6)
290.2
(238.5)
28.8
80.5
2.8%
(6.4)
74.1
(6.7)
(9.0%)
67.4
0.0
6.16
5.99
34
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
For the year ended
31 December 2017 (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
Other gains
Profit before tax
Tax charge
Effective tax rate
Profit / (loss) for the period
Minority interest
Earnings / (loss) per share – basic
(pence)
Earnings / (loss) per share – diluted
(pence)**
Underlying
£m
2,950.9
(2,686.4)
264.5
(222.2)
27.0
69.3
2.3%
(11.2)
–
58.1
(20.2)
(34.8%)
37.9
0.3
3.45
3.36
Non
underlying
items
£m
–
(24.2)
(24.2)
–
–
(24.2)
–
0.7
(23.5)
5.0
(18.5)
Trading
£m
2,950.9
(2,710.6)
240.3
(222.2)
27.0
45.1
1.5%
(11.2)
0.7
34.6
(15.2)
(43.9%)
19.4
0.3
1.75
1.70
Amortisation
and
impairment of
intangibles
arising on
acquisition
£m
Statutory pre
exceptional
£m
Exceptional
items
£m
–
–
–
(19.6)
–
(19.6)
–
–
(19.6)
(5.0)
(24.6)
–
–
–
(4.4)
–
(4.4)
–
–
(4.4)
1.6
(2.8)
2,950.9
(2,710.6)
240.3
(226.6)
27.0
40.7
1.4%
(11.2)
0.7
30.2
(13.6)
(45.0%)
16.6
0.3
1.50
1.45
Statutory
£m
2,950.9
(2,710.6)
240.3
(246.2)
27.0
21.1
0.7%
(11.2)
0.7
10.6
(18.6)
(175.5%)
(8.0)
0.3
(0.76)
(0.76)
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
** Earnings per share is not diluted on a statutory basis
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 Executive
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 other than the APM
for earnings per share which has changed to be with
reference to the diluted weighted average number of shares
rather than the basic weighted average number of shares.
The basis of the change is due to the fact that:
• the Group has made a statutory profit and therefore
unvested options reduce earnings per share, whereas
unvested options could not have been included in prior
years as their conversion would have reduced loss per
share; and
• more options are expected to vest and are therefore
relevant in assessing the expected earnings per share.
Earnings per share on both a basic and diluted basis has
been presented to illustrate the impact of the change.
The comparative numbers within this Finance Review have
been restated to reflect the impact of IFRS15 as disclosed
within note 2 on page 157. The restated balances are as
previously included within the Group’s Financial Statements
for the 6 months to 30 June 2018 with an additional
adjustment relating to the adoption of IFRS15 as set out in
note 2 of the Financial Statements which had no net impact
to the income statement or balance sheet.
Annual Report and Accounts 2018
Serco Group plc
|
35
Finance review continued
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group’s Consolidated
Income Statement on page 151, reflects revenue translated at
the average exchange rates for the period. 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 2018 into
Sterling at the average exchange rate for the year ended
31 December 2017. All revenue in 2018 arose from
continuing activities.
For the year ended 31 December
Reported revenue at constant currency
Foreign exchange differences
Reported revenue at reported currency
2018
£m
2,902.0
(65.2)
2,836.8
Organic Revenue at constant currency
Reported revenue may include revenue generated by
businesses acquired during a particular year from the date
of acquisition 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.
There are three acquisitions excluded for the calculation
of Organic Revenue in the year to 31 December 2018.
• The acquisition of 50% of the issued share capital of Serco
Sodexo Defence Services Pty Ltd (SSDS) on 24 August
2017, resulting in full control being obtained. SSDS 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.
• The acquisition of 100% of the issued share capital of
BTP Systems, LLC (BTP) on 26 January 2018.
• The acquisition of six UK health facilities management
contracts which were transferred from Carillion plc
between June 2018 and August 2018.
An adjustment is required for the two disposals outlined
below:
• The disposal of contracts within the Anglia Support
Partnership on 31 October 2018.
• 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 did 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.
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.
For the year ended 31 December
Organic Revenue at constant currency
Foreign exchange differences
Organic Revenue at reported currency
Impact of any relevant acquisitions or
disposals
Reported revenue at reported currency
For the year ended 31 December
Organic Revenue at reported currency
Impact of any relevant acquisitions or
disposals**
Reported revenue at reported currency
2018
£m
2,838.2
(64.2)
2,774.0
62.8
2,836.8
2017
(restated*)
£m
2,929.7
21.2
2,950.9
* Results for the year ended 31 December 2017 have been restated to
reflect the adoption of IFRS15 with effect from 1 January 2017. See note
2 to the Financial Statements.
Impact of relevant acquisitions and disposals has been restated for
comparison purposes.
**
Revenue
Reported revenue, as shown on the Group’s Consolidated
Income Statement on page 151, reflects only that from
continuing operations. In prior reporting periods an
alternative measure to include discontinued operations has
been used 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 2018 and
in 2017. In 2017 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 which related
to the UK private sector BPO business which had previously
been disclosed as a discontinued operation.
Revenue plus share of joint ventures and associates
Reported revenue, as shown on the Group’s Consolidated
Income Statement on page 151, 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.
36
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
For the year ended 31 December
Revenue plus share of joint ventures and associates
Exclude share of revenue from joint ventures and associates
Reported revenue
2018
£m
3,211.9
(375.1)
2,836.8
2017
(restated*)
£m
3,307.3
(356.4)
2,950.9
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
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 and one-time items
Total Non-underlying items
Trading Profit
Include operating exceptional items
Include amortisation and impairment of intangibles arising on acquisition
Operating profit
2018
£m
93.1
12.8
10.8
23.6
116.7
(31.9)
(4.3)
80.5
2017
(restated*)
£m
69.3
(27.4)
3.2
(24.2)
45.1
(19.6)
(4.4)
21.1
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading
Profit, to make adjustments for unusual items that occur
and remove the impact of historical issues. UTP therefore
provides a measure of the underlying performance of the
business in the current year.
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 £51.8m in 2018 (2017 restated: £64.6m) 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. Items in 2018 which were recorded within this
category included a release of a provision made during the
2014 Contract & Balance Sheet Review following a change
in the Group’s obligations and a settlement received.
Both OCP adjustments and other Contract & Balance Sheet
Review and one-time items 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.
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 34 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 151, by making two 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.
Annual Report and Accounts 2018
Serco Group plc
|
37
Finance review 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 2018 into Sterling at the average exchange rate
for the year ended 31 December 2017.
For the year ended 31 December
Underlying Trading Profit at constant currency
Foreign exchange differences
Underlying Trading Profit at reported currency
Alternative Earnings or Loss Per Share (EPS) measures
For the year ended 31 December
Underlying EPS, basic
Net impact of non-underlying items and amortisation and impairment of intangibles arising
on acquisition
EPS before exceptional items, basic
Impact of exceptional items
Reported EPS, basic
2018
£m
97.1
(4.0)
93.1
2017
(restated*)
pence
3.45
(1.95)
1.50
(2.26)
(0.76)
2018
pence
5.36
2.84
8.20
(2.04)
6.16
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
For the year ended 31 December
Underlying EPS, diluted
Net impact of non-underlying items and amortisation and impairment of intangibles arising
on acquisition
EPS before exceptional items, diluted
Impact of exceptional items
Remove impact of loss
Reported EPS, diluted
2018
Pence
5.21
2.76
7.97
(1.98)
–
5.99
2017
(restated*)
pence
3.36
(1.91)
1.45
(2.20)
(0.01)
(0.76)
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
EPS before exceptional items
EPS, as shown on the Group’s Consolidated Income
Statement on page 151, 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.
Underlying EPS
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 is provided in the summary income
statements on page 34.
38
| Serco Group plc
Annual Report and Accounts 2018
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 155. 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
2018
£m
25.0
(29.7)
16.1
2.0
29.5
42.9
(40.2)
2.7
2017
(restated*)
£m
(6.7)
(28.2)
17.0
–
30.1
12.2
(32.5)
(20.3)
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
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.
For the year ended 31 December
Free Cash Flow
Add back:
Tax paid
Non-cash R&D expenditure
Net interest paid
Capitalised finance costs paid
Trading Cash Flow
Underlying Trading Profit
Underlying Trading Profit cash conversion
2018
£m
25.0
10.6
0.1
16.1
2.0
53.8
93.1
58%
2017
(restated*)
£m
(6.7)
11.4
0.2
17.0
–
21.9
69.3
32%
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
39
Finance review continued
Net Debt
We present an alternative measure to bring together the
various funding sources that are included on the Group’s
Consolidated Balance Sheet on page 154 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
2018
£m
62.5
–
(239.5)
(14.8)
3.8
(188.0)
2017
£m
112.1
25.7
(271.5)
(20.2)
12.8
(141.1)
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
Contract liabilities, trade and other payables
Non-current liabilities
Contract 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%
2018
£m
579.6
67.3
64.8
20.6
30.3
22.9
543.8
1,329.3
2017
(restated*)
£m
551.3
66.7
61.3
19.7
57.3
17.4
512.0
1,285.7
(494.0)
(472.9)
(109.9)
(603.9)
725.4
713.1
116.7
16.4%
93.1
13.1%
(112.0)
(584.9)
700.8
721.9
45.1
6.2%
69.3
9.6%
* Results and balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See
note 2 to the Financial Statements.
40
| Serco Group plc
Annual Report and Accounts 2018
Overview of financial performance
Revenue
Reported Revenue declined by 3.9% in the year to
£2,836.8m (2017 restated: £2,950.9m), a 1.7% reduction
in constant currency.
No revenue arose in 2018 (2017: nil) from operations classified
as discontinued.
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 £116.7m (2017 restated: £45.1m).
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 £93.1m (2017 restated: £69.3m), up 34%. At constant
currency, UTP was £97.1m, up 40%.
Commentary on the underlying performance of the Group is
provided in the Chief Executive’s Review and the Divisional
Reviews sections.
Excluded from UTP were net releases from OCPs of £12.8m
(2017 restated: net charges of £27.4m) following the detailed
reassessment undertaken as part of the budgeting process.
Also excluded from UTP were net releases and additional
profits of £10.8m (2017 restated: net releases of £3.2m)
relating to other provisions and accruals for items identified
during the 2014 Contract & Balance Sheet Review and other
one-time items.
For the year ended 31 December
Revenue
Operating profit
Net investment finance costs
Income tax expense
Profit after tax before exceptional charge
Exceptional pension charge (see exceptional items below)
Profit after tax
Dividends received from joint ventures and associates
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 £44.5m (2017: £19.3m). This represents 6% 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
There were no operations classified as discontinued in 2018
or 2017.
Joint ventures and associates – share of results
In 2018, 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 £20.0m (2017: £17.1m) and £8.7m (2017:
£7.3m) respectively. Total revenues generated by these
businesses were £1,024.7m (2017 restated: £951.8m) and
£160.8m (2017 restated: £155.1m) respectively.
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.
The increase in revenue and profits on the prior year is due to
the improved operating performance of the Group’s material
joint ventures.
2018
£m
375.1
34.6
0.3
(6.1)
28.8
(0.3)
28.5
29.7
2017
(restated*)
£m
356.4
34.1
(0.1)
(7.0)
27.0
–
27.0
28.2
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
41
Finance review continued
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.
For the year ended 31 December
Exceptional items arising
Exceptional (loss)/profit on disposal of subsidiaries and operations
Other exceptional operating items
Restructuring costs
Increase in onerous lease provision
Costs associated with UK Government review
Release of UK frontline clinical health contract provisions
Settlement of defined benefit pension obligations
Reversal of impairment of interest in joint venture and related loan balances
Reversal of impairment on loan balances
Impairment of AsPac customer lists
Cost of Guaranteed Minimum Pension equalisation
Increase in other provisions
Other exceptional operating items
Exceptional operating items
Exceptional finance income
Exceptional tax
Total operating and financing exceptional items net of tax
2018
£m
(0.5)
(32.3)
(1.8)
0.4
–
–
0.8
13.9
–
(9.6)
(2.8)
(31.4)
(31.9)
7.5
2.1
(22.3)
2017
£m
0.3
(28.6)
–
(0.4)
0.4
10.3
4.5
–
(6.1)
–
–
(19.9)
(19.6)
–
(5.0)
(24.6)
Exceptional profit on disposals
There were no material disposals of continuing operations
in 2018 (2017: none).
historically been treated as exceptional and consistent
treatment is applied in 2018. The credit reflects the recovery
of costs from the Group’s insurance providers.
Other exceptional operating items
The annual impairment testing of CGUs in 2018 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 (including onerous
leases), external advisory fees and other incremental costs.
Due to the nature and scale of the impact of the
transformation phase of the Strategy Review, the incremental
costs associated with this programme 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 2018, a charge of £32.3m (2017: £28.6m) 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 18. Non-exceptional
restructuring charges are incurred by the business as part of
normal operational activity, which in the year totalled £6.3m
(2017: £11.1m) and were included within operating profit
before exceptional items. We expect exceptional
restructuring costs of approximately £20.0m will be incurred
in 2019, which we expect to be the final year.
There was an exceptional credit totalling £0.4m (2017: charge
of £0.4m) associated with the UK Government reviews and
the programme of Corporate Renewal. These costs have
An exceptional charge of £9.6m (2017: nil) has been recorded
in the Group’s income statement for the year ended
31 December 2018. This is to recognise the Group’s
obligations associated with equalising the Guaranteed
Minimum Pension (GMP) payments between male and female
employees for the Group’s defined benefit pension schemes
following the High Court ruling made in October 2018.
The Serco Pension and Life Assurance Scheme (SPLAS)
recorded the largest charge being £9.0m. Included in the
£9.6m charge is £0.3m related to the Group’s share of the
GMP cost in one of the Group’s Joint Ventures. This has been
recorded as exceptional to ensure consistent treatment of all
items in 2018 related to the cost of equalising the GMP
payments within the Group’s pension schemes. The impact
of GMP equalisation is not currently estimated to have a
material impact in future years.
An additional charge of £2.8m has been recorded in respect
of an existing legal case in the Group’s North American
Division. The treatment of this additional amount as
exceptional is consistent with the recognition of the original
charge associated with the same legal matter.
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 2018 payments of
£0.8m (2017: £4.5m) were received against the impaired loan.
42
| Serco Group plc
Annual Report and Accounts 2018
Other exceptional operating items continued
An exceptional profit of £13.9m (2017: nil) has been
recognised for the settlement of consideration associated
with the sale of Serco GmbH in 2012 through the offsetting of
outstanding loan balances, the receivable of which had been
impaired. An exceptional loss on disposal of £27.7m was
recorded in 2012 in respect of the sale.
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 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. A cost of this nature did not
reoccur in 2018.
In 2017 there were releases of provisions £0.4m which were
previously charged through exceptional items in relation to
the exit of the UK frontline clinical health contracts. 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 in 2017, totalling £6.1m.
Exceptional finance costs
Part of the consideration for the sale of the Group’s private
sector BPO business in 2015 was a loan note with a face value
of £30m accruing compound interest of 7%. The receivable
associated with this loan note was recorded at a fair value of
£19.5m. The discount on the loan note has been unwinding
through the Group’s net finance cost on an annual basis.
During October 2018, the Intelenet business was sold and
therefore repayment of the loan note was triggered resulting
in a gain of £7.5m. As this gain is outside the normal financing
arrangements of the Group and significant in size it has been
recorded as exceptional investment income.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Exceptional tax
Exceptional tax for the year was a tax credit of £2.1m
(2017: £5.0m charge) which arises on exceptional items
within operating profit.
No net tax credit arises on the exceptional charge associated
with GMP equalisation (further detail on this charge is
included in the “Other exceptional operating items” section
above). The credit that arises on the deferred tax movement
associated with this charge is netted with an equal and
opposite charge that arises on the associated reduction in
the deferred tax asset in order to retain the net deferred tax
position as supported by future forecast profits.
Remaining exceptional costs excluding the pension charge
(£14.8m) only gave rise to a credit of £2.1m, as the majority of
these costs were incurred in the UK where they only impact
our unrecognised deferred tax in relation to losses.
Pre exceptional finance costs and investment revenue
Investment revenue of £4.3m (2017 restated: £8.0m) includes
interest accruing on net retirement benefit assets of £0.8m
(2017: £3.8m), interest earned on deposits and other
receivables of £2.3m (2017: £2.6m), interest arising on
customer contracts £nil (2017: £0.4m) and the movement in
discounting of other receivables of £1.2m (2017: £1.2m).
Finance costs of £18.2m (2017: £19.2m) includes interest
incurred on the USPP loans and the Revolving Credit Facility
of £13.8m (2017: £14.0m), facility fees and other charges of
£3.1m (2017: £3.0m), interest payable on finance leases of
£0.6m (2017: £1.3m), the movement in discount on provisions
of £0.5m (2017: £1.3m) and a loss for foreign exchange on
financing activities of £0.2m (2017: £0.4m credit).
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.
There were no other gains recorded in the year to
31 December 2018.
Tax
Tax charge
Underlying tax
In 2018 we recognised a tax charge of £20.6m on underlying
trading profits after finance cost. The effective tax rate
(26.0%) is lower than in 2017 (34.8%). This is mainly due to a
fall in the rate of tax incurred by our overseas operations,
primarily driven by the fall in US tax rate, together with lower
underlying UK tax losses on which no accounting tax credit is
available which is only partially offset by a lower adjustment
in respect of prior years.
Annual Report and Accounts 2018
Serco Group plc
|
43
To the extent that future UK tax losses are incurred and are
not recognised, our effective tax rate will be driven 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.
Exceptional tax
Analysis of exceptional tax is provided in the Exceptional
items section above.
Contingent tax assets
At 31 December 2018, the Group has gross estimated
unrecognised deferred tax assets of £1.1bn (£211m net),
which are potentially available to offset against future
taxable income. These principally relate to tax trading
losses of £852m. Of these tax losses, £717m have arisen
in the UK business (net £122m).
A £20.3m UK tax asset has been recognised at 31 December
2018 (2017: £17.4m) on the basis of forecast utilisation against
future taxable income.
Taxes paid
Net corporate income tax of £10.6m was paid during the year,
relating primarily to our operations in AsPac (£8.7m), Europe
(£4.1m) and Middle East (£1.1m). 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 £3.3m. A cash
tax refund in Canada on the carry back of prior year losses
has broadly equalled cash tax paid in the US such that the net
cash tax outflow for North America was nil.
The amount of tax paid (£10.6m) differs from the tax charge in
the period (£20.6m) mainly due to the effect of future
expected cash tax outflows for which a charge has been
taken in the current period. In addition, taxes paid/received
from Tax Authorities can arise in later periods to the
associated tax charge/credit and also there is a time lag on
receipts of cash from joint ventures and associates for losses
transferred to them.
Further detail is shown below of taxes that have been paid
during the year.
Finance review continued
Pre exceptional tax
We recognised a tax charge of £8.8m (2017: £13.6m) on
pre-exceptional profits which includes underlying tax
(£20.6m), tax impact of amortisation on intangibles arising on
acquisition of £3.1m credit and £8.7m credit on non-
underlying items. Of the £3.1m credit, £2.3m arises on
balancing the UK deferred tax asset to the level supported
by forecasts due to the recognition of a deferred tax liability
on customer lists arising on the acquisition of the Carillion plc
healthcare facility management contracts. This deferred tax
liability was recognised against goodwill arising on the
acquisition. The £8.7m credit consists of the tax impact on
contract and balance sheet review adjustments and other
material one-time items (non-underlying items) together
with tax items that are in themselves considered to be
non-underlying:
• The tax on non-underlying items during the period
totalled a debt of £3.2m reflecting the impact of current
or future tax charges.
• During the current period we have recognised an
additional £2.9m of deferred tax asset in relation to UK
losses to reflect the improved forecast taxable income
of our UK operations.
• Generally 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 maximum level supported
by future profit forecasts, the increase in the deferred
tax liability associated with the pension scheme (with the
benefit reported in the SOCI) leads to a corresponding
increase in the deferred tax asset to match the future
profit forecasts. Such an increase in the deferred tax asset
therefore leads to a credit 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 £9.0m credit for
2018 (2017: £1.9m charge).
The tax rate on profits before exceptional items on
continuing operations, at 8.9% is lower than the UK standard
corporation tax rate of 19%. This is due to the credits in
relation to pensions and the acquisition and additional
recognition of deferred tax assets noted above, together
with the impact of our joint ventures whose post-tax results
are included in our pre-tax profit which is only partially offset
by the 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 (which includes the result of UK divisions and the majority
of corporate costs). Our tax charge in future years will
continue to be materially impacted by our accounting for
UK deferred taxes.
44
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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
Group. 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 2018, Serco
globally contributed £568m of tax to government in the
jurisdictions in which we operate.
Taxes
borne
£m
15.9
8.2
104.4
7.2
135.7
Taxes
borne
£m
82.8
26.2
24.2
2.5
135.7
Taxes
collected
£m
–
157.1
274.3
0.8
432.2
Taxes
collected
£m
240.3
113.7
73.8
4.4
432.2
Total
£m
15.9
165.3
378.7
8.0
567.9
Total
£m
323.1
139.9
98.0
6.9
567.9
Share count and EPS
The weighted average number of shares for EPS purposes
was 1,094.4m for the year ended 31 December 2018 (2017:
1,089.7m) and diluted weighted average number of shares
was 1,125.4m (2017: restated 1,120.6m).
Basic EPS before exceptional items was 8.20p per share
(2017 restated: 1.50p); including the impact of exceptional
items, Basic EPS was 6.16p (2017 restated: loss of 0.76p).
Basic Underlying EPS was 5.36p per share
(2017 restated: 3.45p).
Diluted EPS before exceptional items was 7.97p per share
(2017 restated: 1.45p); including the impact of exceptional
items, Diluted EPS was 5.99p (2017 restated: loss of 0.76p).
Diluted Underlying EPS was 5.21p per share
(2017 restated: 3.36p).
Taxes by category
For the year ended 31 December 2018
Corporation tax
VAT and similar
People taxes
Other taxes
Total
Taxes by region
For the year ended 31 December 2018
UK & Europe
AsPac
Americas
Middle East
Total
Corporation tax, which is the only cost to be separately
disclosed in our Financial Statements, is only one element
of our tax contribution. For every £1 of corporate tax paid
directly by the Group (tax borne), we bear a further £7.53 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 £3.18
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 2018 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 judges it prudent to do so, in
assessing whether we should resume dividend payments in
respect of 2018, we have been mindful of the fact that 2019 is
the last year of significant outflows of cash related to OCPs
and exceptional costs, which together will mean that net debt
is likely to increase again in 2019, albeit modestly. The Board
will continue to keep the dividend policy under careful and
regular consideration as we progress with completing the
transformation stage and driving forward with the growth
stage of our strategy.
Annual Report and Accounts 2018
Serco Group plc
|
45
Finance review continued
Cash flows
The UTP of £93.1m (2017 restated: £69.3m) converts into a
trading cash inflow of £53.8m (2017: £21.9m). The
improvement in 2018 cash conversion was primarily driven by
margin growth, largely arising from cost efficiencies and
additionally the settlement of a long outstanding legal
matter. In 2018, the working capital outflow was £21.6m (2017
restated: £14.3m) and the OCP utilisation is £51.8m (2017
restated: £64.6m).
The table below shows the operating profit and FCF
reconciled to movements in Net Debt. FCF for the year was
an inflow of £25.0m compared to an outflow of £6.7m in 2017.
The improvement in FCF is largely as a result of improved
operating profit before exceptional items to £112.4m in 2018
from a restated balance of £40.7m in 2017, partially offset by
net provision releases in FY18 of £7.9m, compared to net
For the year ended 31 December
Operating profit on continuing operations
Remove exceptional items
charges of £37.2m in 2017 (restated). In addition, the
utilisation of the OCP’s in 2018 of £51.8m was lower than
the previous year (2017 restated: £64.6m) through better
contract performance and some onerous contracts ending.
The movement in Net Debt is an increase of £46.9m in 2018,
a reconciliation of which is provided at the bottom of the
following table. The movement includes a net outflow of
£29.3m, excluding transaction costs of £0.6m, arising on the
acquisition of BTP Systems, LLC and the acquisition of Six
Carillion plc healthcare facilities management contracts, as
well as both cash and non-cash exceptional items of £20.8m
(FY17 restated: £32.5m) and adverse foreign currency
exchange movements of £22.2m (2017: £17.4m gain).
Operating profit before exceptional items
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) 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
Net Debt at 1 January
Net Debt at 31 December
2018
£m
80.5
31.9
112.4
(28.8)
(68.1)
43.2
16.5
75.2
(21.6)
(10.6)
(0.1)
42.9
29.7
0.6
(16.7)
(2.0)
(29.5)
25.0
(31.3)
(0.3)
1.3
3.0
(3.4)
(19.2)
0.2
(22.3)
(46.9)
(141.1)
(188.0)
2017
(restated*)
£m
21.1
19.6
40.7
(27.0)
(33.6)
46.6
11.4
38.1
(14.3)
(11.4)
(0.2)
12.2
28.2
0.5
(17.5)
–
(30.1)
(6.7)
(5.6)
0.2
(0.8)
3.4
(4.7)
(32.5)
(2.5)
17.4
(31.8)
(109.3)
(141.1)
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
46
| Serco Group plc
Annual Report and Accounts 2018
2018
£m
62.5
–
(239.5)
(14.8)
3.8
(188.0)
2017
£m
112.1
25.7
(271.5)
(20.2)
12.8
(141.1)
Interest rate risk
Given the nature of the Group’s business, we have a
preference for fixed rate debt to reduce the volatility of net
finance costs. Our Treasury 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
2018, 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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Net Debt
As at 31 December
Cash and cash equivalents
Loans receivable
Loans payable
Obligations under finance leases
Derivatives relating to Net Debt
Net Debt
Average Net Debt as calculated on a daily basis for the year
ended 31 December 2018, was £234.9m (2017: £184.3m),
compared with the opening and closing positions of
£141.1m and £188.0m respectively. Peak Net Debt was
£306.9m (2017: £242.7m).
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 2018, the Group had committed funding
of £492m (2017: £741m), comprising £242m of private
placement notes and a £250m revolving credit facility (RCF),
which was undrawn. In addition, the Group had a receivables
financing facility of £30.0m which was unutilised at the
year-end (2017: unutilised of £30.0m).
On 3 December 2018 the Group completed the refinancing
of its RCF with a syndicate of banks. Serco’s RCF provides
funds for general corporate and working capital purposes,
and the ability to issue bonds to support the Group’s
business needs. The previous facility of £368m was due to
mature in April 2020. The new facility provides £250m of
committed funding for five years; the lower amount reflecting
the much reduced need for debt in the business. The terms
and conditions of the new facility are substantially unchanged
from the prior facility.
Annual Report and Accounts 2018
Serco Group plc
|
47
Finance review continued
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 below.
For the year ended 31 December
Operating profit before exceptional items
Following the refinancing in December 2018, the debt
covenants have been amended to include the impact of
IFRS15. The covenants continue to exclude the future impact
of IFRS16 on the Group’s results.
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
Other covenant adjustments to EBITDA
Covenant EBITDA
Net finance costs
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
Other covenant adjustments to net finance costs
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)
2018
£m
112.4
4.3
116.7
(28.8)
29.7
–
38.9
(0.2)
14.7
–
171.0
13.9
0.8
1.2
(0.2)
(0.5)
–
15.2
188.0
2.3
(8.8)
181.5
1.06x
11.2x
2017
(restated*)
£m
40.7
4.4
45.1
(27.0)
28.2
27.4
42.2
0.4
11.4
3.6
131.3
11.2
3.8
1.2
0.4
(1.3)
0.4
15.7
141.1
30.3
7.8
179.2
1.36x
8.4x
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
48
| Serco Group plc
Annual Report and Accounts 2018
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
Contract assets, trade receivables and other current assets
Current tax assets
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Contract liabilities, trade payables and other current liabilities
Current tax liabilities
Provisions
Obligations under finance leases
Loans
Total current liabilities
Non-current liabilities
Contract liabilities, trade payables and other non-current liabilities
Deferred tax liabilities
Provisions
Obligations under finance leases
Loans
Retirement benefit obligations
Total liabilities
Net assets
2018
£m
579.6
67.3
64.8
51.0
60.9
85.8
909.4
22.9
551.5
7.3
62.5
644.2
2017
(restated*)
£m
551.3
66.7
61.3
80.7
59.7
41.8
861.5
17.4
522.3
11.2
112.1
663.0
1,553.6
1,524.5
(497.7)
(29.2)
(120.1)
(5.7)
(21.9)
(674.6)
(109.9)
(21.4)
(119.3)
(9.1)
(217.6)
(14.9)
(492.2)
(474.0)
(25.3)
(146.3)
(8.5)
(31.8)
(685.9)
(112.0)
(20.4)
(174.0)
(11.7)
(239.7)
(15.5)
(573.3)
(1,166.8)
(1,259.2)
386.8
265.3
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
* Balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2 to the
Financial Statements.
At 31 December 2018 the balance sheet had net assets of
£386.8m, a movement of £121.5m from the restated closing
net asset position of £265.3m as at 31 December 2017. The
increase in net assets is mainly due to the following
movements:
• An increase in the net retirement benefit assets of £44.6m
as a result of changes in the financial assumptions
underpinning the defined benefit obligation associated
with SPLAS, predominantly an increase in the discount
rate which is based on UK corporate bond yields,
specifically those with a credit rating of AA. The increase
in corporate bond yields reflects the broad rise in global
corporate bond yields, with macro factors such as the
Federal Reserve tightening monetary conditions by raising
interest rates, the ongoing trade tensions and heightened
political risk – particularly in the UK with Brexit – all
contributing to the rise in corporate bond yields.
The triennial valuation of SPLAS is in the process of being
completed with funding arrangements being agreed with
the scheme’s trustees. As at 31 December 2018 the
estimated actuarial deficit of the SPLAS scheme is
£27.8m (2017: £33.7m).
• A decrease in provisions of £80.9m. Further details on
provision movements is provided below.
• Net Debt increased by £46.9m. Further details of these
movements are provided in the cash flow and Net Debt
sections above.
• An increase in goodwill of £28.3m, caused by the
acquisitions of BTP Systems, LLC and the UK health
facilities management contracts of Carillion plc, as well
as the movements in foreign exchange rates.
Annual Report and Accounts 2018
Serco Group plc
|
49
Finance review continued
Provisions
The total of current and non-current provisions has
decreased by £80.9m since 31 December 2017, on a
restated basis. The movement is predominantly due to:
• A decrease in onerous contract provisions of £64.5m.
• An £8.1m release of other provisions following changes
in the Group’s obligations, £7.5m of which was excluded
from UTP as the provision was made during the Contract
& Balance Sheet Review.
• A final settlement during the period of £8.3m for the
Docklands Light Railway defined benefit pension scheme.
BTP provides satellite communications (SATCOM), radar
modernisation, 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 specialises 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,
Military Strategic & Tactical Relay command post antennas
and radar antennas.
Movements in onerous contract provisions since the
31 December 2017 balance sheet date on a restated basis,
are as follows:
Onerous Contract
Provisions
£m
At 1 January 2018 (restated*)
Charged to the income statement during
the year – trading
Released to the income statement – trading
Utilisation during the year
Unwinding of discount
Foreign exchange
At 31 December 2018
146.6
3.4
(16.2)
(51.8)
0.5
(0.4)
82.1
*
Results for the year ended 31 December 2017 have been restated to
reflect the adoption of IFRS15 with effect from 1 January 2017 and a
brought forward reclassification of £1.5m. See notes 2 and 27 to the
Financial Statements.
The balance of OCPs at 31 December 2018 was £82.1m
(2017 restated: £146.6m). 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 release to OCPs was £12.8m in 2018 (2017
restated: £27.4m charge) and utilisation was £51.8m (2017
restated: £64.6m).
In 2018, the net release in OCPs is reflective of the Group’s
ability to forecast the final years of contracts which are
nearing completion, the expiry of contractual obligations and
relief of obligations through commercial settlement or sale of
contracts such as the Anglia Support Partnership. Additional
charges of £3.4m (2017 restated: £61.9m) have been made in
respect of future losses on existing onerous contract
provisions to reflect the updated forecasts as settlements are
agreed and contracts near completion.
Acquisitions
On 26 January 2018, the Group acquired 100% of the issued
share capital of BTP Systems, LLC (BTP). The acquired
business contributed £12m of revenue and £1.9m of operating
profit before exceptional items to the Group’s results during
year to 31 December 2018. The net cash outflow as a result
of the acquisition was £13.2m, being £1.2m cash acquired
less £14.4m consideration paid.
As explained in note 7 of the Group’s Consolidated Financial
Statements, the Group acquired Carillion plc’s facilities
management contracts at six major NHS hospital sites over
the period from June 2018 to August 2018: Great Western
Hospital in Swindon; Darent Valley Hospital in Dartford;
James Cook University Hospital in Middlesbrough; Harplands
Hospital in Stoke-on-Trent; The Langlands Unit of Queen
Elizabeth University Hospital in Glasgow; and Addenbrooke’s
Treatment Centre in Cambridge.
The total annual revenue of all six contracts is expected to
be around £70m and the estimated operating profit before
exceptional items, including an appropriate allocation of
charges for shared support services and other incremental
overheads, will be approximately £4m, the aggregate
consideration payable is approximately £18m. The acquired
contracts contributed £30.3m of revenue and an operating
loss before exceptional items of £2.1m to the Group’s results
during year to 31 December 2018 due to the transition costs
incurred.
IFRS15
The Group has restated all comparative amounts within the
Consolidated Financial Statements to align with IFRS15. The
impact on opening retained earnings as at 1 January 2017
was a reduction of £49.3m and the impact on the opening
OCP balance as at 1 January 2018 was a reduction of £20.5m.
Underlying Trading Profit decreased by £0.5m and Trading
Profit decreased by £8.9m 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.
IFRS16
A new leasing standard, IFRS16 ‘Leases’, is effective for the
Group from 1 January 2019.
A number of options are allowed under IFRS16 in relation to
the adoption of the new standard. The Group will adopt the
modified retrospective approach for calculating all right of
use assets as at 1 January 2019. This approach is more closely
aligned to the full retrospective transition, without the need
to recalculate all lease liabilities assuming IFRS16 had always
been adopted by the Group.
50
| Serco Group plc
Annual Report and Accounts 2018
The Group has also adopted the exemptions allowable
under IFRS16:
• all leases with an end date before 31 December 2019
are not subjected to transition to IFRS16.
• all short dated leases with a term of less than twelve
months or a cost from new of less than £5,000 are not
capitalised on the balance sheet and the associated
lease expense is recognised through operating costs.
A project relating to the implementation of IFRS16 included
a review of the transition options to be adopted and a robust
data capture exercise. The Group has assessed its lease
portfolio under the principles included within IFRS16 where
the consideration of whether a lease exists has changed
from risks and rewards to one of control. As a result of
this assessment there have been no changes to the
lease assessments made under IAS17.
The expected impact of IFRS16 on the opening balance
sheet of the Group as at 1 January 2019 is a £24.6m reduction
in opening retained earnings and a £118.0m increase in
Net Debt. As the modified retrospective approach is
being adopted, the comparative information for 2018
will not be restated.
Angus Cockburn
Group Chief Financial Officer
20 February 2019
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
51
Risk Management
Risk management approach
We have a structured framework identified in our Serco
Management System (“SMS") to support our management of
risks. Our Group standard, which we require all our Divisions
and Functions to follow, consists of six key processes forming
the risk management life cycle. This enables a consistent
approach to identifying, analysing, monitoring and reporting
risks and a mechanism for providing assurance that the risk
mitigation in place is effective.
We seek to identify, review and report risks at all levels of our
business, reflecting the nature of the activities being
undertaken at those levels, the business and operational
risks, and the level of control considered necessary to protect
our interests and those of our stakeholders.
We recognise that our management and internal control
systems can only seek to manage and not eliminate our risks,
as any system can only provide reasonable, not absolute,
assurance against material misstatement or loss.
Management oversight
We have a systematic approach to our risk oversight, with
nominated members of senior management tasked to ensure
that the risk management framework is understood and
implemented. 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.
For our principal risks, we have Subject Matter Experts
(“SMEs") and a nominated Executive Committee member
allocated to each, supporting their review and management.
Detailed reviews of these risks are carried out on a rolling basis
and contribute to the risk reporting at the Group Risk
Committee (“GRC"). As well as individual ‘deep-dives’ carried
out on each of our principal risks during the year, our divisional
CEOs provide a ‘deep-dive’ of one of their material risks
providing the opportunity for the GRC to challenge risks at
Divisional level and to stress test our Group principal risks (see
pages 91 to 93 for the detailed Corporate Governance Report).
Risk management life cycle
CORPORATE RISK REPORTING TOOL
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 PLANNING
• Assigning responsibility for risk
management implementation and
planning the approach.
RISK IDENTIFICATION
• Identifying risks associated
with achievement of our business
objectives. Includes potential risks
from external factors arising from
the environment within which we
operate, and internal risks arising
from the nature of our business.
Risk Management Life Cycle Processes
RISK MONITORING
•• Monitoring mitigation actions
and their impact (so as to improve
the effectiveness of controls and
improve the residual risk rating).
•• Monitoring changes to
our business and the external
environment, to ensure we have sight
of and respond appropriately to
emerging risks.
RISK MITIGATION
• Identifying controls that will
reduce material risks to a target risk
rating aligned with our risk appetite,
and implementing cost-effective
mitigation and contingency actions
that improve the effectiveness of
controls.
RISK 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 the effectiveness
of current controls.
C
O
M
P
L
I
A
N
C
E
A
S
S
U
R
A
N
C
E
G
N
I
T
N
U
O
C
C
A
D
N
A
T
H
G
I
S
R
E
V
O
52
| Serco Group plc
Annual Report and Accounts 2018
This year we have enhanced our risk overviews with the
introduction of a Key Risk Indicator dashboard. This enables
the GRC to see ‘at a glance’ progress to our mitigation plans,
our tolerance levels and other risk indicators such as
outcomes relating to our three lines of defence activity.
The dashboard has been refined during the year, and this is
expected to continue as our maturity regarding indicators
and performance measures increases.
Risk appetite
Our objective is to be a trusted partner of governments,
delivering superb public services that transform outcomes
and make a positive difference for our fellow citizens. As
such, we have a relatively low risk appetite to ensure that we
can deliver on the wider value that we want to bring to
governments, public services and to society.
The Board considers the risk appetite of the Group in the
context of the factors outlined in the diagram below.
Different risks will attract different levels of risk appetite,
and the use of ‘heat maps’ help us to prioritise our risks using
a combination of agreed impact and likelihood criteria.
Each of our principal risks has 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 required 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.
Risk appetite factors
Regulatory
environment
Controls
Policy
Political
environment
Risk
appetite
Risk culture
Strategy &
organising principles
Risk
exposures
Risk
tolerances
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
53
Principal Risks and Uncertainties
Review of principal risks and wider horizon scanning
Our Executive Committee reviews the principal risks facing
the Group, 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.
We also assess our external and internal environment to
anticipate both risks and opportunities and to increase our
ability to pre-empt, convert or exploit them. Material risks
are covered at the GRC meetings.
This year, emerging risks specifically included reviews on:
– The changes in perception for outsourcing and changes
in government, inflation, other external cost pressures
and Brexit.
We make specific reference below to the UK’s proposed
withdrawal from the European Union (“Brexit”) and our
current assessment of its impact on Serco.
We recognise that significant uncertainty will remain until any
Brexit proposal is fully agreed and understood, and as such
our understanding of potential risks and impacts are being
regularly reviewed and assessed. We have, for example,
reviewed the potential impact of Brexit, including adverse
economic consequences, on our existing contract base,
workforce, bidding activities and supply chain. Reiterating
our CEO’s comment in last year’s Annual Report, we do not
believe that Serco will be materially affected by the UK
withdrawing from the European Union. This is based on the
following key points:
• For our UK and EU contracts, operations are generally
delivered locally in-country and are not critically
dependant on a cross-border supply chain or workforce.
• By operating many contracts, Serco has a natural hedge
from material Brexit risks that may therefore arise on a
limited number of contracts only.
• Many of our existing contracts have provisions which allow
for inflationary adjustments to fees charged by us.
• A ‘hard’ Brexit without a transition period and/or an
orderly withdrawal may cause regulatory and compliance
uncertainty on some limited UK contracts that require
performance under EU regulation, bodies and/or
standards; however, we believe such uncertainties will be
addressed under proposed new UK regulations following
any withdrawal.
• Tariffs will only affect a small number of UK contracts that
require imported goods that cannot be procured locally.
Summary of principal risks
• For our European business, Serco conducts business
through locally established companies in EU states and by
way of a branch of Serco Limited which allows Serco to
continue to operate subject to the freedoms and rules of
the Internal Market.
• Public procurement and bidding processes will remain
broadly unaffected as local laws will continue to apply
post-Brexit.
• We recognise that Brexit may delay existing public sector
outsourcing contracts and/or reduce pipeline
opportunities while the UK Government and the Civil
Service focus on implementing Brexit withdrawal.
• We are not critically reliant on our workforce having to
travel extensively between the EU and UK, or the need to
source EU workers on UK contracts – any such
requirements that do arise will raise a manageable
administrative workload only.
• We are conducting a critical supply chain review, and to
date we are broadly comfortable with our key UK
suppliers’ ability to maintain the provision of goods and
services on key UK contracts.
Our principal risks and emerging risks are constantly
monitored at the appropriate level within the organisation.
However, whilst we may have refined our risk drivers and
controls during the year, these considerations have not
materially affected the principal risks as reported in our 2017
Annual Report.
The resulting principal risks, as described below, have been
reviewed by the Executive Committee, GRC and the Board.
Each risk is classified as a strategic, financial, operational,
people, hazard, or legal and compliance risk. The risks 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. This
year we have included the residual risk trend indicator for
each risk, together with a brief commentary to contextualise
these trends.
The risks are considered over the same three-year timeframe
as the Viability Statement set out on pages 64 and 65, which
takes account of the principal risks in its assessment.
In addition to the principal risks and uncertainties listed
below, there may be other risks, either unknown, or currently
believed to be immaterial, which could turn out to be
material. These risks, whether they materialise individually or
simultaneously, could significantly affect the Group’s
business and financial results.
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
Contract non-compliance,
non-performance or misreporting
Failure of business
critical partner, supplier or
sub-contractor
People risks
Failure to act with integrity
Hazard risks
Catastrophic incident
Legal and
compliance risks
| Serco Group plc
54
Material legal and
regulatory compliance failure
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Winning good business
Executing brilliantly
A place people
are proud to work
Profitable and sustainable
Increasing risk
Decreasing risk
No change
The trend indicator depicts the trend of our residual risk
rating internally over the course of 2018.
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.
Market conditions continue to be challenging in a number of our sectors and geographies, though our diversity and focus on business development
has enabled us to retain important re-bids and gain sufficient new business to stabilise our revenue. With a reasonable pipeline of opportunities
ahead, further opportunity for margin improvement and our access to a wide variety of markets, we consider this risk to be stable.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
External factors reducing the pipeline of
opportunities – political and policy changes in
our markets (such as changes in views about the
private provision of public services, changes
following elections 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 propositions for the markets in
which we compete, or an insufficient understanding
of our competitive environment 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
may affect our ability to set and meet targets for
growth as well as drive process improvements.
Failure to obtain or capitalise on benefits from
our Transformation Programme – (See ‘Failure
of deliver expected benefits from Transformation
Programme’).
• Serco Group and Divisional
• Review pipeline opportunities to
Strategy including annual strategy
reviews, ensuring focus on and
resource allocation to specific
markets and geographies with
the greatest growth potential.
• Serco Operating Model.
• Investment Committee.
• Serco Management System
(“SMS").
• Sector-specific Centres of
Excellence (“CoEs”) and Value
Propositions.
• Newly relaunched Serco Institute
to develop thought leadership
and innovation for our markets.
• Business Life cycle Review Team
(“BLRT") Process.
• Pipeline and Business
Development (“BD") spend
reviews to ensure efficient
deployment of resources.
• Divisional Performance Reporting
(“DPR") process.
• Annual Performance Reviews,
Talent Reviews and Succession
Planning processes.
• Ensure that the divisional and
business unit BD leadership and
resources are appropriate for the
delivery of our growth strategy.
ensure all market activity is
accurately captured and that
budgets are allocated accordingly.
• Review portfolio for new attractive
organic expansion areas.
• Continue to improve leveraging
of Serco best practice and
innovation, as well as refine bid
solution processes and SME
resources to ensure our
propositions remain competitive.
• Continue to adopt a robust
qualification processes so that
Business Development resources
are focused on the most attractive
opportunities.
• 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 bids, as
well as re-bids to ensure existing
clients are experiencing good
service from Serco and fully
understand the value and quality
of our services.
• Continuation of changes to Group
and Divisional overhead and
Shared Services’ structures as part
of the Transformation Programme
to ensure we remain cost
competitive.
• Review and consider appropriate
inorganic growth opportunities as
the market continues to develop.
Annual Report and Accounts 2018
Serco Group plc
|
55
Principal Risks and Uncertainties continued
STRATEGIC RISKS CONTINUED
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 and may lead to reduced share price and the related consequences of a reduced
valuation of the business.
We have maintained a continued focus on Operational Excellence and have made a positive contribution to the debate around public
sector outsourcing.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
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.
Insufficient focus on articulating and evidencing
the benefits of private provision of public
services – may result in an imbalanced public
discourse and a misunderstanding of what Serco
contributes to customers and service delivery.
Failure to manage incidents appropriately – may
result in us not responding in a collaborative manner
with our customers or not communicating in an open
and ethical manner to key stakeholders.
• Serco Values clearly defined and
understood.
• Group Reputation, Brand and
Communication Standard.
• Continual refinement and
improvement of existing
communication and marketing
controls and approaches.
• Customer and stakeholder
• Continued and heightened efforts
relationship, communication and
engagement programmes.
• Proactive engagement with the
media and continual media
monitoring.
• Media training and understanding
of reputational issues for senior
management.
• Incident management processes
and crisis management plans.
to explain and evidence the
benefits and innovations that
Serco brings to the provision of
public services.
• Recently relaunched Serco
Institute to trial and publish
innovative thinking in public
service delivery.
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.
Early momentum on key projects delivery at the end of 2017 (eg. UK divisions consolidation) meant benefits flowed early in 2018, this
established momentum for the rest of the year. The full-year target was achieved by July which meant residual risk in-year was minimal.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Non-delivery of required benefits – we fail to
achieve the expected benefits due to ineffective
portfolio management and governance.
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.
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.
• Serco Target Operating Model
• Key benefits embedded in 2019
and design principles.
• Portfolio programme
management process.
• Stakeholder engagement and
communication plans.
• Benefits management process.
budgets to further increase focus
on delivery and achievement of
benefit outcomes at all levels.
• Further refinements to benefits
tracking and reporting including
differentiation between budget
supporting and budget enhancing
benefits.
• Additional delivery assurance and
supplier management activities
built into portfolio and delivery
management processes.
56
| Serco Group plc
Annual Report and Accounts 2018
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, or an inability to forecast accurately;
the failure to create a suitable capital structure, and an inability to make critical financial transactions, leading to financial instability, potential
business losses, and negative reputational impact.
During 2018, the Finance Transformation Programme has been completed for both our UK and AsPac Divisions. Finance Centres of Excellence
were created for both Divisions which are now in a stabilisation phase. Finalising the transformation phase has significantly reduced our
financial control risk exposure, and stabilisation will continue to reduce this exposure further.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Not setting the right tone from the top – if we do
not set the right tone from the top, we may fail to
embed 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 Finance 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
• Deliver on final components of
strategy.
finance transformation.
• Finance Transformation
Programme governance.
• Serco Management System
(“SMS") – finance processes
and controls.
• Standardised reporting,
forecasting and financial
processes.
• Standardised financial systems
and data structures.
• Skilled and adequately trained
finance staff.
• Embed transformed finance
function and monitor delivery and
risks of outsourced Finance Centre
of Excellence.
• Continuously improve forecasting
and reporting processes and
outputs to deliver better insight
into contract operations.
• Deliver global finance process
improvement and efficiency
through automation and robotics.
• Establish billing assurance
programme.
• Ensure talent is retained within the
finance function through initiatives
such as opportunities for personal
development and improved
training.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
57
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.
Whilst our ongoing mitigation measures continue to deliver clear benefits, the external threats continue to evolve in complexity and
sophistication, resulting in a steady state view of the overall risk.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Non-compliant systems – if our systems are
non-compliant with Serco policies and standards and
regulatory requirements for the protection of
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.
• Enterprise Architecture Boards
& Solution Review meetings.
• Serco Management System
(“SMS").
• Routine vigilance and proactive
vulnerability identification
coordinated through our Security
Operations Centres.
• IT security infrastructure,
processes and controls.
• Embed third-party due diligence
checks for key suppliers.
• Privileged User Management and
Two Factor Authentication for our
centralised managed systems.
• Embed the use of global key
security risk indicators to support
mitigation priorities.
• External assessments.
• Third-party due diligence checks
for key suppliers.
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.
• Active monitoring by our Security
Operations Centres and Computer
Security Incident Response Team
processes.
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.
• Standardised HR processes.
• Cyber security awareness training
part of our Serco Essentials
training programme.
• Regular Phishing training
exercises.
Contract non-compliance, non-performance or misreporting
Failure to deliver contractural requirements or to meet agreed service performance levels and report against these accurately may lead to
significant financial penalties, legal notices, onerous contract provisions or ultimately, early termination of contracts.
The reporting structure, the systems and the monthly business performance review which is conducted at contract, Business Unit and Division
level across our business provides a rigour that allows senior management visibility of contract performance or compliance issues early.
We have seen no major failures in 2018.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
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 being produced.
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 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.
• Contract Management
Application (“CMA").
• Contract governance including
Monthly Contract Reviews,
Business Unit reviews and
Divisional Performance Reporting
(“DPR") process.
• Business Life cycle Review Team
(“BLRT") process.
• Serco Management System
(“SMS").
• Leadership Development
Programme and Contract
Manager training.
• Communication of Our Values and
Code of Conduct.
• Speak Up process (“Ethicspoint”).
• Contract Management training
(Global and Divisional).
• Development and global roll-out
of contract performance
dashboard (“Gauge”).
• Improve consistency of approach
to risk assessment and controls
across all divisions.
• Divisional operational excellence
improvement plans.
58
| Serco Group plc
Annual Report and Accounts 2018
Failure of business-critical partner, sub-contractor or supplier
As a result of the failure of a business-critical1 partner, sub-contractor or supplier 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 on Serco.
An extensive exercise to identify business-critical suppliers across all divisions was concluded in Q3, and the trend is steady while controls are
implemented and systematically tested. This trend will remain the case while we focus on our highest risk suppliers and test the effectiveness of
controls implemented.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Ineffective procurement and supply chain
governance – resulting from non-compliance to
standards and lack of consequence management.
• Serco Management System
(“SMS") – Procurement policy,
standards and procedures.
Identification of significant suppliers – a failure to
identify 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 services.
Limited oversight – resulting in poor sourcing,
contracting and monitoring of business-critical
business 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.
• Sourcing standards and
procedures in each region.
• Identification and maintenance
of business-critical partner,
sub-contractor and supplier list.
• Contracts with appropriate KPIs/
SLAs etc.
• Financial health checks and
monitoring in the UK, North
America and AsPac.
• Focus on highest-rated business-
critical suppliers for roll-out and
testing of controls.
• Develop proposition for formal
supplier and contract
management framework.
• Audit business-critical sub-
contractor and supplier business
continuity plans.
• Risk assessment and mitigation of
business-critical suppliers through
the Sales and Bidding cycle.
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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
59
Principal Risks and Uncertainties continued
PEOPLE RISKS
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; or may impact shareholder, investor and financial institutions’
confidence in Serco.
We have continued to entrench our values through explicit leadership behaviours and communications and celebration through the Pulse
Awards.
Our key controls have been further embedded, including those for our due diligence processes and ethical risk assessment.
We have strengthened and further clarified our expected behaviours through updates of Code of Conduct and associated training.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
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
• Adoption of online Conflict of
Interest registers.
• Refinement of divisional ethics and
compliance risk assessments.
• Review of due diligence processes.
• Continued refresh of Serco
Essentials training.
• Evaluate effectiveness of internal
culture assessment processes.
the top.
• Strong, meaningful and
understood Values.
• Code of Conduct.
• Corporate Governance with
oversight by the Corporate
Responsibility Committee (“CRC").
• Delegated Authority Matrix
(“DAM").
• Serco Management System
(“SMS").
• 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.
• Corporate investigations.
• Speak Up process (“Ethicspoint”).
60
| Serco Group plc
Annual Report and Accounts 2018
HAZARD RISKS
Catastrophic incident
An event (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.
Significant activity completed – frontline operational controls collated and self-assessed. Second line (insurance and contractual risk allocation)
under review and improved.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
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.
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.
Lack of capability and experience – if resources
lack current competency in specialist/regulatory
requirements this 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.
Insufficient safety management
oversight – devolved compliance of regulations to
sector-specific Subject Matter Experts without
appropriate safety management oversight may result
in safety management systems which are not fit for
purpose.
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.
• Serco (Health, Safety and
• Adoption of updated health and
Environmental) HSE Strategy.
safety strategy.
• Effective and engaged safety
• Ensure strategy workplans have
culture.
specific focus on Catastrophic risk.
• Regular safety communications
and maintenance of safety
awareness.
• Improve understanding through
training in insurance and
contractual risk management.
• Competency-based recruitment
• Complete second line controls
programme.
review and alignment of insurance.
• Role description and competency
• Review levels and adequacy of
definition.
compliance assurance.
• Serco Essentials training.
• Safety training and individual
development plans and process
based on role and operational risk.
• Access to subject matter
expertise.
• Safety Management System
(policy and procedures).
• Planned and preventative
inspections, maintenance and
repair programmes.
• Third-party ethical due diligence
process.
• Assure – Serco’s incident and
compliance reporting system.
• Incident/Near-miss investigations.
• Business Life cycle Review Team
(“BLRT") process.
• Divisional Performance Reporting
(“DPR") process.
• Crisis and incident emergency
response plans and testing.
• Business Continuity plans and
testing.
• Adequate risk transfer via contract,
insurance.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
61
Principal Risks and Uncertainties continued
LEGAL AND COMPLIANCE RISKS
Material legal and regulatory compliance failure
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. 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.
Various laws and regulations that apply across the business continue to be subject to increased focus and attention, including anti-bribery and
corruption laws, Market Abuse Regulations, data and privacy laws, modern slavery, trade compliance and human rights.
Our GDPR implementation programme continues to support the business and help drive increased focus on data protection laws.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Lack of governance and oversight – may result in a
failure to identify potential or actual legal or
regulatory breaches resulting in a failure to respond
appropriately or 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 failure to comply with material legal and
regulatory obligations.
Lack of awareness by employees of the legal and
regulatory requirements placed upon them and
the business – 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 and reporting of legal and regulatory
compliance.
Legal or regulatory compliance failure by a
third-party supplier/agent/partner – may result in
Serco being held responsible for their failure under
customer contracts.
• Automated alerts on material legal
and regulatory obligations and
changes.
• Horizon scanning on key potential
new laws and regulations,
including Brexit.
• Legal and contracts experts
aligned to various specialist areas
across the business.
• Greater use of data and trend
analysis to inform Key Risk
Indicators.
• Investment Committee and
Business Life cycle Review Team
(“BLRT") bid process and
governance.
• Third-party ethical and general
due diligence on all suppliers.
• Serco Management System
(“SMS") including various policies
and operating procedures guiding
and regulating conduct.
• Case management software
• Launch of new Conflicts Group
Standard Operating Procedure.
• Ongoing compliance activity.
• Refreshing Serco Essentials
training programmes.
• Continuing key contract and
compliance assurance reviews on
legal compliance.
• Developing and embedding Serco
Trading Principles.
and analytics.
• Legal training.
• Serco Essentials training.
• External and Internal audits.
• Regular reporting to Board
and Executive Committee on
legal issues and new laws across
the Group.
• Speak Up process and case
management system
(“Ethicspoint”).
• Serco Trading Principles
promoting consistency across the
Group on bid risk.
62
| Serco Group plc
Annual Report and Accounts 2018
SFO investigation
We remain under investigation by the UK Serious Fraud
Office (“SFO") which commenced in December 2013. We are
cooperating fully with the SFO’s investigation, but it is not
possible to predict the outcome and timing. No conclusion
has yet been reached. However, in the event that the SFO
decides to prosecute, the range of possible adverse
outcomes is any one or a combination of the following:
• 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 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, a potential impact
on existing contracts and a period of discretionary
debarment from future contracts with government
entities. Such debarment would be discretionary in the
sense that a contracting authority may consider it not to
be relevant to a given bid or re-bid, or that Serco has
provided sufficient evidence that it has addressed any
issues identified in a DPA or be limited in time under the
terms of the Public Contract Regulations 2015.
Upon any such conviction or DPA, the amount of additional
work given to the Group may be reduced, and the Group may
be subject to enhanced scrutiny with respect to its other
contracts and further actions beyond those being
implemented under the Corporate Renewal Programme may
need to be taken.
If the Group faces any criminal convictions, debarment
consequences or enters into a DPA, any such outcome could
result in significant fines, a potential impact on existing
contracts and have a material adverse impact on the Group’s
ability to contract with the 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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
63
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 2021.
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% (2017: 58%) of the current year revenue
relates to contracts where the contract term potentially
comes to an end within three years.
• There is currently significant political uncertainty in the
United Kingdom, United States, Saudi Arabia, Qatar and
Australia.
The strategic plan set out in March 2015 significantly changed
the direction of the Group as explained in previous
shareholder communications. This plan is still being executed
with the Group preparing an updated five-year business plan
each year to establish whether it is on target to achieve its
long-term goals. However, the financials for the last three
years of this period are largely extrapolations of key
assumptions used in the budget process. Given the
difficulties of forecasting over a long time period it would be
inappropriate to draw conclusions on the future prospects of
the Group and for developing sensitivities and mitigation
strategies. Therefore, whilst the Five-year business plan
continues to be developed, it remains a goal for the Group
and is a not a forecast based on known assumptions; this
makes assessing the longer term viability a challenge.
Good progress has been made on the strategic plan and the
Directors expect this to deliver the growth targets which have
been set. Although in the early stages of growth, the ability
of the Group to harvest the benefits of the transformation are
only just starting to be realised. We have previously
highlighted the dependence on the external market and our
ability to win new contracts whilst reducing the cost base.
Market rates of growth have slowed in recent years and while
we expect strong growth in the next two years due to our
new contract wins and order book, thereafter revenue growth
is more difficult to assess, but margins will increase from cost
reduction and improved efficiencies. Importantly in 2018, we
have refinanced the Group’s bank debt, and the new
Five-year funding will provide the financial platform to
continue to invest in the growth of the Group.
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 52 to 63, 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 2019 and 2020 which has been
approved by the Board, and an extrapolation to 2021 using
higher level assumptions based on local market growth rates
and identified opportunities.
The Group’s covenant net debt balance at 31 December 2018
is £181.5m. The Group’s base projections indicate that debt
facilities and projected headroom are adequate to support
the Group over the next three years. The Group’s financial
plan has been stress-tested against key sensitivities which
could materialise as a result of the crystallisation of one or a
number of the 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.
A reverse stress test of the Group’s profit forecast has been
completed using different assumptions of new business and
rebid win rates and the Group’s profit margin. This analysis
shows that the Group can afford to be unsuccessful on 50%
of its target new business and rebid wins, or it can be
unsuccessful on 25% of its target new business and rebid
wins combined with a profit margin 100 basis points below
the Group’s forecast, before the Group’s borrowing facility
covenants are breached in 2021. As context, rebids have a
more significant impact on the Group’s revenue than new
business wins, as contracts accounting for 50% of total
revenue are expected to be rebid in the next three years.
The Group’s rebid win rate has been in excess of 90% over
the last two years. While these sensitivities will change in line
with Group’s order book and contract performance going
forward, including the impact of new contract wins and
losses, the ability for the Group to absorb sensitivities of this
scale within its existing financing 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.
64
| Serco Group plc
Annual Report and Accounts 2018
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 as a result of customer policy or
other changes;
• there is no significant deterioration in new bid and rebid
win rates from those anticipated;
• the Group is able to complete the execution of its
strategy, including further transformation in 2019, and
making progress to revenue growth and further margin
improvement from 2019 onwards; and
• the Group is not subject to any significant penalties or
direct and indirect costs and/or debarment from bidding
for new contracts from the current SFO investigation,
nor does the investigation adversely impact on
existing contracts.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
65
Corporate Responsibility
As a private sector company with global presence and a strong public sector
bond, taking responsibility defines what we do and how we do it. We serve
society on behalf of governments who trust us to provide public services,
and citizens who trust us to take care of them in diverse circumstances.
In this we are also trusted to serve as a responsible employer, partner,
neighbour and investment.
Beyond this report, our organisation is alive with leadership
and action. Each component in our framework represents a
continuously improving system of people, projects and
processes – managed by global teams and fulfilled by our
employees, touching the lives of countless service users
every day. In our report we celebrate examples of exceptional
contributions around the world. Harder to share is all that
exists behind the scenes, enabling them to make a
difference. Nonetheless, we all stand on the shoulders of our
colleagues, atop a solid foundation of shared strategy, policy
and governance.
We believe Serco to be a responsible business, well-
positioned not only to deliver quality services and value for
money, but also to promote higher standards in public
services. We are not perfect, nor are we immune to mistakes,
but we do not hide our imperfections, just as we do not hide
our efforts to overcome them and the strengths with which
we strive to improve.
We define our responsibilities by our principal stakeholder
groups, and the strength of these relationships is the true
test of our progress and performance. In this report we
summarise how we are learning from them and responding
to their needs whilst living the values that underpin
our approach.
Further information is available in the Corporate
Responsibility Committee Report on page 102 and in our full
Corporate Responsibility Report which is available on the
Company’s website.
Being a responsible business is about more than just meeting
our minimum obligations. It is how we contribute and create
sustainable value. It is the outcomes that define us, and how
we achieve them. It is recognising that, to best protect the
interests of any one group of stakeholders, we must
determinedly embrace our responsibilities to all stakeholders.
From the boardroom to the frontline, we seek out
opportunities to make a meaningful difference. Not because
we are required to, but because it makes good business
sense; because we are in a good position to make that
difference; and because it is in our nature as a team of
more than 50,000 people who share the same values and
sense of purpose.
Externally, the focus on what it means to be a responsible
and sustainable business has continued to grow, expanding
in scope and driving increased scrutiny and rigour.
In the past 12 months, for example, we have commenced
measuring and reporting our Gender Pay Gap and supplier
payment performance in the UK, aligned our social
responsibility governance with the Corporate Social
Responsibility Act in the United Arab Emirates, and worked on
implementation of the new Modern Slavery Bill in Australia.
Alongside our customers and other stakeholders, we see
industry-shaping potential in these developments: to drive
transparency, accountability and improved governance
further and deeper across the public service landscape. For
Serco, these changes complement our existing endeavours
and are welcome opportunities to share our performance
more widely and inclusively whilst helping our key
stakeholders become better and more objectively informed.
Through our corporate responsibility framework, we address
the most pressing needs of our key stakeholder groups. Our
efforts are not limited to these items, but this is where we
focus our attention and ambitions most closely.
66
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Our corporate responsibility framework below defines our principal areas of
responsibility and helps to guide practice and behaviour whilst facilitating
measurement of our performance.
D
i
v
e
a
r
n
s
w
e
d
o
i
w
r
n
o
k
c
l
r
p
u
k
f
o
l
a
s
i
c
v
r
c
e
e
e
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 strive to manage our
impact on the
communities, economies
and environments in
which we operate
responsibly.
Our owners
We are determined to
protect our shareholders’
interests and create
long-term, sustainable
value for them.
p72
See page 72 for information
on our customers
p75
See page 75 for information
on our people.
p77
See page 77 for information
on our world.
p79
See page 79 for more
information on our owners.
Annual Report and Accounts 2018
Serco Group plc
|
67
Corporate Responsibility
Our commitment
We have continued to build momentum in long-term objectives for
sustainable improvement: consolidating progress and maintaining
key strategies.
Our CR categories
Next steps identified in our 2017 report
Progress in 2018
Our priority next steps
Behaving with
integrity and
treating
people with
respect
Our
customers
Develop a condensed Code of Conduct for temporary workers.
Complete our global review of Anti-Bribery and Corruption (ABC) ‘adequate
procedures’.
Apply elements of the UK ABC assessment toolkit in other Divisions.
Relaunch the Serco Institute.
Explore opportunities to measure and report performance for our responsibilities
to our customers at Group level.
Our
people
Develop and deploy a ‘just’ health and safety culture framework.
Deploy our safety culture assessment tool globally.
Replicate our new global aviation safety forum in other safety critical areas.
Complete a formal review of our online incident management tool.
Improve ‘near-miss’ incident reporting.
Continue working to improve our leadership gender balance.
Develop our understanding of ethnicity as a strategic diversity focus in our regions.
Our
world
Relaunch the Serco Foundation.
Refresh and refocus our environment strategy.
Launch our refreshed fair competition training for managers and our new
conflicts of interest register.
Improve guidance for ethical and human rights due diligence in new geographies
and partner selection and appointment.
Deploy our new Supplier Relationship Management solution.
Explore opportunities to address Tier 2 suppliers in high-risk areas.
For progress and priorities relating to our responsibilities to our owners, see our Strategic Report (specifically:
Key Performance Indicators, pages 9 to 11; Chief Executive’s Review, pages 20 to 27; and Principal Risks and Uncertainties,
pages 54 to 63).
68
| Serco Group plc
Annual Report and Accounts 2018
• Develop a Group business ethics and
human rights dashboard.
• Further review the legislative standards for
Modern Slavery that apply in each Division
to ensure all local requirements are met.
• Continue to explore opportunities to
• Build respect for the new Serco Institute
measure and report performance for
and deploy its capabilities to the maximum
our responsibilities to our customers at
through developing strategic partnerships.
Group level.
• Continue to drive a range of initiatives
across our custodial, health and transport
operations to address increasing violence.
• Embed our new Communities of Practice.
• Continue to develop and promote our
proposed four principles for governing
outsourced public service delivery in
• Better coordinate and share insight from
the UK.
our Divisional customer surveys.
• Finalise and deploy our ‘just’ health and
• Formulate and deliver Corporate and
safety culture framework.
• Act on our safety culture assessment
Divisional action plans to improve
employee engagement in response to our
• Continue our work to improve ‘near-miss’
• Drive employee wellbeing forward as a
results.
incident reporting.
strategic priority.
• Launch our new cross-Divisional oversight
groups for safety-critical areas.
2018 survey.
• Respond to Provision Five of the 2018
UK Corporate Governance Code.
• Promote our staff inclusion networks at
both the Divisional and Group levels.
• Launch our new employer brand.
• Launch an annual People Report for
internal and external publication.
• Formally relaunch the Serco Foundation
• Complete the launch of our new conflicts
externally.
•
Improve community investment reporting.
• Roll out our new environmental strategy
across our Divisions.
• Commence reporting in line with The
Companies (Directors’ Report) and Limited
Liability Partnerships (Energy and Carbon
Report) Regulations 2018.
•
Incorporate risk tolerance variation into our
due diligence process.
of interest register and Group Standard
Operating Procedure for conflicts of
interest; develop and deploy new fair
competition training for high-risk roles.
• Publish new guidance for ethical and
human rights due diligence in new
geographies and partner selection and
• Trial our new Tier 2+ supply chain
appointment.
questionnaire.
Our CR categories
Next steps identified in our 2017 report
Progress in 2018
Our priority next steps
Behaving with
integrity and
treating
people with
respect
Our
customers
Develop a condensed Code of Conduct for temporary workers.
Complete our global review of Anti-Bribery and Corruption (ABC) ‘adequate
procedures’.
Apply elements of the UK ABC assessment toolkit in other Divisions.
Relaunch the Serco Institute.
Explore opportunities to measure and report performance for our responsibilities
to our customers at Group level.
Our
people
Develop and deploy a ‘just’ health and safety culture framework.
Deploy our safety culture assessment tool globally.
Replicate our new global aviation safety forum in other safety critical areas.
Complete a formal review of our online incident management tool.
Improve ‘near-miss’ incident reporting.
Continue working to improve our leadership gender balance.
Develop our understanding of ethnicity as a strategic diversity focus in our regions.
Our
world
Relaunch the Serco Foundation.
Refresh and refocus our environment strategy.
Launch our refreshed fair competition training for managers and our new
conflicts of interest register.
Improve guidance for ethical and human rights due diligence in new geographies
and partner selection and appointment.
Deploy our new Supplier Relationship Management solution.
Explore opportunities to address Tier 2 suppliers in high-risk areas.
• Develop a Group business ethics and
human rights dashboard.
• Further review the legislative standards for
Modern Slavery that apply in each Division
to ensure all local requirements are met.
• Continue to explore opportunities to
measure and report performance for
our responsibilities to our customers at
Group level.
• Continue to drive a range of initiatives
across our custodial, health and transport
operations to address increasing violence.
• Better coordinate and share insight from
our Divisional customer surveys.
• Build respect for the new Serco Institute
and deploy its capabilities to the maximum
through developing strategic partnerships.
• Embed our new Communities of Practice.
• Continue to develop and promote our
proposed four principles for governing
outsourced public service delivery in
the UK.
• Finalise and deploy our ‘just’ health and
safety culture framework.
• Act on our safety culture assessment
results.
• Continue our work to improve ‘near-miss’
incident reporting.
• Drive employee wellbeing forward as a
strategic priority.
• Launch our new cross-Divisional oversight
groups for safety-critical areas.
• Formulate and deliver Corporate and
Divisional action plans to improve
employee engagement in response to our
2018 survey.
• Respond to Provision Five of the 2018
UK Corporate Governance Code.
• Promote our staff inclusion networks at
both the Divisional and Group levels.
• Launch our new employer brand.
• Launch an annual People Report for
internal and external publication.
• Formally relaunch the Serco Foundation
externally.
Improve community investment reporting.
•
• Roll out our new environmental strategy
across our Divisions.
• Commence reporting in line with The
Companies (Directors’ Report) and Limited
Liability Partnerships (Energy and Carbon
Report) Regulations 2018.
Incorporate risk tolerance variation into our
due diligence process.
•
• Complete the launch of our new conflicts
of interest register and Group Standard
Operating Procedure for conflicts of
interest; develop and deploy new fair
competition training for high-risk roles.
• Publish new guidance for ethical and
human rights due diligence in new
geographies and partner selection and
appointment.
• Trial our new Tier 2+ supply chain
questionnaire.
Completed
In progress
Under review
Ongoing (target for
2020 achieved and
revised upwards)
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
69
Corporate Responsibility
Our commitment continued
Our approach to corporate responsibility is structured around our key
stakeholders, focusing on how we create or contribute sustainable value
whilst protecting their interests and meeting their needs with accountability
and transparency.
Our stakeholder engagement
We are committed to proactively and regularly engaging our
stakeholders in open, honest dialogue that enables effective
collaboration, service and management. We want to
understand their priorities and points of view, communicate
our own and determine how we can best define and fulfil
our responsibilities.
We actively manage our relationships with our stakeholder
groups, maintaining various formal and informal means of
engagement at local, regional and Group levels.
Our customers
We recognise our customers to be those we serve – the
public – and the governments and other organisations who
engage us to provide public services. We maintain service-
specific feedback channels for service users, such as
dedicated customer service personnel and surveys, and
follow formal processes for engaging with our contract
customers, including contract bidding and performance
review. Individual contract customer relationships are
managed by our business leadership from Contract Directors
to our Group CEO. We also engage customers in our industry
research through the Serco Institute.
Our people
Effective leadership and line management are our principal
means of engaging our employees. Building trust and
relationships and communicating effectively are key
competencies in our Leadership Model. We also invite
employee feedback via: Viewpoint, our employee
engagement survey; Speak Up, our whistleblowing process;
and Yammer, our internal social media platform. We also
maintain various employee-led networks at all organisational
levels and strong relationships with our recognised
trade unions.
Our world
At Contract and Business Unit levels we maintain
relationships with specific non-governmental organisations
(NGOs) with whom we consult or collaborate for delivery of
service outcomes. We also engage with NGOs and charities
in the regions where we operate through the Serco
Foundation, an independent charitable organisation
established specifically for that purpose.
Our engagement with communities – those we serve and
those where we operate – is at two levels: business-led and
employee-led. We are committed to proactive dialogue with
representative bodies to understand and manage our
impact; and facilitating employee participation in community
initiatives and charitable giving, which also applies to the
regional causes our employees choose to support.
We maintain strong, collaborative relationships with our
suppliers and strategic partners, both centrally and locally,
engaging them regularly in strategy and performance review
meetings, management forums and site visits.
Our owners
See ‘Our owners: Transparency’ on page 79 for more
information.
Our Serco Management System
The Serco Management System (SMS) is our management
framework. It describes how we do business and 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, owned by Group Functional
Directors, signed by the Group Chief Executive and
approved by the plc Board. They define our strategic
commitments and apply across the Group.
• 24 Group standards, approved by the Executive
Committee. They define the minimum standards we must
achieve, focusing on mandatory requirements applicable
across the Group.
• 45 Group Standard Operating Procedures, owned by
functional subject matter experts and approved by the
Executive Committee. They provide consistent
procedures to address key areas of control that are
applied across the Group.
Country, Divisional and Local operating procedures build on
these foundations, complying with relevant laws and
regulations and sensitive to local customs, traditions and
cultures.
All elements of the SMS are subject to a schedule of regular
review to ensure they meet our needs and are up-to-date,
relevant and appropriate.
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 employment.
Our Code of Conduct
Our Code of Conduct applies to everyone who works for and
on behalf of Serco, helping 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.
70
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
In 2018 we developed a version for short-term temporary
workers; revised our Supplier Code of Conduct, reinforcing
our expectations of compliance regarding modern slavery in
our supply chain; and developed the first in a series of short
briefing videos on elements in our Code.
In 2019 we will review the impact, effectiveness and
accessibility of our current Code of Conduct materials and
refresh our approach to Code of Conduct training.
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.
Our Values are incorporated into the Serco Management
System, our Code of Conduct and all existing channels,
publications and resources.
Our Viewpoint Culture Index comprises engagement levels
for each of the four Values and, alongside our ‘Speak Up’
whistleblowing process, enable us to regularly assess and
reinforce our culture. Culture Index results inform annual
engagement action planning and our Values strategy.
In addition to the ways in which our Values are embedded
and reinforced continuously through Group systems and
processes, each Division is responsible for the ongoing
promotion of our Values at the local level, driving them
through employee communications, recognition schemes
and engagement initiatives.
Behaving with integrity and treating people
with respect
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 respect for human rights.
We have zero tolerance for any form of bribery and
corruption or any activities that break any law relating to
human rights, either directly or indirectly, anywhere in the
world. We will not engage in any form of human trafficking or
use forced, bonded, illegal or child labour, nor knowingly
work with anyone who does; this commitment recognises all
applicable modern slavery legislation. We use international
human rights standards as a framework to assess, monitor,
mitigate and remedy any actual or potential adverse human
rights impacts that may affect our business.
In 2018 we developed our UK Anti-Bribery and Corruption
(ABC) assessment tool into a Group ABC Risk Indicator
Questionnaire, embedding it in our SMS self-assessment
tool, completed annually by contracts across all Divisions.
We also delivered the following in all Divisions:
• a review of ABC adequate procedures and our Speak Up
(whistleblowing) programme;
• assessment of ethics, regulatory compliance and human
rights risks; new modern slavery awareness training for
managers; and
• continued promotion of Speak Up to increase trust in the
process, whilst reviewing it for improvement.
Our 2018 employee engagement survey results indicate that
employee perceptions of our Values remain similar to last
year. For more information, see our full Corporate
Responsibility Report.
In 2019 we will continue to actively and regularly promote and
reinforce our Values throughout the business whilst
monitoring employee understanding and perceptions of how
well they are lived. As required, we will respond with specific,
focused and appropriate interventions.
In 2019 we will:
• continue to monitor and work actively to mitigate our
ethics, regulatory compliance and human rights risks;
• review data and internal reporting to develop an effective
dashboard;
• continue to raise awareness of Speak Up and review how
•
we monitor live cases to ensure optimal case management
and closure; and
further review the legislative standards for modern slavery
that apply in each Division to ensure all local requirements
are met.
Annual Report and Accounts 2018
Serco Group plc
|
71
WWW
For more information, see our annual Modern Slavery Statement at
www.serco.com/slaverystatement.
p78
See also: Fair competition, page 78; Responsible relationships, page 78.
Corporate Responsibility
Our customers
r
u
c ustomers
O
ple
o
e
p
r
u
O
O
u
r
o
w
n
e
rs
Our wo r l d
Duty of care
We place the health, safety and wellbeing of the public at the
heart of service design and delivery.
Quality service delivery
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 and maintain.
We design and deliver services in ways that focus on the
needs and experiences of service users and enable and
enhance service-related outcomes. We work to ensure that
service users are treated with consideration, courtesy,
compassion and respect, and that our provisions and
interactions exemplify our Value of Care.
In 2018 we:
• made use across our service delivery of Serco’s
ExperienceLab – which specialises in citizen-centric
design;
• embedded our Serco Cares programme to improve
patient experience – training 3,000 hospital colleagues;
• continued to implement a broad range of coordinated,
mutually supporting initiatives to address prison violence,
e.g. key worker training, five-minute interventions,
improved intelligence, social responsibility units and body
cameras;
• established a security working group across our Health
business to review security and address issues of
increased violence in hospitals;
• actively worked with UK police authorities to tackle
increased violence on trains; and
• deployed our Centres of Excellence (CoEs) to focus on
end user experience and outcomes.
In 2019 we will:
• continue to support our contracts, Divisions and CoEs
in delivering all objectives relating to duty of care, directly
or indirectly;
• continue to explore opportunities to measure and report
our duty of care performance at a Group level; and
• continue to drive a range of initiatives across our
custodial, health and transport operations to address
increasing violence.
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 2018 we:
• worked to improve the relationship between suppliers
and contractors through our development of the ‘Four
Principles’ on how to better govern public services, which
should help strengthen delivery of outsourced services
across the sector;
• continued to develop how we bring various different
elements of management information together to enable
us to focus management attention to address potential
issues and opportunities;
• ran customer insight surveys in each of our regions;
• strengthened operational delivery further – achieving win
rates of around 50% for new bids and around 90% for
rebids and extensions;
• relaunched the Serco Institute which sources crowd
thinking for innovation in public service delivery; and
• deployed our Centres of Excellence to enhance best
practice and product development.
In 2019 we will:
• continue working to develop and promote our proposed
four principles for governing outsourced public service
delivery in the UK;
• better coordinate and share insight from our Divisional
customer surveys;
• build respect for the new Serco Institute and deploy its
capabilities to the maximum through developing strategic
partnerships; and
• commence the contract managers’ development
programme with Oxford Saïd Business School. For more
information, see: Employee engagement and
development on page 75.
72
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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 2018 we:
• developed and agreed a new strategy for the Serco
Foundation, focused on supporting non-profit
organisations engaged in enhancing public service
outcomes;
• made use across our service delivery of Serco’s
ExperienceLab – which specialises in citizen-centric
design;
• more generally:
– 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.
In 2019 we will:
•
formally relaunch the Serco Foundation and increase
further its charitable support and impact on social
outcomes; and
• continue to explore potential criteria with which to more
precisely define and measure our contribution to social
outcomes through our operations.
Duty of care
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• our work with the Texas Department of Transportation,
helping citizens travel safely;
• the He Waka Angamua staff network at Kohuora
Auckland South Corrections Facility, supporting better
outcomes for Maori;
• our focus on improving patient care through employee
engagement, at the GCC Patient Experience Summit in
Abu Dhabi; and
• our UK colleague who cared for an asylum seeker with
terminal cancer.
Quality service delivery
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• our awards for industrial security excellence from the
US Department of Defense;
• our Australian immigration detention team who
secured and protected several hundred detainees
during a category two cyclone and evacuation;
• our Transport Solutions Provider of the Year Award
from the United Arab Emirates Transport Community;
and
• our UK custodial team who helped to restore prison
operations in the Caribbean.
Social outcomes
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• our work with the US Navy to help Reservists and their
families access psychological healthcare;
• our team in Melbourne, Australia who worked at night
to reclaim Princes Park from vandalism ahead of a
30,000-strong public vigil;
• our team in Baghdad who kept Iraqi airspace open
during a local strike; and
• our UK Leisure team who helped a girl with a
tracheostomy learn to swim.
Annual Report and Accounts 2018
Serco Group plc
|
73
Corporate Responsibility
Our customers continued
Value for public money
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:
• select and bid for opportunities where we can achieve
optimal balance of value creation for our stakeholders;
• 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.
Value for public money
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• our Premier Supplier Excellence Award from Raytheon;
• a report from the Australian Federal Human Services
Minister, highlighting cost-effective high performance
from Serco Citizen Services; and
• our London Cycle Hire mechanics who generated
significant efficiency gains and helped increase bike
availability for the public.
In 2018 we:
•
launched Communities of Practice (CoPs) which are
international fora to develop, enhance and share
best practice in specific capability or competencies –
including contract efficiency;
found significant efficiencies for our customers on
several next generation contracts including our MELABS
contract with the Australian Defence Force in the Middle
East and our CMS health insurance eligibility support
contract in the US;
further rolled out formal Operational Excellence training
and activities across all our Divisions to help run
continuous improvement exercises and improve
the efficiency of our operations; and
•
•
• reduced our overhead costs thereby enabling us to
be more efficient in our delivery to customers.
In 2019 we will:
• embed the CoPs and consider extending them to
additional competencies;
• continue to review the efficiency of our contract delivery,
including through the continued use of Operational
Excellence; and
improve our measurement of the value of outsourced
services to the public.
•
74
| Serco Group plc
Annual Report and Accounts 2018
Corporate Responsibility
Our people
r
u
c ustomers
O
ple
o
e
p
r
u
O
O
u
r
o
w
n
e
rs
Our wo r l d
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. We recognise that our commitment to a vision
of zero harm is a challenging, long-term aspiration that will
take continuous concerted effort if it is ever to be achieved
given our operational risks. Our Health, Safety and
Environment (HSE) strategy is designed to help clarify our
next steps on our journey.
We strive to:
•
identify, assess and actively manage the hazards, impacts
and risks arising from our operations, investigating
incidents and monitoring performance and systems;
• actively encourage input from employees and others to
build sustainable solutions;
• promote a ‘just’ health and safety culture based on active
and caring leadership and mutual trust, innovation and
pride; and
• regularly review, learn and identify opportunities for
continual improvement at all levels of governance.
In 2018 we refreshed our Group HSE strategy in response
to evolving risks and opportunities and the continuous
improvement of our health and safety governance,
oversight and risk assessment capability. The new strategy
reinforces our existing principles and priorities whilst
introducing a more prominent focus on employee wellbeing
and increased emphasis on shared ownership, ‘just’ culture
and preventive awareness.
We also:
• developed a ‘just’ health and safety culture framework for
adoption across the business and incorporated this in our
online incident management tool;
• rolled the Health and Safety Laboratory (HSL) Safety
Climate culture assessment tool out across all Divisions
with favourable results;
• enhanced our safety management system by introducing
functionality to facilitate identification and management
of operational safety hazards and improve line of sight for
new or changing risks; and
• completed a formal review of our online incident
management tool against market leaders, identifying
opportunities for future improvement.
In 2019 we will:
• act on the findings from the culture assessment tool;
•
finalise and deploy our ‘just’ health and safety culture
framework;
• build on current work to improve near-miss reporting
and safety observations;
• drive employee wellbeing forward as a strategic priority,
•
building on everything we already have in place;
launch new cross-Divisional oversight groups to drive
and coordinate our continued focus on improvement in
the following safety-critical areas: Rail, Marine and
Physical Assaults;
• complete our systems review to better align the
management of safety, compliance, environment, risk and
insurance and better inform risk management by
providing an holistic view of data and performance; and
• explore potential longer-term future performance
trend indicators.
Employee engagement and development
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 2018 we began to develop our approach to engagement
beyond a traditional annual survey by introducing a stronger
and more versatile survey capability (through our new
engagement partner, Glint), which will enable us to engage
with employees more closely and regularly throughout the
employee lifecycle.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Safe and healthy operations
Employee engagement and development
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• our new C5ISR ‘Safety Blitz’ hazard and incident
reduction programme;
• our participation in the Sustaining Resilience at Work
research trial, focused on preventing occupational
stress;
• our new virtual portals providing 24/7 medical support
for our employees in the Middle East; and
• our UK colleagues recognised for health and safety
excellence by the Royal Air Force and the Ministry
of Defence.
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• our ‘Job Rotation’ programme, enabling our high
potential US and Canadian colleagues to expand
their skill sets through alternative role assignments;
• our Asia Pacific ‘Emerge’ programme, developing
our managers for internal career progression;
• our programmes for engaging and developing
National Emirati interns, graduates and management
talent; and
• our Large Apprentice Employer of the Year Award in
the UK.
Annual Report and Accounts 2018
Serco Group plc
|
75
Corporate Responsibility
Our people continued
We also:
• supported our leaders in owning and driving their career
and personal development, continued to involve leaders
in our business plans and strengthened leadership
communications;
• supported our managers through interventions focused
on building capability and pride;
• supported all employees through stronger promotion
of taking action to build engagement locally;
• reinforced engagement as a strategic priority by
incorporating it as a performance measure into our
Performance Share Plan Awards, made to our
Executive team and senior leaders globally;
• continued to build and strengthen our system of
Group and regional development programmes;
• delivered our Oxford Management Programme for
a further 120 members of our global management
population, bringing the cumulative total to 328; and
• opened the Management Programme to a broader
population of management roles across the business
whilst introducing an ongoing curriculum of virtual
education for programme alumni.
In 2019 we will:
• continue working to deliver our 2020 employee
•
engagement target of 70 points or above, as defined in
our Group performance framework;
formulate and deliver Corporate and Divisional action
plans to improve employee engagement in response to
our 2018 survey; and
Diverse workforce and inclusive workplace
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• our listing in Forbes’ America’s Best Employers for
Women 2018;
• our annual celebrations of diversity in Australia, New
Zealand and Hong Kong;
• the appointment of Ayesha Sultan to our Middle East
Executive Management Team as Managing Director for
Growth; and
• our UK work to drive equality in recruitment and the
advances in diversity and inclusion led by our LGBT+
and BAME networks.
In 2018 we:
• achieved our 2020 target of a minimum 25% women in
leadership roles, and revised our target to 35% by 2025;
• recognised four official global focus areas (gender,
disability, BAME and LGBT+), assigning each an Executive
Committee Sponsor;
• refreshed and refined our Divisional D&I strategies in
response to progress made since 2016, key organisational
changes and the new global focus areas;
• continued taking action in our Divisions to deliver regional
D&I objectives; and
• explore our options for enhancing how employee interests
• reported our Gender Pay Gap for 2017 in April (12.9%) and
prepared our 2018 Gender Pay Gap report (11.9%).
In 2019 we will work to:
• create excitement around staff inclusion networks
both within our Divisions and across the Group;
• ensure each Division sets stretching ambitions
•
•
around the short and medium term;
launch our new employer brand to attract and
recruit a more diverse workforce; and
launch an annual People Report which we will share both
internally and externally to keep momentum and focus.
are factored into Board decision-making in order to
respond to Provision Five of the 2018 UK Corporate
Governance Code.
Diverse workforce and inclusive workplace
Our business thrives because of our talented and diverse
workforce, for which we must continually challenge ourselves
to ensure diversity and inclusion (D&I) are embedded in our
culture and ways of working.
We strive to:
• attract, develop and retain employees from the broadest
possible talent pool;
• proactively manage and regularly analyse the diversity of
our workforce; and
• 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.
76
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Corporate Responsibility
Our world
r
u
c ustomers
O
ple
o
e
p
r
u
O
O
u
r
o
w
n
e
rs
Our wo r l d
Contributing to communities
Through our business operations we contribute to local
employment, small-medium enterprises, communities and
economies. Beyond this, we encourage and facilitate
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
In 2019 we will:
• continue to reinvigorate our governance for charitable
and community contributions, focusing on the
improvement of community investment reporting across
the business. We recognise significant levels of local
activity by our operations and our employees in all
regions, but also recognise challenges in capturing the
full extent of our commitment. We will engage with the
business in order to identify and implement improvements
that will enable us to resume reporting our global
community investment performance; and
formally relaunch the Serco Foundation externally and
build real momentum in its activities.
• ensure small firms, voluntary and community
organisations, and social enterprises are actively
encouraged to be members of Serco’s supply chain.
In 2018 we:
• strengthened our governance relating to community
initiatives and charitable giving, requiring more robust
due diligence in the consideration of any sponsorship
opportunity or charitable contribution;
• developed a new strategy for the Serco Foundation which
has now been agreed by all Trustees. Its refreshed mission
is to support non-profit-making organisations in the
delivery of public services through awarded grants and
the secondment of Serco employees. It has already
started supporting charitable causes under this new
mission. See our full Corporate Responsibility Report for
more details; and
• strengthened executive oversight and facilitation of our
social responsibility agenda in the Middle East in response
to new legislation in the UAE which is withdrawing legacy
restrictions, promoting corporate action and introducing
formal reporting requirements.
Protecting the environment
We are committed to limiting the impact our operations
have on the environment through more sustainable
business practice.
We strive to:
•
identify and assess the hazards, impacts and risks that
arise from our activities and services, investigating
incidents and monitoring performance and systems;
• 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 the SMS;
• actively encourage input from employees and others to
build sustainable solutions;
• promote a commitment to the environment based on
active and caring leadership and mutual trust, innovation
and pride; and
• regularly review, learn and identify opportunities for
continual improvement at all levels of governance.
In 2018 we refreshed our Group Health, Safety and
Environment strategy in response to evolving risks and
opportunities and the continuous improvement of our
environmental governance, oversight and risk assessment
capability. The new strategy reinforces our existing principles
and priorities whilst introducing a more prominent focus on
specific customer priorities.
Contributing to communities
Protecting the environment
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• how our colleagues in North America challenge
themselves in support of charitable causes and a
culture of health and wellbeing;
• the commitment of our team at Fiona Stanley Hospital
to making a positive difference to their communities;
• our contributions to colleagues and other stakeholders
in the Middle East during Ramadan; and
• our partnerships with local suppliers and social
enterprises across Scotland, supporting local
communities whilst enhancing service user
experiences.
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• our new, environmentally-responsible North American
headquarters;
• our work with the Royal Australian Navy to monitor and
manage a range of environmental incidents;
• our celebration of World Environment Day across Serco
Middle East, focused on reducing plastic use and
eliminating plastic waste; and
• our work to deliver environmentally-friendly leisure
centres for Birmingham City Council, UK.
Annual Report and Accounts 2018
Serco Group plc
|
77
Corporate Responsibility
Our world continued
In 2019 we will roll out and embed our new Group Standard
Operating Procedure and register for Conflicts of Interest
across the business. We will also develop and deploy
targeted fair competition training for high-risk roles.
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 strive to:
• only work with customers, partners and suppliers who
respect our Values and meet our standards of business
conduct and ethics;
• complete legal, ethical and human rights due diligence on
proposed key third parties and conduct ongoing
monitoring throughout the lifetime of the relationship;
• complete robust analysis of requirements and establish a
clear management structure for third-party arrangements
considered necessary to meet contract requirements,
including joint ventures, strategic partnerships and
consortium arrangements;
• apply robust supplier sourcing and selection criteria; and
• monitor supplier performance to inform relationship
management and identify opportunities for improvement.
In 2018 we strengthened the human rights elements in our
Supplier Code of Conduct and developed a new
questionnaire for enhanced supplier due diligence, focusing
on how our Tier 1 suppliers manage modern slavery risks
within their own supply chains. We also completed a review
of our third-party due diligence process, including quality of
reports and information provided.
We commenced reporting our supplier payment
performance per new UK regulations introduced in 2017.
In 2018, 83.09% of our supplier invoices were paid on time,
putting Serco in the top quartile of reporting companies,
but still with room for improvement.
In our 2017 report we advised that in 2018 we would deploy
the Supplier Relationship Management solution previously
piloted in the UK. This work has since been placed under
review whilst other priorities have taken precedence.
In 2019 we will:
• publish new guidance on ethical and human rights due
diligence for new geography entry and the selection and
appointment of partners;
• review our third-party due diligence process to enable
different risk tolerances to be applied at initial assessment
and through ongoing monitoring; and
• trial our new Tier 2+ supply chain questionnaire for
modern slavery due diligence.
We also:
• shaped future environmental strategy and driven
continuous improvement in our most energy and carbon
intensive business units, including a programme of
environmental and energy reviews in our UK Justice &
Immigration business and a new Energy Management
System for our UK Leisure business; and
• worked with an independent energy performance and
carbon compliance consultancy to explore the
opportunity for science-based carbon reduction targets
aligned to Government requirements.
In 2019 we will:
• roll out our new environmental strategy across our
Divisions to further embed a culture of environmental
stewardship and drive improvements;
• commence reporting in line with The Companies
(Directors’ Report) and Limited Liability Partnerships
(Energy and Carbon Report) Regulations 2018; and
• monitor Divisional action planning and delivery to ensure
that Business Units continue driving improvement in their
most energy and carbon intensive contracts.
Fair competition
We strive to 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 may 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 2018 we completed significant work to develop
appropriate processes for capturing conflicts of interest.
This has included redrafting operating procedures,
developing an online tool and producing a short video
explaining what a conflict of interest is and what to do
about it.
Responsible relationships
IN ACTION
See our full Corporate Responsibility Report to find out
about:
• our work with the Tasmanian Government and
Australian Antarctic Division of the Department of the
Environment to engage local industry support for the
Icebreaker programme;
• driving total data transparency in medical insurance for
our Middle East employees; and
• engaging our UK supply chain to help us minimise
waste and avoid waste to landfill.
78
| Serco Group plc
Annual Report and Accounts 2018
Corporate Responsibility
Our owners
r
u
c ustomers
O
ple
o
e
p
r
u
O
O
u
r
o
w
n
e
rs
Our wo r l d
Shareholder returns
We focus on creating long-term, sustainable value –
protecting the interests of our owners alongside those of
our employees, customers and the communities in which
we operate.
Transparency
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 focus as much on the preservation and growth of the
business as on the maximisation of shareholder value.
We believe that in a free market system, and in the long-term,
the two will automatically coincide, even if there is some
short-term divergence. 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.
As of 2018, an additional two performance measures for
sustainable shareholder value generation have been included
in relation to long-term incentives (alongside relative total
shareholder return, earnings per share growth and return on
invested capital), which take into account progress in the
Group’s employee engagement score and our order book.
As set out in our guidance and outlook, we expect to deliver
further progress in 2019 with Revenue growth of 3-4%
anticipated and Underlying Trading Profit forecast to increase
to approximately £105m. Revenue growth is expected to
accelerate to around 5% in 2020. In terms of our ambition of
achieving margins of at least 5% over the longer term, we
believe this is still achievable. We continue to deliver against
our plans and make good progress against our strategy.
p9
p20
For more information and our progress and performance in 2018, as well as our
guidance and outlook, see Key Performance Indicators on pages 9 to 11 and
Chief Executive’s Report on pages 20 to 27.
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 2018, we delivered our annual schedule of external
reporting and shareholder engagement, including additional
trading and contract news updates to ensure transparency of
performance and engaging with over 100 different
institutional investment funds. We have again been
recognised for our commitment to transparency with a ‘Most
Honoured Companies’ award from Institutional Investor.
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.
p54
p91
For more information and our progress and performance in 2018, see:
Principal risks and uncertainties on pages 54 to 63 and Group Risk Committee
report on pages 91 to 93.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
79
Corporate Responsibility
Key Performance Indicators
2014
2015
2016
2017
2018
vs 2018
Var % Notes
2017
Behaving with integrity and
treating people with respect
Viewpoint Index:
Ethics and Integrity
14-17: %
18: Avg. score
70
69
69
69
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 Index:
Learning & Development
Inclusive workplace:
Viewpoint Index:
Diversity & Inclusion
Number of women:
Serco Group plc Board
Number of men:
Serco Group plc Board
%
%
%
%
%
14-17: %
18: Avg. score
14-17: %
18: Avg. score
14-17: %
18: Avg. score
14-17: %
18: Avg. score
14-17: %
18: Avg. score
Number (%)
Number (%)
Number of women: Executive
Committee and Direct Reports Number (%)
Number of men: Executive
Committee and Direct Reports Number (%)
Number of women:
all other employee levels
Number of men:
all other employee levels
Number of employees with
disclosed disabilities
Number (%)
Number (%)
Number (%)
0
0
95
56
15
9
70
51
58
51
44
0
0
96
63
24
6
48
53
59
55
46
0
0
97
53
16
6
64
54
62
72
48
0
0
90
42
9
5
89
56
65
71
49
75
67
69
70
73
0
0
94
54
18
11
75
67
70
69
60
3
(30.0)
7
(70.0)
13
(16.7)
65
(83.3)
2
(22.2)
7
(77.8)
12
(17.1)
58
(82.9)
3
(30.0)
7
(70.0)
15
(21.7)
54
(78.3)
21,165
(42.6)
18,798
(41.9)
18,129
(41.6)
28,531
(57.4)
26,054
(58.1)
25,435
(58.4)
74
3
(33.3)
6
(66.7)
28
(31.8)
60
(68.2)
18,960
(42.4)
25,757
(57.6)
3
(30.0)
7
(70.0)
12
(16.2)
62
(83.8)
23,157
(44.4)
29,028
(55.6)
228
(0.7)
–
0
0
4
12
9
6
-14
–
–
–
–
–
0
-1
13
6
831
322
–
–
4.4
28.6
100.0
120.0
-15.7
–
-14.3
86.7
11.1
4.6
1.3
468
(1.3)
516
(1.2)
425
(1.0)
343
(0.8)
-82
-19.3
Age profile:
16-24
25-40
41-54
%
%
%
10.2
35.2
29.8
9.5
35.9
29.2
9.1
35.7
29.2
8.7
38.8
31.4
8.5
38.7
29.8
-0.2
-0.1
-1.6
-2.3
-0.3
-5.1
1
2
1
1
1
1
3
1
4
4
4
4
3
80
| Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
2014
2015
2016
2017
2018
vs 2018
Var % Notes
2017
Our people - Age profile continued
55-64
65+
Undisclosed
Staff turnover
%
%
%
%
Proportion of days lost to sickness %
14.6
2.4
7.8
31.0
3.3
14.9
2.3
8.2
32.8
3.2
15.6
2.6
7.8
33.8
3.2
17.9
3.1
0.1
30.6
3.1
17.6
3.1
2.3
27.0
12.3
-0.3
0
-1.7
–
-2.2 -2,200.0
3.6
-9.2
11.8
-296.8
Safe and healthy operations:
Viewpoint Index: Safety
Lost Time Incident
Frequency Rate
Lost Time Incident
Severity Rate
Major Incident
Frequency Rate
Physical Assault
Frequency Rate
Serious Physical Assault
Frequency Rate
Prosecutions
Fines paid
Our world
Protecting the environment:
Carbon dioxide equivalent
(Scope 1+2)
Scope 1 - Combustion of fuels
and operation of facilities
Scope 2 - Grid electricity
purchased for own use (location-
based)
tCO2e
tCO2e
tCO2e
14-17: %
18: Avg. score
Per 1m hours
worked
70
71
73
75
77
–
4.81
5.79
4.98
4.18
4.93
-0.75
-17.9
%
17.53
19.10
22.96
23.68
26.14
-2.46
-10.3
Per 1m hours
worked
Per 1m hours
worked
Per 1m hours
worked
Number
£’000
0.33
0.34
0.27
0.33
0.41
-0.08
-24.2
7.04
7.19
6.92
8.96
13.12
-4.16
-46.4
0.38
0
50
0.49
1
200
0.93
0
0
0.89
0
116
1.37
-0.48
-53.9
0
0
0
-116
343,717 298,986 291,883 253,655
259,814
6,159
173,441
162,197
182,819
174,289
176,254
1,965
5
6
1
7
8
9
7
7
10
11
12
13
14
–
–
2.4
1.1
170,276
136,789 109,064
79,366
83,560
4,194
5.3
15
Headcount intensity
(Scope 1+2)
tCO2e/FTE
Carbon Disclosure Project
Score
6.32
97%
5.16
99%
Prosecutions
Fines paid
Enforcement notices
Fair competition:
Number
£’000
Number
Upheld cases of anti-competitive
behaviour
Number
Responsible relationships:
Third-party due diligence screening
Third parties validated
Number
Third parties pending review
Number
Third parties disqualified
Number
0
0
0
0
–
–
–
0
0
0
0
–
–
–
5.98
5.56
5.53
-0.03
-0.5
B
0
0
0
0
–
–
–
B
0
0
0
0
C
0
0
0
0
–
0
0
0
0
–
–
–
–
28,066
7,867
-20,199
1,143
3
191
1
952
2
-71.9
83.2
66.6
16
17
18
Annual Report and Accounts 2018
Serco Group plc
|
81
Corporate Responsibility continued
Key Performance Indicators continued
Notes:
The performance analysis is based on data reported as at 20 February 2019, unless otherwise stated. Additional data may arise after this date. Where this
occurs, numbers will be corrected in the following year report.
All data is for the total Group unless otherwise stated. All data excludes joint ventures and historical BPO data to enable 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.
Please refer to our full Corporate Responsibility Report for Group targets. Other annual targets are managed at local and regional levels.
1. Applies to all data from our ‘Viewpoint’ employee engagement survey. In 2018, our methodology for calculating employee engagement changed,
aligned to our new survey provider. Pre-2018, engagement results represent the proportion of engaged employees expressed as a percentage. As of
2018, engagement scores represent the average response, with maximum potential scores of 100. It is not possible to adjust all our historic data to
restate to the new methodology. However, analysis performed by our new survey provider indicates that engagement levels from 2017 to 2018 have
remained broadly stable, with opportunity for improvement against new benchmarks. Regarding Viewpoint Index scores, an index comprises one or
more related questions that cover a specific area of analysis.
Inclusive workplace and age profile figures are representative only of employees for whom relevant data is available.
2. Where anonymous cases provide insufficient information, we are unable to investigate.
3.
4. From 2018, this data will be the same as that submitted to the annual Hampton-Alexander Review, UK. For 2018 the data was submitted on 30th June.
5. Reduction in 2017 reflects improvements in data availability resulting from new D&I strategy and focus on developing clear and robust data.
6.
Increase in 2018 reflects introduction of new absence management system and subsequent planned improvement in absence capture.
7. 2017 numbers corrected following additional data due to reclassifications or delayed reporting.
8. Our lost time incident frequency rate in 2018, whilst an increase against 2017, reflects the five-year average baseline. One contributing factor is the
increase reported in assaults. When these are removed the lost time incident frequency rate is brought down to 4.2. The main cause for non-assault
incidents remains slips and trips and manual handling.
9. We have changed the way we report lost days. Lost days will now be reported so that days lost are allocated in the year they occur rather than the year
the incident occurred in. Figures presented reflect this change. Adjustments have been made to 2016 and 2017 data to enable comparison of current
performance.
10. 94% of assaults in 2018 relate to Justice and Immigration which has seen a 39% increase against 2017. This remains an area of significant management
attention. We continue to deliver a programme of co-ordinated, mutually-supporting initiatives to manage this risk.
11. Clarification was sought from the UK Ministry of Justice regarding the inclusion of spitting and potting under serious assaults. They confirmed that these
are not currently included in published statistics for Serious Assault. These have therefore been removed from the figures and the 2017 figure adjusted to
reflect this change.
12. 2015 date relates to an incident in 2011.
13. 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.
14. Please refer to our full Corporate Responsibility Report for a full breakdown of our environmental performance. Our reporting year for greenhouse gas
emissions is one quarter behind our financial year, namely 1 October 2017 to 30 September 2018. 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%. Units reported: tCO2e = Tonnes Carbon Dioxide Equivalent; FTE = Full Time Employee.
15. Additional 9,512 tCO2e due to inclusion of Middle East domestic accommodation in scope as per advice received from Carbon Credentials. Reductions
from closure of Bolton and JD Williams offices (circa 1,000 tCO2e). Reductions due to UK conversion factor (UK grid 19% less carbon intensive vs 2017).
Conversion factors for Middle East and Australia slightly increased. Location-based electricity emissions are calculated using the electricity grid average
emission factors.
16. New scoring mechanism introduced in 2015. We have continued to manage our carbon emissions in line with the legacy Carbon Disclosure Project
criteria for a score of B (see our Carbon Disclosure Project scores for 2016-17). However, changes made by the Carbon Disclosure Project in 2018,
including the introduction of new or intensified criteria in certain areas, have reset the baseline for all participants. We accept that, against the new
criteria, our Carbon Disclosure Project score is C, and recognise that our existing plans are appropriate for driving improvement. Further information can
be found in our full Corporate Responsibility Report and on the Carbon Disclosure Project website, www.cdp.net/en
17. 2018 numbers reflect business as usual addition of third parties following completion of initial due diligence review of all third parties completed in 2016
and 2017.
18. Additional organisations disqualified because they are no longer used by Serco or there is a gap of 2+ years in the relationship: 6,634 in 2017; 173 in 2018.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
20 February 2019
82
| Serco Group plc
Annual Report and Accounts 2018
Corporate Governance
Corporate Governance
84 Board of Directors
86 Chairman’s governance overview
89 Board and Governance
91 Group Risk Committee Report
94 Audit Committee Report
100 Nomination Committee Report
102 Corporate Responsibility Committee Report
104 Code compliance
106 Remuneration Report - implementation
126 Remuneration Report - policy summary
132 Directors’ Report
138 Directors’ Responsibility Statement
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
C
o
o
r
r
p
p
o
o
r
r
a
a
t
t
e
e
G
G
o
o
v
v
e
e
r
r
n
n
a
a
n
n
c
c
e
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Annual Report and Accounts 2018
Serco Group plc
Serco Group plc
|
|
83
83
Board of Directors
Sir Roy Gardner
Chairman
Rupert Soames OBE
Group Chief Executive Officer
Angus Cockburn
Group Chief Financial Officer
John Rishton
Senior Independent
Non-Executive Director
Kirsty Bashforth
Independent Non-Executive
Director
A N
CR
GR
A N
CR
GR
A N
CR
GR
A N
CR
GR
A N
CR
GR
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
June 2015 (Chairman since
July 2015)
Skills and experience
Sir Roy Gardner is an
experienced chairman with
over 40 years’ experience in
both executive and
non-executive roles in a
variety of businesses in the
services, energy, industrial,
chemicals, electronics,
insurance and leisure sectors.
He is a Fellow of the
Chartered Association of
Certified Accountants, the
Royal Aeronautical Society,
the Royal Society of Arts and
the City and Guilds Institute
and has an Honorary
Doctorate from Thames Valley
University.
Previous roles
Chairman of Compass Group
PLC, Connaught plc and
Manchester United and
Plymouth Argyle football
clubs. Chief Executive of
Centrica plc, Managing
Director of GEC-Marconi
Limited and a Director of GEC
plc, Senior Independent
Director of William Hill plc and
a Non-Executive Director of
Willis Group Holdings Limited
and Laporte plc.
Chairman of the Advisory
Board of the Energy Futures
Lab at Imperial College
London, the Apprenticeship
Ambassadors Network and
Mainstream Renewable Power
Limited and Senior Adviser to
Credit Suisse.
Current external
commitments
Senior Independent Director
of Mainstream Renewable
Power Limited.
May 2014
October 2014
September 2016
September 2017
Skills and experience
Rupert Soames is an
experienced chief executive
officer having held the role
for nearly 20 years in other
companies before joining
Serco as Chief Executive
in 2014.
He studied Politics,
Philosophy and Economics at
Oxford University, where he is
now a visiting fellow, and was
President of the Oxford Union.
Previous roles
Chief Executive of Aggreko
plc, and the Banking and
Securities Division of Misys
plc.
Senior Independent Director
and a member of the
Remuneration, Nomination
and Audit Committees of
Electrocomponents plc.
Current external
commitments
Non-Executive Director and a
member of the Audit,
Nomination and
Remuneration Committees of
DS Smith Plc.
Skills and experience
Skills and experience
Skills and experience
Angus Cockburn is a
chartered accountant with
considerable experience
gained in a variety of sectors
before joining Serco in 2014.
He has an MBA from the IMD
Business School in Switzerland
and is an Honorary Professor
at the University of Edinburgh.
Previous roles
Chief Financial Officer and
Interim Chief Executive of
Aggreko plc, Managing
Director of Pringle of Scotland
and senior finance positions at
PepsiCo Inc including
Regional Finance Director
for Central Europe.
Non-Executive Director of
Howdens Joinery Group plc
and Senior Independent
Director and a member of the
Audit, Remuneration and
Nomination Committees of
GKN plc.
Current external
commitments
Non-Executive Director and
Chair of the Audit Committee
and a member of the
Nomination and
Remuneration Committees of
Ashtead Group plc.
John Rishton has considerable
experience in chief executive
and chief financial officer roles
gained from a variety of
companies during a period of
around 40 years.
He has a BA in Economics
from Nottingham University
and is a Fellow of the
Chartered Institute of
Management Accountants.
Previous roles
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.
Current external
commitments
Non-Executive Director and
Chair of the Audit Committee
of Unilever plc.
Non-Executive Director and
Chair of the Audit Committee
of Informa plc.
Non-Executive Director of
Associated British Ports.
Kirsty Bashforth is an
experienced board member
within the construction,
services and education
industries, with expertise in
change management, safety
and risk management,
organisational culture and
leadership.
She has an MA (Cantab) in
Economics from the University
of Cambridge.
She has been running her own
corporate advisory business,
QuayFive Limited, since 2016.
Previous roles
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.
Governor of Leeds Beckett
University and Ashville
College.
Current external
commitments
Non-Executive Director, Chair
of Safety, Health and
Environment Committee and
a member of the Nomination,
Remuneration, Risk
Management and Audit
Committees of Kier Group
plc.
Independent Non-Executive
Director, Chair of the
Remuneration and People
Committee and a member
of the Audit & Risk and
Reputation & Ethics
Committees of GEMS Mensa
Holdings Limited.
Director of QuayFive Limited.
84
| Serco Group plc
Annual Report and Accounts 2018
Key to Committee membership (Red highlight denotes Chair)
A
N
R
Audit Committee
Nomination Committee
Remuneration Committee
C
GR
Corporate Responsibility Committee
Group Risk Committee
Eric Born
Independent Non-Executive
Director
Ian El-Mokadem
Independent Non-Executive
Director
Rachel Lomax
Independent Non-Executive
Director
Lynne Peacock
Independent Non-Executive
Director
A N
CR
GR
A N
CR
GR
A N
CR
GR
A N
CR
GR
Appointed to the Board
Appointed to the Board
Appointed to the Board
Appointed to the Board
January 2019
July 2017
March 2014
July 2017
Skills and experience
Skills and experience
Skills and experience
Skills and experience:
Eric Born is an experienced
chief executive officer with
experience in the aviation
services, logistics and retail
sectors. He is currently Chief
Executive Officer of Swissport
International Limited which he
joined in 2015.
He has an MBA from the
University of Rochester, New
York, and is a graduate of the
University of Applied Sciences
in Zurich.
Previous roles
Chief Executive Officer of
Wincanton plc and
Non-Executive Director and
member of the Audit,
Nomination and
Remuneration Committees of
John Menzies plc.
Current external
commitments
Chief Executive Officer of
Swissport International
Limited.
Ian El-Mokadem is an
experienced chief executive
officer with international
experience in business
transformation and in
acquisitions and disposals.
He is currently Chief Executive
Officer of V. Group which he
joined in 2017.
He has a BSc (Hons) in
Economics and Statistics from
University College London
and an MBA from INSEAD.
Previous roles
Chief Executive Officer of
Exova Group plc, Group
Managing Director, UK &
Ireland of Compass Group plc
and senior management
positions with Centrica plc
and the global management
consultancy, Accenture.
Current external
commitments
Chief Executive Officer of
V.Group.
Rachel Lomax has significant
experience of government
and economic policy.
She has an MA in History from
Cambridge University and an
MSc in Economics from the
London School of Economics.
Previous roles
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.
Senior Independent Director
and Chair of the Conduct and
Values Committee at HSBC
Holdings plc and a Trustee/
Board Member of Imperial
College, London.
Current external
commitments
Non-Executive Director of
Heathrow Airport Holdings
Limited.
Director of SETL Development
Limited.
Governor of the Ditchley
Foundation.
Member of the Board of
Breugel.
Deputy Chair of the British
Council.
Lynne Peacock has over 25
years’ senior management
experience in a range of roles
including brand development,
mergers and acquisitions,
change management and
business transformation.
She has a BA (Hons) in
Business Studies.
Previous roles
Non-Executive Chair of
Standard Life Assurance
Limited and Non-Executive
Director and a member of the
Nomination and Governance
Committees of Standard Life
Aberdeen plc.
Chief Executive of Woolwich
plc and National Australia
Bank Limited’s UK businesses
and a Non-Executive Director
and Chair of the Audit
Committee of Scottish Water.
Current external
commitments
Senior Independent Director,
Chair of the Remuneration
Committee and member of
the Audit, Risk and
Nomination Committees of
Nationwide Building Society.
Non-Executive Director and a
member of the Audit and Risk,
Nominations and
Remuneration Committees of
Jardine Lloyd Thompson
Group plc.
Chair of Trustees of the
Westminister Society for
People with Learning
Disabilities.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
85
Corporate Governance Report
Chairman’s governance overview
Sir Roy Gardner
Chairman
2018 Highlights
• Continued refreshment of the Board through
the appointment of Eric Born following the
resignation of Mike Clasper.
• Appointment of John Rishton as Senior
Independent Director.
• Continued refreshment of Committee
membership with changes to the Audit,
Corporate Responsibility and Nomination
Committees.
• Improvements to internal procedures to
improve Board effectiveness following the
internal Board evaluation undertaken in 2017.
• External Board evaluation undertaken by
ICSA Board Evaluation Limited.
This report sets out how Serco is governed
and the key activities of the Board of
Directors in promoting effective governance
during 2018. Further information on how the
Company complied with the UK Corporate
Governance Code during 2018 is set out on
pages 104 and 105.
Dear Shareholders
I am pleased to present the Corporate Governance Report
for 2018. 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.
As in previous years, we report against the UK Corporate
Governance Code published by the Financial Reporting
Council on 27 April 2016 (“the Code”). I confirm that, during
2018, the Company has complied fully with the provisions of
the Code. Details of how the Company has complied with the
Code are set out on pages 104 to 105.
The Board has reviewed the UK Corporate Governance Code
published in July 2018 by the Financial Reporting Council
(“the 2018 Code”) which applies to accounting periods
beginning on or after 1 January 2019.
The Company already complies with the vast majority of the
2018 Code’s provisions and, with some changes in processes
and procedures and additional disclosure relating to existing
processes and procedures, the Board believes that full
compliance will be achieved and so reported in the annual
report for the year ending 31 December 2019.
The most significant change is in respect of workforce
engagement. The Company already enjoys good employee
relations, the mechanisms for which are set out in the
Directors’ Report on pages 132 to 138, and to meet the
requirements of the 2018 Code, the Company has appointed
Kirsty Bashforth, one of our Non-Executive directors and the
Chair of our Corporate Responsibility Committee, as the
“lead” employee voice representative on the Board and the
Group HR Director will take executive responsibility for
activity that will ensure two-way communication. In addition,
our current internal communication methods will be reviewed
to support such a way of operating and amongst other
changes, a forum comprising the nominated Non-Executive
Director, the Group HR Director, the Group General Counsel
and Company Secretary and a representative from each
Division will be established to discuss a range of issues that
have relevance to the Board agenda to ensure a two-way
dialogue.
86
| Serco Group plc
Annual Report and Accounts 2018
Effectiveness
As Chairman, I am responsible for providing leadership to
ensure that the Board operates effectively. I have been
supported in this by all the Directors, in particular Mike
Clasper, our Senior Independent Director until his resignation
on 31 December 2018. The annual reviews of Board
effectiveness help the Board to consider how it operates and
how its operations can be improved. This year, the review was
externally facilitated by ICSA Board Evaluation Limited. The
findings of this review have provided us with ideas to further
improve the manner in which the Board operates, which,
together with progress against recommendations from the
previous internal evaluation, are set out on page 90.
Changes in the Board
The Board continued to review Board composition and
succession planning with assistance from the Nomination
Committee.
During the year, the Nomination Committee, as part of its
routine business, reviewed the composition of the Board and,
to ensure continued refreshment of the Board and the
appropriate breadth of experience, recommended that an
additional Non-Executive Director with international
experience should be recruited.
Korn Ferry was appointed to assist with the recruitment
process and several individuals were identified as suitable
candidates, of whom five were interviewed by myself and by
my executive and non-executive colleagues, following which
Eric Born was invited to join the Board and become a member
of the Audit and Corporate Responsibility Committees with
effect from 1 January 2019.
Eric, who is currently Chief Executive Officer of Swissport
International Limited, has considerable international, strategic
and operational experience.
Mike Clasper, who joined the Board in May 2014, and who was
the Senior Independent Non-Executive Director, stood down
on 31 December 2018.
As a result of these changes to the Board, John Rishton,
who was appointed as a Non-Executive Director in 2016,
assumed the role of Senior Independent Director and joined
the Nomination Committee on 1 January 2019. In addition,
Kirsty Bashforth, who was appointed as a Non-Executive
Director in 2017, replaced Mike Clasper as Chair of the
Corporate Responsibility Committee on 1 January 2019.
Contract site visits
Non-Executive Directors are encouraged to continually
increase their knowledge of the Company and its operations.
This includes visits to contract sites which enables them to
witness the excellent day-to-day service provided by our
contract teams. The visits provide 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. During the year, our Non-Executive Directors
have visited sites operated within each of the Company’s
divisions including at HM Naval Base, Clyde (“Faslane”),
Northlink Ferries, International Nuclear Services, Caledonian
Sleepers, ‘Compass’ in Glasgow and Liverpool, Norfolk and
Norwich Hospital, the Norfolk Naval Shipyard in Portsmouth,
Virginia, the Federal Retirement Thrift Investment Board,
Washington, Fiona Stanley Hospital, Western Australia, the
Dubai Metro, HMAS Watson, Sydney, Brisbane Immigration
Transit Centre, Fleet Marine Services, Southern Queensland
Correctional Centre and Villawood Immigration Detention
Centre.
Diversity
The Board is committed to ensuring the development
of gender and ethnic diversity amongst Serco’s senior
management population and annually reviews its
recommendations on gender and ethnic diversity for
senior management roles.
More information is provided in the Nomination Committee
Report on pages 100 to 101.
Shareholder engagement
The Board continued to engage in an open and meaningful
way with its shareholders during the course of 2018. 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 2019 Annual General Meeting.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Sir Roy Gardner
Chairman
20 February 2019
Annual Report and Accounts 2018
Serco Group plc
|
87
Corporate Governance Report
Chairman’s governance overview continued
What the Board has achieved in 2018
• Reviewed and challenged the strategy of the Group and
supported the Executive management in the Group’s
strategic development.
• Received operational ‘deep dives’ from across the
Divisions.
• Reviewed the Operating Model and Finance
• Received, discussed and reviewed regular reports from
Transformation plans.
the Chief Executive and Chief Financial Officer.
• Regularly reviewed financial performance.
• Reviewed and agreed budgets.
• Reviewed and challenged the Centres of Excellence.
• Considered succession planning both for the Board
and the senior management team, including diversity.
• Focused on the ongoing performance of the Group.
• Reviewed the Gender Pay position.
• Reviewed employee engagement, as well as receiving
• Reviewed, challenged and refreshed the Tax and
regular People reports.
Treasury Policy.
• Focused on further embedding the Corporate
• Engaged with the Company’s stakeholders.
Responsibility Framework.
• Considered the UK political environment and its
• Focused on further embedding the Corporate Renewal
potential impact on the Company.
Programme.
• Received regular reports from the Head of Investor
• Reviewed and challenged management on the progress
Relations.
of the Group’s business development pipeline.
• Received regular reports on ethics, compliance and
• Received regular legal and governance reports,
Health, Safety and Environment.
including diversity and governance developments and
received training as a Board.
• Focused on and reviewed key individual material bids
and acquisitions over the year.
• Continued to drive improvements in Health and Safety
and, specifically, to challenge measures put in place to
support the reduction in physical assaults in prisons.
• Changes to Board and Committee membership.
• 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 and overseas.
• Received detailed reports of the proceedings of each
of the Board’s Committees.
• Received a progress report on the implementation
of General Data Protection Regulation.
• Continued enhancement of risk management.
• Considered and implemented recommendations
arising from Board Regulation.
Board priorities for 2019
• Continue to assess and challenge the Group’s strategy.
• Support and challenge management on embedding the
• 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.
• Continued focus on enhancing risk management.
• Focus on Board and Senior Management succession
planning, including diversity.
• Further embedding of the Serco Values within the
culture of the Group.
• Further review of Divisional operations and ensuring
the ongoing transformation and strengthening of
the Group.
Group’s transformation initiatives.
• Budget and financial performance reviews.
• Monitor changes to relevant legal, regulatory and
governance areas.
• Continue to oversee employee engagement.
• Continued focus on governance developments
and training.
• Continue to oversee ethics, compliance and Health,
Safety and Environment.
•
Implementation of recommendations arising from
Board evaluations.
88
| Serco Group plc
Annual Report and Accounts 2018
Board and Governance
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
The Board has a comprehensive corporate governance framework, with clearly
defined responsibilities and accountabilities to safeguard long-term shareholder
value, which 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
The Company’s governance structure is illustrated above. There is a schedule of matters reserved for the Board which
is available on the Company’s website. The Board has delegated certain of its responsibilities to the Audit, Corporate
Responsibility, Group Risk, Nomination and Remuneration Committees, the terms of reference of each of which are also
available on the Company’s website. In addition, there is a Disclosure Group which meets to consider the disclosure
of information to meet legal and regulatory obligations under Market Abuse Regulation.
The Executive Committee is chaired by the Group Chief Executive and additionally comprises the Group Chief Financial
Officer, Divisional Chief Executives, the Group General Counsel and Company Secretary, the Group HR Director and the
Group Director of Strategy and Communications. The Committee has delegated responsibility from the Board to ensure the
effective direction and control of the business and to deliver the Group’s long-term strategy and goals.
The Investment Committee comprises the Group Chief Executive, the Group Chief Financial Officer, the Group General
Counsel and Company Secretary, and other members of the management team. It acts on behalf of the Board to review,
monitor and approve bids, mergers, acquisitions and disposals and other corporate activity within specific authority limits
delegated by the Board.
The Approvals and Allotments Committee comprises the Group Chief Executive, the Group Chief Financial Officer and the
Group General Counsel and Company Secretary. This Committee acts on behalf of the Board between Board meetings in
respect of matters not specifically reserved to the Board, including the approval of documentation for shareholders and the
allotment of shares.
The table below gives details of attendance of Board and Committee meetings during 2018:
Sir Roy Gardner1
Rupert Soames
Angus Cockburn
Kirsty Bashforth
Mike Clasper2
Ian El-Mokadem
Rachel Lomax
Lynne Peacock3
John Rishton
Board
Audit
Corporate
Responsibility
Group Risk
Nomination
Remuneration
8/8
8/8
8/8
8/8
7/8
8/8
8/8
7/8
8/8
–
–
–
–
5/6
–
6/6
5/6
6/6
2/3
3/3
–
3/3
3/3
3/3
–
–
–
–
–
–
–
3/4
4/4
4/4
–
4/4
4/4
–
–
–
2/4
–
–
4/4
–
4/4
–
–
4/4
–
–
–
4/4
4/4
1. Sir Roy Gardner was unable to attend the Corporate Responsibility Committee meeting on 12 December 2018 due to illness.
2. Mike Clasper was unable to attend the Nomination Committee meeting on 10 September 2018 due to illness. He was also unable to attend meetings
of the Board and the Audit, Group Risk and Nomination Committees held on 31 October/1 November 2018 since he was recuperating following
an operation.
3. Lynne Peacock was unable to attend meetings of the Board and the Audit Committee which were rescheduled to 11 December 2018, a date on which
she already had prior commitments.
Annual Report and Accounts 2018
Serco Group plc
|
89
Corporate Governance Report
Board and Governance continued
Board evaluation
During 2018, in response to recommendations arising from
the internal Board evaluation undertaken in 2017, a number of
improvements were made to internal procedures to improve
Board effectiveness. Progress was made in the following
areas specifically noted for improvement:
• Strategy. Briefing documentation was circulated to the
Board in advance of the annual strategy meeting and
several Non-Executive Directors met with Management
and the consultants who assisted with the strategy review
before it took place. Following the strategy review, there
were opportunities for follow up discussion at subsequent
board meetings.
• Succession planning. Detailed succession plans were
discussed by the Board with particular reference to the
assumption of responsibilities previously held by the
Chief Operating Officer who left the Company on
31 December 2017.
• Shareholder engagement. Engagement with
shareholders has been discussed on a regular basis by
the Board and additionally the Remuneration Committee.
• Board training. Although a number of initiatives were
introduced or re-introduced, further consideration will
be given to the training opportunities to be made
available to Directors.
As indicated in the 2017 Annual Report, the external
evaluation of the Board and its Committees, which it had
been intended to undertake during 2017, was deferred to
provide an opportunity for the Non-Executive Directors who
were appointed in 2017 to settle into their roles.
An external evaluation was duly undertaken in 2018 by
Geoffrey Shepheard of ICSA Board Evaluation Limited which
has no other connection with the Company. This evaluation,
acknowledging progress on areas of improvement identified
in previous internal evaluations, concluded that the Board
continued to operate effectively, but that it would benefit
from several changes of a procedural nature which would
improve the overall performance of the Board and go some
way to helping the Board achieve its strategic goals. In
particular:
• More detailed reporting of the appraisals of Non-
Executive Directors and the Chief Executive.
• More frequent review of processes, procedures and
policies.
• A broader role for the Nomination Committee.
The recommendations made in the report will be
implemented during the course of 2019.
Appointment, induction and training
The Chairman is responsible for ensuring that an appropriate
induction is provided 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 2018, the Directors received advice and training on a
number of areas, including:
• General Data Protection Regulation.
• Regulatory developments and changes to the UK Listing
Rules and Corporate Governance.
• Market Abuse Regulation.
• Anti-bribery and corruption.
• Money laundering.
• Crisis management.
• New accounting standards.
External directorships
The Company has a policy which allows the Executive
Directors to accept directorships of other quoted companies
and to retain the fees paid, 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.
Angus Cockburn was a Non-Executive Director of GKN plc
(Senior Independent Director from 20 February 2018) until his
resignation on 19 April 2018 following the acquisition of GKN
plc by Melrose Industries plc. He was appointed as a
Non-Executive Director, Chair of the Audit Committee and a
member of the Nomination and Remuneration Committee of
Ashtead Group plc on 9 October 2018.
Rupert Soames has been appointed as a Non-Executive
Director and a member of the Audit, Nomination and
Remuneration Committees of DS Smith Plc with effect from
1 March 2019.
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
external positions and interests or arrangements with third
parties held by each Director and, where appropriate, to
authorise those situational conflicts following consideration.
Notwithstanding the above, each Director is aware of his or
her 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.
90
| Serco Group plc
Annual Report and Accounts 2018
Group Risk Committee Report
Group Risk Committee members
Rachel Lomax (Chair)
Ian El-Mokadem
John Rishton
Dear Shareholders
The Committee has continued to oversee the Group’s
efforts to enhance its risk management capability and
the way that the Risk Management Framework has been
embedded at Divisional level. During its regular reviews of
principal risks, it has paid particular attention to the
monitoring of progress in constructing and implementing
effective risk management plans.
The Committee has focused on:
• conducting ‘deep dives’ with each Division, considering
and challenging their approach to their material risks,
and gaining a deeper understanding of the management
approach to risk management generally;
• challenging divisional risk registers to ensure they are
aligned to the Group’s principal risks; and
• satisfying itself that Divisions have adequate capability
to implement the Group’s Risk Management Framework.
A Key Risk Indicator Dashboard has been introduced to
help improve oversight and visibility of the effectiveness
of our risk management approach.
The Dashboard includes indicators such as tolerance levels,
progress in implementing mitigation plans, leading and/or
lagging indicators and results from our three lines of
defence activity for each principal risk.
These improvements in reporting, process and structure,
have generated a greater understanding and confidence in
our management of risk, and the progress that is being
made towards achieving target outcomes.
Following a review and horizon scanning exercise by the
Executive Committee, it was agreed that there were no
material changes to our principal risks since our 2017 report.
I would like to thank Mike Clasper for his contribution to
the work of the Committee since its creation, and welcome
Kirsty Bashforth who is joining the Committee later
this year.
Rachel Lomax
Chair of the Group Risk Committee
20 February 2019
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
91
Corporate Governance Report
Group Risk Committee Report continued
Committee’s responsibilities
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 all
the principal risks facing the Group, and the action being
taken by management to mitigate risks that are outside of
the Group’s risk appetite;
• challenging and advising the Board on the current risk
exposures facing the Group, future risk strategy and
reviewing regular risk management reports 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 risk assessment processes, and ensuring both
qualitative and quantitative metrics are used to inform the
Board’s decision-making; 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 for the Committee are available on
the Company’s website.
Membership and attendees
The Committee is comprised 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”).
Biographical details for each member of the Committee are
provided on pages 84 and 85. The Committee met four times
during the year and details of Committee membership
and attendance at meetings are set out on page 89 and
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 Chief Executive, the Group General Counsel
and Company Secretary and the Group Risk and Compliance
Director.
Activities of the Committee during 2018
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 (“deep
dives”) of the following risks: Failure to manage our
reputation, Financial control failure, Failure to deliver
expected benefits from Transformation, Contract
non-compliance, non-performance or misreporting,
Catastrophic incident, Material legal and regulatory
compliance failure, Failure of business critical partner,
supplier, sub-contractor and Major information security
breach. Failure to grow profitably was reviewed
specifically at our October Board meeting following an
initial review of the content by the Committee. Failure to
act with integrity was reviewed by our Corporate
Responsibility Committee;
• receiving presentations, as planned, from all four
Divisional CEOs covering their Divisional Risk
Management process, alignment of their risks to the
Group Risk Register and a selected ‘deep dive’ on one of
their principal risks. These included a review on a Major
information security breach from Serco Americas, Failure
to convert sufficient profitable business by 2019 to achieve
2021 Plan from Serco Asia Pacific, Contract non-
compliance, non-performance or misreporting from Serco
UK and Failure to grow profitably from Serco Middle East;
• refining the risk review process at Leadership level,
resulting in ‘deep dive’ reviews for certain risks to be
discussed in more detail by appropriate Committees. For
example, the ‘deep dive’ on Failure to act with integrity
risk was carried out with the Corporate Responsibility
Committee;
• reviews on potential cost pressures in the UK, Brexit and
other matters. Refer to page 54 for more details on
emerging risks; and
• on-going challenge and support of the Group Risk and
Compliance Director to improve, enhance and embed the
risk management framework.
2019 priorities and focus
During 2019, the Committee will continue their focus on
undertaking detailed ‘deep dive’ reviews into Group
principal risks, which may not be classified as such but none
the less warrant review and discussion at Committee level.
Meetings with the Divisional teams will also continue. Focus
will remain on the progression of mitigation actions and their
effectiveness in driving the Risk Management Agenda.
We will continue to refine our Key Risk Indicators, Corporate
Risk Management Tool and the supporting policies,
standards and reporting.
92
| Serco Group plc
Annual Report and Accounts 2018
Serco’s approach to managing business risks and internal control
Serco’s internal control framework 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”).
Second line of defence – The Group Risk and Compliance
Function is responsible for the development and
implementation of policies and standards associated with
Risk Management and Compliance Assurance. It is the
custodian of the Group Compliance Assurance Programme
(“CAP“) and the Principal Risk Register, providing
management oversight, assurance and challenge.
Internal controls and key processes are defined within the
Serco Management System (“SMS"). To provide
management assurance that these controls are effective, we
use a ‘three line of defence’ compliance assurance model to
test business compliance.
The CAP aims to ensure we have a consistent approach to
compliance assurance across all Divisions, with direction
provided by Group around minimum requirements based
upon our principal risks.
The Executive Committee is responsible for providing
oversight, challenge and direction across the first and
second lines of defence, including the review of the
Group Risk Register and individual risks as required.
Third line of defence – The Group Head of Internal Audit
reports functionally to the Audit Committee Chair and is
responsible for the delivery of the Internal Audit
programme.
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
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. The in-house Internal Audit team uses PwC as a
co-sourced resource, where appropriate.
The Board has overall responsibility for risk management
and internal control and formally reviews the findings of the
overall Internal Audit programme. It is supported in these
duties by the Group Risk and Audit Committees.
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 2018 Annual Report and Accounts.
First line of defence – Contract Managers, Business and
Function leaders within the Group are responsible for
identifying and managing risks and for implementing
associated processes and controls.
We endeavour to ensure that appropriate processes and
controls are in place through the implementation of our SMS
and that suitably trained staff seek to ensure that customer,
legal and regulatory requirements are adhered to.
We conduct an annual SMS self-assessment which is
completed by our Contract Managers and other Leaders
across the Group. This process enables a deeper
understanding of SMS compliance levels and helps drive
improvements. Progress against actions identified through
this self-assessment is monitored by senior management.
We recognise that whilst the SMS controls can provide
reasonable assurance against mistatement or loss, this
cannot be absolute.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
93
Corporate Governance Report
Audit Committee Report
Audit Committee members
John Rishton (Chair)
Eric Born
Rachel Lomax
Lynne Peacock
Dear Shareholders
I am pleased to present the Committee’s report for the year
ended 31 December 2018 and to welcome Eric Born, who was
appointed a Non-Executive Director on 1 January 2019, as a
member 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 during 2018, which are reported to the Board as a
matter of course, are described in this report.
In 2019, the Committee will continue to focus on the critical
accounting judgements made, financial controls and the
operating performance of the new finance operating
structure and emerging risks arising from it.
John Rishton
Chair of the Audit Committee
20 February 2019
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 are available on
the Company’s website.
The Committee met six times during the year and details of
Committee membership and attendance at meetings are set
out on page 89. In addition to the members of the
Committee, the Chief Financial Officer, the Director of
Finance, 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 meets privately with the Chief Financial
Officer.
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.
Membership and attendees
The Committee is comprised 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”) 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 84 and 85.
94
| Serco Group plc
Annual Report and Accounts 2018
Activities of the Committee during the year
The Committee has an annual agenda plan 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 2018
principally fell into three main areas:
Accounting, tax and financial reporting
• Reviewing the integrity of the half-year and annual
financial statements and the associated significant
financial reporting judgements and disclosures;
• Considering the liquidity risk and the basis for preparing
the half-year and annual financial statements on a going
concern basis, and reviewing the related disclosures in the
Annual Report and Accounts;
• Considering the provisions of the Code regarding going
concern and viability statements and reviewing emerging
practice and investor comment;
• Reviewing updates on accounting matters and new
accounting standards, including the new accounting
standards on financial instruments (IFRS9), revenue
(IFRS15) and leasing (IFRS16); and
• 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;
Internal controls
• Assessing the effectiveness of the Group’s internal control
environment and making recommendations to the Board;
• Receiving presentations from the Chief Financial Officers
of each division regarding the controls and risks in each of
the Divisions;
• Assessing the findings and directing the work of the
Group’s financial assurance function;
• Receiving reports from Internal Audit on the audit
programme and resulting recommendations. Where
relevant, divisional and business unit management were
invited to the Audit Committee to discuss the findings
from Internal Audit reviews;
•
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 2019 Internal Audit plan;
• Reviewing the adequacy of resources of the Internal Audit
function and considering and approving the scope of the
Internal Audit programme; and
• Considering reports from the External Auditor on their
assessment of the control environment.
External auditor
• Considering and approving the audit approach and scope
of the audit undertaken by KPMG LLP as External Auditor
and their fees;
– the findings and opinions of the External Auditor;
• Agreeing reporting materiality thresholds;
– the disclosures in relation to internal controls and the
• Reviewing reports on audit findings;
work of the Committee in discharging its
responsibilities;
• Considering and approving letters of representation
issued to KPMG LLP;
– that the information presented in the Annual Report
• Considering the independence of KPMG LLP and their
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;
effectiveness, taking into account:
– non-audit work undertaken by the External Auditor;
– feedback from a survey targeted at various
stakeholders; and
– the effectiveness of the disclosure controls and
– the Committee’s own assessment.
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.
• Making a recommendation to the Board on the
appointment of the External Auditor.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
95
Corporate Governance Report
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.
• The output from key risk indicators associated with the risk
of financial control failure; and
• Management’s review of the output and adequacy of the
Group’s finance function first and second lines of defence,
with a focus to deliver better assurance through system
controls and data analytics.
Financial control risk is monitored through one of the Group’s
Principal Risks, ‘financial control failure’. The Committee has
reviewed this risk during 2018 and has focused in particular on:
• The impact of the Group’s Finance Transformation
programme and risks associated with the delivery of
financial information under the new operating model,
with briefings received from Management;
• 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;
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.
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.
Finance Transformation programme
Management has completed the
transition to the new finance operating
model developed through the Group’s
Finance Transformation programme in
the UK and AsPac. The operating model
requires the new outsourced service
provider to deliver the initial output of
the finance function through greater
leverage of its centres of excellence,
where processes can be standardised
and their efficiency improved.
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 has been kept informed
of the progress through the Finance
Transformation Programme and is being
briefed on any risks and issues arising
while the model is being embedded.
Through its oversight of the Finance
Transformation programme the
Committee has considered the potential
risks associated with the new finance
operating model and challenged
Management on the processes and
controls put in place to mitigate
those risks.
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, and that
adequate consideration was given to
contracts with low margins to assess
whether any additional OCPs were
required to be recorded.
The Committee concluded that the new
finance operating model was
appropriate and progress was in line
with expectations.
The Committee was satisfied that
Management has taken sufficient steps
to mitigate the risks associated with the
Finance Transformation programme
and the ongoing management of the
new structure.
96
| Serco Group plc
Annual Report and Accounts 2018
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 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.
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 2018 Half and Full Year results and
the 2018 Annual Report ahead of their
approval by the Board.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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 2018 results and
the 2018 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 understanding of the
financial statements.
The Committee were satisfied that the
adoption of IFRS9 and IFRS15 have been
appropriately reflected in the Financial
Statements for the current year and the
prior year restatement.
The Committee are comfortable with
the policy choices made and the
approach taken by Management in
respect of the adoption of IFRS16.
The impact of IFRS16 is disclosed within
note 2 of the Financial Statements.
The Adoption of New Accounting Standards in 2018
The Committee challenged the policy
choices made that determine how
revenue is recognised under IFRS15 and
transition methods adopted in detail
with Management and the External
Auditor.
The Committee have been briefed on
the expected impact of IFRS16 and the
project undertaken to prepare the
Group for the new accounting standard.
Due to the significance of IFRS16, as
with the adoption of IFRS15, the
Committee members took part in an
IFRS16 education session held with the
External Auditors and senior members
of the Group Finance team.
During the year the Group’s Financial
Statements were prepared under IFRS9
and IFRS15.
IFRS9 has not had a material impact on
the Group’s financial statements.
Management performed a detailed
assessment of the impact of IFRS15 and
restated its prior 2017 numbers to
reflect the change in accounting
standards.
Management updated the Group’s
revenue recognition policies for
long-term contracts to align with IFRS15.
Management has implemented a new
piece of software and developed
processes to manage the Group’s lease
data and enable the Group to account
for leases under IFRS16 from 1 January
2019.
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 2018.
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 the 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.
Annual Report and Accounts 2018
Serco Group plc
|
97
Corporate Governance Report
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.
Exceptional Items
The Group has undergone a significant
restructuring programme as a result of
the Strategy Review undertaken in 2014.
As a result of this the Group incurred
significant restructuring costs
associated with changes made to the
strategy, organisational structure and
underlying infrastructure required to
support the future growth in revenues
and profit margins.
Following review, the Committee
concluded that the process followed
was appropriate and the resulting
conclusions reached and calculations
performed were appropriately balanced.
The Committee considered both the
process undertaken by Management to
finalise the assumptions for the main
schemes, including the additional
liability associated with obligations in
respect of the equalisation of
Guaranteed Minimum Pensions, and
how these assumptions benchmark
against the market. Advice was taken
from independent actuaries on the
appropriateness of the assumptions
used.
The Committee has scrutinised and
challenged Management on the items
recognised as exceptional during the
year to ensure consistent application of
the Group’s policy, which is in line with
FRC guidance, and the controls in place
to ensure that appropriate restructuring
costs are charged as exceptional items.
The Committee concluded that the
items recorded as exceptional were
appropriate and that appropriate review
controls were in place to ensure that
costs which should be recorded within
Underlying Trading Profit were not
instead recorded as exceptional.
Viability Statement
In October 2018, the FRC ‘Business model reporting; Risk and
viability reporting’ study was issued. The Committee has
reviewed the 2018 Viability Statement in light of this study
and believe that the Group’s Viability Statement is
appropriate and balanced in respect of highlighting the risks
the Group is exposed to and the assumptions being made in
assessing its viability.
The Viability Statement is set out on pages 64 and 65.
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
meeting; 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 2018, 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 2019 Internal Audit programme will continue to focus on
the key risks across the business.
External Auditor
The Audit Committee manages the relationship with the
Company’s External Auditor on behalf of the Board. In 2017,
KPMG LLP were appointed by the Board as the Company’s
external auditor for the 2016/17 audit and have served as the
Company’s auditor for two years. John Luke was appointed
as audit partner in 2018. In accordance with the Revised
Ethical Standard 2016, the Company will continue the
practice of the rotation of the audit engagement partner at
least every five years.
98
| Serco Group plc
Annual Report and Accounts 2018
Non-audit fees
The Committee limits the non-audit work undertaken by the
External Auditor and monitors the non-audit fees paid during
the year. For the financial year ended 31 December 2018, the
non-audit fees paid to KPMG LLP were £0.1m (2017: £0.1m).
The majority of the fees relate to the UK Government review
where KPMG LLP is being used for continuity given the
complex nature of the work performed, with their services in
respect of the review commencing prior to KPMG LLP’s
appointment as External Auditor. These services
predominantly relate to data extraction under instruction
from the Group’s external lawyers and will end when the UK
Government review is concluded. 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
185. 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 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.
During the year, the FRC Audit Quality Review (AQR) team
completed a review of KPMG’s audit of Serco Group plc’s
2017 financial statements. The Committee considered the
findings of the review and discussed them with KPMG, and
the Chairman of the Committee also discussed the findings
with the FRC’s AQR team. Whilst none of the findings were
regarded by the Committee as significant, some matters
were identified as requiring improvement and we are
satisfied with the responses implemented by KPMG in the
audit of the Group’s 2018 financial statements.
The Committee also reviewed the External Auditor’s
engagement letter and determined the remuneration of the
External Auditor in accordance with the authority given to it
by shareholders. The Committee considered the External
Auditor’s remuneration to be appropriate.
It is proposed that KPMG LLP be re-appointed as External
Auditor of the Company at the next AGM in May 2019 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 the Company’s
website.
The Independent Auditor’s Report to shareholders is set out
on pages 140 to 150.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
99
Corporate Governance Report
Nomination Committee Report
Nomination Committee members
Sir Roy Gardner (Chair)
Lynne Peacock
John Rishton
Dear Shareholders
During the year, the Committee reviewed the balance of
skills on the Board to identify where additional skills would
be beneficial, reviewed the annual plan of agenda items to
ensure all those matters required to be addressed by the
Committee were fully discussed and confirmed the renewal
of appointments for further terms of three years for those
Non-Executive Directors whose three year terms of
appointment were due for renewal.
As part of the Committee’s objective to ensure the Board is
continually refreshed, the Committee recommended that
an additional Non-Executive Director with international
experience should be recruited. Following a selection
process more fully described later in this report, Eric Born
was appointed as Non-Executive Director and a member of
the Audit and Corporate Responsibility Committees on 1
January 2019.
Mike Clasper, who was the Senior Independent Non-
Executive Director, stood down on 31 December 2018
following which John Rishton was appointed as Senior
Independent Director and a member of the Nomination
Committee and Kirsty Bashforth was appointed Chair of the
Corporate Responsibility Committee.
Sir Roy Gardner
Chair of the Nomination Committee
20 February 2019
Committee’s responsibilities
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 33%
(2017: 33%).
The key responsibilities of the Committee are:
• Reviewing the size, structure and composition of the
Board and identifying candidates for appointment to
the Board;
• Recommending membership of Board Committees;
• Undertaking succession planning for Directors and other
senior executives and ensuring that the leadership needs
of the organisation continue to be met; and
• Reviewing induction and training needs of Directors.
The Terms of Reference for the Committee are available on
the Company’s website.
Membership and attendees
The Committee is comprised 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 Committee met
four times during the year and details of Committee
membership and attendance at meetings are set out on page
89. Meetings of the Committee are normally attended by the
Group 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 84 and 85.
Activities of the Committee during 2018
During the year the Committee’s key activities included:
• The appointment of a non-executive director
As part of the ongoing process of ensuring the Board’s
continuing refreshment, the Committee recommended
that an additional non-executive director with, in
particular, international experience should be recruited to
join the board. Korn Ferry, which has no other connection
with the Company, was appointed to identify potential
candidates to match the specification prepared by the
Committee.
Following the identification of several potential
candidates, a shortlist of candidates was prepared by the
Committee and members of the Committee and other
executive and Non-Executive Directors interviewed these
shortlisted candidates.
Following these interviews, the Committee recommended
to the Board that Eric Born should be appointed as a
Non-Executive Director and a member of the Audit and
Corporate Responsibility Committees.
Eric, who was duly appointed with effect from 1 January
2019, has attended meetings with members of the
Executive Committee and other key senior managers as
part of a comprehensive induction programme which will
also include meetings with the Company’s advisers and
visits to contract sites.
100 | Serco Group plc
Annual Report and Accounts 2018
• Changes to Committee membership
Mike Clasper, who was the Senior Independent Director,
stood down as a Non-Executive Director on 31 December
2018, which created opportunities for some further
refreshment of roles on the Board and the Company’s
Committees. John Rishton replaced him as Senior
Independent Director and as a member of the Nomination
Committee and Kirsty Bashforth took his place as chair of
the Corporate Responsibility Committee.
• 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. We believe
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 reviews and assesses the Board
Diversity Policy annually and recommends 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 76.
The Board Diversity Policy is available on the Company’s
website.
67%
Performance review
The Committee’s performance was assessed as part of the
Board’s annual effectiveness review. Although it was felt that
the Committee worked effectively, it was agreed that the
Committee should have a broader role and the general
observation that changes of a procedural nature, including
the more frequent review of processes, procedures and
policies, would improve overall performance was considered
appropriate to the Committee as well as the Board and will
be implemented.
2019 priorities and focus
During 2019, the Committee will continue to focus on
developing its approach to succession planning for the
Board, its Committees and the wider management team.
Gender diversity: Board
33%
Male
Female
Gender diversity: Senior Management
68%
32%
Male
Female
Gender diversity: Board
67%
33%
Male
Female
Gender diversity: Senior Management
68%
32%
Male
Female
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
101
Corporate Governance Report
Corporate Responsibility Committee Report
Corporate Responsibility Committee members
Kirsty Bashforth (Chair)
Eric Born
Ian El-Mokadem
Sir Roy Gardner
Rupert Soames
Dear Shareholders
It has been three years since the new Corporate
Responsibility Committee separated from the Group Risk
Committee to focus on the continuation of our corporate
renewal whilst driving the maturity and strategic alignment
of our corporate responsibility agenda. In that time, we
have witnessed the business transformation gather pace,
building on the foundations laid in 2014-15 and
underpinning Serco’s future growth.
The Corporate Renewal Programme has been a core
element of our stabilisation, but it represents more than just
a milestone in Serco’s history. Through the steps we have
taken and the lessons we have learned, the principles of
corporate renewal have become, and must continue to be,
embedded in our culture, our ways of working and our
relationships with stakeholders.
Alongside other key components in our corporate strategy
today, the momentum and direction of our corporate
responsibility agenda is an important outcome of our
renewal and ongoing development. Intensifying external
scrutiny and focus on responsible business practice
continues to challenge all organisations globally and we are
proud that the business continues to respond with drive
and commitment.
As Serco moves from renewal towards growth, the
Committee’s agenda evolves and so too does its
membership. Mike Clasper, Chair of the Committee since
2016, left with his departure from the Board at the end of
the year. I would like to thank Mike for his contribution to
developing the Committee and clarifying its focus. I would
also like to welcome Eric Born to the Committee, who has
joined us following his appointment to the Board.
I was honoured to be asked to chair the Corporate
Responsibility Committee. The Committee’s remit,
including oversight of ethics and business conduct, culture
and employee engagement, approach to stakeholder
relationships and ongoing corporate renewal activity,
provides an ideal arena for assuring the integrity of the
business and its approach to responsible operation and
growth. The next phase in Serco’s evolution and
performance promises to be the most engaging yet and,
together with my fellow Committee members, I look
forward to overseeing and reporting our progress.
Kirsty Bashforth
Chair of the Corporate Responsibility Committee
20 February 2019
102 | Serco Group plc
Annual Report and Accounts 2018
2019 priorities and focus
During 2019, the Committee will:
• continue to undertake deep dives into key areas within its
remit to ensure appropriate focus, control and rigour
throughout the Group, including a review of Corporate
Renewal Programme progress in our Middle East and UK
& Europe Divisions;
• continue to support embedding the Serco Corporate
Responsibility Framework whilst ensuring it remains
integral to the Group’s public purpose and
responsibilities;
• review the Committee’s position, focus and approach
regarding corporate renewal and corporate responsibility
to ensure they remain appropriate, embedded in the
business and conducive to the ongoing delivery of the
Group strategy;
• oversee the implementation of the Group’s Business
Integrity Compliance Plan and continue to challenge the
integrity and effectiveness of Speak Up, including the
strengthening of trust in the process;
• oversee the effective implementation of the refreshed
Group HSE strategy; and
• review the approach adopted to further ensure workforce
engagement in accordance with the provisions of the 2018
UK Corporate Governance Code.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Committee’s responsibilities
The Committee is responsible for overseeing and
considering the Group’s current and future approach
regarding all aspects of corporate responsibility as defined
by the Corporate Responsibility Framework.
The Committee also reviews and scrutinises the Group’s
continued approach to corporate renewal.
The Terms of Reference for the Committee are available on
the Company’s website.
Membership and attendees
The Committee is comprised of both Executive and Non-
Executive Directors and biographical details for each
member of the Committee are provided on pages 84 and 85.
The Committee met three times during the year and details
of Committee membership and attendance at meetings are
set out on page 89. Meetings of the Committee are normally
attended by the Group General Counsel and Company
Secretary, the Group HR Director, the Director, Business
Compliance and Ethics, and the Managing Director, Group
Operations.
Activities of the Committee during 2018
Key activities included:
• supporting the embedding of the Serco Corporate
Responsibility Framework whilst ensuring it remains
integral to the Group’s public purpose and
responsibilities;
• monitoring and reviewing the progress of the Corporate
Renewal Programme, including: the findings of the annual
SMS self-assessment process and compliance assurance
programme; ongoing contract management performance
and reporting; and in-depth analysis of progress in our
Americas and Asia Pacific Divisions;
• ratification of the refreshed Group Health, Safety and
Environment (HSE) strategy and monitoring and reviewing
the Group’s HSE performance, including: lessons learnt
and action plans from specific incidents, an overview of
HSE governance and oversight, specific initiatives to drive
continuous improvement and in-depth analysis of marine
safety and physical assaults;
• monitoring and reviewing the Group’s Ethics and Speak
Up performance, including: trends, resolution times,
investigation outcomes, lessons learnt and specific
initiatives to drive continuous improvement;
• reviewing the culture of the Group through analysis of the
Culture Index generated by the annual ‘Viewpoint’
employee engagement survey;
in-depth analysis of the Group principal risk, failure to act
with integrity;
•
• preparation of the Group’s annual Corporate
Responsibility Report and Modern Slavery Statement; and
• changes to Committee membership – Kirsty Bashforth
was appointed Chair of the Committee following Mike
Clasper’s decision to stand down from the Board, with
effect from 1 January 2019. Newly-appointed Non-
Executive Director, Eric Born was also appointed to the
Corporate Responsibility Committee with effect from
1 January 2019.
Annual Report and Accounts 2018
Serco Group plc
|
103
Corporate Governance Report
Compliance with the UK Corporate Governance Code
This section of the Corporate Governance Report describes how the Company has complied with the principles
of the UK Corporate Governance Code (“the Code”) published by the Financial Reporting Council on 27 April
2016 and which is available at www.frc.org.uk. It should be read in conjunction with the Corporate Governance
Report as a whole, set out on pages 83 to 103.
The Company has complied in full with the Code during 2018.
A. Leadership
A.1 The Role of the Board
The Board is collectively responsible to the
Company’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
schedule of matters reserved to the Board.
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 Annual General
Meeting (“AGM"). Details of the number of
Board and Committee meetings held during
2018 and the Directors’ attendance are
shown on page 89.
A.2 Division of responsibilities
The roles and responsibilities of the
Chairman and Chief Executive are separate
and are clearly defined, documented and
approved by the Board.
Sir Roy Gardner, the Chairman, leads and is
responsible for the operation of the Board.
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, in consultation with the
Company Secretary, sets the Board’s
agenda. Meetings are arranged to ensure
sufficient time is available for the discussion
of all matters, in particular strategic issues.
The Chairman encourages 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. As part of the
business planning process, all Directors
attend the annual Board Strategy Day at
which the future direction of the Company
is considered.
The Senior Independent Director is available
to address shareholders’ concerns regarding
governance. He is also available to address
concerns on other issues as an alternative
contact to the Chairman, Group Chief
Executive or Group Chief Financial Officer.
A description of the key responsibilities of
the Senior Independent Directors is available
on the Company’s website.
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 would 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, the Board reviewed the
overall balance of skills, experience, diversity,
independence and knowledge of Board and
Committee members and concluded that the
Board was of an appropriate size to meet the
requirements of the business.
In accordance with the Code, the Board
undertakes an annual review of the
independence of its Non-Executive
Directors. The Board considers each of the
Non-Executive Directors to be independent
and free of any business relationships that
could compromise the exercise of
independent and objective judgement.
B.2 Appointments to the Board
The Nomination Committee, which is chaired
by the Company’s chairman, leads the
process for Board appointments, with the
assistance of an external search company,
and makes recommendations to the Board.
All appointments are made on merit against
objective criteria. Non-Executive Directors
are appointed for periods of three years and
any term beyond six years would be subject
to rigorous review. All Directors submit
themselves for re-election at each annual
general meeting.
104 | Serco Group plc
Eric Born was appointed as Non-Executive
Director on 1 January 2019. Full details
regarding the appointment process are
given in the Nomination Committee report.
B.3 Commitment
The time commitment of Non-Executive
Directors is defined on appointment and
regularly evaluated. The Board is satisfied
that each of the Non-Executive Directors is
able to devote sufficient time to the
Company’s business. Executive Directors are
encouraged to take on non-executive roles
to broaden their experience, subject to the
Board’s approval and the time commitment
required. Angus Cockburn is a non-executive
director, Chair of the Audit Committee and a
member of the Nomination and
Remuneration Committee of Ashtead Group
plc. Rupert Soames has been appointed as a
non-executive director and a member of the
Audit, Nomination and Remuneration
Committees of DS Smith Plc with effect from
1 March 2019.
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 the year, the Board received briefings
from advisers on relevant topics designed to
update Directors’ skills and knowledge in
particular areas. A number of the Non-
Executive Directors also visited contract sites
and attended Divisional management
meetings to broaden familiarity with the
Group’s operations. Reports of such visits are
shared with all Board members.
B.5 Information and support
The Directors have access to independent
professional advice at the Company’s
expense as well as to the advice and services
of the Company Secretary who advises the
Board on corporate governance matters.
The Company Secretary ensures that
information is received by the Board and its
committees on a timely basis for them to
review prior to meetings and ensures that
board procedures are followed and that the
Company and the Board operate within
applicable legislation. The Company
Secretary is also responsible for facilitating
Directors’ inductions, assisting with
identifying and enabling appropriate training
and board performance evaluation.
The appointment and removal of the
Company Secretary is a matter for the Board
as a whole.
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
The Chairman, in conjunction with the
Company Secretary, ensures that all Board
members receive timely, accurate and
effective information.
B.6 Evaluation
The evaluation of the Board is externally
facilitated every three years and in 2018 an
external performance evaluation was
undertaken by ICSA Board Evaluation
Limited. Full details are given on page 90.
The Chairman reviews the performance of
Non-Executive Directors annually and the
Non-Executive Directors, led by the Senior
Independent Director, are responsible for
the Chairman’s annual performance review.
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.
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. All
Directors will stand for election or re-election
at the 2019 AGM. Full biographical details for
all Directors are on pages 84 and 85.
C. Accountability
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 138 with an
explanation of the Group’s strategy and
business model together with the relevant
risks and performance metrics set out on
pages 15 to 63.
A further statement is provided on page 138
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 94 to
99 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 and Audit
Committees, 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 54 to 63. The Viability Statement on
pages 64 to 65 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 52 to 63 and 91 to 93.
C.3 Audit Committee and Auditors
The Audit Committee report on pages 94 to
99 sets out details of the composition of the
Committee, including the expertise of
members, and outlines how the Committee
discharged its responsibilities during the
year.
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 of the Committee,
which are available on the Company’s
website.
D. Remuneration
D.1 The level and components
of remuneration
The Remuneration Report on pages 106 to
131 outlines the activities of the Committee
during the year 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
the year (including salary, bonus and
share awards).
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 of the
Committee which are available on the
Company’s website.
No Director is involved in setting his or her
own remuneration.
E. Relations with shareholders
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. There has been
active engagement with shareholders
through meetings, presentations and
roadshows throughout the year.
E.2 Constructive use of General meetings
At general meetings, proxy appointment
forms enable shareholders to vote in favour
of or against resolutions, or to withhold their
vote. Proxy forms and announcements of
results of votes make clear that votes
withheld are not counted when calculating
the results of the vote since they are not a
vote in law.
All valid proxy appointment forms are
recorded and counted and, after a vote has
been counted, information regarding the
proxy votes is given at the meeting and
published on the Company’s website.
Separate resolutions are proposed at general
meetings on substantially separate issues.
Should a significant proportion of votes be
cast against a resolution, the Company
would explain, when announcing the result,
what action it intends to take to understand
the reasons behind the result.
Notice of general meetings is despatched to
shareholders at least 14 working days in
advance and, in the case of annual general
meetings, at least 20 working days in
advance.
All directors are required to attend annual
general meetings and the chairs of each of
the Board Committees are available to
answer relevant questions.
The AGM will be held on Thursday 9 May
2019 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
the Company’s website.
Annual Report and Accounts 2018
Serco Group plc
|
105
Implementing the Remuneration Policy approved
in 2018
The Committee values its relationship with, and continued
support from, shareholders and we were pleased to receive
strong support for our new Directors’ Remuneration Policy at
the 2018 AGM. Through the new Policy we refreshed the
focus on value creation and share ownership, and reinforced
the alignment of the high calibre executives (appointed in
2014) with the completion of the transformation and the
delivery of the outcomes previously committed to
shareholders. The Policy, which is supported by our Executive
Team, aims 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.
During 2018 we have achieved simplification of our long-term
incentive arrangements, with the removal of the Deferred
Bonus Plan, which also resulted in a significant reduction in
remuneration opportunity for both the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO). Good practice
measures have also been introduced in 2018, including the
mandatory 3 year deferral into shares of any bonus earned
over 100% of salary in respect of performance over 2018
(these bonuses are disclosed in the report that follows).
As previously communicated, the last award under the legacy
Deferred Bonus Plan was made to the Executive Directors in
2018 in respect of the deferral of part of the bonuses earned
against performance in 2017 and in line with the
Remuneration Policy approved by Shareholders in respect of
remuneration for that financial year.
Remuneration Report
Report On Directors’ Remuneration
Remuneration Committee members
Lynne Peacock (Chair)
Kirsty Bashforth
Sir Roy Gardner
John Rishton
Reward aligned to performance
Dear Shareholders
On behalf of the Board, I am pleased to present the
Directors’ Remuneration Report (“the Report”) for Serco
Group plc for the year ended 31 December 2018. The 2018
Report sets out how the Directors’ Remuneration Policy (“the
Policy”), approved at the 2018 AGM, has been implemented
for 2018 and how the Policy will be implemented in 2019.
No changes to the Policy are proposed for the coming year.
A summary of the approved Policy is reproduced here for
reference and the full Policy can be found in our 2017
Directors’ Remuneration Report which is available on the
Company’s website.
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 decisions
Since the arrival of our current Executive Directors in 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.
As reported by the Chairman in his introduction to this year’s
Annual report, 2018 has been another successful year as we
continued through the transformation phase of the 2015 plan
and began to see the return to growth.
Despite market challenges, particularly in the UK, the
management team has delivered a strong trading result,
above that expected at the start of the year. Although
bolstered by some non-recurring items, the strong profit
growth in 2018 and increased margins also reflect both
significant improvements in operational performance and
cost reduction delivered through the transformation of the
business to date. Order intake of £2.9bn has delivered a
book-to-bill ratio of over 100%. Progress on delivering
transformation savings and other cost efficiencies will
continue into 2019, however 2018 marked the start of the
delivery of the third phase of our corporate strategy, growth.
106 | Serco Group plc
Annual Report and Accounts 2018
Summary of key decisions taken in 2018
• Confirmation of 2018 vesting of the 2015 Performance Share Plan (PSP) awards which vested at 66.67% and the 2015
Deferred Bonus Plan (DBP) Matching Share Awards which vested in full.
• Determination of vesting of the 2014 PSP and Recruitment Awards granted to the CEO and CFO that were subject to
Absolute Share Price performance conditions assessed during the year. The Absolute Share Price elements did not vest
as the minimum performance was not achieved.
• Assessment of performance for the 2018 Annual Bonus. It was determined that the CEO should receive a bonus of 77.1%
of maximum and the CFO a bonus of 75.6% of maximum.
• Assessment of performance for the 2014 PSP Awards five year EPS element, 2016 DBP and 2016 PSP Awards (EPS and
ROIC tranches) with performance periods ending in FY18 and vesting in 2019.
• Determination of DBP Matching Share Awards granted in connection with the deferral of 2017 bonuses under the 2017
Remuneration Policy, and awards granted under the PSP in June 2018.
• Determination of a nil salary increase for the CEO and a 2% increase for the CFO in 2019.
• Review of the TSR performance condition and peer group used in the PSP awards and confirmation that this
appropriately aligns the PSP awards with shareholder experience.
• Preparation of new share plan rules including the determination of a revised list of triggers for both malus and clawback
to be applied in line with the approved Policy reflecting current market practice and the latest Corporate Governance
Code Guidance.
Remuneration linked to delivery of the strategic plan – 2018 variable pay outcomes
Overall, the Company’s strong performance has delivered the incentive outcomes in 2018 summarised below.
Plan
Annual Bonus
Annual Bonus
Annual Bonus
PSP
PSP
PSP & DBP
KPI
Trading Profit
Revenue
Free Cash Flow
Relative TSR
Average ROIC
Aggregate EPS
1. At constant currency.
Below Threshold
Between Threshold and Target
Between Target and Max
2018 performance
2018 incentive outcome
£105.9m1
£2,902.0m1
(£25.0m)1
Below Median
11.7%
17.58p
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
107
Remuneration Report continued
Report On Directors’ Remuneration continued
In addition to these specific performance targets, the
Committee also considered the Company’s performance
as a whole when deciding on levels of payout for the Annual
Bonus and PSP, as well as when determining any salary
increases for the coming year, to ensure that the overall
remuneration packages continue to reflect Company
performance.
Annual bonus payments are based on a combination of
financial targets (70% weighting) and personal objectives
linked to the delivery of the Group’s operational and strategic
priorities (30%). The strong financial performance in the year
saw significant increases to trading profit in 2018 with trading
profit for bonus purposes assessed to be £105.9m, and the
achievement of positive Free Cash Flow of £25m for the first
time in four years. The Committee also considered the
performance of each Executive Director against his personal
objectives and, taking into consideration all factors, it was
agreed that bonuses of 77.1% and 75.6% of maximum
should be awarded to the CEO and CFO respectively.
These bonuses, to the extent they are over 100% of salary,
are subject to mandatory deferral into shares for three years,
therefore 26% of the bonus awarded to the CEO and 15% of
the bonus awarded to the CFO will be deferred. Full details
of the annual bonus outcomes are set out on pages 116 to 118.
Long term incentives with performance periods ending in
2018 were determined to have mixed vesting outcomes
reflecting the challenges faced by the Group since the
awards were granted. In particular, it was determined that the
final tranche of the 2014 PSP awards (subject to a five year
EPS condition and due to vest in 2019) will not vest. This
means that overall 0% of the 2014 annual PSP award, granted
to the Executive Directors, vested. The performance period
for the TSR tranche of the 2015 PSP award ended in 2018.
Despite the recent financial performance of the Group, over
the relevant performance period the minimum TSR required
for vesting was not met. When combined with the EPS and
ROIC tranches of the 2015 PSP awards, which were disclosed
in the 2017 DRR, the overall vesting outcome was 66.67%
which the Committee agreed was an appropriate outcome.
Of the annual PSP and DBP awards granted in 2016, which will
vest in 2019, the performance period for the EPS (both PSP
and DBP) and ROIC (PSP only) tranches has now completed.
On assessment of the financial performance, the maximum
EPS and ROIC targets were exceeded. The Committee
determined that it was appropriate for these tranches to vest
in full recognising the achievements made by the Executive
team and senior management in transforming the business.
The long term incentive outcomes are discussed further on
pages 119 to 120.
Implementation of the remuneration policy in 2019
Salary
Base salaries for the CEO and CFO were set in a way which
reflected the needs of the business at the time they were
recruited in 2014, and the experience they both brought to
the roles. Given the circumstances at the time, and their
positions as experienced leaders of a FTSE 100 business, the
Committee recognised that it would have to pay highly
(relative to FTSE 250 companies) to attract them to what was
then a business with a number of very significant challenges
to face. Shareholders gave overwhelming support to their
appointment and subsequently to their remuneration.
Following the departure of the Chief Operating Officer
(COO) at the end of 2017, the key duties he fulfilled have
been shared amongst the remaining Executive Directors
and the Executive Committee. Recognising the additional
responsibilities taken on following the departure of the COO,
the key role the CFO has played in the transformation of
Serco and the value he continues to bring to the business,
the Committee has determined to increase his base salary
in 2019 by 2%. This is in line with the increase for the wider
workforce. This is the first increase in base salary for the CFO
since joining Serco in 2014. No increase to base salary is
proposed for the CEO, for the fifth successive year.
Bonus
Bonus targets are set to reflect the opportunities and
challenges that the Company is likely to face in the coming
year, and are based on trading profit, cash and revenue,
together with key operational and strategically aligned
personal objectives. Any bonus earned over 100% of salary
will continue to be subject to compulsory deferral into shares
for three years.
LTIP
In line with the policy approved in 2018, long-term incentive
awards will be granted to Executive Directors with a
combination of financial measure (85% of the award split
equally between EPS, TSR and ROIC) and strategic objectives
(15% of the award split equally between employee
engagement and order-book goals). The Committee has
determined that these measures remain aligned with the
strategic plan and targets will be set taking into consideration
the challenging market conditions and market consensus.
108 | Serco Group plc
Annual Report and Accounts 2018
Consideration of wider workforce remuneration
Whilst the Committee’s primary purpose is the governance of
pay for Executive Directors, we continue to exercise oversight
of remuneration for senior management and take into
consideration pay policy across the wider workforce as part
of our decision-making process. The Committee also reviews
the gender pay gap reporting requirements (for which the
2018 report may be found on our website) and the
remuneration practices across the Group. To further support
our decision making and the alignment of executive pay with
the wider workforce, we are incorporating more detailed
updates from management on the pay and working practices
across the workforce into our annual programme of work.
This will be supported by the developments to our ‘employee
voice’ mechanism through which we will improve the clarity
and extent of the feedback from this key stakeholder group.
Shareholder engagement
Further to the 2017/18 consultation with our main
shareholders and investor agencies on our new remuneration
Policy, we contacted our top shareholders to share
updates and invite feedback on how that Policy had been
implemented during 2018, and the implementation plans
for 2019, which are shared here in more detail. In addition,
our Investor Relations team are in regular contact with
our shareholders and share any feedback or queries on
remuneration throughout the year so that we can maintain an
ongoing dialogue.
Concluding comments
On behalf of my colleagues on the Committee, we appreciate
the input and support we have received on the
implementation of our Policy in 2018. The Committee
believes that the Policy has, and will continue to, ensure that
our executive management team are rewarded for and
incentivised to achieve completion of the Transformation
phase and the continued delivery of the Growth phase of
our strategy.
On behalf of the Board:
Lynne Peacock
Chair of the Remuneration Committee
20 February 2019
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
109
The Remuneration Committee
The role of the Committee is to determine and recommend to the Board a fair and responsible remuneration framework
that aligns the executive management team to shareholders’ interests and is designed to reward and incentivise them
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 and the
reward strategy throughout the rest of the business.
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 are available on the Company’s website.
Members of the Committee and attendees
All members of the Committee are independent, Non-Executive Directors of the Group, initially appointed for a three-year
term. That appointment may be terminated on three months’ written notice. Lynne Peacock joined the Committee on 1 July
2017 and has been Chair of the Remuneration Committee since 15 September 2017. Sir Roy Gardner, John Rishton and Kirsty
Bashforth have been members of the Remuneration Committee since 1 June 2015, 13 September 2016 and 15 September 2017
respectively.
In addition, the following individuals attended the Remuneration Committee meetings during the year:
Rupert Soames
Anthony Kirby
Nigel Crossley
Tara Gonzalez
Position
CEO
Group HR Director
Comments
Attended by invitation
Attends as an executive responsible for
advising on the People Strategy
Group Financial Controller
Attended by invitation
Group Reward Director
Group General Counsel &
Company Secretary
Deputy Company Secretary
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 advisers to the Remuneration
Committee
Attend when required as the independent
advisers to the Committee
Lianne Dance from December 2018
Group Head of Reward
David Eveleigh
Chandrika Kher until February 2018/
Stuart Haydon from May 2018 as Interim
PricewaterhouseCoopers LLP
No person is present during any discussion relating to their own remuneration arrangements.
110 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued Summary of the Committee’s activities during the financial year
Meeting
Regular items
February
May
September
December
Considered feedback from the shareholder consultation on the 2017 Policy Review; agreed new
Remuneration Policy to be put to shareholders at the 2018 AGM; considered base pay of Executive Directors
and members of the Executive Committee; considered performance against 2017 targets and confirmation
of 2017 bonus payable; reviewed achievement of performance conditions for the long term incentives vesting
in respect of awards granted in 2015; set performance targets and objectives for 2018; reviewed and
approved the 2017 Remuneration Report; received an update on the 2017 UK Gender Pay Report; and
received an update on draft remuneration related amendments to the UK Corporate Governance Code.
Considered administrative changes to the PSP Rules and the Share Dealing Code; considered AGM voting
outcomes; confirmed the TSR vesting outcome for the relevant tranches of PSP and Recruitment Awards
granted in 2014; approved the rules to support the new compulsory bonus deferral; considered the pay
philosophy and principles relating to members of the Executive Committee and the approach to
benchmarking the remuneration for these roles; received a market practice and Corporate Governance
update regarding executive remuneration; and considered the forward agenda and timing of meetings
for 2019.
Reviewed progress of Executive Directors against annual bonus targets and objectives; considered share
based reward policy below main Board considering market trends and corporate governance updates with a
view to preparing new plan Rules for 2019; considered shareholder engagement; received and discussed
remuneration related governance updates in respect of the Directors’ Remuneration Report, UK Corporate
Governance Code and BEIS ‘Delivering on Fair pay’ recommendations; received an update on the review of
the wider senior management team at Serco; and considered the review of the TSR comparator group
following a review to ensure it remains appropriate.
Reviewed the proposed approach to the structure of the Remuneration Report; reviewed the Committee’s
annual programme of work; considered base pay of Executive Directors and Executive Committee members
for 2019; considered the grant policy to apply to annual long-term incentive awards in 2019; received an
update on in-flight share awards and performance tracking for these; considered the detail for the 2018 UK
Gender Pay Report; reviewed new share plan Rules for 2019; and received an update on the global review of
senior management and considered the proposed reward strategy, remuneration framework and incentive
recommendations from this.
Advisers to the Remuneration Committee
The Committee has been advised during the year by PricewaterhouseCoopers LLP (PwC). PwC were selected as advisers to
the Committee through a competitive tendering process in 2012 and no conflicts of interest were identified. PwC have
provided advice throughout the year mainly around the following key executive reward areas:
• support in reviewing the Directors’ Remuneration Report;
• design of performance conditions;
•
• assistance with general and technical reward queries.
informing the Committee on market practice and governance issues; and
Fees paid to PwC as advisers to the Committee during the year totalled £42,100. 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 CEO
on the remuneration and performance of the other members of the Executive Committee.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
111
At a glance: implementation of Remuneration Policy for 2019
There are no changes proposed to the Policy approved by shareholders at our 2018 AGM, a summary of which is set out at the
end of this report. Our pay structure which will continue to apply in 2019 is summarised as follows:
Performance
Share Plan
Vests subject to three-year
EPS, ROIC, TSR and Strategic
Objectives conditions period.
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
Year
1
2
3
4
5
Chart is illustrative and is not to scale. Details of Executive Director remuneration for 2019 may be found on page 114. A summary of the Executive
Remuneration Policy that was approved by shareholders at the 2018 AGM can be found on pages 126 to 131, the full approved 2018 Directors’
Remuneration Policy is set out in the 2017 Director’s Remuneration Report which is available via our website.
How our variable pay structure aligns to the core KPIs for 2019
Our aspiration is to be the best managed company in our sector. To achieve this we concentrate on doing four things
really well; winning good business, executing brilliantly, being a place people are proud to work and being profitable and
sustainable. Our variable pay for 2019 aligns to this through the targets set against a number of our core KPIs, each of
which has an important role in realising this aspiration. Total Shareholder Return aligns variable pay with value created
for shareholders.
Core KPIs
Financial
Trading Profit
Revenue
Free Cash Flow
Relative TSR
Average ROIC
Aggregate EPS
Non-financial
Annual bonus
PSP
In-year non-financial objectives
Growth-aligned strategic objectives
✓
✓
✓
✓
✓
✓
✓
✓
112 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
The following charts illustrate the value that may be delivered to Executive Directors under different performance scenarios
for the year ending 31 December 2019.
Rupert Soames (£’000s)
2019 Policy
6000
5000
4000
3000
2000
1000
0
£4,332
39%
34%
27%
£5,182
16%
33%
29%
22%
£2,738
31%
27%
42%
£1,144
100%
Minimum
Target
Maximum
Maximum
(including share
price appreciation)
Angus Cockburn (£’000s)
3000
2500
2000
1500
1000
500
0
2019 Policy
£2,400
37%
£2,846
16%
31%
£1,559
29%
25%
46%
£717
100%
33%
28%
30%
25%
Minimum
Target
Maximum
Maximum
(including share
price appreciation)
The scenarios in the above graphs are defined as follows:
• Fixed elements of remuneration:
– base salary as applicable from 1 April 2019;
Fixed elements of remuneration
Annual variable
Multiple period variable
Value attributable to share price appreciation
Fixed elements of remuneration
Annual variable
Multiple period variable
Value attributable to share price appreciation
– estimated value of benefits to be provided in 2019 in line with the Remuneration Policy (based on the value of actual
benefits provided in 2018); and
– 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. The Performance Share Plan value under the
maximum scenario is also shown assuming 50% share price appreciation over the performance period.
Annual Report and Accounts 2018
Serco Group plc
|
113
Implementation of Remuneration Policy for 2019 – Executive Directors
Element
CEO (Rupert Soames)
CFO (Angus Cockburn)
Base salary from
1 April 20191
£850,000
Pension*
30% of salary
Annual bonus
Max 175% of salary
On-target 87.5% of salary
£510,000
30% of salary
Max 155% of salary
On-target 77.5% of salary
Annual bonus measures2
28% Trading Profit
28% Cash Flow
14% Revenue 30% in year non-financial objectives
Compulsory three-year deferral into Serco shares of bonus over 100% of salary
Performance Share Plan
(PSP)
PSP measures3
Assessed over the
three-year performance
period
Maximum 200% of salary
Maximum 175% of salary
70% financial
30% non-financial
Awards granted under the PSP in 2019 will be subject to Group performance over a three-year
period ending 31 December 2021.
For 2019, 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
FTSE 250 (excluding investment trusts).
• Average ROIC – Pre-tax Return on Invested Capital (ROIC), measured as an average over
the performance period.
For 2019 the remaining 15% will be based on Strategic Objectives – performance targets for
the awards granted in 2019 will be based on improvements in order book and employee
engagement, which are critical to delivering the business strategy over the next three years.
The Committee has concluded that a weighting of 15% for strategic measures and 85% for
financial measures is an appropriate balance.
Holding requirement
Vested shares from the PSP must be held for two years post-vesting (after payment of tax).
Shareholding guideline
200% of salary
150% of salary
Malus and clawback
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 apply to the annual bonus plan.
1. Following the resignation of the Chief Operating Officer at the end of 2017, the CFO took on additional responsibilities. He has also been
instrumental in the delivery of the transformation to date and therefore it was agreed to award him a 2% increase for 2019 in line with the increases to
be given to the wider workforce. This is the first increase in base salary for the CFO since joining Serco in 2014. No increase to base salary is proposed
for the CEO for the fifth successive year.
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.
3. 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.
* the pension contribution rate for any new directors is set as a maximum of 20% of salary
114 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Implementation of Remuneration Policy for 2019 – Non-Executive Directors
Following changes to the Non-Executive Directors and their committee memberships a review of the fees for Non-Executive
Directors was undertaken. In line with the approved Non-Executive Directors’ Remuneration Policy, the fees for the period
from 1 January 2019 will be as follows.
Element – Annual Board and Committee fees
Chairman
Senior Independent Director
Board fees
Audit Committee Chairmanship
Audit Committee membership
Corporate Responsibility Committee Chairmanship
Corporate Responsibility Committee membership
Group Risk Committee Chairmanship
Group Risk Committee membership
Remuneration Committee Chairmanship
Remuneration Committee membership
Element – travel allowance
Allowance for travel to international meetings
Base fee to
apply from
1 January 2019
£
Base fee
1 April 2018
£
Change
£
250,000
250,000
No change
15,000
53,000
12,500
5,000
12,500
5,000
12,500
5,000
12,500
5,000
25,000
50,000
(10,000)
3,000
12,500
No change
5,000
No change
No fee
payable
New fee
5,000
No change
15,000
8,000
10,000
(2,500)
(3,000)
2,500
5,000
No change
No longer
available
5,000
Removed
The fees for Non-Executive Directors were last reviewed with effect from 1 April 2018 when a membership fee of £5,000 per
annum for the Corporate Responsibility Committee was introduced. No fee, however, was introduced for chairing this
Committee as this was chaired by the Senior Independent Director who was already in receipt of an additional fee. Following
changes to the roles held by Non-Executive Directors a fee has been introduced for chairing the Corporate Responsibility
Committee and the Senior Independent Director fee has been reduced.
No additional fee is payable for the Chair or membership of the Nomination Committee.
The Chairman does not receive any additional fees for his committee memberships nor do the Executive Directors where they
sit on Board committees.
Dates of Directors’ service contracts/letters of appointment
Directors who served on the Board during the financial year ended 31 December 2018.
Director
Rupert Soames
Angus Cockburn
Sir Roy Gardner
Mike Clasper1
Rachel Lomax
John Rishton
Lynne Peacock
Ian El-Mokadem
Kirsty Bashforth
Date of appointment to the Board
8 May 2014
27 October 2014
1 June 2015
3 March 2014
3 March 2014
13 September 2016
1 July 2017
1 July 2017
15 September 2017
Notes:
1. Mike Clasper resigned on 31 December 2018.
Each Director is subject to election at the first AGM following their appointment and re-election at each subsequent AGM.
Annual Report and Accounts 2018
Serco Group plc
|
115
Annual Report on Remuneration
The implementation of the Remuneration Policy for year ended 31 December 2018
The Remuneration Policy applied for the year ended 31 December 2018 was consistent with the Policy approved by
shareholders at the AGM in 2018.
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 2018 for each Executive
Director, together with comparative figures for 2017. Details of Non-Executive Directors’ fees are set out in the next section.
All figures in £
Salary
Taxable benefits1
Pension2
Total fixed remuneration
Bonus3
Long term incentives4, 5
Total variable remuneration
Total
Rupert Soames
Angus Cockburn
2018
2017
2018
2017
850,000
38,865
255,000
850,000
40,232
255,000
500,000
53,889
150,000
1,143,865
1,145,232
703,889
1,146,863
2,187,373
956,505
1,579,261
585,900
1,120,493
500,000
63,317
150,000
713,317
489,580
543,399
3,334,236
2,535,766
1,706,393
1,032,979
4,478,100
3,680,998
2,410,282
1,746,296
Notes:
1. The taxable benefits relate to the provision of independent financial advice, a car or car allowance (fully inclusive of all scheme costs including insurance
and maintenance), health care and private medical assessments, as well as taxable business expenses. 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. Rupert Soames’ 2018 taxable benefit
includes £23,367 company car benefit. Angus Cockburn’s 2018 taxable benefit includes £21,716 (on a grossed up basis) for travel between his home, in
Scotland, and London. The 2017 taxable benefit values have been restated to include taxable benefits provided in the period but not previously disclosed.
2. 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.
3. Performance bonuses earned in the period under review, but not paid until the following financial year. For 2018 this figure includes £296,863 of Rupert
Soames’ and £85,900 of Angus Cockburn’s 2018 bonuses which will be subject to mandatory deferral into Serco shares for a three year period at the
point the bonuses are paid in 2019. During the year Rupert Soames participated in the DBP for the last time, voluntarily deferring 25% of his 2017 bonus
paid in 2018 via the purchase of Investment Shares.
4. This is the estimated or actual value of long-term incentives for which the performance period ended in the year. The 2014 PSP Awards and 2014
Recruitment Awards granted to Rupert and Angus that were subject to an Absolute Share Price performance condition, and the 2015 PSP Awards that
were subject to TSR performance (for which the performance period in each case ended 22 February 2018) did not meet the minimum criteria for each
condition and therefore these awards lapsed in full. The 2014 PSP Awards granted to Rupert and Angus that were subject to a five year EPS performance
condition (for which the performance period ended 31 December 2018) did not meet the minimum criteria and therefore these awards will also lapse
in full in 2019. The 2016 PSP Awards that were subject to EPS and ROIC performance, and the 2016 DBP Awards subject to EPS performance, for which
the performance periods ended 31 December 2018, are reported for 2018 on an estimated basis. Further details are provided on pages 119 to 120.
5. The long-term incentive values reported for 2017 have been restated to reflect the actual share price at the relevant vest dates for the Awards.
Variable pay outcomes (audited information)
Performance-related annual bonus
For 2018, 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 2018 annual
bonus were subject to an Underlying Trading Profit underpin (after adjustment for in-year Onerous Contract Provisions (OCP)
items) of £89.5m 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.
Financial performance
Performance measure
Revenue
Free Cash Flow
Trading Profit
1. At constant currency.
Weighting
for 2018
(% maximum
bonus
opportunity)
14%
28%
28%
Threshold
target
(£m)
£2,970
£(6.4)
£89.5
Target
(£m)
£3,127
£9.2
£94.0
Maximum
target
(£m)
£3,283
£25.0
£107.5
Actual
Performance1
(£m)
£2,902.0
£25.0
£105.9
Achievement
against measure
(% maximum
opportunity for
this measure)
0%
100%
95%
116 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Non-financial performance
Weighting for 2017 (% maximum opportunity)
30%
Achievement against measure (% maximum opportunity for this measure)
Overall 2018 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
75.0%
70.0%
Rupert Soames
Angus Cockburn
77.1%
175%
134.9%
£1,146,863
75.6%
155%
117.2%
£585,900
Financial performance for 2018 has been strong; both Trading Profit and Free Cash Flow performance exceeded the stretching
targets set by the Committee at the beginning of the year, with significant growth in the Underlying Trading Profit and positive
Free Cash Flow achieved for the first time since 2014. Therefore, these components were determined to pay out at 95% 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 £116.7m 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 outcomes for 2015, 2016 and 2017
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 2018 in a consistent
manner to the principles established in 2015, 2016 and 2017.
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 +£4.4m increase. The Committee then considers items to properly reflect management effort and in-year
operational performance. The Committee has concluded that a total of -£15.2m should be deducted from Trading Profit in
constant currency to arrive at a calculation of Trading Profit for bonus purposes in 2018; this compares with +£23.6m which was
added to Trading Profit in 2017. The main difference between the two years is that in 2018 there was a +£13.0m net credit to
Trading Profit related to Onerous Contract Provisions charges and releases which was excluded from Trading Profit for bonus
purposes, whilst in 2017 there was a net charge 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, 2017 and 2018.
£‘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
2018
116.7
4.4
121.1
(15.2)
105.9
97.1
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
Annual Report and Accounts 2018
Serco Group plc
|
117
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 the delivery of the Global
Transformation.
• Promote Serco Thought Leadership around
UK Government contracting practices and
support the launch of the Serco Institute.
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.
• Delivery of a refinancing strategy.
• Completion of 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.
The Committee deemed performance to be very strong overall. Rupert has
continued to show highly effective and visible leadership throughout 2018
and over the course of the last 12 months has achieved significant further
progress in delivering the plan set out in 2015. He has delivered further
transformation of the business, removing over £20m of costs in 2018, and
has started to deliver against the third phase of the plan - growth. The
Group signed contracts with a total value of £2.9bn during the year
delivering a strong performance with our closing order book at its highest
level since 2013 at £11.5bn. Over 40 contract awards in 2018 were worth
more than £10m each. In addition, in the first 6 weeks of 2019 we signed our
largest ever contract (AASC – accommodation and asylum services) in the
UK, and a significant contract in Australia (NGHS – defence healthcare
provision in Australia), on the back of significant efforts made during 2018.
Rupert has delivered thought leadership around UK Government
contracting practices, which is particularly important in the wake of the
challenges facing our market, and the Group has successfully launched the
Serco Institute which is a platform for all interested parties to share ideas
regarding the delivery of public services. The Committee continue to
monitor the successful embedding of values through the annual employee
engagement survey “Viewpoint”. Engagement in 2018 remained broadly
the same as in 2017 when the Group recorded its highest score since the
survey began in 2011; engagement is a key determinant of the future
success of the business. 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.
Overall, the Committee deemed Angus’s performance to be very strong
against his objectives. Angus has made a significant contribution to the
delivery of the strong performance in 2018 with significant growth in
profits, net debt lower than we expected, positive free cash flow for the
first time since 2014, and strong order intake. These are significant
achievements in the current, challenging market in which Serco operates.
Contract and Balance Sheet Onerous Contract Provision liability now
stands at £79m, down from £146m in 2017 and £447m in 2014. Net debt
reduced from £745m at the end of 2013 to £188m at the end of 2018, with
Net Debt:EBITDA at 1.2x which is well within our medium-term target range
of 1-2x. Angus delivered a successful refinancing of the Group’s Revolving
Credit Facility towards the end of 2018 providing £250m of committed
funds for 5 years on substantially unchanged terms from the prior facility
and at a lower amount (previously £368m) reflecting the much reduced
need for debt in the business. The Global Finance Transformation has
completed and Angus has delivered against the key milestones agreed at
the start of the year. In terms of the Transformation Plan, operating costs
reduced again in 2018 with a further £20m of costs removed from the
business, which together with the strong profit performance resulted in
margins expanding from 2.3% to 3.3%. 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.
Note:
1. Bonuses earned over 100% of salary are subject to mandatory deferral into Serco shares for 3 years.
118 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Long term incentives
The long term incentives amount included in the 2018 single total figure of remuneration includes the following Performance
Share Plan, Deferred Bonus Plan and Recruitment Awards.
Performance Share Plan (PSP)
A number of Performance Share Plan awards are included in the 2018 single figure of remuneration for the Executive Directors:
• the Absolute Share Price element of the 2014 Performance Share Plan (PSP) awards with a performance period ending on
the announcement of the Company’s 2017 results on 22 February 2018;
• the five year EPS element of the 2014 PSP awards with a performance period ending 31 December 2018;
• the TSR element of the 2015 PSP awards with a performance period ending on the announcement of the Company’s 2017
results on 22 February 2018; and
• the elements of the 2016 PSP awards subject to EPS and ROIC performance in the period to 31 December 2018.
The above awards were granted in the form of nominal cost options.
The performance assessment and vesting outcome for each award is as follows:
Award
Performance condition
2014 PSP
2014 PSP
2015 PSP
2016 PSP
2016 PSP
Absolute Share Price
Five year EPS
Relative TSR1
Aggregate EPS2
Average pre-tax ROIC3
Relative
weighting
Threshold4 –
25% vesting
Maximum –
100% vesting
Actual
Percentage of
max achieved
1/3
1/6
1/3
1/3
1/3
£4.50
30.0p
£6.00
35.0p
Median ranking Upper quartile ranking
9.1p
10.2%
7.5p
8.4%
£0.91
9.1p
Below median
17.58p
11.7%
0%
0%
0%
100%
100%
Notes
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
completion of the Rights Issue in 2015 and ending on 22 February 2018 with the announcement of the Company’s results for the 2017 financial year.
2. The financial outturns supporting the three year aggregate EPS performance of 17.58p reflect reported values; being pre-IFRS 15 for 2016 and 2017, and
post IFRS 15 for 2018. A separate internal assessment for the impact of IFRS 15 on Trading Profit was undertaken to support the Committee’s assessment
that the EPS performance related element of the 2016 PSP award should vest in full. The impact of IFRS 15 was determined to be relatively minor, and did
not impact the vesting level of 100% for the EPS tranche of the 2016 PSP award.
3. ROIC targets for the 2016 PSP award were also set pre IFRS 15. The financial outturn above reflects the average of reported ROIC; being pre IFRS 15 for
2016 and 2017, and post IFRS 15 for 2018. As for the EPS vesting outcome, an adjusted calculation was also performed to assess the impact of IFRS 15 on
the vesting outcome, and the impact on ROIC performance was determined to be minor, not affecting the vesting outcome.
In all cases 25% of the award vests at threshold performance, rising on a straight-line basis to 100% vesting at maximum performance.
4.
Executive
Director
Award
Date of grant
No. of
shares
awarded
No. of
shares
vesting
Vesting
date
Share price
at vest
Value of
vesting
Value
attributable
to share
price
appreciation
Rupert
Soames
2014 PSP (Abs SP)
27 June 2014
192,1321
2014 PSP (5yr EPS)
27 June 2014
96,0661
2015 PSP (TSR)
29 May 2015
413,927
0
0
0
27 June 2018
£1.0080
27 June 2019
£0.94712
29 May 2018
£0.9670
£0
£0
£0
n/a
n/a
n/a
2016 PSP (EPS)
6 April 2016
589,970
589,970
6 April 2019
£0.94712
£546,958
£(7,909)3
2016 PSP (ROIC)
6 April 2016
589,970
589,970
6 April 2019
£0.94712
£546,958
£(7,909)3
Angus
Cockburn
2014 PSP (Abs SP)
31 October 2014
121,7471
2014 PSP (5yr EPS) 31 October 2014
60,8911
2015 PSP (TSR)
29 May 2015
213,051
0
0
0
31 October 2018
£0.9610
31 October 2019
£0.94712
29 May 2018
£0.9670
£0
£0
£0
n/a
n/a
n/a
2016 PSP (EPS)
6 April 2016
303,661
303,661
6 April 2019
£0.94712
£281,522
£(4,071)3
2016 PSP (ROIC)
6 April 2016
303,661
303,661
6 April 2019
£0.94712
£281,522
£(4,071)3
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 (£0.9471) is the Q4 average closing share price to 31 December 2018.
3. The value included in the single figure reflects a small depreciation in the share price from that at grant (£0.9605) to the estimate of the share price at
vest (based on the 2018 Q4 average share price).
Annual Report and Accounts 2018
Serco Group plc
|
119
Deferred Bonus Plan (DBP)
The performance period for the 2016 Deferred Bonus Plan (DBP) Matching Share Award (a conditional share award) wholly
subject to EPS performance ended on 31 December 2018. 25% of this award vests for threshold performance of an Adjusted
EPS of 7.5p rising on a straight-line basis to 100% vesting for at or above maximum performance of an Adjusted EPS of 9.1p
measured as an aggregate over the three-year performance period. The Adjusted EPS for the period was measured as 17.58p
therefore the 2016 DBP Matching Share Award will vest in full.
Executive Director
Rupert Soames
Angus Cockburn
Date of grant
3 May 2016
3 May 2016
No. of shares
awarded
No. of shares
vesting
Vesting
date
Share price at
vest
Value of
vesting
Value
attributable to
share price
appreciation
1,154,540
588,589
1,154,540
588,589
3 May 2019
3 May 2019
£0.94711
£0.94711
£1,093,458
£557,449
£(9,672)2
£(4,931)2
Notes:
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 2018.
2. The value included in the single figure reflects a small depreciation in the share price from that at grant (£0.9555) to the estimate of the
share price at vest (based on the 2018 Q4 average share price).
Recruitment Awards
The 2018 LTI value includes the element 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 subject to an Absolute
Share Price performance condition. For the Absolute Share Price element, 25% of the award would vest for an average closing
share price over the 30 days following the announcement of the Company’s 2017 results of £4.50 rising on a straight-line basis
to 100% vesting for an average closing share price of £6.00. The share price assessed at the end of the performance period
was £0.91 which is below that required for threshold vesting and therefore this element lapsed in full.
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 of
vesting
Rupert Soames
Price (40%)
27 June 2014
153,953
0
27 June 2018
£1.0080
Absolute Share
Angus Cockburn
Absolute Share
Price (40%)
31 October 2014
112,714
0
31 October 2018
£0.9610
£0
£0
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.
Sir Roy Gardner1
Mike Clasper2
Rachel Lomax3
John Rishton4
Ian El-Mokadem5
Lynne Peacock6
Kirsty Bashforth7
Total
Board fee (including
Chairmanship fees) (£)
Taxable benefits8 (£)
Total (£)
2018
2017
2018
2017
2018
2017
250,000
250,000
19,004
1,688
269,004
251,688
88,000
70,000
75,500
61,750
65,000
57,917
92,603
70,000
75,227
29,000
31,468
16,151
–
–
–
–
2,520
3,468
–
–
–
–
1,973
426
88,000
70,000
78,020
61,750
65,000
59,889
92,603
70,000
78,695
29,000
31,468
16,577
668,167
564,449
23,497
5,582
691,663
570,032
120 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Notes to the Non-Executive Directors’ Single Figure table:
1. Sir Roy Gardner is Chairman of the Board, Chairman of the Nomination Committee and a member of the Remuneration and Corporate Responsibility
Committees.
2. Mike Clasper was Senior Independent Director, Chairman of the Corporate Responsibility Committee and a member of Audit, Nomination and
Group Risk Committees. He resigned on 31 December 2018.
3. Rachel Lomax is Chairman of the Group Risk Committee and a member of Audit Committee.
4. John Rishton is Chairman of the Audit Committee and a member of the Remuneration and Group Risk Committees. His 2017 fees have been restated
to show fees actually received in respect of that financial year.
Ian El-Mokadem is a member of the Group Risk and Corporate Responsibility Committees.
5.
6. Lynne Peacock is Chairman of Remuneration Committee and a member of the Audit and Nomination Committees.
7. Kirsty Bashforth is a member of the Remuneration and Corporate Responsibility Committees.
8. Taxable benefits in 2017 and 2018 relate to reimbursed taxable travel and subsistence business expenses. Sir Roy Gardner’s taxable benefit value
in 2018 includes £11,666.67 of taxable business expenses relating to 2017 which were reimbursed in 2018.
Performance graph and table
This graph shows the value as at 31 December 2018, of a £100 investment in Serco on 31 December 2008 compared with £100
invested in the FTSE 250 index on the same date. It has been assumed that all dividends paid have been reinvested. The TSR
level shown at 31 December each year is the average of the closing daily TSR levels for the 30-day period up to and including
that date. The Company chose the FTSE 250 index as the comparator for this graph as Serco has been a constituent of that
index throughout the period.
Serco performance graph
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
Dec 2018
Serco
FTSE 250 Index
Annual Report and Accounts 2018
Serco Group plc
|
121
CEO’s pay in last ten financial years
Year ended 31
December
Group CEO
2009
2010
2011
2012
2013
2014
2015
2016
2017
20181
Christopher Hyman
Christopher Hyman
Christopher Hyman
Christopher Hyman
Christopher Hyman
Ed Casey
Ed Casey
Rupert Soames
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
4,478,100
90%
91%
81%
72%
n/a
74%
71%
0%
87%
82%
75%
77%
295%
169%
80%
64%
0%
0%
0%
n/a
100%
24%
91%
73%
1. The 2018 single figure of remuneration for the CEO reflects the new approved Remuneration Policy which gave the CEO a higher maximum opportunity
but which will be subject to compulsory deferral above a threshold. As set out in the notes to the single figure table, LTI awards with performance
periods ending in 2018 include a number of shares under awards reportable in 2018 which did not (or will not) vest. The single figure also includes
an amount in respect of past DBP awards which are no longer part of the current Policy. In line with our TSR performance relative to the FTSE 250,
our awards subject to TSR have consistently not vested.
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 20,000 of the 50,000 individuals Serco employs worldwide.
Inflation and local pay practices form a key driver in the salary and benefits provided in each location, and as the CEO is based
in the UK we have chosen employees within the same country.
CEO
Average change for all other UK employees
Salary
0%
1.18%1
Benefits2
-3%
-1%
Bonus3
20%
-8%
1. This represents the average pay increase for all UK employees that was applied in the 2018 annual pay review cycle.
2. The nature of benefits provided to the CEO and to employees in 2018 compared to 2017 remains the same. The percentage change between 2017
and 2018 reflects the reduction in the costs incurred in providing those same benefits.
3. 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 2018 compared to the 2017 bonuses paid in April 2018. The reduction in the average employee bonus is
due to the different performance outcomes at Divisional and Business Unit levels compared to 2017 which impacts the bonuses for the comparator
population. The increase in the CEO’s bonus is due to the change in opportunity in line with the approved Remuneration Policy and the performance
outcomes compared to 2017. The CEO’s 2018 bonus over 100% of salary is subject to compulsory deferral for three years into shares.
Relative importance of spend on pay
The table below details the percentage change in dividends and overall expenditure on pay compared with the previous
financial year.
Serco considers overall expenditure on staff pay in the context of the general finances of the Company. This includes the
determination of the annual salary increase budget, the annual grant of shares and annual bonus for the business.
Dividend per share
Overall expenditure on wages and salaries
2018 vs 2017
0%
2018
nil
2017
nil
-4.9%
£1,438.7m
£1,513.6m
Dividend per share, and overall expenditure on wages and salaries have the same meaning as in the notes to the Company
Financial Statements.
122 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Pensions (audited information)
As at 31 December 2018, 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)
No payments for loss of office were made in the year.
Payments to past Directors (audited information)
No payments to past Directors were made in the year.
Awards made in 2018
Performance Share Plan (PSP) (audited information)
In 2018 the CEO received awards equivalent to 200% of salary, and the CFO received awards equivalent to 175% of salary.
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 2020.
Performance measure
Aggregate EPS
Weighting
of measure
28.33%
Relative TSR
28.33%
Average ROIC
28.33%
Order book
7.50%
Employee engagement
7.50%
Performance target
Statutory Earnings Per Share (EPS) before exceptional items (adjusted to reflect
tax paid on a cash basis) of 13.7p (threshold, 25% vesting) to 16.7p (maximum,
100% vesting), measured as an aggregate over the three-year performance
period.
Total Shareholder Return (TSR) of median (threshold, 25% vesting) to upper
quartile (maximum, 100% vesting) when ranked relative to companies in the
FTSE 250 (excluding investment trusts), measured over the three year
performance period.
Pre-tax Return on Invested Capital (ROIC) of 9.9% (threshold, 25% vesting) to
12.2% (maximum, 100% vesting), measured as an average over the three-year
performance period.
Book-to-bill ratio of 100% (threshold, 50% vesting) to 105% (maximum, 100%
vesting), measured as an average over the three-year performance period.
Employee engagement of 56% (threshold, 50% vesting) to 60% (maximum,
100% vesting), measured via the Serco Employee Engagement Survey in the
final year of the 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. In determining the extent to which these awards will vest the Committee
will consider the Group’s underlying performance (with input from the Group Audit and Risk Committees as appropriate) and
external market reference points to ensure that outcomes are fair and reflect the underlying performance of the Group.
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.
Directors
Rupert
Soames
Angus
Cockburn
Type of interest
awarded
Nominal cost
option
Nominal cost
option
Basis of
Award
(% salary)
200%
175%
Market price
at award
(p)1
Face value
(£)2
Percentage
vesting at
threshold
performance
Number of
shares
Performance
period
end date
96.95 1,700,000
25% 1,753,481
31 December
2020
96.95
875,000
25%
902,527
31 December
2020
Grant date
25 June
2018
25 June
2018
Notes:
1. Closing share price on 22 June 2018 (being the last trading day prior to the grant).
2. Calculated using the closing share price on the trading day immediately prior to the grant date.
Annual Report and Accounts 2018
Serco Group plc
|
123
Deferred Bonus Plan (DBP) (audited information)
The table below summarises the Matching Share Awards granted to Executive Directors in 2018 in relation to their
participation in the DBP in respect of their 2017 bonuses paid in 2018.
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 (ie. for each Investment Share that could have been purchased from the gross bonus deferred,
two Matching Shares are granted). Matching Share Awards granted in 2018 vest subject to Aggregate EPS over the three-year
performance period ending 31 December 2020. 25% of the Matching Share Award will vest for threshold performance
(Aggregate EPS of 13.7p), rising on a straight-line basis to 100% vesting for maximum performance (Aggregate EPS of 16.7p
or above).
The definition of EPS is statutory Earnings Per Share before exceptional items (adjusted to reflect tax paid on a cash basis).
Directors
Basis
of Award
(% salary)
Grant date
Rupert Soames
56%
23 August 2018
Face value
(£)1
478,252
Percentage
vesting at
threshold
performance
Number of
shares
Performance
period end date
25%
488,418
31 December 2020
Note:
1. The face value has been determined using the share price on 22 August 2018 of 97.92p per share (being the price paid by the Director to acquire the
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.
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:
2017 Remuneration Policy
2017 Annual Report on Remuneration
2016 Remuneration Policy
2016 Annual Report on Remuneration
2015 Annual Report on Remuneration
2014 Annual Report on Remuneration
2013 Annual Report on Remuneration
2013 Remuneration Policy
2012 Remuneration Report
2011 Remuneration Report
Year of
AGM
2018
2018
2017
2017
2016
2015
2014
2014
2013
2012
For
%
Number
88.51%
756,102,233
86.95%
742,773,852
93.39%
736,257,238
96.30%
759,195,936
96.68%
814,337,337
98.87%
760,294,709
99.61%
367,080,126
98.08%
358,418,242
95.82%
346,071,397
93.72%
351,474,463
Against
%
Number
11.49%
98,143,929
13.05%
111,481,844
6.61%
52,086,742
3.70%
29,155,876
3.32%
27,947,300
1.13%
8,671,241
0.39%
1,442,674
1.92%
7,033,412
4.18%
15,084,901
6.28%
23,547,217
Withheld
%
Number1
n/a
61,479
n/a
51,945
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
Note:
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.
124 | Serco Group plc
Annual Report and Accounts 2018
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 also served as a Non-Executive Director, and was appointed the Senior Independent
Director from 20 February 2018, of GKN plc until his resignation on 19 April 2018 following the acquisition of GKN by Melrose
Industries plc. He retained the fee payable of £63,000 per annum as a Non-Executive Director and £10,000 per annum as
Senior Independent Director (pro-rated for the period served in role). Angus was appointed as a Non-Executive Director
and Chair of the Audit Committee of Ashtead Group plc with effect from 9 October 2018 in respect of which he retained the
total fee payable of £75,000 per annum (£60,000 per annum as a Non-Executive Director and £15,000 per annum as Chair of
the Audit Committee).
No other fee-paying external positions were held by the Executive Directors during the year ended 31 December 2018.
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 £0.9560 per share at 31 December 2018 (being the last trading day of the financial year).
Executive Directors
Shares
Share options5
Number of shares
owned outright
(including
connected
persons) at
31 December
2018 (or date of
cessation)2
Value invested3
(£)
Subject to
performance
conditions4
Subject to
performance
conditions6
Exercised during
the year7
2,272,945
£2,942,628
2,516,884
5,123,882
733,132
£811,599
1,030,059
2,648,737
827,855
426,101
Total share
interests at
31 December
2018
(or date of
cessation)2
9,913,711
4,411,928
Name
Rupert Soames
Angus Cockburn
Share ownership
requirements (%
of salary)1
200%
150%
Notes:
1. The CEO, Rupert Soames, and CFO, Angus Cockburn, have both met their contractual investment commitments of investing 200% and 150% of salary,
respectively. The CEO has also met his shareholding guideline.
2.
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period 1 January 2019 and the date of this report.
3. Based on the share price at the point of acquisition of each tranche of shares held outright at 31 December 2018 by the Executive Director and/or their
4.
connected persons.
Includes awards made to Rupert Soames and Angus Cockburn 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.
5. All options are in the form of nominal cost options subject to a 2p per share exercise price. There are no interests in the form of share options that are
6.
not subject to performance conditions, nor are there any share options that are vested but unexercised.
Includes awards under the Performance Share Plan 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 2p per share
exercise price.
7. Rupert Soames and Angus Cockburn exercised vested options in respect of their 2015 PSP awards that were subject to EPS and ROIC performance
conditions tested at the end of 2017 and which vested during 2018.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
125
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
Rachel Lomax
John Rishton
Ian El-Mokadem
Lynne Peacock
Kirsty Bashforth
Number of shares owned outright
(including connected persons) at
31 December 2018 (or date of
resignation)1
100,000
56,000
40,000
43,086
50,000
15,000
10,000
Notes:
1.
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period 1 January 2019 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 2018, 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 8,728,497 and 3,527,740 ordinary shares at 1 January 2018 and 31 December 2018 respectively.
Summary of the approved Remuneration Policy for Executive Directors
The 2018 Directors’ Remuneration Policy (“the Policy”) took effect following shareholder approval at the 2018 Annual General
Meeting (held on 10 May 2018). The full Policy may be found on the Company’s website. A summary of the approved policy for
Executive Directors’ is provided below. This summary does not replace or override the full approved policy which is available
on our website within the 2017 Annual Report and Accounts.
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
holistic 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.
126 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued How the element supports our
strategic objectives
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.
Operation
Opportunity
Performance framework
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 individuals.
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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
127
How the element supports our
strategic objectives
Benefits
To provide a competitive
level of benefits.
Operation
Opportunity
Performance framework
None
The maximum opportunity
for benefits is defined by the
nature of the benefits and the
cost of providing them. As
the cost of providing such
benefits varies based on
market rates and other
factors, there is no formal
maximum monetary value.
A range of benefits may be
provided to Executive
Directors. These include, but
are not limited to, company
car or car allowance, private
medical insurance,
permanent healthcare
insurance, life cover, annual
allowance for independent
financial advice, and
voluntary health checks every
two years.
Relocation benefits will be
provided in a manner that
reflects individual
circumstances and Serco’s
relocation benefits policy. For
example, relocation benefits
could include temporary
accommodation for the
executive and dependents,
education costs for
dependents and tax
equalisation.
Benefits are reviewed
annually against market
practice and are designed to
be competitive.
128 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued 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.
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.
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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
129
How the element supports our
strategic objectives
Performance Share Plan
(PSP)
Recognises achievement
against the longer-term
objectives linked to the
Group’s strategy and aligns
incentives with shareholder
value creation.
Operation
Opportunity
Performance framework
Maximum annual award of up
to 200% of base salary for the
CEO and 175% for other
Directors.
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.
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 may be 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.
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.
130 | Serco Group plc
Annual Report and Accounts 2018
Remuneration Report continued
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
How the element supports our
strategic objectives
Pension
To provide pension-related
benefits to encourage
executives to build savings
for retirement.
Shareholding guidelines
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 pension
contributions (or the
equivalent), and/or combined
with a cash supplement, of up
to 30% of base salary.
None
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.
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 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.
The Committee reviews the
shareholding guideline with
the Policy review to ensure
the guidelines remain in line
with market and best
practice.
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.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
20 February 2019
Annual Report and Accounts 2018
Serco Group plc
|
131
Directors’ Report
Annual Report and Accounts
The Directors present the Annual Report and Accounts
of the Group for the year ended 31 December 2018.
Comparative figures used in this report are for the year
ended 31 December 2017 unless otherwise stated.
The Corporate Governance Report, including the
Remuneration Report, set out on pages 83 to 131,
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 20
to 33 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 32
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 (“AGM").
At the Annual General Meeting in May 2018, 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 will expire at the conclusion of
the 2019 AGM, at which a resolution will be proposed for its
renewal, or, if earlier, 30 June 2019.
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.
The Company is not aware of any agreement between
shareholders that may result in restrictions on the transfer
of securities and/or voting rights.
Authority for the purchase of shares
At the Annual General Meeting in May 2018, the Company
was granted authority by shareholders to purchase up to
109,856,423 ordinary shares (10% of the Company’s issued
ordinary share capital as at 28 March 2018). This authority
will expire at the conclusion of the 2019 AGM, at which a
resolution will be proposed for its renewal, or, if earlier,
30 June 2019.
Dividends
No interim dividends were paid during the financial year
ended 31 December 2018 (2017: nil). The Directors are not
recommending a final dividend be paid for 2018 (2017: nil).
Directors
The current members of the Board, all of whom served
throughout the year with the exception of Eric Born who
was appointed on 1 January 2019, are set out on pages 84
and 85.
Mike Clasper resigned as a Director on 31 December 2018.
Eric Born, having been appointed as Director since the
previous AGM, will resign and offer himself for election
at the AGM on 9 May 2019 in accordance with the Articles
of Association.
In accordance with the UK Corporate Governance Code,
all other Directors will stand for re-election at the AGM.
Directors’ interests
With the exception of the Executive Directors’ service
contracts and the Non-Executive Directors’ letters of
appointment, there are no contracts in which any Director
has an interest.
Certain change of control conditions are included in the
Executive Directors’ service contracts, which provide for
compensation or reduction of notice periods in the event
of a change of control of the Company.
Details of the Directors’ interests in the ordinary shares and
options over the ordinary shares of the Company as at
31 December 2018 are set out in the Remuneration Report on
pages 125 and 126. Between 1 January 2019 and the date of
this report there were no changes in the Directors’ interests
in ordinary shares and options over ordinary shares.
Directors’ indemnities
The Company maintains Directors‘ and Officers’ liability
insurance. 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 the
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 operates through a branch
of one of its subsidiary companies. These include the
following countries: Abu Dhabi, Afghanistan, Bahrain,
Belgium, Dubai, France, Guam, Iraq, Italy, Luxembourg,
Netherlands, Qatar and Singapore.
132 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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
• Clarence 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 name of which has
subsequently been changed to Clarence 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
Clarence Correctional Centre by the State. Both the
project deed and the operator subcontract 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.
• CMS Eligibility Support Services: In June 2018, Serco Inc.
was awarded a follow-on 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.
• Special Security Agreement: 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 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).
• Asylum Accommodation and Support Services Contract
(“AASC"): On 8 January 2019 Serco Limited entered into
contracts with the Secretary of State for the Home
Department (acting through its UK Home Office Visas and
Immigration department) for two regions of the new
AASC, being the North West of England and the Midlands
& East of England. Under AASC, Serco will be responsible
for the provision of properties for initial and dispersed
accommodation requirements, for transportation to and
from properties, and for a range of other services to
support the welfare of asylum seekers. In the two regions
for which Serco has been selected, there are currently
approximately 20,000 asylum seekers living in more than
5,000 properties. The AASC Contract becomes
operational on 1 September 2019. In the event of a change
of control or ownership of Serco Limited, which in the
reasonable opinion of the Authority adversely affects
Serco’s ability to perform the services, the contract may
be terminated by the Authority.
Annual Report and Accounts 2018
Serco Group plc
|
133
Directors’ Report continued
Financing facilities
• Revolving credit facility: the Company has a £250,000,000
revolving credit facility dated 3 December 2018 (amended
with a syndicate of banks). 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 $309,264,151 at 31 December 2018, and their maturity
is between 20 October 2019 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 of the Company will be held at
Clifford Chance LLP, 10 Upper Bank Street, Canary Wharf,
London E14 5JJ on Thursday 9 May 2019 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 202 to 208.
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.
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 is proud of its record of managing employee
relations and believes 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 and employee feedback is invited through
Viewpoint, our employee engagement survey. 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.
134 | Serco Group plc
Annual Report and Accounts 2018
Corporate responsibility
As a provider of public services, the Group is committed
to operating with a public service ethos and recognises its
responsibilities. The Company’s approach to corporate
responsibility is structured around our key stakeholders,
focusing on how we work to add sustainable value whilst
delivering their requirements with accountability and
transparency. Our corporate responsibility framework defines
our principal areas of responsibility and helps to guide
practice and behaviour whilst facilitating measurement of
performance. More information on Corporate Responsibility,
including greenhouse gas emission reporting, can be found
in the Strategic Report on pages 66 to 82.
Going concern
In assessing the basis of preparation of the financial
statements for the year ended 31 December 2018, the
Directors have considered the principles of the Financial
Reporting Council’s ‘Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting, 2014;
namely assessing the applicability of the going concern
basis, the review period and disclosures. The Group’s current
principal debt facilities at the year-end comprised a £250m
revolving credit facility, and £242m of US private placement
notes. As at 31 December 2018, the Group had £492m
of committed credit facilities and committed headroom
of £308m.
The Directors have undertaken a rigorous assessment of
going concern and liquidity taking into account financial
forecasts. In order to satisfy themselves that the Company
has 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.
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 2020.
The Directors have also reviewed the principal risks
considered on pages 52 to 63 and taken account of the
results of sensitivity testing.
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.
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, a resolution will therefore
be proposed that the authority granted at the AGM in May
2018 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.
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 Audit Committee has considered the reappointment
of KPMG LLP as auditor and recommended it to the Board.
The Board recommends the reappointment of KPMG LLP
to shareholders at the AGM to be held on 9 May 2019.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
135
Directors’ Report continued
Interests in voting rights
At 31 December 2018, the Company had been notified under Rule 5 of the Disclosure and Transparency Rules of the Financial
Conduct Authority of the following interests in voting rights over the issued share capital of the Company:
Notifying person
BlackRock Inc
FIL Limited
Lancaster Investment Management LLP1
Marathon Asset Management LLP
Majedie Asset Management Limited
Azvalor Asset Management S.G.I.I.C., S.A2
MSD Partners, L.P.
Orbis Group
Tameside MBC re: Greater Manchester Pension Fund
Number
of shares at date
of notification
% held
at date of
notification
Nature of Holding
34,854,885
5,571,238
45,278,466
85,704,589
73,169,712
156,204
73,325,916
70,030,527
58,353,594
55,965,452
54,936,411
54,563,815
54,510,229
34,127,885
Indirect
3.17
0.51
Securities Lending
4.12 Contract for difference
7.80
6.66
0.01
6.67
6.37
5.31
5.09
5.00
4.97
4.96
3.11
Total
Indirect
Stock Loan
Total
Swap
Indirect
Direct
Direct
Indirect
Indirect
Direct
Notes:
1. On 11 January 2019, Lancaster Investment Management LLP notified the Company that their interest in voting rights had been reduced to 5.98%.
2. On 15 February 2019, Azvalor Asset Management S.G.I.I.C., S.A notified the Company that their interest in voting rights had been reduced to 4.95%.
136 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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 132
Page 132
Pages 84 and 95
Pages 133
Page 77
Pages 66 to 82
Page 132
Page 90
Page 138
Page 149
Page 76 and 101
Pages 8 and 132
Page 75 and 86 and 134
Page 134
Pages 202 to 209
Page 12 to 19
Pages 135 and 156
Page 81
Pages 140 to 150
Pages 119 to 124
Page 135
Page 132
Page 104
Page 135
Page 132
Page 132
Pages 52 to 63 and 93
Page 132
Pages 133
Page 219 and 220
Page 136
Pages 104 and 105
Pages 3 to 82
Page 64 and 65
Page 132
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
20 February 2019
137
Annual Report and Accounts 2018
Serco Group plc
|
137
Directors’ Report continued
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.
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.
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 (IFRSs) as adopted by the European
Union 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 European Union;
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’s 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 are 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.
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
20 February 2019
Group Chief Financial Officer
20 February 2019
138 | Serco Group plc
Annual Report and Accounts 2018
Financial Statements
Financial Statements
140
Independent Auditor’s Report
151 Consolidated Income Statement
152
Consolidated Statement of Comprehensive Income
153
Consolidated Statement of Changes in Equity
154 Consolidated Balance Sheet
155
Consolidated Cash Flow Statement
156
Notes to the Consolidated Financial Statements
222 Company Balance Sheet
223
Company Statement of Changes in Equity
224
Notes to the Company Financial Statements
228 Appendix: List of Subsidiaries
231
Appendix: Supplementary Information
232 Shareholder Information
233 Useful Contacts
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
i
F
F
n
n
a
a
n
n
c
c
i
i
a
a
l
l
S
S
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
Annual Report and Accounts 2018
Annual Report and Accounts 2018
Serco Group plc
Serco Group plc
|
|
139
139
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 2018 which comprise the Consolidated Income Statement,
the Consolidated Statement of Comprehensive Income, the Consolidated and parent
Company Statement of Changes in Equity, the Consolidated and parent Company
Balance Sheet, the Consolidated Cash Flow Statement, and the related notes,
including the accounting policies in notes 2 and 39.
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 2018 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 three financial years ended 31 December 2018.
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 judgement, 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 (amended since 2017 to include The impact
of uncertainties due to Britain exiting the European Union on our audit and
Classification of Exceptional Items and to remove Retirement Benefit Surplus to reflect
the reducing level of judgement involved) , in arriving at our audit opinion above,
together with our key audit procedures to address those matters and our findings from
those procedures in order that the Company’s members as a body may better
understand the process by which we arrived at our audit opinion.
These matters were addressed, and our findings 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.
140 | Serco Group plc
Annual Report and Accounts 2018
The impact of uncertainties due to UK exiting the European Union on our audit
A new key audit matter identified in 2018. Refer to page 54 (principal risks)
The risk
Our response
Unprecedented levels of uncertainty
All audits assess and challenge the reasonableness
of estimates, in particular as described in
Recoverability of group goodwill and of parent’s
investment in subsidiaries below, and related
disclosures and the appropriateness of the going
concern basis of preparation of the financial
statements (see below). All of these depend on
assessments of the future economic environment
and the Group’s future prospects and performance.
In addition, we are required to consider the other
information presented in the Annual Report
including the principal risks disclosure and the
viability statement and to consider the directors’
statement 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.
Brexit is one of the most significant economic
events for the UK and at the date of this report its
effects are subject to unprecedented levels of
uncertainty of outcomes, with the full range of
possible effects unknown.
We developed a standardised firm-wide approach to the consideration
of the uncertainties arising from Brexit in planning and performing our
audits. Our procedures included:
• Our Brexit knowledge: We considered the directors’ assessment of
Brexit-related sources of risk for the Group’s business and financial
resources compared with our own understanding of the risks. We
considered the directors’ plans to take action to mitigate the risks.
• Sensitivity analysis: When addressing Recoverability of group
goodwill and of parent’s investment in subsidiaries and other areas
that depend on forecasts, we compared the directors’ sensitivity
analysis to our assessment of the full range of reasonably possible
scenarios resulting from Brexit uncertainty and, where forecast cash
flows are required to be discounted, considered adjustments to
discount rates for the level of remaining uncertainty.
• Assessing transparency: As well as assessing individual disclosures
as part of our procedures on Recoverability of group goodwill and of
parent’s investment in subsidiaries we considered all of the Brexit
related disclosures together, including those in the strategic report,
comparing the overall picture against our understanding of the risks.
Our findings
As reported under Recoverability of group goodwill and of parent’s
investment in subsidiaries, we found the resulting estimates and related
disclosures of the carrying value of goodwill and disclosures in relation
to going concern to be balanced. However, no audit should be
expected to predict the unknowable factors or all possible future
implications for a Group and this is particularly the case in relation to
Brexit.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
141
Independent Auditor’s Report continued
to the members of Serco Group plc
Revenue and margin recognition
Revenue £2,836.8m (2017 restated: £2,950.9m), operating profit £80.5m (2017 restated: £21.1m) and Onerous Contract
Provisions of £82.1m (2017 restated: £148.1m)
Assessment of risk vs. prior year: Unchanged
2017 balances have been restated for the adoption of IFRS 15 Revenue from Contracts with Customers. Refer to page 97
(Audit Committee Report), pages 157 to 161 and 163 to 164 (accounting policy), page 171 (key judgements), pages 196 to 197
(contract assets, trade and other receivables note in the financial statements) and page 200 (provisions note in the
financial statements)
The risk
Our response
Subjective estimate
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 identification of performance
obligations within contracts and 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; and
• The recognition and recoverability
assessments of contract related assets,
including those recognised as direct
incremental costs prior to service
commencement.
Where an onerous contract provision is
required, judgement is required in
assessing the level of provision, including
estimated cost to complete taking into
account contractual obligations to the
end of the contract, extension periods
and customer negotiations.
Our procedures included:
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 in accordance with IFRS 15
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 IFRS 15 accounting standard,
including restated balances in prior year. We also inspected and challenged
accounting papers prepared by the Group to understand the support and
corroborate the position 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, checking 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.
142 | Serco Group plc
Annual Report and Accounts 2018
The risk
Our response
The effect of these matters is that, as part
of our risk assessment, we determined that
onerous contract provisions has a high
degree of estimation uncertainty, with a
potential range of reasonable outcomes
greater than our materiality for the
financial statements as a whole, and
possibly many times that amount.
• 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 findings
In determining the application of the Group’s revenue recognition policy, there is
room for judgement and we found that within that, the Group’s judgement for
revenue recognised was balanced based on our analysis of the level of prudence
within the key contract judgements and the impact of those judgements on the
financial statements across the portfolio.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
143
Independent Auditor’s Report continued
to the members of Serco Group plc
Recoverability of group goodwill and of parent’s investment in subsidiaries
Group: £579.6m (2017: £551.3m); parent Company: £2,021.7m (2017: 2,010.5m)
Assessment of risk vs. prior year: Unchanged
Refer to page 97 (Audit Committee Report), page 165 (accounting policy), page 166 (key judgements) and pages 191 to 193
(Goodwill note in the financial statements)
The risk
Our response
Our procedures included:
•
Identification of CGUs: We assessed whether management’s identification of
CGUs, and the group of CGUs to which goodwill has been allocated for impairment
purposes, is consistent with the level at which performance is monitored for internal
management purposes following the reorganisation of the Group’s organisational
structure and the requirements of IAS 36.
• 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 current actual cash flows to historic
forecasts to assess the historical accuracy in the impairment model and we have
also reviewed forecast cash flows against budgets.
• Sensitivity analysis: We tested the sensitivity of impairment calculations to changes
in key underlying assumptions, which were discount rate and terminal growth rate
for all CGUs. For CGUs that had the lowest headroom, which were: Health and
Direct Services, we sensitised the five year cash flow forecasts by eliminating new
wins within the pipeline.
• 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 Directors’ 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 findings:
We found the Group’s assumptions applied for the purposes of estimating recoverable
amount of Group goodwill and of parent’s investment in subsidiaries to be balanced
with a recoverable amount exceeding the book value by £820m and £766m
respectively. Our independent assessment of the growth assumptions indicates
sufficient headroom when sensitised for new contract wins later in the forecast period.
We found that the disclosures describing the inherent degree of subjectivity in the
estimates and the potential impact of reasonably possible changes in key assumptions
to be proportionate.
Forecast-based valuation
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 Brexit
uncertainty regarding contract
attrition, 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 through value in
use calculations is subjective due to
the inherent uncertainty involved in
forecasting and discounting future
cash flows.
The cash generating units (CGUs)
which were most sensitive to a
deterioration in the division’s
projections or an increase in discount
rate were the Health CGU and Direct
Services CGU. As at year end 31
December 2018, the Health CGU has
headroom of £65m and Direct
Services has headroom of £42m.
The effect of these matters is that, as
part of our risk assessment, we
determined that the value in use of
goodwill is £1,444m and value in use
of investments in subsidiaries is
£1,996m. Both goodwill and
investments in subsidiaries have a
high degree of estimation
uncertainty, with a potential range of
reasonable outcomes greater than
our materiality for the financial
statements as a whole, and possibly
many times that amount. The
financial statements (note 18)
disclose the sensitivity for goodwill
estimated by the Group.
144 | Serco Group plc
Annual Report and Accounts 2018
Classification of Exceptional Items £31.9m (2017: 19.6m)
Assessment of risk vs. prior year: increased
A new key audit matter identified in 2018. Refer to page 98 (Audit Committee Report), page 172 (key judgements) and pages
183 to 184 (Exceptional items note in the financial statements)
The risk
Our response
Presentation appropriateness
Significant judgement is involved in
determining the classification of
exceptional items in the financial
statements, and accurately
identifying specific elements for
inclusion within exceptional items.
Accordingly we consider this area to
be particularly susceptible to the risk
of management bias.
Our procedures included:
• Accounting analysis: We assessed whether the accounting policy applied is
consistent with guidance issued from the Financial Reporting Council (FRC). We also
inspected accounting papers prepared by the Group to understand the support
provided in respect of key judgements taken and assumptions made.
• Assessing policy application: We inspected the classification of items adopted by
the Group including, where relevant, the identification of specific cost items within
the overall classification and compared the specific method used to Group policy.
• Tests of details: We inspected a sample of items included within exceptional items
to ensure recognition is in line with Group policy. This included, amongst others,
sample testing items included under restructuring to check that these are wholly
and exclusively incurred for the purposes of the Transformation Programme.
• Consistent application: We compared the classification of exceptional items where
these relate to, or bear similar characteristics to, historical items to check that these
are treated in a consistent manner.
• Assessing transparency: We also assessed whether the Group’s disclosures
regarding the classification of exceptional items appropriately reflects the
judgements made.
Our findings:
In determining the treatment of profit or loss items under the Group’s accounting
policy, there is room for judgement. We found that the Group’s judgement was
balanced.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
145
Independent Auditor’s Report continued
to the members of Serco Group plc
The risk
Our response
Our application of materiality
and an overview of the scope
of our audit
Materiality
Materiality for the Group financial statements as a whole was set at £5 million (2017: £5
million), determined with reference to a normalised benchmark of Group Profit Before
Tax and Exceptional Items taking into account historical financial performance and the
Group’s current profit margins in light of the Group’s ongoing Strategy Review. The
group team performed procedures on the items excluded from normalised group
profit before tax. This materiality represents 5.1% (2017: 12.9%) of Group Profit Before
Tax and Exceptional Items of £98.5 million (2017: £38.7 million as originally reported in
that year).
Materiality for the parent company financial statements as a whole was set at
£4.5 million (2017: £4.5 million), determined with reference to a benchmark of
company total assets of £2,449.9 million (2017: £2,457.0 million), of which it
represents 0.2% (2017: 0.2%).
We agreed to report to the Audit Committee any corrected or uncorrected identified
misstatements exceeding £0.25 million (2017: £0.25 million), in addition to other
identified misstatements that warranted reporting on qualitative grounds.
Scope of our audit
Of the Group’s 10 (2017: 8) reporting components, we subjected 10 (2017: 6) to full
scope audits for Group purposes.
These 10 (2017: 6) components represent approximately 100% (2017: 99.8%) of the
Group’s Revenue, 100% (2017: 99.4%) of Group profit before tax and 100% (2017: 98.4%)
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 (2017: £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 (2017: 4 of the 6 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 (2017: all) component locations to assess the audit risk and
strategy and also performed reviews over all file reviews at year end. 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.
The Group operates a shared service centre in India, the outputs of which are included
in the financial information of the reporting components it services and therefore it is
not a separate reporting component. The shared service centre is subject to specified
risk-focused audit procedures, predominantly the testing of transaction processing and
review controls. Additional procedures are performed at certain reporting components
to address the audit risks not covered by the work performed over the shared service
centre.
146 | Serco Group plc
Annual Report and Accounts 2018
The risk
Our response
We have nothing to report on
going concern
The Directors have prepared the financial statements on the going concern basis as
they do not intend to liquidate the Company or the Group or to cease their operations,
and as they have concluded that the Company’s and the Group’s financial position
means that this is realistic. They have also concluded that there are no material
uncertainties that could have cast significant doubt over their ability to continue as a
going concern for at least a year from the date of approval of the financial statements
(“the going concern period”).
Our responsibility is to conclude on the appropriateness of the Directors’ conclusions
and, had there been a material uncertainty related to going concern, to make reference
to that in this audit report. However, as we cannot predict all future events or
conditions and as subsequent events may result in outcomes that are inconsistent with
judgements that were reasonable at the time they were made, the absence of
reference to a material uncertainty in this auditor’s report is not a guarantee that the
Group and the Company will continue in operation.
In our evaluation of the Directors’ conclusions, we considered the inherent risks to the
Group’s and Company’s business model and analysed how those risks might affect the
Group’s and Company’s financial resources or ability to continue operations over the
going concern period. The risks that we considered most likely to adversely affect the
Group’s and Company’s available financial resources over this period were:
• The impact of a significant reduction in contract profitability arising from the one, or
a combination of, the principal risks outlined in the Group’s strategic on page 54,
including the early termination of contracts; and
• The impact of a material legal and regulatory compliance failure.
• As these were risks that could potentially cast significant doubt on the Group’s and
the Company’s ability to continue as a going concern, we considered sensitivities
over the level of available financial resources indicated by the Group’s financial
forecasts taking account of reasonably possible (but not unrealistic) adverse effects
that could arise from these risks individually and collectively and evaluated the
achievability of the actions the Directors consider they would take to improve the
position should the risks materialise. We also considered less predictable but
realistic second order impacts, such as the impact of Brexit and political and policy
changes in Serco’s markets.
Based on this work, 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 137 is materially
inconsistent with our audit knowledge.
We have nothing to report in these respects, and we did not identify going concern as
a key audit matter.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
147
Independent Auditor’s Report continued
to the members of Serco Group plc
The risk
Our response
We have nothing to report on
the other information in the
Annual Report
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.
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 64 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.
Our work is limited to assessing these matters in the context of only the knowledge
acquired during our financial statements audit. As we cannot predict all future events
or conditions and as subsequent events may result in outcomes that are inconsistent
with judgements that were reasonable at the time they were made, the absence of
anything to report on these statements is not a guarantee as to the Group’s and
Company’s longer-term viability.
148 | Serco Group plc
Annual Report and Accounts 2018
The risk
Our response
We have nothing to report on
the other information in the
Annual Report continued
We have nothing to report in
respect of the matters on which
we are required to report by
exception
Respective responsibilities
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.
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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
149
Independent Auditor’s Report continued
to the members of Serco Group plc
The risk
Our response
Respective responsibilities
continued
The purpose of our audit work
and to whom we owe our
responsibilities
Irregularities – ability to detect
We identified areas of laws and regulations that could reasonably be expected to have
a material effect on the financial statements from our general commercial and sector
experience, through discussion with the directors and other management (as required
by auditing standards), and from inspection of the Group’s regulatory and legal
correspondence and discussed with the directors and other management the policies
and procedures regarding compliance with laws and regulations. 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.
The potential effect of these laws and regulations on the financial statements varies
considerably.
Firstly, the Group is subject to laws and regulations that directly affect the financial
statements including financial reporting legislation (including related companies
legislation), distributable profits legislation and taxation legislation and we assessed
the extent of compliance with these laws and regulations as part of our procedures on
the related financial statement items.
Secondly, the Group is subject to many other laws and regulations where the
consequences of non-compliance could have a material effect on amounts or
disclosures in the financial statements, for instance through the imposition of fines or
litigation or the loss of the Group’s licence to operate. We identified the following
areas as those most likely to have such an effect: anti-bribery, employment law, and
certain aspects of company legislation. Auditing standards limit the required audit
procedures to identify non-compliance with these laws and regulations to enquiry of
the directors and other management and inspection of regulatory and legal
correspondence, if any. These limited procedures did not identify actual or suspected
non-compliance.
Owing to the inherent limitations of an audit, there is an unavoidable risk that we may
not have detected some material misstatements in the financial statements, even
though we have properly planned and performed our audit in accordance with auditing
standards. For example, the further removed non-compliance with laws and regulations
(irregularities) is from the events and transactions reflected in the financial statements,
the less likely the inherently limited procedures required by auditing standards would
identify it. In addition, 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. We are not responsible for
preventing non-compliance and cannot be expected to detect non-compliance with all
laws and regulations.
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 and the terms of our engagement by
the Company. 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 the further matters we are required to state to them in accordance with the
terms agreed by the Company 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.
John Luke (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
15 Canada Square, London, E14 5GL
20 February 2019
150 | Serco Group plc
Annual Report and Accounts 2018
Consolidated Income Statement
For the year ended 31 December
Continuing operations
Revenue
Cost of sales
Gross profit
Administrative expenses
Other 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
Exceptional finance income
Total net finance costs
Other gains
Profit before tax
Profit before tax and exceptional finance income
Tax on profit before exceptional items
Exceptional tax
Tax charge
Profit/(loss) for the year
Attributable to:
Equity owners of the Company
Non controlling interests
Earnings per share (EPS)
Basic EPS
Diluted EPS
Note
9
2018
£m
2,836.8
(2,546.6)
290.2
8
10
6
13
14
10
15
15
(202.3)
(0.5)
(31.4)
(4.3)
(238.5)
28.8
80.5
112.4
4.3
(18.2)
7.5
(6.4)
–
74.1
66.6
(8.8)
2.1
(6.7)
67.4
67.4
–
2017
(restated*)
£m
2,950.9
(2,710.6)
240.3
(222.2)
0.3
(19.9)
(4.4)
(246.2)
27.0
21.1
40.7
8.0
(19.2)
–
(11.2)
0.7
10.6
10.6
(13.6)
(5.0)
(18.6)
(8.0)
(8.3)
0.3
17
17
6.16p
5.99p
(0.76p)
(0.76p)
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
Annual Report and Accounts 2018
Serco Group plc
|
151
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**
Total other comprehensive income for the year
Total comprehensive income for the year
Attributable to:
Equity owners of the Company
Non controlling interest
Note
31
31
15
6
2018
£m
67.4
2017
(restated***)
£m
(8.0)
52.1
(0.2)
(9.2)
2.0
(5.3)
0.6
40.0
(106.5)
(0.6)
18.1
0.9
(14.6)
(0.2)
(102.9)
107.4
(110.9)
107.3
0.1
(111.0)
0.1
* 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.
*** Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
152 | Serco Group plc
Annual Report and Accounts 2018
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
22.0
327.9
0.1
49.3
(91.1)
82.9
(52.1)
24.6
363.6
1.4
–
–
–
–
–
–
–
–
–
–
–
–
(7.5)
(89.0)
–
–
(14.5)
(111.0)
0.1
–
–
–
–
–
–
(6.0)
6.0
11.4
–
–
–
–
–
–
–
11.4
–
–
–
(0.2)
22.0
327.9
0.1
41.8
(180.1)
88.3
(46.1)
10.1
264.0
1.3
–
–
–
–
–
–
–
–
–
69.3
42.7
–
–
(4.7)
107.3
0.1
–
–
–
–
–
–
–
–
–
(28.0)
27.4
14.7
–
–
–
–
–
–
(0.6)
14.7
–
–
–
–
22.0
327.9
0.1
111.1
(137.4)
75.0
(18.7)
5.4
385.4
1.4
At 1 January 2017
(restated*)
Total
comprehensive
income for the year
(restated*)
Shares transferred
to option holders
on exercise of share
options
Expense in relation
to share based
payments
Change in non
controlling interest
At 1 January 2018
(restated*)
Total
comprehensive
expense 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
At 31 December
2018
* Balances and results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See
note 2.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
153
Consolidated Balance Sheet
At 31 December
2018
£m
Note
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
Contract assets
Trade and other receivables
Current tax assets
Cash and cash equivalents
Derivative financial instruments
Total assets
Current liabilities
Contract liabilities
Trade and other payables
Derivative financial instruments
Current tax liabilities
Provisions
Obligations under finance leases
Loans
Non current liabilities
Contract 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
18
19
20
6
22
30
16
31
21
22
22
23
30
24
24
30
27
25
26
24
24
16
27
25
26
31
32
33
At 31 December
2017
(restated*)
£m
551.3
66.7
61.3
19.7
57.3
3.7
59.7
41.8
861.5
17.4
239.6
272.4
11.2
112.1
10.3
663.0
At 1 January
2017
(restated*)
£m
577.9
83.6
67.2
20.1
44.4
14.2
55.3
150.4
1,013.1
22.4
254.6
290.8
11.0
177.8
4.9
761.5
579.6
67.3
64.8
20.6
30.3
0.1
60.9
85.8
909.4
22.9
244.3
299.5
7.3
62.5
7.7
644.2
1,553.6
1,524.5
1,774.6
(74.3)
(419.7)
(3.7)
(29.2)
(120.1)
(5.7)
(21.9)
(674.6)
(86.6)
(23.3)
(21.4)
(119.3)
(9.1)
(217.6)
(14.9)
(492.2)
(1,166.8)
386.8
22.0
327.9
0.1
111.1
(137.4)
75.0
(18.7)
5.4
385.4
1.4
386.8
(64.3)
(408.6)
(1.1)
(25.3)
(146.3)
(8.5)
(31.8)
(685.9)
(83.3)
(28.7)
(20.4)
(174.0)
(11.7)
(239.7)
(15.5)
(573.3)
(71.5)
(469.8)
(0.6)
(25.9)
(160.3)
(12.3)
(9.7)
(750.1)
(85.5)
(16.8)
(30.5)
(202.9)
(15.9)
(290.2)
(17.7)
(659.5)
(1,259.2)
(1,409.6)
265.3
365.0
22.0
327.9
0.1
41.8
(180.1)
88.3
(46.1)
10.1
264.0
1.3
265.3
22.0
327.9
0.1
49.3
(91.1)
82.9
(52.1)
24.6
363.6
1.4
365.0
* Balances as at 31 December 2017 and 1 January 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
The financial statements were approved by the Board of Directors on 20 February 2019 and signed on its behalf by:
Rupert Soames
Angus Cockburn
Group Chief Executive Officer
Group Chief Financial Officer
154 | Serco Group plc
Annual Report and Accounts 2018
Consolidated Cash Flow Statement
For the year ended 31 December
Net cash inflow from operating activities before exceptional items
Exceptional items
Net cash inflow/(outflow) from operating activities
Investing activities
Interest received
(Decrease)/increase in security deposits
Dividends received from joint ventures and associates
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of intangible assets
Net cash inflow/(outflow) on disposal of subsidiaries and operations
Acquisition of subsidiaries, net of cash acquired
Proceeds from loans receivable
Exceptional finance income received
Purchase of other intangible assets
Purchase of property, plant and equipment
Net cash inflow/(outflow) from investing activities
Financing activities
Interest paid
Capitalised finance costs paid
Repayment of loans
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)
Cash and cash equivalents at end of year
Note
37
8
7
23
2018
£m
42.9
(40.2)
2.7
0.6
(0.3)
29.7
5.3
0.5
1.5
(32.8)
29.9
7.5
(8.9)
(26.4)
6.6
(16.7)
(2.0)
(31.3)
(8.7)
0.2
(58.5)
(49.2)
112.1
(0.4)
62.5
2017
(restated*)
£m
12.2
(32.5)
(20.3)
0.5
0.2
28.2
1.5
0.1
(7.1)
1.5
0.6
-
(18.4)
(13.3)
(6.2)
(17.5)
-
(3.8)
(12.6)
(2.5)
(36.4)
(62.9)
177.8
(2.8)
112.1
*
Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
155
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 140 to 233 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 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 2018, 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 £250m
revolving credit facility, and £242m of US private placement notes. As at 31 December 2018, the Group had £492m of
committed credit facilities and committed headroom of £308m.
On 3 December 2018 the Group completed the refinancing of its RCF with a syndicate of banks. Serco’s RCF provides funds
for general corporate and working capital purposes, and the ability to issue bonds to support the Group’s business needs.
The previous facility of £368m was due to mature in April 2020. The new facility provides £250m of committed funding with a
maturity date of December 2023; the lower amount reflecting the much reduced need for debt in the business. The terms and
conditions of the new facility are substantially unchanged from the prior facility.
156 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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 2020. The Directors have
also reviewed the principal risks considered on pages 54 to 63 of the Strategic Report and taken account of the results of
sensitivity testing.
Adoption of new and revised standards
IFRS9 Financial Instruments (effective 1 January 2018) 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 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. 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, the counterparty credit risk is not
considered to be material.
Prior year restatement for the impact of 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 has been 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 2017 or that begin and end within the same annual reporting period have not been
restated;
•
for contracts that have variable consideration and which completed prior to 1 January 2018, the revenues recognised
reflected 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 in the financial
statements for the year ended 31 December 2018.
There was no material impact of applying the practical expedients noted above.
The cumulative effect of initial application of the standard has been applied as an adjustment to brought forward retained
earnings as at 1 January 2017.
Annual Report and Accounts 2018
Serco Group plc
|
157
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
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. The restated balances are as previously included
within the Group’s Financial Statements for the 6 months to 30 June 2018 with one additional balance sheet reclassification
relating to the adoption of IFRS15, which had no net impact on the income statement or balance sheet. The impact of the
additional adjustment on the balance sheet for the year ended 31 December 2017 was to reduce provisions by £9.7m and
to increase deferred income by the same amount with £1.0m being current and the remaining £8.7m being non-current.
A reclassification was also made to the balance sheet for the year ended 31 December 2016. This adjustment reduced
provisions by £15.7m, increased non-current deferred income by £11.7m and reduced unbilled receivables by £4.0m.
Impact on retained earnings as at 1 January 2017 and the consolidated income statement
for the year ended 31 December 2017
As previously stated
IFRS15 adjustments:
(i) Declining unit prices
(ii) Upfront fees
(iii) Transition, transformation and other mobilisation activities
(iv) Asset maintenance and replacement, including vessel dry docking
(v) Pass through revenues and procurement arrangements
(vi) Consideration payable to a customer
(vii) Percentage of completion accounting
(viii) OCP charges and releases
As restated
Retained
earnings
£m
83.1
(14.7)
(2.7)
(4.3)
(11.8)
–
–
(0.3)
–
49.3
Operating profit
before
exceptional items
£m
49.6
5.0
0.8
(1.7)
(4.3)
–
(0.4)
0.1
(8.4)
40.7
Revenue
£m
2,953.6
5.4
0.9
2.2
1.3
(12.5)
(0.5)
0.5
–
2,950.9
The Group’s accounting policy for the items above are covered in the Group’s revenue recognition policy below this
restatement section. The reason the adjustments noted above arise is:
(i) Declining unit prices. Where unit prices have been set to decline over the future periods, revenue recognised in prior
years for these contracts has been deferred under IFRS15 in order to recognise revenue consistently in line with output
received by the customer.
(ii) Upfront fees. In some instances upfront fees were recognised as revenue under IAS18 but are deferred under IFRS15
where no separate performance obligation exists relating to these fees.
(iii) Transition, transformation and other mobilisation activities. In some instances revenue recognised under IAS18 has been
deferred under IFRS15 where no separate performance obligation exists.
(iv) Asset maintenance and replacement, including vessel dry docking. Adopting IFRS15 has resulted in the deferral of
revenue recognised under IAS18 on certain contracts as a result of changing to the appropriate revenue
recognition method.
(v) Pass through revenues and procurement arrangements. For certain procurement arrangements the Group does not have
control prior to transfer, but does have a level of risk associated with the activity, therefore these arrangements are
recognised on a net basis under IFRS15 instead of the gross basis under IAS18 due to the Group acting as agent rather
than principal in these transactions.
(vi) 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.
(vii) 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.
(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 second half of 2017, 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.
158 | Serco Group plc
Annual Report and Accounts 2018
Impact on consolidated income statement
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
Net finance costs
Other gains
Profit before tax
Tax on profit before exceptional items
Exceptional tax
Tax charge
Profit/(loss) for the year
Earnings per share (EPS)
Basic (EPS)
Diluted (EPS)
Impact on consolidated statement of other comprehensive income
Profit for the year
Other comprehensive income for the year:
Items that will not be reclassified subsequently to profit or loss:
Net actuarial loss on defined benefit pension schemes
Actuarial loss on reimbursable rights
Tax relating to items not reclassified
Share of other comprehensive income in joint ventures and associates
Items that may be reclassified subsequently to profit or loss:
Net exchange loss on translation of foreign operations
Fair value loss on cash flow hedges
Total other comprehensive income for the year
Total comprehensive income for the year
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Year ended
31 December
2017
as previously
stated
£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
Year ended
31 December
2017
as restated
£m
2,950.9
(2,710.6)
240.3
(222.2)
0.3
(19.9)
(4.4)
(246.2)
27.0
21.1
40.7
8.0
(19.2)
(11.2)
0.7
10.6
(13.6)
(5.0)
(18.6)
(8.0)
Adjustment
£m
(2.7)
(5.9)
(8.6)
–
–
–
–
–
(0.3)
(8.9)
(8.9)
0.4
–
0.4
–
(8.5)
0.4
–
0.4
(8.1)
(0.02p)
(0.02p)
(0.74p)
(0.74p)
(0.76p)
(0.76p)
Year ended
31 December
2017
as previously
stated
£m
Year ended
31 December
2017
as restated
£m
Adjustment
£m
0.1
(8.1)
(8.0)
(106.5)
(0.6)
18.1
0.9
(14.6)
(0.2)
(102.9)
(102.8)
–
–
–
–
–
–
–
(8.1)
(106.5)
(0.6)
18.1
0.9
(14.6)
(0.2)
(102.9)
(110.9)
Annual Report and Accounts 2018
Serco Group plc
|
159
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Impact on 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
As at
31 December
2017
as previously
stated
£m
As at
31 December
2017
as restated
£m
Adjustment
£m
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
–
–
(3.9)
5.4
–
–
4.7
–
6.2
–
5.5
–
–
–
5.5
551.3
66.7
61.3
19.7
57.3
3.7
59.7
41.8
861.5
17.4
512.0
11.2
112.1
10.3
663.0
1,512.8
11.7
1,524.5
(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)
(1,205.6)
307.2
22.0
327.9
0.1
83.7
(180.1)
88.3
(46.1)
10.1
305.9
1.3
307.2
(10.0)
–
–
2.2
–
–
(7.8)
(83.3)
–
37.5
–
–
–
(45.8)
(53.6)
(41.9)
–
–
–
(41.9)
–
–
–
–
(41.9)
–
(41.9)
(472.9)
(1.1)
(25.3)
(146.3)
(8.5)
(31.8)
(685.9)
(112.0)
(20.4)
(174.0)
(11.7)
(239.7)
(15.5)
(573.3)
(1,259.2)
265.3
22.0
327.9
0.1
41.8
(180.1)
88.3
(46.1)
10.1
264.0
1.3
265.3
160 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Impact on components of the cash flow statement
Operating profit for the year
Adjustments for:
Share of profits in joint ventures and associates
Share based payment expense
Exceptional impairment of intangible assets
Impairment and write down of intangible assets
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 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 from operating activities
Year ended
31 December
2017
as previously
stated
£m
Year ended
31 December
2017
as restated
£m
Adjustment
£m
30.0
(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)
(8.9)
0.3
–
–
–
(3.4)
–
–
–
–
–
12.8
–
9.7
0.8
–
0.4
(5.7)
(5.3)
(4.5)
–
–
(4.5)
21.1
(27.0)
11.4
8.9
(0.1)
20.9
25.8
(0.3)
0.3
0.3
(0.7)
(43.2)
0.1
(3.6)
17.5
3.7
13.0
(42.9)
(26.2)
(8.7)
(11.4)
(0.2)
(20.3)
New standards and interpretations not applied: IFRS16 Leases
IFRS16 Leases (effective 1 January 2019), specifies how to recognise, measure, present and disclose leases. The standard
provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease
term is 12 months or less or the underlying asset is of a low value. Lessors continue to classify leases as operating or finance,
with the IFRS 16 approach to lessor accounting remaining substantially unchanged from its predecessor, IAS 17.
Under the applicable transition rules a lessee shall either apply IFRS 16 with full retrospective effect or alternatively not restate
comparative information but recognise the cumulative effect of initially applying IFRS 16 as an adjustment to opening equity
at the date of initial application, subject to the Group’s application of the following expedients:
• No reassessment is required as to whether a contract is, or contains, a lease at the date of initial application.
• No reassessment is required for:
– leases with a lease term end date within one year of the date of initial application; or
– leases for low value assets, which the Group considers to be those with an initial cost value less than £5,000 except for
circumstances where those assets form part of a bundle of leased assets accounted for as a single lease contract.
• The Group has adopted the modified retrospective transition approach and as such the valuation of the right of use asset
at 1 January 2019 is calculated as if the lease had always existed and hence the net book value of the asset on 1 January
2019 is based on the assumption of straight line amortisation.
The lease liability at 1 January 2019 is calculated as the present value of future payments in relation to the lease, discounted at
the applicable incremental borrowing rate.
Below is set out the expected lease accounting policy under IFRS16 together with the estimated impact of adopting
the standard.
Annual Report and Accounts 2018
Serco Group plc
|
161
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Leases
A right of use asset is recognised as an asset of the Group at the present value of minimum lease payments determined at the
inception of the lease, which is equal to the lease liability on inception. The corresponding liability to the lessor is included in
the balance sheet as a 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).
Leases for assets with an initial cost of less than £5,000 except for circumstances where those assets form part of a bundle of
leased assets accounted for as a single lease contract, or with a lease term of less than 12 months, or both, are charged to the
income statement on a straight-line basis over the term of the relevant lease.
Estimated impact of the adoption of IFRS16
The estimated impact for the Group of adopting IFRS16 is as follows:
Retained earnings at 31 December 2018
Lease liability recognised
Right of use asset recognised, net of impairments
Deferred tax asset recognised
Adjustment to retained earnings due to the implementation of IFRS16
Retained earnings at 1 January 2019
As at
1 January 2019
£m
110.6
(118.0)
88.0
5.4
(24.6)
86.0
The Group will continue to work to design, implement and refine procedures to apply the new requirements of IFRS16 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 changes to the impact shown above prior to the 30 June 2019 results being issued. However, at this time
these are not expected to be significant.
In calculating the lease liability to be recognised on transition, the Group used a weighted average incremental borrowing rate
on 1 January 2019 of 3.50%. Applying this weighted average incremental borrowing rate to the operating lease commitments
disclosed in note 28 gives a liability of £187.2m. This differs from the lease liability recognised as a result of transitioning to
IFRS16 for the following reasons:
Operating lease commitments discounted at the weighted average incremental borrowing rate
Less: leases ending within 12 months of the transition date to IFRS16 covered by the practical expedient
Less: leases included in the operating lease commitment not meeting the recognition criteria of IFRS16
Lease liability on transition to IFRS16
As at 1 January
2019
£m
187.2
(44.8)
(24.4)
118.0
The implementation of IFRS16 Leases has required the Group to make a number of judgements, the certainty of the exercise
of termination options and estimates. The key judgements applied relate to the likelihood of lease extension options being
exercised, the certainty of the exercise of termination options and the identification of leases embedded within other
contracts. The key estimates used in assessing the impact of adopting the new standard are the incremental borrowing rates
applied in calculating the present value of future lease payments to identify the lease liability at 1 January 2019.
In addition to the areas where a financial impact has been identified as a result of adoption of IFRS16 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:
(i) Lease amendments. Where changes in a lease occur, this will trigger a reassessment of the lease liability. Changes in the
lease liability will be recognised via an adjustment to the right of use asset. However, if the carrying amount of the
right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, any remaining
amount of the remeasurement will be recognised in profit or loss.
(ii) Lease incentives. Where a lease incentive is received prior to the commencement of a lease, the amount is offset against
the right of use asset at inception. Where a lease includes a period or periods of reduced or free rentals, these are included
in the calculation of the present value of the lease liability on inception.
162 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
(iii) Variable lease payments. Where a contract to lease an asset has a pricing mechanism that allows for changes after the
commencement date, other than those that change simply due to the passage of time, it is considered to have variable
lease payments. These payments will depend on an index or rate and are included in the calculated lease liability at the
lease commencement date according to the rate or index as at that date.
(iv) Sub-leases. Where a Group entity leases an asset and this asset is subsequently leased to another entity, this is considered
to be a sub-lease if the original head lease remains in place. In this instance the entity which has entered into the head
lease is acting as both a lessee and a lessor simultaneously. As a result, the head lease is accounted for in accordance with
the Group’s lease accounting policy. When acting as a lessor, there is a requirement to determine whether the sub-lease is
an operating lease or a finance lease, with the accounting following this determination.
(v) Separate lease and non-lease components. Lease contracts can often contain elements related to the use of an asset and
elements that are unrelated, for example where a property lease also includes a charge for insurance or maintenance. The
lease component and the associated non-lease component are accounted for as a single lease component.
New standards and interpretations not applied: IFRIC23 Uncertainty over Income Tax Treatments
As an interpretation, IFRIC23 Uncertainty over Income Tax Treatments clarifies the application of the recognition and
measurement criteria of IAS12 when there is uncertainty over income tax treatments yet to be accepted by tax authorities. The
interpretation has an effective date of 1 January 2019 and is not expected to have a significant impact on the Group’s financial
statements.
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: 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 certain contracts where a separate performance obligation has been identified for services where the pattern of
delivery differs to the core services and which 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.
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 project based long-term contracts. Revenue associated with these contracts is recognised
at the point in time when control over the deliverable is passed to the customer or where the Group has a legally enforceable
right to remuneration for the work completed to date.
Annual Report and Accounts 2018
Serco Group plc
|
163
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Revenue recognition: Contract modifications
When a modification to an existing contract is approved, the Group first assesses whether it adds distinct goods or services to
the existing contract that are priced commensurate with the stand-alone selling prices for those goods or services. If this is the
case then the modification is accounted for prospectively as a separate contract. If the pricing is not commensurate with the
stand-alone selling prices for the goods or services and the new goods or services are not distinct from those in the original
contract then this is considered to form part of the original contract. Pricing is updated for the entirety of the revised contract
and any historic adjustments recognised as a result are recognised through opening retained earnings. If the pricing is not
commensurate with the stand-alone selling prices for the goods or services and the new goods or services are distinct from
those in the original contract then this is considered to represent the termination of the original contract and the creation of a
new contract which is accounted for prospectively from the date of modification.
Revenue recognition: Other
Sales of goods are recognised when goods are delivered and title has passed.
The transaction price allocated to future performance obligations disclosed in the financial statements includes estimated
variable income where the contractual agreement requires a stand ready obligation to provide future goods or services and
no separate purchase decision is required based on the terms of the existing contract and customary business practices.
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.
The Group has no material exposure to returns or refunds.
Contract costs
Bid costs are capitalised only when they relate directly to a contract and are incremental to securing the contract. Bid costs
are amortised over the duration of the contract to which they relate in equal annual instalments. 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.
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.
164 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Such translation differences are recognised as income or expenses in the period in which the operation is disposed of.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the
foreign entity and translated at the closing rate.
Business combinations
Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each
acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or
assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition related costs are
recognised in profit or loss as incurred.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration
arrangement, measured at its acquisition date fair value. Subsequent changes in fair values are adjusted against the cost of
acquisition where they qualify as measurement period adjustments (which is subject to a maximum of one year). All other
subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in
accordance with the relevant accounting standards. Changes in the fair value of contingent consideration classified as equity
are not recognised.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under 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 5 and 6.
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.
Annual Report and Accounts 2018
Serco Group plc
|
165
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Other intangible assets continued
Customer relationships can arise on the acquisition of subsidiaries and represent the incremental value expected to be gained
as a result of existing contracts in the purchased business. These assets are amortised over the average length of the
related contracts.
Licences comprise premiums paid for the acquisition of licences, while franchises represent costs incurred in obtaining
franchise rights arising on the acquisition of franchises. These are amortised on a straight-line basis over the life of the
respective licence or franchise.
Software and IT represent computer systems and processes used by the Group in order to generate future economic value
through normal business operations. The underlying assets are amortised over the period from which the Group expects to
benefit, which is typically between three to eight years.
Development expenditure is capitalised as an intangible asset only if all of certain conditions are met, with all research costs
and other development expenditure being expensed when incurred. The period of expected benefit, and therefore period of
amortisation, is typically between three and eight years. The capitalisation criteria are as follows:
• an asset is created that can be separately identified, and which the Group intends to use or sell;
• the finalisation of the asset is technically feasible and the Group has adequate resources to complete its development for
use or sale;
it is probable that the asset created will generate future economic benefits; and
•
• the development cost of the asset can be measured reliably.
Property, plant and equipment
Assets held for use in the rendering of services, or for administrative purposes, are stated in the balance sheet at cost, net of
accumulated depreciation and any provision for impairment. Assets are grouped into classes of similar nature and use and
separately disclosed except where this is not material.
Depreciation is provided on a straight line basis at rates designed to reduce the assets to their residual value over their
estimated useful lives.
The principal annual rates used are:
Freehold buildings
Short leasehold assets
Machinery
Motor vehicles
Furniture
Office equipment
Leased equipment
2.5%
The higher of 10% or the rate produced by the lease term
15% – 20%
10% – 50%
10%
20% – 33%
The higher of the rate produced by the lease term or useful life
The gain or loss arising on the disposal or retirement of an asset is determined as the difference between the sales proceeds
and the carrying amount of the asset and is recognised in the income statement. Given that there is limited history of material
gains or losses on disposal of fixed assets, the level of judgement involved in determining the depreciation rates is not
considered to be significant.
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.
166 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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.
At each reporting date, the Group assesses whether there is an indication that a previously recognised impairment loss has
reversed because of a change in the estimates used to determine the impairment loss. If there is such an indication, and the
recoverable amount of the impaired asset, or CGU, subsequently increases, then the impairment loss is generally reversed.
Impairment losses and reversals are recognised immediately within administrative expenses within the income statement
unless it is considered to be an exceptional item.
Retirement benefit costs
Payments to defined contribution pension schemes are charged as an expense as they fall due.
For defined benefit pension schemes, the cost of providing benefits is determined using the projected unit credit actuarial
cost method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised
in full in the period in which they occur. They are recognised outside the income statement and are presented in the statement
of comprehensive income.
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. 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 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 30.
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).
Annual Report and Accounts 2018
Serco Group plc
|
167
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Derivative financial instruments and hedging activities continued
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 30.
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss
immediately, together with any changes in the fair value of the hedged item that is attributable to the hedged risk. The
change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are
recognised in the line of the income statement relating to the hedged item.
Hedge accounting is discontinued when the Group de-designates the hedging relationship, the hedging instrument expires
or is sold, terminated, exercised, or no longer qualifies for hedge accounting. The adjustment to the carrying amount of the
hedged item arising from the hedged risk is amortised to profit or loss from that date.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are
deferred in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss. Amounts
accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same
line of the income statement as the recognised hedged item.
Hedge accounting is discontinued when the Group de-designates the hedging relationship, the hedging instrument expires
or is sold, terminated, exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at
that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a
forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised
immediately in profit or loss.
Tax
The tax expense represents the sum of current tax expense and deferred tax expense.
Current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been
enacted or substantively enacted by the balance sheet date.
Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between the tax
bases of assets and liabilities and their carrying amounts for accounting purposes.
Deferred tax 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.
168 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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.
As an interpretation, IFRIC 23 Uncertainty over Income Tax Treatments clarifies the application of the recognition and measurement
criteria of IAS12, when there is uncertainty over income tax treatments yet to be accepted by tax authorities. The interpretation has
an effective date of 1 January 2019 and is not expected to have a significant impact on the Group’s financial statements.
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 35. The expected life
used in the models has been adjusted, based on management’s best estimate, for the effects of non transferability, exercise
restrictions, and behavioural considerations. Where relevant, the value of the option has also been adjusted to take account of
market conditions applicable to the option.
Inventories
Inventories are stated at the lower of cost and net realisable value and comprise service spares, parts awaiting installation and
work in progress for projects undertaken for customers where payment is received on completion. Cost comprises direct
materials and, where applicable, direct labour costs that have been incurred in bringing the inventories to their present
location and condition.
Trade receivables
Trade receivables are recognised initially at cost (being the same as fair value) and subsequently at amortised cost less any
provision for impairment, to ensure that amounts recognised represent the recoverable amount.
A provision for impairment arises where there is evidence that the Group will not be able to collect amounts due, which is
achieved by creating an allowance for doubtful debts recognised in the income statement within administrative expenses.
Determining whether a trade receivable is impaired requires judgement to be applied based on the information available at
each reporting date. Key indicators of impairment include disputes with customers over commercial positions, or where
debtors have significant financial difficulties such as historic default of payments or information that suggests bankruptcy or
financial reorganisation are a reasonable possibility. The majority of contracts entered into by the Group are with government
organisations 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.
Annual Report and Accounts 2018
Serco Group plc
|
169
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that
necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets,
until such time as the assets are substantially ready for their intended use or sale.
All other borrowing costs are recognised as an expense in the period in which they are incurred.
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.
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.
Key sources of estimation uncertainty
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 adjustments to the carrying amounts of onerous contract
provisions within the next financial year.
170 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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, an amount of £3.4m was charged to historic provisions, and releases of £16.2m have been made. No
charges have been made to new onerous contract provisions during the current year. 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 1.24%.
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 2018.
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.
Annual Report and Accounts 2018
Serco Group plc
|
171
Notes to the Consolidated Financial
Statements continued
3. Critical accounting judgements and key sources of estimation uncertainty continued
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 31.
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 equal to the full surplus that will ultimately be
available to the Group as a future refund.
• 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.
Critical accounting judgements
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 10.
The segmental analysis of continuing operations in note 4 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.
172 | Serco Group plc
Annual Report and Accounts 2018
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 and timing.
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.
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 16.
4. Segmental information
The Group’s operating segments reflecting the information reported to the Board in 2018 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.
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 2.
Information about major customers
The Group has four major governmental customers which each represent more than 10% of Group revenues. The customers’
revenues were £1,113.1m (2017: £1,104.3m) for the UK Government within the UK & Europe segment, £522.8m (2017: £571.1m) for
the US Government within the Americas segment, £498.7m (2017: £523.5m) for the Australian Government within the AsPac
segment and £232.9m (2017: £239.8m) for the Government of the United Arab Emirates within the Middle East segment. The
amounts shown for 2017 have been restated to show the impact of applying IFRS15 Revenue from Contracts with Customers.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
173
Notes to the Consolidated Financial
Statements continued
4. Segmental information continued
The following is an analysis of the Group’s revenue, results, assets and liabilities by reportable segment:
Year ended 31 December 2018
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
Exceptional finance income
Profit before tax
Tax charge
Tax on exceptional items
Profit for the year from continuing operations
UK&E
£m
Americas
£m
AsPac
£m
Middle
East
£m
Corporate
£m
Total
£m
1,300.7
645.6
548.2
342.3
–
2,836.8
51.6
43.2
40.5
(0.5)
51.1
(0.5)
(11.0)
39.6
(3.2)
40.0
–
(2.8)
37.2
(0.6)
39.9
–
(4.5)
35.4
21.5
–
21.5
–
–
21.5
(40.1)
116.7
–
(4.3)
(40.1)
112.4
–
(13.1)
(53.2)
(0.5)
(31.4)
80.5
4.3
(18.2)
7.5
74.1
(8.8)
2.1
67.4
* 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.
Year ended 31 December 2018
Supplementary information
Share of profits in joint ventures and associates, net of
interest and tax
Depreciation of plant, property and equipment
Impairment of plant, property and equipment
Total depreciation and impairment of plant, property
and equipment
Amortisation of intangible assets arising on acquisition
Amortisation of other intangible assets
Impairment 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
28.6
(11.4)
(0.7)
(12.1)
(0.5)
(0.4)
(0.1)
(1.0)
–
(3.3)
–
(3.3)
(3.2)
(1.5)
–
(4.7)
0.2
(2.5)
–
(2.5)
(0.6)
(4.9)
–
(5.5)
–
(0.7)
–
(0.7)
–
(0.3)
–
(0.3)
–
(1.6)
–
(1.6)
–
(11.5)
–
(11.5)
19.6
487.6
507.2
–
426.4
426.4
0.6
222.1
222.7
0.4
123.4
123.8
–
135.0
135.0
(339.4)
(130.3)
(152.1)
(93.6)
(142.8)
28.8
(19.5)
(0.7)
(20.2)
(4.3)
(18.6)
(0.1)
(23.0)
20.6
1,394.5
1,415.1
138.5
1,553.6
(858.2)
(308.6)
(1,166.8)
*** 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.
174 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Year ended 31 December 2017 (restated***)
Revenue
Result
Trading profit/(loss) from continuing operations*
Amortisation and impairment of intangibles arising on
acquisition
Operating profit/(loss) before exceptional items
Exceptional profit 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
Loss for the year from continuing operations
UK&E
£m
Americas
£m
1,331.5
689.3
AsPac
£m
577.5
Middle
East
£m
352.6
Corporate
£m
Total
£m
–
2,950.9
(4.1)
–
(4.1)
0.3
11.9
8.1
39.8
(3.0)
36.8
–
(0.3)
36.5
33.7
(1.4)
32.3
–
(7.4)
24.9
17.3
–
17.3
–
0.1
17.4
(41.6)
45.1
–
(41.6)
–
(24.2)
(65.8)
(4.4)
40.7
0.3
(19.9)
21.1
8.0
(19.2)
0.7
10.6
(13.6)
(5.0)
(8.0)
* 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.
*** Results and balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017.
See note 2.
Year ended 31 December 2017 (restated***)
Supplementary information
Share of profits in joint ventures and associates, net of
interest and tax
Depreciation of plant, property and equipment
Reversal of 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 (restated***)
Interests in joint ventures and associates
Other segment assets****
Total segment assets
Unallocated assets
Consolidated total assets
Segment liabilities (restated***)
Segment liabilities****
Unallocated liabilities, including liabilities held for sale
Consolidated total liabilities
UK&E
£m
Americas
£m
AsPac
£m
Middle
East
£m
Corporate
£m
Total
£m
26.3
(12.3)
0.1
(12.2)
–
–
(1.1)
–
(1.1)
18.9
452.4
471.3
–
(3.2)
–
(3.2)
(3.0)
–
(1.5)
–
(4.5)
–
387.6
387.6
0.8
(3.2)
–
(3.2)
(1.4)
(6.1)
(4.8)
–
(12.3)
0.4
225.2
225.6
–
(0.8)
–
(0.8)
–
–
(0.2)
–
(0.2)
0.4
113.7
114.1
(0.1)
(1.4)
–
(1.4)
–
–
(13.8)
(2.8)
(16.6)
–
133.2
133.2
(407.5)
(124.9)
(161.3)
(86.2)
(142.0)
27.0
(20.9)
0.1
(20.8)
(4.4)
(6.1)
(21.4)
(2.8)
(34.7)
19.7
1,312.1
1,331.8
192.7
1,524.5
(921.9)
(337.3)
(1,259.2)
*** Results and balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See
note 2.
**** 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.
Annual Report and Accounts 2018
Serco Group plc
|
175
Notes to the Consolidated Financial
Statements continued
5. 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
AWE Management Limited
Merseyrail Services Holding Company Limited
2018
100%
100%
100%
2018
24.5%
50%
2017
100%
100%
100%
2017
24.5%
50%
A full list of subsidiaries and related undertakings is included in the Appendix on pages 228 to 230 which form part of the
financial statements.
6. Joint ventures and associates
AWE Management Limited (AWEML) and Merseyrail Services Holding Company Limited (MSHCL) were the only equity
accounted entities which were material to the Group during the year or prior year. Dividends of £20.0m (2017: £17.1m) and
£8.7m (2017: £7.3m) respectively were received from these companies in the year.
Summarised financial information of AWEML and MSHCL and an aggregation of the other equity accounted entities in which
the Group has an interest is as follows:
31 December 2018
Summarised financial information
Revenue
Operating profit before exceptional items
Exceptional items
Operating profit
Net investment revenue/(finance costs)
Income tax charge
Profit from continuing operations
Profit from continuing operations before
exceptional items
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
Group portion of
material joint
ventures and
associates*
£m
Group portion of
other joint
venture
arrangements
and associates*
£m
1,024.7
160.8
331.5
43.6
100.4
–
100.4
0.6
(18.6)
82.4
82.4
–
82.4
518.5
210.1
(190.6)
(517.6)
20.4
24.5%
5.0
17.1
(0.6)
16.5
0.2
(3.3)
13.4
14.0
4.1
17.5
8.0
45.7
(28.0)
(0.8)
24.9
50.0%
12.4
33.2
(0.3)
32.9
0.2
(6.2)
26.9
27.2
2.0
28.9
131.0
74.3
(60.7)
(127.2)
17.4
–
17.4
1.4
–
1.4
0.1
0.1
1.6
1.6
–
1.6
2.6
15.4
(12.5)
(2.3)
3.2
–
3.2
Total
£m
375.1
34.6
(0.3)
34.3
0.3
(6.1)
28.5
28.8
2.0
30.5
133.6
89.7
(73.2)
(129.5)
20.6
–
20.6
* Total results of the entity multiplied by the respective proportion of Group ownership.
176 | Serco Group plc
Annual Report and Accounts 2018
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
98.1
(9.7)
–
–
0.6
–
Group portion of
material joint
ventures and
associates*
£m
Group portion of
other joint
venture
arrangements
and associates*
£m
41.2
(3.4)
–
(1.0)
0.2
–
5.1
(0.2)
(2.3)
(1.0)
0.1
–
MSHCL
(100% of
results)
£m
34.3
(2.0)
–
(2.0)
0.2
–
Total
£m
46.3
(3.6)
(2.3)
(2.0)
0.3
–
* Total results of the entity multiplied by the respective proportion of Group ownership.
The financial statements of MSHCL are for a period which is different from that of the Group, being for the 52 week period
ended 5 January 2019 (2017: 52 week period ended 6 January 2018). 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 cost associated with the Group’s share of MSHCL’s obligation in respect of the equalisation of guaranteed minimum
pension (GMP) payments has been recorded as exceptional to ensure consistent treatment across all defined benefit pension
schemes the Group is liable for. More information is provided in note 10.
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: 2018
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
2.2%
2.2%
3.0%
23.0
25.6
£m
(2,030.4)
1,512.8
(517.6)
–
–
517.6
–
MSHCL
3.1%
2.2%
2.9%
N/A
N/A
£m
(290.3)
193.3
(97.0)
58.2
38.8
–
–
* 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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
177
Notes to the Consolidated Financial
Statements continued
6. Joint ventures and associates continued
31 December 2017 (restated**)
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
951.8
90.8
0.2
(18.8)
72.2
–
72.2
665.6
197.3
(179.0)
(664.3)
19.6
24.5%
4.8
MSHCL
(100% of
results)
£m
155.1
17.2
(0.2)
(3.9)
13.1
2.0
15.1
8.7
43.5
(26.1)
(1.6)
24.5
50.0%
12.3
Group portion of
material joint
ventures and
associates*
£m
Group portion of
other joint
venture
arrangements
and associates*
£m
310.7
30.8
(0.1)
(6.6)
24.1
1.0
25.1
167.5
70.1
(57.0)
(163.5)
17.1
–
17.1
45.7
3.3
–
(0.4)
2.9
(0.1)
2.8
2.2
17.1
(14.0)
(2.7)
2.6
–
2.6
Total
£m
356.4
34.1
(0.1)
(7.0)
27.0
0.9
27.9
169.7
87.2
(71.0)
(166.2)
19.7
–
19.7
* Total results of the entity multiplied by the respective proportion of Group ownership.
** Results and balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See
note 2.
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
77.2
(8.3)
–
–
0.2
–
Group portion of
material joint
ventures and
associates*
£m
Group portion of
other joint
venture
arrangements
and associates*
£m
35.7
(3.0)
–
(1.1)
0.1
(0.2)
5.5
(0.5)
(2.7)
(1.4)
–
–
MSHCL
(100% of
results)
£m
33.6
(1.9)
–
(2.2)
0.1
(0.3)
Total
£m
41.2
(3.5)
(2.7)
(2.5)
0.1
(0.2)
* 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:
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)
AWEML
MSHCL
2.2%
2.2%
2.6%
22.9
25.2
3.1%
2.2%
2.5%
N/A
N/A
178 | Serco Group plc
Annual Report and Accounts 2018
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
£m
(2,233.3)
1,569.1
(664.2)
–
–
664.2
–
MSHCL
£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.
7. Acquisitions
On 26 January 2018, the Group acquired 100% of the issued share capital of BTP Systems, LLC (BTP). The acquired business
contributed £12m of revenue and £1.9m of operating profit before exceptional items to the Group’s results during year to
31 December 2018. Having incorporated the assets, liabilities and operations of BTP into the Group, BTP Systems, LLC was
liquidated on 26 January 2018.
BTP provides satellite communications (SATCOM), radar modernisation, 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 specialises 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, Military Strategic &
Tactical Relay command post antennas and radar antennas.
The Group acquired Carillion plc’s facilities management contracts at six major NHS hospital sites over the period from June
2018 to August 2018: Great Western Hospital in Swindon; Darent Valley Hospital in Dartford; James Cook University Hospital in
Middlesbrough; Harplands Hospital in Stoke-on-Trent; The Langlands Unit of Queen Elizabeth University Hospital in Glasgow;
and Addenbrooke’s Treatment Centre in Cambridge.
The total annual revenue of all six contracts is expected to be around £70m and the estimated operating profit before
exceptional items, including an appropriate allocation of charges for shared support services and other incremental
overheads, will be approximately £4m, the aggregate consideration payable was £18.1m. The acquired contracts contributed
£30.3m of revenue and an operating loss before exceptional items of £2.1m to the Group’s results during year to 31 December
2018 due to the transition costs incurred.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Goodwill
Acquisition related intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Provisions
Deferred tax liability
Acquisition date fair value of consideration transferred
Satisfied by:
Cash
Contingent consideration
Total consideration
Provisional
fair value
Carillion Health
contracts
£m
Fair value
BTP
£m
10.0
3.1
0.2
0.3
1.5
1.2
(1.2)
(0.7)
–
14.4
14.4
–
14.4
6.8
13.6
–
–
–
–
–
–
(2.3)
18.1
16.1
2.0
18.1
Total
£m
16.8
16.7
0.2
0.3
1.5
1.2
(1.2)
(0.7)
(2.3)
32.5
30.5
2.0
32.5
Annual Report and Accounts 2018
Serco Group plc
|
179
Notes to the Consolidated Financial
Statements continued
7. Acquisitions continued
The net cash outflow as a result of acquisitions completed during the year was £32.8m made up of £30.5m consideration paid
on acquisitions made during the year, costs related to current year acquisitions of £0.6m, consideration related to historic
acquisitions of £2.9m and £1.2m of cash acquired.
Goodwill on the Carillion Health contracts represents the premium associated with taking over contracts considered to have
synergies with existing Health related contracts already being operated by the Group, and bring an established workforce
able to deliver the services required under the contracts. The contracts acquired are considered to be accretive to the Group’s
financial performance. The contingent consideration payable on the Carillion Health contracts is contingent on the Group
receiving certain indemnities in relation to the contracts acquired.
Goodwill on the acquisition of BTP represents the premium associated with enabling the Group to enter into new markets with
a developed customer base and a series of established product and service offerings. These services complement Serco’s
capabilities in Command, Control, Communications, Computers, Combat Systems, Intelligence, Surveillance and
Reconnaissance (C5ISR) services. Combining the skills of Serco and BTP Systems will enable the delivery of expanded C5ISR
services supporting naval modernisation and sustainment for ship, shore and hardware integration projects.
Based on estimates made of the full year impact of acquisitions arising during the year, had the acquisitions taken place on
1 January 2018 Group revenue and operating profit before exceptional items for the period would have increased by £41.3m
and approximately £6.2m respectively, taking total Group revenue to £2,878.1m and total Group operating profit before
exceptional items to £118.6m.
The total impact of acquisitions to the Group’s cash flow position in the period was as follows:
Net cash outflow on acquisition of BTP
Consideration paid in respect of Carillion contract acquisition completed including acquisition related costs
Deferred consideration paid in respect of historic acquisition:
Anglia Support Partnership
Grafton Correctional Centre
Serco Sodexo Defence Services
Net cash outflow arising in the year on acquisitions
£m
(13.2)
(16.7)
(1.2)
(1.1)
(0.6)
(32.8)
8. Disposals
A summary of the disposals taking place in the year ended 31 December 2018 were as follows:
Year ended 31 December 2018
Disposal of the Anglia Support Partnership contract
Settlement of consideration for Service Glasgow LLP
Profit/(loss)
on disposal
£m
(0.5)
–
(0.5)
Cash flow
£m
(0.3)
1.8
1.5
In October 2018 the Group’s interest in the Anglia Support Partnership contract was disposed of, resulting in a net cash
outflow of £0.3m with a loss on disposal of £0.5m. Further details are provided below.
Trade and other receivables
Trade and other payables
Net assets disposed
Consideration
Less:
Net assets disposed
Disposal costs
Income statement impact of disposal
Anglia Support
Partnership
contract
£m
0.5
(0.6)
(0.1)
Anglia Support
Partnership
contract
£m
–
(0.1)
(0.4)
(0.5)
180 | Serco Group plc
Annual Report and Accounts 2018
The net cash outflow arising on the disposal of the Anglia Support Partnership contract and the impact on Net Debt is
as follows:
Consideration
Less: Disposal costs
Net cash flow on disposal and movement in Net Debt
Anglia Support
Partnership
contract
£m
–
(0.3)
(0.3)
9. Revenue from contracts with customers
Revenue
As a result of the adoption of IFRS15 all disclosures contained in this note are new or restated from that previously disclosed in
the Group’s financial statements.
Information regarding the Group’s major customers, and a segmental analysis of revenue is provided in note 4.
An analysis of the Group’s revenue from its key market sectors, together with the timing of revenue recognition across the
Group’s revenue from contracts with customers is as follows:
Year ended 31 December 2018
Key sectors
Defence
Justice & Immigration
Transport
Health
Citizen Services
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in
previous periods
Revenue recognised at a point in time
Products and services transferred over time
Year ended 31 December 2017
Key sectors
Defence
Justice & Immigration
Transport
Health
Citizen Services
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in
previous periods
Revenue recognised at a point in time
Products and services transferred over time
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Total
£m
260.2
269.8
151.4
231.8
387.5
1,300.7
1.6
38.9
1,260.2
1,300.7
338.3
–
90.2
–
217.1
645.6
–
–
645.6
645.6
56.2
271.4
18.3
89.1
113.2
40.8
–
204.6
28.5
68.4
695.5
541.2
464.5
349.4
786.2
548.2
342.3
2,836.8
3.2
1.8
543.2
548.2
–
–
342.3
4.8
40.7
2,791.3
342.3
2,836.8
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Total
£m
291.9
258.0
153.0
180.7
447.9
1,331.5
0.2
45.0
1,286.3
1,331.5
325.7
–
86.5
–
277.1
689.3
–
–
689.3
689.3
76.9
303.0
32.5
91.1
74.0
577.5
–
4.8
572.7
577.5
41.2
–
204.9
33.7
72.8
352.6
–
–
352.6
352.6
735.7
561.0
476.9
305.5
871.8
2,950.9
0.2
49.8
2,900.9
2,950.9
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
181
Notes to the Consolidated Financial
Statements continued
9. Revenue from contracts with customers continued
Transaction price allocated to remaining performance obligations
The following table shows the transaction price allocated to remaining performance obligations. This represents revenue
expected to be recognised in subsequent periods arising on existing contractual arrangements. The Group has not taken the
practical expedient in IFRS15.121 not to disclose information about performance obligations that have original expected
durations of one year or less and therefore no consideration from contracts with customers is excluded from the amounts
included below. Forecast variable revenue is included only to the extent that it is highly probable that a significant reversal will
not occur.
Within 1 year (2019)
Between 2 – 5 years (2020 – 2023)
5 years and beyond (2025+)
UK&E
£m
1,138.3
2,962.6
3,849.2
7,950.1
Americas
£m
424.8
162.9
0.6
588.3
AsPac
£m
497.0
724.8
1,727.2
2,949.0
Middle East
£m
241.1
144.1
170.2
555.4
Total
£m
2,301.2
3,994.4
5,747.2
12,042.8
Contract balance sheet items
The contract balances arising from contracts with customers are as follows:
Contract assets
Capitalised bid costs
Capitalised mobilisation and phase in costs
Accrued income and other unbilled receivables
2018
£m
4.9
17.2
222.2
244.3
2017
£m
6.2
18.9
214.5
239.6
These amounts exclude Trade receivables disclosed separately in note 22. The key judgements relating to contract assets are
described in note 22.
Contract liabilities
Deferred income
2018
£m
(160.9)
2017
£m
(147.6)
These amounts exclude Trade payables disclosed separately in note 24.
During the current year and the prior year, there have been no significant changes in contract assets or contract liabilities
other than those arising in the normal course of business.
182 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
10. 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.
Other exceptional operating items arising on continuing operations
For the year ended 31 December
Exceptional items arising
Exceptional (loss)/profit on disposal of subsidiaries and operations
Other exceptional operating items
Restructuring costs
Increase in onerous lease provision
Costs associated with UK Government review
Release of UK frontline clinical health contract provisions
Settlement of defined benefit pension obligations
Reversal of impairment of interest in joint venture and related loan balances
Reversal of impairment on loan balances
Impairment of AsPac customer lists
Cost of Guaranteed Minimum Pension equalisation
Increase in other provisions
Other exceptional operating items
Exceptional operating items
Exceptional finance income
Exceptional tax
Total operating and financing exceptional items net of tax
2018
£m
(0.5)
(32.3)
(1.8)
0.4
–
–
0.8
13.9
–
(9.6)
(2.8)
(31.4)
(31.9)
7.5
2.1
(22.3)
2017
£m
0.3
(28.6)
–
(0.4)
0.4
10.3
4.5
–
(6.1)
–
–
(19.9)
(19.6)
–
(5.0)
(24.6)
Exceptional profit on disposals
There were no material disposals of continuing operations in 2018 (2017: none).
Other exceptional operating items
The annual impairment testing of CGUs in 2018 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 (including onerous leases), external advisory fees and other incremental costs. Due to the
nature and scale of the impact of the transformation phase of the Strategy Review, the incremental costs associated with this
programme 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 2018, a charge of £32.3m (2017:
£28.6m) 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 18. Non-exceptional restructuring charges are incurred by the business as part
of normal operational activity, which in the year totalled £6.3m (2017: £11.1m) and were included within operating profit before
exceptional items. We expect exceptional restructuring costs of approximately £20.0m will be incurred in 2019, which we
expect to be the final year.
There was an exceptional credit totalling £0.4m (2017: charge of £0.4m) 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 2018. The credit reflects the recovery of costs from the Group’s insurance providers.
An exceptional charge of £9.6m (2017: nil) has been recorded in the Group’s income statement for the year ended 31
December 2018. This is to recognise the Group’s obligations associated with equalising the Guaranteed Minimum Pension
(GMP) payments between male and female employees for the Group’s defined benefit pension schemes following a High
Court ruling made in October 2018. The Serco Pension and Life Assurance Scheme (SPLAS) recorded the largest charge being
£9.0m. Included in the £9.6m charge is £0.3m related to the Group’s share of the GMP cost in one of the Group’s Joint
Ventures. This has been recorded as exceptional to ensure consistent treatment of all items in 2018 related to the cost of
equalising the GMP payments within the Group’s pension schemes. The impact of GMP equalisation is not currently estimated
to have a material impact in future years.
Annual Report and Accounts 2018
Serco Group plc
|
183
Notes to the Consolidated Financial
Statements continued
10. Exceptional items continued
An additional charge of £2.8m has been recorded in respect of a legal dispute in the Group’s North American Division. The
treatment of this additional amount as exceptional is consistent with the recognition of the original charge associated with the
same legal matter.
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 2018 payments of £0.8m (2017: £4.5m)
were received against the impaired loan.
An exceptional profit of £13.9m (2017: nil) has been recognised for the settlement of consideration associated with the sale of
Serco GmbH in 2012 through the offsetting of outstanding loan balances, the receivable of which had been impaired. An
exceptional loss on disposal of £27.7m was recorded in 2012 in respect of the sale.
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 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. A cost of this nature did not reoccur in 2018.
In 2017 there were releases of provisions £0.4m which were previously charged through exceptional items in relation to the exit
of the UK frontline clinical health contracts. 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 in 2017, totalling £6.1m.
Exceptional finance income
Part of the consideration for the sale of the Group’s private sector BPO business in 2015 was a loan note with a face value of
£30m accruing compound interest of 7%. The receivable associated with this loan note was recorded at a fair value of £19.5m.
The discount on the loan note has been unwinding through the Group’s net finance cost on an annual basis. During October
2018, the Intelenet business was sold and therefore repayment of the loan note was triggered resulting in a gain of £7.5m. As
this gain is outside the normal financing arrangements of the Group and significant in size it has been recorded as exceptional
investment income.
Exceptional tax
Exceptional tax for the year was a tax credit of £2.1m (2017: £5.0m charge) which arises on exceptional items within
operating profit.
No net tax credit arises on the exceptional charge associated with GMP equalisation (further detail on this charge is included
in the “Other exceptional operating items” section above). The credit of £1.6m that arises on the deferred tax movement
associated with this charge is netted with an equal and opposite charge that arises on the associated reduction in the
deferred tax asset in order to retain the net deferred tax position as supported by future forecast profits.
Remaining exceptional costs excluding the pension charge (£14.8m) only gave rise to a credit of £2.1m, as the majority of these
costs were incurred in the UK where they only impact our unrecognised deferred tax in relation to losses.
184 | Serco Group plc
Annual Report and Accounts 2018
11. Operating profit
Operating profit is stated after charging/(crediting):
Year ended 31 December
Research and development costs
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 (loss)/gain on disposal of subsidiaries and operations (note 8)
Staff costs (note 12)
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
2018
£m
0.6
–
0.5
1.5
20.2
4.3
18.7
0.5
1,453.4
(1.0)
0.4
0.2
152.2
(1.7)
2017
£m
1.7
8.9
0.2
0.3
20.8
4.4
21.4
(0.3)
1,525.0
0.7
1.2
(0.2)
99.6
(2.4)
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
Amounts payable 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
– Other services
Total non-audit fees
2018
£m
1.0
0.2
1.2
0.1
0.1
0.2
2017
£m
1.0
0.2
1.2
0.1
0.1
0.2
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 99. No services were provided pursuant to
contingent fee arrangements.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
185
Notes to the Consolidated Financial
Statements continued
12. 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
2018
number
20,307
6,091
8,851
4,185
950
40,384
2017
number
21,222
7,421
8,739
4,428
954
42,764
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.
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 31)
Share based payment expense (note 35)
13. Investment revenue
Year ended 31 December
Interest receivable on other loans and deposits
Net interest receivable on retirement benefit obligations (note 31)
Interest arising on customer contracts
Movement in discount on other debtors
2018
£m
1,251.7
95.3
91.7
1,438.7
14.7
1,453.4
2018
£m
2.3
0.8
–
1.2
4.3
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
14. 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
2018
£m
0.6
13.8
3.1
0.5
18.0
0.2
18.2
2017
£m
1,326.5
102.9
84.2
1,513.6
11.4
1,525.0
2017
(restated*)
£m
2.6
3.8
0.4
1.2
8.0
2017
£m
1.3
14.0
3.0
1.3
19.6
(0.4)
19.2
186 | Serco Group plc
Annual Report and Accounts 2018
15. Tax
15 (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 (credit)/charge
Adjustments in respect of prior years
Before
exceptional
items
2018
£m
Exceptional
items
2018
£m
23.6
(0.9)
(13.8)
(0.1)
8.8
(1.4)
–
(0.7)
–
(2.1)
Before
exceptional
items
2017
(restated*)
£m
14.6
(0.8)
1.7
(1.9)
13.6
Total
2018
£m
22.2
(0.9)
(14.5)
(0.1)
6.7
Exceptional
items
2017
£m
Total
2017
(restated*)
£m
(2.4)
–
7.4
–
5.0
12.2
(0.8)
9.1
(1.9)
18.6
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
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 19.00% (2017: 19.25%)
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
2018
£m
98.5
18.7
5.3
(7.5)
2.5
(0.3)
1.7
–
7.3
(2.5)
(1.0)
(10.1)
(5.3)
8.8
Exceptional
items
2018
£m
(24.4)
(4.6)
–
3.5
–
–
–
–
(0.7)
(0.4)
–
–
0.1
(2.1)
Before
exceptional
items
(restated***)
2017
£m
Exceptional
items
2017
£m
Total
(restated***)
2017
£m
30.2
(19.6)
10.6
5.8
5.9
(3.0)
2.3
(1.2)
1.4
–
9.2
(0.9)
(2.9)
2.2
(5.2)
13.6
(3.8)
0.3
2.9
0.1
(0.5)
(2.2)
(8.8)
(0.8)
(0.5)
–
18.3
–
5.0
2.0
6.2
(0.1)
2.4
(1.7)
(0.8)
(8.8)
8.4
(1.4)
(2.9)
20.5
(5.2)
18.6
Total
2018
£m
74.1
14.1
5.3
(4.0)
2.5
(0.3)
1.7
–
6.6
(2.9)
(1.0)
(10.1)
(5.2)
6.7
* Relates to costs that are not allowable for tax deduction under local tax law
** 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. Additional tax is recognised in relation to brought forward losses as shown in the deferred tax note below. UK
unprovided deferred tax in relation to exceptional items relates to amounts which have been charged to the income statement in the current period
for which no tax deduction has yet been taken, for items such as restructuring costs.
*** Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
The income tax charge for the year is based on the blended UK statutory rate of corporation tax for the period of 19.00% (2017:
19.25%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
187
Notes to the Consolidated Financial
Statements continued
15. Tax continued
15 (b) Income tax recognised in the SOCI
Year ended 31 December
Current tax
Taken to retirement benefit obligations reserve
Deferred tax
Relating to cash flow hedges
Taken to retirement benefit obligations reserve
2018
£m
–
–
(9.2)
(9.2)
2017
£m
–
–
18.1
18.1
16. 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
Exchange differences
At 31 December – asset
2018
£m
(39.3)
(14.7)
9.2
2.3
3.0
(39.5)
2017
(restated*)
£m
(24.8)
7.2
(18.1)
(1.0)
(2.6)
(39.3)
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
The movement in deferred tax assets and liabilities during the year was as follows:
At 1 January 2018 (restated*)
(Credited)/charged to income statement
(note 15a)
Items recognised in equity and in other
comprehensive income (note 15b)
Arising on acquisition
Exchange differences
At 31 December 2018
24.6
(13.7)
Temporary
differences
on assets/
intangibles
£m
Share based
payment
and
employee
benefits
£m
Retirement
benefit
schemes
£m
25.8
(12.2)
2.5
OCPs
£m
(7.9)
Tax
losses
£m
(18.7)
Other
temporary
differences
£m
Total
£m
(28.8)
(39.3)
(4.7)
(1.8)
(1.7)
0.8
(1.9)
(5.4)
(14.7)
–
2.3
1.2
–
–
0.3
9.2
–
(0.1)
9.9
–
–
(0.3)
(7.4)
–
–
–
–
–
1.9
9.2
2.3
3.0
(20.6)
(32.3)
(39.5)
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
Of the amount credited to the income statement, £0.1m (2017: charge of £0.1m) 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 (2017: £nil).
188 | Serco Group plc
Annual Report and Accounts 2018
The movement in deferred tax assets and liabilities during the previous year was as follows:
At 1 January 2017 (restated*)
(Credited)/charged to income statement
(note 15a)
Items recognised in equity and in other
comprehensive income (note 15b)
Arising on acquisition
Exchange differences
At 31 December 2017
Temporary
differences
on assets/
intangibles
£m
Share based
payment
and
employee
benefits
£m
36.5
(12.0)
(6.7)
–
(0.1)
(3.9)
25.8
0.3
–
(0.9)
0.4
(12.2)
Retirement
benefit
schemes
£m
17.6
2.8
(18.1)
–
0.2
2.5
Tax
losses
£m
(10.3)
Other
temporary
differences
£m
(38.8)
Total
£m
(24.8)
(8.4)
10.0
7.2
–
–
–
–
–
–
(18.7)
(28.8)
(18.1)
(1.0)
(2.6)
(39.3)
OCPs
£m
(17.8)
9.2
–
–
0.7
(7.9)
* Results and balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017.
See note 2.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets
against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following is the
analysis of the deferred tax balances (after offset) for financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
2018
£m
21.4
(60.9)
(39.5)
2017
(restated*)
£m
20.4
(59.7)
(39.3)
* Balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
As at the balance sheet date, the UK has a potential deferred tax asset of £168.8m (2017: £177.0m) available for offset against
future profits. A deferred tax asset has currently been recognised of £20.3m (2017: £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 £148.5m)
based on current forecasts; additional asset recognition is contingent on further improvement in the UK profit forecast.
Measures enacted during 2016 cut the future tax rate from April 2020 from 19% to 17%. These measures will reduce the
Group’s future current tax charge accordingly. The deferred tax balance at 31 December 2018 has been calculated reflecting
the reduced rate.
Losses of £0.2m (2017: £0.1m) expire within 5 years, losses of £0.1m (2017 £0.1m) expire within 6-10 years, losses of £0.7m (2017
£4.1m) expire within 20 years and losses of £1,015.2m (2017 £998.4m) may be carried forward indefinitely.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
189
Notes to the Consolidated Financial
Statements continued
17. 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
2018
millions
1,094.4
31.0
1,125.4
2017
(restated*)
millions
1,089.7
30.9
1,120.6
* The number of dilutive ordinary shares has been restated to ensure that the calculation is consistent with the method used for the current financial
year. This does not impact the diluted earnings per share for 2017 as the Company was in a loss making position.
At 31 December 2018 options over 145,238 (2017: 236,616) shares were excluded from the weighted average number of shares
used for calculating diluted earnings per share in accordance with IFRS2 Share Based Payments because their exercise price
was above the average share price for the year and they were, therefore, anti-dilutive.
Earnings per share
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
2018
£m
67.4
–
67.4
Per share
amount
2018
pence
6.16
(0.17)
5.99
67.4
24.4
(2.1)
6.16
2.23
(0.19)
89.7
8.20
Earnings
2017
(restated*)
£m
Per share
amount
2017
(restated*)
Pence
(8.3)
–
(8.3)
(8.3)
19.6
5.0
16.3
(0.76)
–
(0.76)
(0.76)
1.80
0.46
1.50
* Results and balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017.
See note 2.
190 | Serco Group plc
Annual Report and Accounts 2018
18. Goodwill
At 1 January 2017
Exchange differences
At 1 January 2018
Exchange differences
Acquisitions
At 31 December 2018
Accumulated
impairment
losses
£m
(348.6)
21.9
(326.7)
(12.9)
–
(339.6)
Cost
£m
926.5
(48.5)
878.0
24.4
16.8
919.2
Carrying
amount
£m
577.9
(26.6)
551.3
11.5
16.8
579.6
Movements in the balance since the prior year end can be seen as follows:
UK & Europe
Americas
AsPac
Middle East
Goodwill
balance
1 January
2018
£m
177.5
253.0
110.8
10.0
551.3
Additions
2018
£m
Exchange
differences
2018
£m
Impairment
2018
£m
Goodwill
balance
31 December
2018
£m
Headroom on
impairment
analysis
2018
£m
Headroom on
impairment
analysis
2017
£m
6.8
10.0
–
–
16.8
–
15.9
(4.9)
0.5
11.5
–
–
–
–
–
184.3
278.9
105.9
10.5
579.6
593.6
159.4
307.8
57.9
1,118.7
427.7
151.8
231.6
145.6
956.7
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.
Late in 2017, the Group amalgamated its Central Government and Local and Regional Government divisions into a combined
UK & Europe division led by a single management team. Within the UK & Europe division, there are a number of business
units, each individually representing a cash generating unit, three of which have an amount of goodwill allocated to them.
Following the combination of divisions in 2017, the management structure across the UK & Europe division has been aligned
to the management structure across other divisions with divisional resources and certain operational decisions being
considered on a division-wide basis. The UK & Europe division now represents the lowest level at which goodwill is monitored
for internal management purposes and as a result goodwill will be tested for impairment across the group of CGUs that make
up the division.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
191
Notes to the Consolidated Financial
Statements continued
18. Goodwill continued
Had the movements and headroom for the year ended 31 December 2018 been prepared on a basis consistent with the year
ended 31 December 2017, the result would have been:
UK & Europe
Justice & Immigration
Health
Direct Services & Europe
Americas
AsPac
Middle East
Goodwill
balance
1 January
2018
£m
49.6
60.6
67.3
253.0
110.8
10.0
551.3
Additions
2018
£m
Exchange
differences
2018
£m
Impairment
2018
£m
Goodwill
balance
31 December
2018
£m
Headroom on
impairment
analysis
2018
£m
Headroom on
impairment
analysis
(restated*)
2017
£m
–
6.8
–
10.0
–
–
16.8
–
–
–
15.9
(4.9)
0.5
11.5
–
–
–
–
–
–
–
49.6
67.4
67.3
278.9
105.9
10.5
579.6
188.4
64.9
41.6
159.4
307.8
57.9
820.0
127.4
19.4
71.5
151.8
231.6
145.6
747.3
* Within the Group’s restructuring activities late in 2017, the historic Citizen Services business unit was amalgamated with Direct Services, meaning that
no separate financial information is available for 2018. As a result, the headroom on the impairment analysis for 2017 has been restated, increasing by
£1.2m, to reflect the value in use calculation of the Citizen Services business unit as at 31 December 2017.
Headroom under the revised approach used in 2018 is greater than that which would have existed under the 2017 approach
due to the fact that there are additional business units to which no goodwill was previously allocated which form part of the
UK & Europe group of CGUs.
The key assumptions applied in the impairment review are set out below:
UK & Europe
Americas
AsPac
Middle East
Discount
rate
2018
%
10.0
10.6
10.0
11.8
Discount
rate
2017
%
10.8
10.5
9.7
10.8
Terminal
growth
rates
2018
%
2.0
2.4
2.4
2.5
Terminal
growth
rates
2017
%
2.0
2.4
2.4
2.5
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.
192 | Serco Group plc
Annual Report and Accounts 2018
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. No impairment results from these changes being made to the
key assumptions either individually or in combination. When reviewing the cash generating units in a manner consistent with
2017, it was noted that a reduction of £6.9m in the terminal year cash flows for the Health CGU would lead to the recoverable
amount no longer exceeding the carrying value. Having reviewed the forecast cash flows associated with the group of CGUs
making up UK and Europe the required reduction in terminal year cash flows, which would result in an impairment of goodwill,
was considered an unlikely scenario.
19. Other intangible assets
Acquisition related
Customer
relationships
£m
Licences
and franchises
£m
Software
and IT
£m
Other
Internally
generated
development
expenditure
£m
Cost
At 1 January 2018
Arising on acquisition
Eliminated on disposal
Additions from internal development
Additions from external acquisition
Disposals
Reclassification from property, plant and equipment
Exchange differences
At 31 December 2018
Accumulated amortisation and impairment
At 1 January 2018
Brought forward reclassification
Arising on acquisition
Eliminated on disposal
Impairment charge
Amortisation charge – internal development
Amortisation charge – external
Disposals
Reclassification from property, plant and equipment
Exchange differences
At 31 December 2018
Net book value
At 31 December 2018
65.1
16.7
(3.9)
–
–
(27.7)
–
1.5
51.7
58.5
–
–
(3.9)
–
–
4.3
(27.7)
–
1.0
32.2
19.5
0.2
–
–
–
–
–
–
–
0.2
0.1
–
–
–
–
–
–
–
–
–
0.1
0.1
122.8
–
(7.0)
6.5
2.4
(5.0)
3.4
–
123.1
75.8
1.2
–
(7.0)
0.1
10.8
2.2
(3.0)
2.4
0.3
82.8
56.6
–
–
–
–
–
–
0.1
56.7
43.6
–
–
–
–
5.6
–
–
–
0.1
49.3
Total
£m
244.7
16.7
(10.9)
6.5
2.4
(32.7)
3.4
1.6
231.7
178.0
1.2
–
(10.9)
0.1
16.4
6.5
(30.7)
2.4
1.4
164.4
40.3
7.4
67.3
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
193
Notes to the Consolidated Financial
Statements continued
19. Other intangible assets continued
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
67.6
0.9
–
–
–
–
–
–
–
(3.4)
65.1
50.4
–
–
6.1
–
4.4
–
–
(2.4)
58.5
6.6
0.3
–
–
–
–
(0.1)
–
–
–
–
0.2
0.3
–
–
–
–
–
(0.1)
–
(0.1)
0.1
0.1
120.6
0.9
(1.2)
9.9
7.6
(13.4)
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
55.7
–
–
0.9
–
(0.1)
(0.2)
–
0.7
(0.4)
56.6
38.3
–
–
–
5.7
–
(0.1)
–
(0.3)
43.6
Total
£m
244.2
1.8
(1.2)
10.8
7.6
(13.6)
–
0.4
0.7
(6.0)
244.7
160.6
0.9
(1.1)
8.9
17.5
8.3
(13.2)
0.4
(4.3)
178.0
47.0
13.0
66.7
Included in Software and IT and other internally generated development expenditure is an amount of £3.6m (2017: £6.1m) in
respect of leased intangibles.
Customer relationships are amortised over the average length of contracts acquired. The Group is carrying £19.5m
(2017: £6.6m) 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 £4.3m (2017: £4.4m).
The net book value of internally generated intangible assets as at 31 December 2018 was approximately £7.4m (2017: £13.0m)
in development expenditure and £28.0m (2017: £34.3m) in software and IT.
194 | Serco Group plc
Annual Report and Accounts 2018
20. Property, plant and equipment
Cost
At 1 January 2018 (restated*)
Arising on acquisition
Eliminated on disposal
Additions
Reclassification to other intangible assets
Disposals
Exchange differences
At 31 December 2018
Accumulated depreciation and impairment
At 1 January 2018 (restated*)
Brought forward reclassification
Eliminated on disposal
Charge for the year – impairment
Charge for the year – depreciation
Reclassification to other intangible assets
Disposals
Exchange differences
At 31 December 2018
Net book value
At 31 December 2018
Cost
At 1 January 2017 (restated*)
Arising on acquisition
Additions*
Reclassification to other intangible assets
Disposals*
Exchange differences
At 31 December 2017
Accumulated depreciation and impairment
At 1 January 2017 (restated*)
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 (restated*)
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Freehold
land and
buildings
£m
Short-
leasehold
assets
£m
Machinery, motor
vehicles, furniture
and equipment
£m
30.3
0.1
–
6.5
–
(7.2)
0.6
30.3
23.8
–
–
–
2.6
–
(7.0)
0.1
19.5
186.4
0.1
(1.9)
23.5
(3.4)
(31.2)
0.2
173.7
133.5
0.3
(1.9)
0.7
16.7
(2.4)
(25.6)
0.1
121.4
4.6
–
–
–
–
–
–
4.6
2.7
–
–
–
0.2
–
–
–
2.9
1.7
10.8
52.3
64.8
Freehold
land and
buildings
£m
Short-
leasehold
assets
£m
Machinery, motor
vehicles, furniture
and equipment
£m
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
202.3
0.4
15.7
–
(29.8)
(2.2)
186.4
146.2
0.4
(0.1)
17.5
–
(28.9)
(1.6)
133.5
52.9
61.3
Total
£m
221.3
0.2
(1.9)
30.0
(3.4)
(38.4)
0.8
208.6
160.0
0.3
(1.9)
0.7
19.5
(2.4)
(32.6)
0.2
143.8
Total
£m
238.7
0.4
18.2
(0.4)
(32.3)
(3.3)
221.3
171.5
0.4
(0.1)
20.9
(0.4)
(29.9)
(2.4)
160.0
* Balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
The carrying amount of the Group’s Machinery, motor vehicles, furniture and equipment includes an amount of £23.4m (2017:
£23.4m) in respect of assets held under finance leases.
The carrying amount of the Group’s Short-leasehold assets includes an amount of £0.1m (2017: £0.1m) in respect of assets held
under finance leases.
Annual Report and Accounts 2018
Serco Group plc
|
195
Notes to the Consolidated Financial
Statements continued
21. Inventories
Service spares
Parts awaiting installation
Work in progress
22. Contract assets, trade and other receivables
Contract assets: Current
Accrued income and other unbilled receivables
Capitalised bid and phase in costs
2018
£m
14.9
2.7
5.3
22.9
2018
£m
222.2
22.1
244.3
2017
£m
13.0
1.9
2.5
17.4
2017
(restated*)
£m
214.5
25.1
239.6
* Balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
The Group has capitalised bid costs of £4.9m (2017: £6.2m) and phase in costs of £17.2m (2017 restated*: £18.9m) that are
realised as a part of the normal operating cycle of the Group. These assets represent up-front investment in contracts which
are recoverable and expected to provide benefits over the life of those contracts. 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 can only be capitalised when the expenditure meets all three criteria identified in note 2.
Movements in the period were as follows:
Capitalised bid and phase in costs
At 1 January
Additions
Amortisation
Reclassified to contract asset
Exchange differences
At 31 December
2018
£m
25.1
3.9
(5.5)
(1.2)
(0.2)
22.1
2017
(restated*)
£m
27.0
5.0
(6.8)
–
(0.1)
25.1
* Balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
Total trade and other receivables held by the Group at 31 December 2018 amount to £329.8m (2017: £329.7m).
Trade and other receivables: Non current
Loans receivable (note 26)
Other investments
Other receivables
2018
£m
–
9.9
20.4
30.3
2017
£m
25.7
10.0
21.6
57.3
196 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Trade and other receivables: Current
Trade receivables
Prepayments
Amounts owed by joint ventures and associates
Security deposits
Other receivables
2018
£m
227.1
51.2
0.7
0.2
20.3
299.5
2017
(restated*)
£m
188.8
48.4
0.6
0.3
34.3
272.4
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
The Group has a receivables financing facility of £30.0m (2017: £30.0m), which was un-utilised at 31 December 2018
(31 December 2017: £nil utilised).
The management of trade receivables is the responsibility of the operating segments, although they report to Group on a
monthly basis on debtor days, debtor ageing and significant outstanding debts. The average credit period taken by
customers is 29 days (2017: 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, £88.7m is due from agencies of the UK Government, the Group’s largest customer, £34.8m from the
Australian Government, £64.9m from the Government of the United Arab Emirates, and £13.4m 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 2017, £54.1m 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 2018, a total of £0.8m (2017: £1.6m) 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 £2.8m as of 31 December 2018 (2017: £3.6m). The Group does not have any impairments
associated with expected credit losses.
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
2018
£m
168.2
35.2
9.6
16.1
0.8
(2.8)
227.1
2017
£m
144.3
29.6
8.2
8.7
1.6
(3.6)
188.8
Of the total overdue trade receivable balance, 50% (2017: 38%) relates to the UK, US or Australian governments, and a further
37% (2017: 38%) 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
2018
£m
3.6
(1.0)
0.2
–
2.8
2017
£m
3.6
0.7
(0.5)
(0.2)
3.6
Included in the current other receivables balance is a further £5.6m (2017: £10.2m) due from agencies of the UK Government.
An amount of £nil (2017: £5.5m) is held within current other receivables in relation to insurance claims where it is probable that
the Group will receive future payments.
Annual Report and Accounts 2018
Serco Group plc
|
197
Notes to the Consolidated Financial
Statements continued
23. Cash and cash equivalents
Customer advance payments*
Other cash and short-term deposits
Total cash and cash equivalents
Sterling
2018
£m
–
38.7
38.7
Other
currencies
2018
£m
1.0
22.8
23.8
Total
2018
£m
1.0
61.5
62.5
Sterling
2017
£m
–
79.6
79.6
Other
currencies
2017
£m
0.2
32.3
32.5
Total
2017
£m
0.2
111.9
112.1
* Customer advance payments totalling £1.0m (2017: £0.2m) are encumbered cash balances.
Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at
bank and other short-term highly liquid investments with a maturity of three months or less.
24. Contract liabilities, trade and other payables
Contract liabilities: Current
Deferred income
Contract liabilities: Non current
Deferred income
2018
£m
74.3
2017
(restated*)
£m
64.3
86.6
83.3
* Balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
Total trade and other payables held by the Group at 31 December 2018 amount to £443.0m (2017: £437.3m).
Trade and other payables: Current
Trade payables
Other payables
Accruals
The average credit period taken for trade purchases is 30 days (2017: 33 days).
Trade and other payables: Non current
Other payables
2018
£m
67.4
89.6
262.7
419.7
2018
£m
23.3
2017
£m
78.4
71.1
259.1
408.6
2017
£m
28.7
198 | Serco Group plc
Annual Report and Accounts 2018
25. Obligations under finance leases
Amounts payable under finance leases
Within one year
Between one and five years
After five years
Less: future finance charges
Present value of lease obligations
Less: amount due for settlement within one year (shown within
current liabilities)
Amount due for settlement after one year
Minimum lease
payments
2018
£m
Present value of
minimum lease
payments
2018
£m
Minimum lease
payments
2017
£m
Present value of
minimum lease
payments
2017
£m
6.1
8.6
0.9
15.6
(0.8)
14.8
(5.7)
9.1
5.7
8.2
0.9
14.8
–
14.8
(5.7)
9.1
9.1
11.0
1.4
21.5
(1.3)
20.2
(8.5)
11.7
Finance lease obligations are secured by the lessors’ title to the leased assets.
The Directors estimate that the fair value of the Group’s lease obligations approximates their carrying amount.
26. 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 22)
Amount due for settlement after one year
Total
2018
£m
21.9
6.4
159.5
51.7
239.5
(21.9)
–
217.6
Other loans
Loan receivables
Carrying amount
2018
£m
Fair value
2018
£m
Carrying amount
2017
£m
239.5
–
239.5
229.9
–
229.9
271.5
(25.7)
245.8
The fair values are based on cash flows discounted using a market rate appropriate to the loan. All loans are held at
amortised cost.
8.5
10.4
1.3
20.2
–
20.2
(8.5)
11.7
Total
2017
£m
31.8
19.7
105.0
89.3
245.8
(31.8)
25.7
239.7
Fair value
2017
£m
263.1
(25.7)
237.4
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
199
Notes to the Consolidated Financial
Statements continued
26. Loans continued
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
Net Debt
Loans payable
Obligations under finance leases
Liabilities arising from financing
activities
Cash and cash equivalents
Loan receivables
Derivatives relating to Net Debt
Net Debt
At 1 January
2018
£m
(271.5)
(20.2)
(291.7)
112.1
25.7
12.8
(141.1)
At 1 January
2017
£m
(299.9)
(28.2)
(328.1)
177.8
22.9
18.1
(109.3)
Cash
flow
£m
33.3
8.7
42.0
(50.4)
(37.4)
–
(45.8)
Cash
flow
£m
3.8
12.6
16.4
(57.3)
(0.6)
–
(41.5)
* Acquisitions represent the net cash/(debt) acquired on acquisition.
27. Provisions
Acquisitions*
£m
Disposals
£m
Exchange
differences
£m
Non cash
movements
£m
At 31
December
2018
£m
11.6
(3.4)
(239.5)
(14.8)
–
–
–
1.2
–
–
1.2
–
–
–
–
–
–
–
(12.9)
0.1
(12.8)
(0.4)
–
(9.0)
(22.2)
8.2
–
11.7
–
19.9
Acquisitions*
£m
Disposals
£m
Exchange
differences
£m
Non cash
movements
£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)
(5.5)
–
3.4
–
(2.1)
At 1 January 2018 (restated*)
Brought forward reclassification
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
Reclassification
Unwinding of discount
Exchange differences
At 31 December 2018
Analysed as:
Current
Non current
Employee
related
£m
Property
£m
Contract
£m
55.7
–
–
–
2.8
14.3
(4.7)
(0.7)
(7.9)
–
–
–
59.5
19.9
39.6
59.5
13.6
–
–
–
1.8
2.1
–
(2.1)
(2.9)
–
–
(0.1)
12.4
4.3
8.1
12.4
148.1
(1.5)
–
–
–
3.4
–
(16.2)
(51.8)
–
0.5
(0.4)
82.1
54.6
27.5
82.1
Other
£m
102.9
–
0.7
–
2.8
3.3
(0.9)
(12.0)
(13.2)
0.5
–
1.3
85.4
41.3
44.1
85.4
(254.3)
62.5
–
3.8
(188.0)
At 31
December
2017
£m
(271.5)
(20.2)
(291.7)
112.1
25.7
12.8
(141.1)
Total
£m
320.3
(1.5)
0.7
–
7.4
23.1
(5.6)
(31.0)
(75.8)
0.5
0.5
0.8
239.4
120.1
119.3
239.4
* Balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
200 | Serco Group plc
Annual Report and Accounts 2018
Contract provisions relate to onerous contracts which will be utilised over the life of each individual contract. 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 2018, additional charges have been made
in respect of future losses on a number of onerous contracts totalling £3.4m. This increase related to revisions to existing
OCPs of £82.1m at 31 December 2018. No new OCPs were created during the year.
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. The timing of utilisation is dependant on future events which could occur within the next
twelve months over a longer period with the majority expected to be settled by 31 December 2021.
28. Capital and other commitments
Capital expenditure contracted but not provided
Property, plant and equipment
Intangible assets
2018
£m
0.8
0.9
2017
£m
0.9
0.2
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:
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Within one year
Between one and five years
After five years
2018
£m
73.2
95.1
22.1
190.4
2017
(restated*)
£m
63.1
122.0
33.6
218.7
* Subsequent to issuing the annual report and accounts for the year ended 31 December 2017, a decision was made following a review of the terms and
conditions associated with the commitments of the Group’s contracts, to reclassify certain costs from operating lease charges to service costs and to
remove costs beyond the expected termination date. There was no impact on classification in the income statement, however the reclassification
meant that future costs relating to the service were no longer classified as operating lease commitments.
Annual Report and Accounts 2018
Serco Group plc
|
201
Notes to the Consolidated Financial
Statements continued
29. 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 (2017: £4.3m). The actual commitment outstanding at 31 December 2018 was £4.3m (2017: £4.3m).
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 2018 was £225.3m (2017: £227.1m).
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 and timing.
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 also aware of other claims and potential claims which involve or may involve legal proceedings against the Group
although the timing of settlement of these claims remains uncertain. 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.
30. Financial risk management
30 (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 2018 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.
202 | Serco Group plc
Annual Report and Accounts 2018
The Group held the following financial instruments which fall within the scope of IFRS9 Financial Instruments at 31 December:
Carrying amount
(measurement basis)
Comparison
fair value
Carrying amount
(measurement basis)
Comparison
fair value
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 22)
Security deposits (note 22)
Amounts owed by joint ventures and associates
(note 22)
Financial assets – non current
Derivative instruments in designated hedge
accounting relationships
Cross currency swaps
Forward foreign exchange contracts
Loans and receivables
Loan receivables (note 22)
Other investments (note 22)
Financial liabilities – current
Derivatives designated as FVTPL
Forward foreign exchange contracts
Financial liabilities at amortised cost
Trade payables (note 24)
Loans (note 26)
Obligations under finance leases (note 25)
Financial liabilities – non current
Derivative instruments in designated hedge
accounting relationships
Forward foreign exchange contracts
Financial liabilities at amortised cost
Loans (note 26)
Obligations under finance leases (note 25)
Amortised
cost
2018
£m
Fair value
– Level 2
2018
£m
Level 2
2018
£m
Amortised
cost
2017
£m
Fair value
– Level 2
2017
£m
62.5
–
62.5
112.1
–
–
–
227.1
0.2
0.7
–
–
–
9.9
2.4
5.1
0.2
–
–
–
–
0.1
–
–
–
–
–
–
–
–
227.1
0.2
188.8
0.3
0.7
0.6
–
–
–
9.9
–
–
25.7
10.0
–
4.5
5.7
0.1
–
–
–
3.6
0.1
–
–
Level 2
2017
£m
112.1
–
–
–
188.8
0.3
0.6
–
–
25.7
10.0
–
(3.7)
–
–
(1.1)
–
(67.4)
(21.9)
(5.7)
–
(217.6)
(9.1)
–
–
–
–
–
–
(67.4)
(21.6)
(5.7)
(78.4)
(31.8)
(8.5)
–
–
–
(78.4)
(31.8)
(8.5)
–
–
(0.1)
–
(208.3)
(9.1)
(239.7)
(11.7)
–
–
(231.3)
(11.7)
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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
203
Notes to the Consolidated Financial
Statements continued
30. Financial risk management continued
ii) Fair value of derivative financial instruments
The fair valuation of derivative financial instruments results in a net asset of £4.1m (2017: net assets of £12.8m) comprising non
current assets of £0.1m (2017: £3.7m), current assets of £7.7m (2017: £10.3m), current liabilities of £3.7m (2017: £1.1m) and non
current liabilities of £nil (2017: £0.1m).
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
(4.2)
(4.5)
(8.7)
–
–
–
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)
1 January 2018
£m
9.3
3.5
12.8
1 January 2017
£m
14.2
4.3
18.5
31 December
2018
£m
5.1
(1.0)
4.1
31 December
2017
£m
9.3
3.5
12.8
The fair value of financial liabilities at fair value through profit and loss is £3.7m (2017: £1.1m) 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.
30 (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.
204 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
30 (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
2018
£m
250.0
Amount
2017
£m
480.0
Drawn
2018
£m
–
Drawn
2017
£m
–
Utilised for
bonding facility
2018
£m
–
Utilised for
bonding
facility
2017
£m
–
Total facility
available
2018
£m
250.0
Total facility
available
2017
£m
480.0
On 3 December 2018 the Group entered into a new £250m revolving credit facility with a maturity date of December 2023.
In addition to the banking facility, the Group has outstanding US private placements of £242.2m (2017: £260.7m) which will be
repaid as bullet repayments between 2019 and 2024.
In addition to the bank and private placement facilities the Group has a £30.0m receivables financing facility (2017: £30.0m) of
which £nil (2017: £nil) 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 2018
Trade payables (note 24)
Obligations under finance leases (note 25)
Loans* (note 26)
Future loan interest
Derivatives settled on gross basis:
Outflow
Inflow
*
Loans are stated gross of capitalised finance costs.
At 31 December 2017
Trade payables (note 24)
Obligations under finance leases (note 25)
Loans* (note 26)
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
67.4
5.7
21.9
12.6
467.5
(471.8)
103.3
–
2.9
6.4
11.6
–
–
–
5.3
162.1
20.5
–
–
–
0.9
51.8
1.3
–
–
20.9
187.9
54.0
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
67.4
14.8
242.2
46.0
467.5
(471.8)
366.1
Total
£m
78.4
20.2
272.9
56.5
919.9
(933.1)
414.8
Gross cash flows in the table above relating to forward foreign exchange contracts total £448.6m (inflow) and £449.8m
(outflow) on demand or within one year and £nil (inflow) and £nil (outflow) between one and two years (2017: £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).
Annual Report and Accounts 2018
Serco Group plc
|
205
Notes to the Consolidated Financial
Statements continued
30. Financial risk management continued
30 (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 2018, 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. Details of the Group’s accounting policies in relation to derivatives qualifying for hedge
accounting under IFRS9 can be seen in note 2.
At 31 December 2018, the Group held cross currency swaps designated as cash flow hedges against $28.5m 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
October 2019
2018 Receivable
2017 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
%
28.5
3.8
4.1
28.5
3.8
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
Indian Rupee
2018
£m
(8.8)
1.7
7.7
2017
£m
(9.4)
0.6
9.2
All derivatives designated as cash flow hedges are highly effective and as at 31 December 2018 a net fair value loss of £0.1m
(2017: £0.7m) has been deferred in the hedging reserve. During the course of the year to 31 December 2018, £0.6m
(2017: £0.1m) of fair value gains were transferred to the hedging reserve and £0.1m (2017: £0.2m) 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 2018 was
£194.3m (2017: £151.8m).
206 | Serco Group plc
Annual Report and Accounts 2018
iv) Currency sensitivity
The Group’s currency exposures in respect of monetary items at 31 December 2018 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)
2018
£m
–
0.1
–
0.1
Equity gain/
(loss)
2018
£m
Pre-tax profits
gain/(loss)
2017
£m
Equity gain/
(loss)
2017
£m
(0.1)
–
(0.8)
(0.9)
–
–
–
–
(0.1)
–
(1.0)
(1.1)
30 (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
Floating rate
2018
£m
Fixed rate
2018
£m
62.5
–
–
–
Financial liabilities
US Dollar loans
Other loans
Floating rate
2018
£m
–
–
Fixed rate
2018
£m
242.2
–
242.2
Weighted
average
interest rate
Floating rate
2018
%
–
–
Weighted
average
interest rate
2018
%
5.2
–
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
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 £14.8m (2017: £20.2m) 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 a decrease in pre-tax profit for the year to 31 December 2018 of £0.2m
(2017: increase of £1.0m).
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
207
Notes to the Consolidated Financial
Statements continued
30. Financial risk management continued
30 (f) Credit risk
The Group’s principal financial assets are cash and cash equivalents, contract assets 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 contract asset and 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 has not recorded any impairments related to contract assets or trade and other receivables relating to credit risk
during the year ended 31 December 2018 (2017: none).
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 2018, the Company has issued guarantees in respect of certain joint ventures and
associates as per note 29.
30 (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
2018
£m
(62.5)
242.2
14.8
386.8
581.3
2017
(restated*)
£m
(112.1)
272.9
20.2
265.3
446.3
* Balances for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
208 | Serco Group plc
Annual Report and Accounts 2018
31. Retirement benefit schemes
31 (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 2019 are £4.9m (2018: £7.1m).
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 2018 the estimated actuarial deficit of SPLAS was £27.8m
(2017: £33.7m) based on the actuarial assessment on the funding basis whereas the accounting valuation resulted in an asset of
£85.8m. 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 2017, with employer contributions of 29.3% of pensionable salaries to
be made up to 31 October 2018, dropping to 28.3% from 1 November 2018 to 31 December 2022. Additional shortfall
contributions made up of four payments of £0.5m payable at the end of each April through to 2022 were also agreed. In
addition to this agreement a decision was reached between the Group and the SPLAS trustees to make a one-off shortfall
contribution of £4.0m during the year, with this payment being made in December 2018. It is anticipated that a revised
Schedule of Contributions will be signed before 5 July 2019 following the finalisation of the 2018 SPLAS actuarial valuation.
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 schemes 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, 47% of the scheme’s assets are annuity policies, 46% are Liability Driven
Investments (LDIs) and the remainder is split between equities, bonds and cash or cash equivalents. 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 scheme’s
liabilities. The value of these investments vary in line with gilt yields, which have increased from 2.53% p.a. to 2.86% p.a.
during 2018 resulting in a decrease in the value of these assets. SPLAS previously identified an investment strategy
consisting of Multi-Asset Absolute Return (MAAR), Buy and Maintain credit (B&M) and LDI. 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.
•
Interest risk. The present value of the defined benefit schemes’ liabilities are 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
schemes’ liabilities. This will be partially offset by an increase in the return of the schemes’ debt investments.
• Longevity risk. The present value of the defined benefit schemes’ liabilities are calculated by reference to the best estimate
of the mortality of the schemes’ participants both during and after their employment. An increase in the life expectancy of
the schemes’ participants will increase the schemes’ liabilities.
• Salary risk. The present value of the defined benefit schemes’ liabilities are calculated by reference to the future salaries of
the schemes’ participants, as such, an increase in the salary of the schemes’ participants will increase the schemes’
liabilities.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
209
Notes to the Consolidated Financial
Statements continued
31. Retirement benefit schemes continued
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 the 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 (2017: £0.4m). 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.
ii) Events in the year
During the year, the Group made two one-off contributions into the SPLAS scheme. In April 2018 a payment of £1.2m was
made and this was followed by a payment for £4.0m in December 2018.
Also during the year, following a ruling in the High Court, the Group has recognised a past service cost for the impact of
Guaranteed Minimum Pension equalisation. The total amount recognised by the Group is £9.6m and this has been treated as
an exceptional item in the 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 gain recognised
Administrative expenses and taxes
Recognised in arriving at operating profit after exceptionals
Interest income on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Finance income
Contract
specific
2018
£m
Non contract
specific
2018
£m
1.1
–
–
–
1.1
(0.4)
(0.1)
0.4
(0.1)
4.6
9.3
–
3.9
17.8
(33.3)
–
32.6
(0.7)
Total
2018
£m
5.7
9.3
–
3.9
18.9
(33.7)
(0.1)
33.0
(0.8)
210 | Serco Group plc
Annual Report and Accounts 2018
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 profit/(loss) 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
2018
£m
Non contract
specific
2018
£m
(0.5)
(0.4)
(0.9)
–
1.7
–
0.8
–
(0.3)
(0.3)
0.5
40.7
(33.4)
7.3
–
74.0
(30.0)
51.3
–
0.1
0.1
51.4
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)
Contract
specific
2017
£m
Non contract
specific
2017
£m
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Total
2018
£m
40.2
(33.8)
6.4
–
75.7
(30.0)
52.1
–
(0.2)
(0.2)
51.9
Total
2017
£m
8.6
0.3
(2.0)
5.3
12.2
(41.8)
(0.1)
38.1
(3.8)
Total
2017
£m
(39.7)
(41.8)
(81.5)
1.0
(31.6)
5.6
11.0
(0.4)
10.6
–
(10.3)
0.8
1.1
(0.2)
(0.4)
(0.6)
0.5
(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)
Annual Report and Accounts 2018
Serco Group plc
|
211
Notes to the Consolidated Financial
Statements continued
31. Retirement 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
Property
Cash and other
Private debt mandates
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)
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
2018
£m
Non contract
specific
2018
£m
9.7
3.8
–
1.2
2.9
–
–
39.9
93.4
580.7
–
8.7
11.4
600.2
Total
2018
£m
49.6
97.2
580.7
1.2
11.6
11.4
600.2
17.6
(23.8)
1,334.3
(1,263.2)
1,351.9
(1,287.0)
64.9
3.7
2.3
70.9
(14.9)
85.8
70.9
(9.9)
61.0
Total
2017
£m
56.2
23.7
709.8
0.2
1.6
6.0
587.5
(6.2)
3.7
2.3
(0.2)
(0.2)
–
(0.2)
–
(0.2)
71.1
–
–
71.1
(14.7)
85.8
71.1
(9.9)
61.2
Contract
specific
2017
£m
Non contract
specific
2017
£m
46.3
20.8
709.8
–
–
3.2
587.5
9.9
2.9
–
0.2
1.6
2.8
–
17.4
(23.4)
(6.0)
3.6
2.4
–
–
–
–
–
–
1,367.6
(1,341.3)
1,385.0
(1,364.7)
26.3
–
–
26.3
(15.5)
41.8
26.3
(2.5)
23.8
20.3
3.6
2.4
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.
* 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. Pension assets are deemed to be recoverable and there are no adjustments in
respect of minimum funding requirements as economic benefits are available to the Group either in the form of future refunds
or, for plans still open to benefit accrual, in the form of possible reductions in future contributions.
212 | Serco Group plc
Annual Report and Accounts 2018
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, private debt mandates and property assets can be classified as Level 3 instruments, and LDIs are classified as Level 2.
Changes in the fair value of scheme liabilities
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 1 January 2018
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 financial assumptions
Effect of experience adjustments
At 31 December 2018
Changes in the fair value of scheme assets
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 1 January 2018
Interest income on scheme assets – employer
Interest income on scheme assets – employee
Administrative expenses and taxes
Employer contributions
Contributions by employees
Benefits paid
Return on scheme assets less interest income
At 31 December 2018
Contract
specific
£m
Non contract
specific
£m
12.0
1.0
0.4
–
0.1
0.5
0.1
(0.2)
–
10.3
(0.8)
–
–
23.4
1.1
0.5
–
0.1
0.4
0.1
(0.1)
(1.7)
–
23.8
1,418.0
7.6
–
0.3
0.5
37.6
–
(77.6)
(1.0)
21.3
(4.8)
(2.0)
(58.6)
1,341.3
4.6
–
9.3
0.2
32.6
–
(80.7)
(74.0)
30.0
1,263.3
Contract
specific
£m
Non contract
specific
£m
5.8
0.4
0.1
–
0.5
0.2
(0.2)
10.6
–
17.4
0.4
0.1
–
0.5
0.2
(0.1)
(0.9)
17.6
1,550.7
41.4
–
(5.3)
8.7
0.4
(77.6)
(92.1)
(58.6)
1,367.6
33.3
–
(3.8)
10.2
0.3
(80.7)
7.4
1,334.3
Total
£m
1,430.0
8.6
0.4
0.3
0.6
38.1
0.1
(77.8)
(1.0)
31.6
(5.6)
(2.0)
(58.6)
1,364.7
5.7
0.5
9.3
0.3
33.0
0.1
(80.8)
(75.7)
30.0
1,287.1
Total
£m
1,556.5
41.8
0.1
(5.3)
9.2
0.6
(77.8)
(81.5)
(58.6)
1,385.0
33.7
0.1
(3.8)
10.7
0.5
(80.8)
6.5
1,351.9
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
213
Notes to the Consolidated Financial
Statements continued
31. Retirement benefit schemes continued
Changes in the franchise adjustment
At 1 January 2017
Interest on franchise adjustment
Taken to SOCI
At 1 January 2018
Interest on franchise adjustment
At 31 December 2018
Total
£m
3.7
0.1
(0.2)
3.6
0.1
3.7
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 16.1 years (2017: 17.9 years).
Main assumptions
Rate of salary increases
Rate of increase in pensions in payment
Rate of increase in deferred pensions
Inflation assumption
Discount rate
Post retirement mortality
Current pensioners at 65 – male
Current pensioners at 65 – female
Future pensioners at 65 – male
Future pensioners at 65 – female
2018
%
2017
%
2.80
2.20 (CPI) and 3.00 (RPI)
2.30 (CPI) and 3.30 (RPI)
2.30 (CPI) and 3.30 (RPI)
2.90
2.70
2.30 (CPI) and 3.00 (RPI)
2.30 (CPI) and 3.00 (RPI)
2.20 (CPI) and 3.20 (RPI)
2.50
2018
years
22.6
25.1
24.4
27.0
2017
years
22.5
25.1
24.3
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 2018 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 2018 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.
(Increase)/decrease in 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
2018
£m
(102.8)
112.2
66.9
(64.7)
2.4
(2.3)
39.9
2017
£m
(107.9)
122.0
83.4
(78.0)
3.6
(3.5)
41.6
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.
214 | Serco Group plc
Annual Report and Accounts 2018
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 2018 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%
(2017: 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.
31 (b) Defined contribution schemes
The Group paid employer contributions of £73.6m (2017: £75.0m) 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.
32. Share capital
Issued and fully paid
1,098,564,237 (2017: 1,098,564,237) ordinary shares of 2p each at 1 January
Issued on the exercise of share options
1,098,564,237 (2017: 1,098,564,237) ordinary shares of 2p each at
31 December
The Company has one class of ordinary shares which carry no right to fixed income.
33. Share premium account
At 1 January and 31 December
2018
£m
22.0
–
Number
2018
millions
1,098.6
–
2017
£m
22.0
–
Number
2017
millions
1,098.6
–
22.0
1,098.6
22.0
1,098.6
2018
£m
327.9
2017
£m
327.9
34. Reserves
34 (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.
34 (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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
215
Notes to the Consolidated Financial
Statements continued
34. Reserves continued
34 (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
2018, the ESOT held 3,527,740 (2017: 8,728,497) shares equal to 0.3% of the current allotted share capital (2017: 0.8%).
The market value of shares held by the ESOT as at 31 December 2018 was £ 3.4m (2017: £8.6m).
34 (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 2017
Total comprehensive income for the year
At 1 January 2018
Total comprehensive income for the year
At 31 December 2018
Hedging
reserve
£m
Translation
reserve
£m
(0.5)
(0.2)
(0.7)
0.6
(0.1)
25.1
(14.3)
10.8
(5.3)
5.5
35. Share based payment expense
The Group recognised the following expenses related to equity-settled share based payment transactions:
Performance Share Plan
Deferred Bonus Plan
2018
£m
13.1
1.6
14.7
Total
£m
24.6
(14.5)
10.1
(4.7)
5.4
2017
£m
9.9
1.5
11.4
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
2018
thousands
Weighted
average exercise
price
2018
£
Number of
options
2017
thousands
Weighted
average
exercise price
2017
£
93
(38)
55
4.16
(0.28)
3.88
93
–
93
4.16
–
4.16
Of these options, 54,545 (2017: 92,540) were exercisable at the end of the year, with a weighted average exercise price of £3.88
(2017: £4.16).
The options outstanding at 31 December 2018 had a weighted average contractual life of 0.37 years (2017: 0.87 years).
The exercise price for options outstanding at 31 December 2018 was £3.88 (2017: ranged from £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 £0.95 (2017: £1.17).
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.
216 | Serco Group plc
Annual Report and Accounts 2018
Performance Share Plan (PSP)
Under the PSP, eligible employees have been granted options with an exercise price of zero or two pence. Awards vest after
the performance period of three to five years and are subject to the achievement of certain performance measures, with the
exception of non-performance awards. 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 performance measures are Earnings per Share (EPS), Total Shareholder Return (TSR)
and Return on Invested Capital (ROIC). Additional measures related to Strategic Objectives were introduced for new grants
in 2018.
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
2018
thousands
41,001
15,213
(4,445)
(8,218)
43,551
Weighted
average
exercise price
2018
£
0.02
0.02
0.02
0.02
0.02
Number of
options
2017
thousands
34,485
15,936
(1,123)
(8,297)
41,001
Weighted
average
exercise price
2017
£
0.02
0.02
0.02
0.02
0.02
Of these options, 3,829,638 (2017: 1,040,066) were exercisable at the end of the year. The options outstanding at 31 December
2018 had a weighted average contractual life of 7.4 years (2017: 7.7 years).
In the year, fifteen grants were made, of which eight were non-performance conditional share awards and three non-
performance nominal share awards. The remaining four performance based awards are with 85% of the award split equally
between Earnings per Share (EPS), Total Shareholder Return (TSR) and Return on Invested Capital (ROIC) performance
conditions and the remaining 15% based on Strategic Objectives based on improvements in order book and employee
engagement. The options subject to market-based performance conditions (such as the TSR condition for these awards), were
valued using the Monte Carlo Simulation model. For 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:
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
2018
£0.97
0.02
34.6%
3
0.79%
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 £0.87 (2017: £0.99).
Annual Report and Accounts 2018
Serco Group plc
|
217
Notes to the Consolidated Financial
Statements continued
35. Share based payment expense continued
Deferred Bonus Plan (DBP)
Under the DBP, eligible employees are entitled to use up to 50% of their earned annual bonus to purchase shares in the Group
at market price. Provided they remain in employment for this period, the shares are retained for that period and the
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
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options
2018
thousands
4,894
956
(755)
(74)
5,021
Weighted
average
exercise price
2018
£
Number of
options
2017
thousands
Weighted
average
exercise price
2017
£
Nil
Nil
Nil
Nil
Nil
2,945
2,549
–
(600)
4,894
Nil
Nil
Nil
Nil
Nil
None of these options were exercisable at the end of the year (2017: none). The options outstanding at 31 December 2018 had
a weighted average contractual life of 1.2 years (2017: 1.6 years).
There were 955,582 new options granted under the Deferred Bonus Plan in the year, with 100% of the deferred bonus subject
to the same EPS performance conditions as the PSP.
The portion subject to EPS performance conditions was deemed to have a fair value equal to their face value less the present
value of any dividend payments not received over the vesting period.
Expected volatility was determined by calculating the historical volatility of the Group’s share price over the previous three
years. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of
non-transferability, exercise restrictions and behavioural considerations.
The assumptions for options granted during the year with EPS performance conditions are:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
The weighted average fair value of options granted under this scheme in the year is £0.99 (2017: £1.20).
2018
£0.99
Nil
34.3%
3 years
1.01%
218 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
36. 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
2018
£m
Current
outstanding at
31 December
2018
£m
Non current
outstanding at
31 December
2018
£m
0.4
7.3
9.7
20.0
4.8
42.2
0.1
0.6
–
–
5.3
6.0
–
–
–
–
–
–
Joint venture receivable and loan amounts outstanding have arisen from transactions undertaken during the general course of
trading, are unsecured, and will be settled in cash. Interest arising on loans is based on LIBOR, or its equivalent, with an
appropriate margin. No guarantee has been given or received. The only loan amounts owed by joint ventures or associates
related to a single entity which have been provided for in full (see note 6).
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
–
–
–
–
–
–
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
2018
£m
9.5
5.3
14.8
2017
£m
12.5
6.2
18.7
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive
Committee (2018: 17 individuals, 2017: 23 individuals).
Annual Report and Accounts 2018
Serco Group plc
|
219
Notes to the Consolidated Financial
Statements continued
36. Related party transactions continued
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
2018
£m
4.0
3.1
1.8
8.9
2017
£m
5.5
6.3
0.1
11.9
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 116 to 131.
220 | Serco Group plc
Annual Report and Accounts 2018
37. Notes to the consolidated cash flow statement
Year ended 31 December
Operating profit for the year
Adjustments for:
Share of profits in joint ventures and associates
Share based payment expense
Exceptional impairment of intangible assets
Impairment of property, plant and equipment
Impairment of intangible assets
Depreciation of property, plant and equipment
Amortisation of intangible assets
Exceptional loss/(profit) on disposal of subsidiaries
and operations
Reversal of impairment on loan balances
Loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Exceptional Interest in JV
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
(Increase)/decrease in inventories
(Increase)/decrease in receivables
Decrease/(increase) in payables
Movements in working capital
Cash generated by operations
Tax paid
Non cash R&D expenditure
Net cash inflow/(outflow) from operating activities
2018
Before
exceptional
items
£m
2018
Exceptional
items
£m
112.4
(31.9)
(28.8)
14.7
–
0.7
0.1
19.5
22.9
–
–
0.5
1.5
–
–
(68.1)
(0.2)
(37.2)
75.2
(5.0)
(22.9)
6.3
(21.6)
53.6
(10.6)
(0.1)
42.9
–
–
–
–
–
–
–
0.5
(13.9)
–
–
0.3
–
(13.8)
–
(26.9)
(58.8)
–
0.4
18.2
18.6
(40.2)
–
–
(40.2)
2017
(restated*)
Before
exceptional
items
£m
2017
Exceptional
items
£m
2017
(restated*)
Total
£m
40.7
(19.6)
21.1
(27.0)
11.4
–
(0.1)
–
20.9
25.8
–
–
0.3
0.3
–
(0.7)
(33.6)
0.1
(2.6)
38.1
3.7
8.5
(26.5)
(14.3)
23.8
(11.4)
(0.2)
12.2
–
–
8.9
–
–
–
–
(0.3)
–
–
–
–
–
(9.6)
–
(1.0)
(20.6)
–
4.5
(16.4)
(11.9)
(32.5)
–
–
(32.5)
(27.0)
11.4
8.9
(0.1)
–
20.9
25.8
(0.3)
–
0.3
0.3
–
(0.7)
(43.2)
0.1
(3.6)
17.5
3.7
13.0
(42.9)
(26.2)
(8.7)
(11.4)
(0.2)
(20.3)
2018
Total
£m
80.5
(28.8)
14.7
–
0.7
0.1
19.5
22.9
0.5
(13.9)
0.5
1.5
0.3
–
(81.9)
(0.2)
(64.1)
16.4
(5.0)
(22.5)
24.5
(3.0)
13.4
(10.6)
(0.1)
2.7
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
Additions to property, plant and equipment during the year amounting to £3.6m (2017: £4.7m) were financed by new
finance leases.
38. Post balance sheet events
On 7 January 2019, the Group signed a contract with the UK Home Office Visas and Immigration department to run
two regions of the new Asylum Accommodation and Support Services Contract (AASC). The Group continues to work through
the anticipated financial impact that AASC will have on its results and financial position for 2019 and future years, particularly
in relation to the lease of accommodation used to service the contract.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
221
Company Balance Sheet
At 31 December
Fixed assets
Investments in subsidiaries
Current assets
Debtors: amounts due within one year
Debtors: amounts due after more than one year
Derivative financial instruments due within one year
Derivative financial instruments due after more than one year
Cash at bank and in hand
Total assets
Creditors: amounts falling due within one year
Trade and other payables
Borrowings
Provisions
Corporation tax liability
Derivative financial instruments
Net current assets
Creditors: amounts falling due after more than one year
Borrowings
Amounts owed to subsidiary companies
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
2018
£m
2017
(restated*)
£m
40
41
41
45
45
42
43
44
45
43
44
47
48
49
50
52
2,021.7
2,010.5
3.2
381.0
–
7.5
36.5
428.2
3.4
291.2
10.1
3.6
138.2
446.5
2,449.9
2,457.0
(60.6)
(21.9)
(2.8)
(0.1)
(3.7)
(89.1)
339.1
(217.6)
(1,130.3)
(41.1)
(1,389.0)
(1,478.1)
971.8
22.0
327.9
0.1
580.0
60.7
(18.7)
(0.2)
971.8
(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
617.6
74.0
(46.1)
(0.6)
994.9
* Balances as at 31 December 2017 have been restated to reclassify net exchange gain/(loss) on translation of loans in respect of foreign operations
from the hedging reserve to the profit and loss account. This adjustment has no impact on the net assets of the Company and the impact on net loss
is a reduction of £6.7m.
The financial statements (registered number 02048608) were approved by the Board of Directors on 20 February 2019 and
signed on its behalf by:
Rupert Soames
Angus Cockburn
Group Chief Executive Officer
Group Chief Financial Officer
222 | Serco Group plc
Annual Report and Accounts 2018
Company Statement of Changes in Equity
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
At 1 January 2017
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
At 1 January 2018
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
premium
account
£m
Capital
redemption
reserve
£m
Profit and
loss account
(restated*)
£m
Share based
payment
reserve
£m
Own shares
reserve
£m
Hedging and
translation
reserve
(restated*)
£m
Total
shareholders’
equity
£m
327.9
0.1
620.6
68.5
(52.1)
(0.7)
986.3
–
–
–
–
–
–
–
–
(3.0)
–
–
0.1
(2.9)
–
–
–
(6.0)
6.0
9.2
2.3
–
–
–
–
–
–
9.2
2.3
Share
capital
£m
22.0
–
–
–
–
22.0
327.9
0.1
617.6
74.0
(46.1)
(0.6)
994.9
(37.6)
–
–
0.4
(37.2)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(28.0)
27.4
11.2
3.5
60.7
–
–
–
–
–
(0.6)
11.2
3.5
At 31 December 2018
22.0
327.9
0.1
580.0
(18.7)
(0.2)
971.8
* Balances as at 31 December 2017 and 1 January 2017 have been restated to reclassify net gain/(loss) on translation of loans in respect of foreign
operations from the hedging reserve to the profit and loss account. This adjustment has no impact on the net assets of the Company and the impact
on net loss is a reduction of £6.7m.
Annual Report and Accounts 2018
Serco Group plc
|
223
Notes to the Company Financial Statements
39. 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 £37.6m (2017 restated: £3.0m), and loss in total comprehensive income for the year was a loss of £37.2m
(2017: loss of £2.9m).
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.
40. Investments held as fixed assets
Shares in subsidiary companies at cost
At 1 January 2017
Options over parent’s shares awarded to employees of subsidiaries
At 1 January 2018
Options over parent’s shares awarded to employees of subsidiaries
At 31 December 2018
The Company directly owns 100% of the ordinary share capital of the following subsidiaries:
Name
Serco Holdings Limited
41. Debtors
Amounts due within one year
Other debtors
Amounts due after more than one year
Amounts owed by subsidiary companies
42. Trade and other payables
Amounts owed to subsidiary companies
Trade creditors
Accruals and deferred income
Other creditors including taxation and social security
£m
2,001.3
9.2
2,010.5
11.2
2,021.7
% ownership
100%
2017
£m
3.4
3.4
2017
£m
291.2
2017
£m
35.6
0.1
12.9
2.3
50.9
2018
£m
3.2
3.2
2018
£m
381.0
2018
£m
42.5
1.6
13.7
2.8
60.6
224 | Serco Group plc
Annual Report and Accounts 2018
43. 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
44. Provisions
At 1 January 2018
Released to income statement
At 31 December 2018
Analysed as:
Current
Non-current
2018
£m
239.5
(21.9)
217.6
21.9
6.4
159.5
51.7
239.5
Other
£m
44.2
(0.3)
43.9
2.8
41.1
43.9
2017
£m
259.4
(31.8)
227.6
31.8
19.7
118.6
89.3
259.4
Total
£m
44.6
(0.7)
43.9
2.8
41.1
43.9
Employee
related
£m
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.
45. Derivative financial instruments
Currency swaps
Forward foreign exchange contracts
Analysed as:
Non current
Current
Assets
2018
£m
Liabilities
2018
£m
5.1
2.4
7.5
–
7.5
7.5
–
(3.7)
(3.7)
–
(3.7)
(3.7)
Assets
2017
£m
9.3
4.4
13.7
3.6
10.1
13.7
Liabilities
2017
£m
–
(1.0)
(1.0)
–
(1.0)
(1.0)
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 30 of the Group’s consolidated financial statements.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
225
Notes to the Company Financial
Statements continued
46. 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
47. Called up share capital
Issued and fully paid
1,098,564,237 ordinary shares of 2p each at 1 January and
31 December
2018
£m
0.3
0.8
29.5
30.6
2017
£m
2017
£m
0.3
2.2
26.1
28.6
Number
2017
millions
2018
£m
Number
2018
millions
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.
48. Share premium account
At 1 January and 31 December
49. Profit and loss account
At 1 January
Loss for the year
At 31 December
2018
£m
327.9
2018
£m
617.6
(37.6)
580.0
2017
(restated*)
£m
327.9
2017
(restated*)
£m
620.6
(3.0)
617.6
* Balances as at 31 December 2017 have been restated to reclassify net exchange gain/(loss) on translation of loans in respect of foreign operations
from the hedging reserve to the profit and loss account. This adjustment has no impact on the net assets of the Company and the impact on net loss
is a reduction of £6.7m.
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 £37.6m (2017: £3.0m), and loss in total comprehensive income for the year was
a loss of £37.2m (2017: loss of £2.9m).
50. 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
2018
£m
74.0
11.2
3.5
(28.0)
60.7
2017
£m
68.5
9.2
2.3
(6.0)
74.0
Details of the share based payment disclosures are set out in note 35 of the Group’s consolidated financial statements.
226 | Serco Group plc
Annual Report and Accounts 2018
51. 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 2018,
the ESOT held 3,527,740 (2017: 8,728,497) shares equal to 0.3% of the current allotted share capital (2017: 0.8%). The market value
of shares held by the ESOT as at 31 December 2018 was £3.4m (2017: £8.6m).
52. Hedging and translation reserve
At 1 January
Fair value gain on cash flow hedges during the period
At 31 December
2018
£m
(0.6)
0.4
(0.2)
2017
(restated*)
£m
(0.7)
0.1
(0.6)
* Balances as at 31 December 2017 have been restated to reclassify net exchange gain/(loss) on translation of loans in respect of foreign operations
from the hedging reserve to the profit and loss account. This adjustment has no impact on the net assets of the Company and the impact on net loss
is a reduction of £6.7m.
53. 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 (2017: £4.3m). The actual commitment outstanding at 31 December 2018 was £4.3m (2017: £4.3m).
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 2018 was £207.0m (2017: £210.4m).
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.
54. 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.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Annual Report and Accounts 2018
Serco Group plc
|
227
Appendix: List of subsidiaries and related
undertakings
Company name
Aeradio Technical Services WLL4
Antab Operations & Contracting LLC
AWE Management Limited3
BAS-Serco Limited
CCM Software Services Ltd2
Conflucent Innovations, LLC
Djurgardens Farjetrafik AB
DMS Maritime Pty Limited
Equity Aviation Holdings (Pty) Ltd2
Serco Group
interest
Registered office address
49%
60%
24.5%
10%
100%
49%
50%
100%
50%
Headquarters Building, Building # 1605, Road # 5141,
Askar # 951, PO Box 26803 Manama, Kingdom of Bahrain
Office No. 31, 4th Floor, Amar 40 Building (No. 2444),
6987 King Abdulaziz Road, Al Masif, PO Box 50025, Riyadh
11523, Kingdom of Saudi Arabia
Atomic Weapons Establishment, Aldermaston, Reading,
Berkshire, RG7 4PR United Kingdom
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 Sweden
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
Block F, 1st Floor, Gilloolys View, Osborn Lane, Bedfordview,
Johannesburg 2000, South Africa
Block F, 1st Floor, Gilloolys View, Osborn Lane, Bedfordview,
Johannesburg 2000, South Africa
Equity Aviation Investment Holdings (Pty) Ltd2
50%
Hong Kong Parking Limited
Innu Serco Inc
Innu Serco Limited Partnership
40%
49%
49%
Room 2601, World Trade Centre, 280 Gloucester Road,
Causeway Bay, Hong Kong
P.O. Box 1012, Station C, Happy Valley - Goose Bay,
A0P 1C0, Canada
P.O. Box 1012, Station C, Happy Valley - Goose Bay,
A0P 1C0, Canada
International Aeradio (Emirates) LLC – Abu Dhabi 49%
International Aeradio (Emirates) LLC – Dubai
49%
JBI Properties Services Company LLC
Khadamat Facilities Management LLC
49%
49%
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
LOGTEC Inc.
100%
Suite 1000, 1818 Library Street, Reston VA 20190, United States
Merseyrail Services Holding Company Limited3
50%
Northern Rail Holdings Limited
Northern Pathways Holding Pty Limited
COMPASS SNI Limited
Priority Properties North West Limited
Serco (Jersey) Limited
Serco Australia Pty Limited3
Serco Belgium S.A
Serco Caledonian Sleepers Limited
Serco Canada Inc.
Serco Citizen Services Pty Ltd
50%
10%
100%
100%
100%
100%
100%
100%
100%
100%
Eversheds House, 70 Great Bridgewater Street, Manchester,
Lancashire, M1 5ES United Kingdom
Eversheds House, 70 Great Bridgewater Street, Manchester,
Lancashire, M1 5ES United Kingdom
John Laing, Level 16, 15 Castlereagh St, Sydney NSW 2000,
Australia
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
228 | Serco Group plc
Annual Report and Accounts 2018
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Serco Group
interest
Registered office address
Company name
Serco Corporate Services Limited
Serco Defence Clothing Pty Ltd
Serco Defence SA
Serco Defence Services Pty Ltd
Serco Environmental Services Limited
100%
100%
100%
100%
100%
Serco Ferries (Guernsey) Crewing Limited
100%
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
Serco Leisure Operating Limited
Serco Limited3
Serco Listening Company Limited
Serco Luxembourg S.A.
Serco Nederland B.V.
Serco New Zealand (Asset Management Services)
Limited
Serco New Zealand Limited
Serco New Zealand Training Limited
Serco North America (Holdings), Inc.
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
Avenue de Cortenbergh 60-1000, Brussels, Belgium
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
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
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, 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 Stümper, L-2557 Luxembourg
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
17 Boulevard Royal 17, L – 2449 Luxembourg
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
Annual Report and Accounts 2018
Serco Group plc
|
229
Appendix: List of subsidiaries and related
undertakings continued
Company name
Serco North America Limited
Serco Paisa Limited
Serco PIK Limited
Serco Pension Trustee Limited
Serco Projects LLC
Serco Regional Services Limited
Serco Sarl
Serco SAS
Serco Saudi Arabia LLC
Serco Services GmbH
Serco Services Inc.
Serco Services Ireland Limited
Serco Singapore Pte Limited
Serco SpA
Serco Switzerland SA
Serco Group
interest
Registered office address
100%
50%
100%
100%
49%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
Surrey, Ci Tower, St. George’s Square, New Malden, Surrey,
KT3 4TE United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
Global Business Centre 2, Second Floor, Al Hitmi Village
Building, C-Ring Road, PO Box 25422 Doha, State of Qatar
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
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
38 Beach Road, #29-11 South Beach Tower, Singapore, 189767
Via Sciadonna 24/26, 00044 Frascati (Roma), Italy
86 bis Route de Frontenex, 1208 Geneva, Switzerland
Serco Traffic Camera Services (VIC) Pty Limited
100%
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
Serco-IAL Limited
VIAPATH Group LLP
100%
33%
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
Francis House, 9 King’s Head Yard, London, SE1 1NA,
United Kingdom
1. Serco Holdings Limited is directly owned by Serco Group plc. All other subsidiaries and associated undertakings are held indirectly via
Group companies.
2. Companies in liquidation as at 31 December 2018.
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 due to being consolidated in full as a result of considerations over control.
230 | Serco Group plc
Annual Report and Accounts 2018
Appendix: Supplementary Information
Five-year record (unaudited)
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
Adjusted Revenue
Less: Share of revenue of joint ventures and
associates
Revenue
Underlying Trading Profit*
OCP and Contract and Balance Sheet Review
adjustments
Include benefit from non-depreciation and
amortisation of assets held for sale
Include other one-time items
Trading Profit/(Loss)*
Amortisation and impairment of intangibles
arising on acquisition
Operating profit/(loss) before exceptional
items
Exceptional profit/(loss) on disposal of
subsidiaries and operations
Other exceptional operating items
Operating profit/(loss)
Net finance costs
Exceptional finance income/(costs)
Other gains
Profit/(loss) before tax
Tax (charge)/credit
Profit/(loss) after tax
Recourse Net Debt
Net Debt
2018
£m
2017
(restated***)
£m
3,211.9
3,307.3
(375.1)
2,836.8
93.1
23.6
–
–
116.7
(4.3)
112.4
(0.5)
(31.4)
80.5
(13.9)
7.5
–
74.1
(6.7)
67.4
(356.4)
2,950.9
69.3
(24.2)
–
–
45.1
(4.4)
40.7
0.3
(19.9)
21.1
(11.2)
–
0.7
10.6
(18.6)
(8.0)
2016
£m
3,529
(481)
3,048
82.1
14.2
0.5
3.5
100.3
2015
(restated**)
£m
4,252
(737)
3,515
95.9
20.9
11.7
9.0
137.5
(5.1)
(4.9)
2014
£m
4,753
(798)
3,955
113.2
(745.3)
–
–
(632.1)
(23.7)
95.2
0.1
(70.6)
24.7
(12.6)
(0.4)
–
11.7
(12.8)
(1.1)
132.6
(655.8)
2.8
(190.3)
(54.9)
(31.9)
(32.8)
–
(119.6)
(33.5)
(153.1)
(82.2)
(82.2)
(5.4)
(656.1)
(1,317.3)
(36.7)
–
–
(1,354.0)
6.9
(1,347.1)
(642.7)
(642.7)
(188.0)
(188.0)
(141.1)
(141.1)
(109.3)
(109.3)
Earnings/(loss) per share before exceptional
items
Basic (loss)/earnings per share
Dividend per share
Pence
Pence
Pence
Pence
Pence
8.20
6.16
–
1.50
(0.76)
–
6.12
(0.11)
–
6.55
(15.47)
–
(107.43)
(205.66)
3.10
*
Included in 2014 Trading Loss were charges totalling £745.3m arising from the Contract and Balance Sheet Review undertaken in 2014, with £718.0m
charged to Adjusted Operating Profit and £27.3m charged to Management estimate of items relating to UK Government reviews.
** The 2015 general and administrative expenses and net finance costs have been restated following the change in accounting policy regarding foreign
exchange movements on investment and financing arrangements. No changes have been made to the comparative periods for 2014 and prior as it is
impracticable.
*** Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 with effect from 1 January 2017. See note 2.
No changes were made to earlier periods, hence the results for the years ended 31 December 2016, 31 December 2015 and 31 December 2014 would
need to be restated for the impact of IFRS9 and IFRS15 in order to be prepared in accordance with current International Financial Reporting
Standards.
Annual Report and Accounts 2018
Serco Group plc
|
231
Shareholder Information
Our website
The Company’s 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.
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.
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.
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, giving quick and
easy access to your shareholding.
Electronic communications
We encourage shareholders to consider receiving their
communications electronically which 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
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.
Changes of address
To avoid missing important correspondence relating to your
shareholding, it is important that you inform our Registrar of
your new address as soon as possible.
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.
232 | Serco Group plc
Annual Report and Accounts 2018
Useful Contacts
Serco’s registered office
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY
United Kingdom
Telephone
Email
+44 (0)1256 745 900
investorcentre@serco.com
Registered in England and Wales No. 2048608
Group General Counsel and Company Secretary
David Eveleigh
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. (excluding public holidays
in England and Wales)
Website
www.shareview.co.uk
Shareholders can securely send queries via the website
using the ‘Help’ section.
ADR depositary bank
Deutsche Bank Trust Company Americas
c/o American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn NY 11219
USA
Telephone
Website
Email
+1 866 249 2593 (toll-free within USA)
+1 718 921 8124 (from outside USA)
www.adr.db.com
db@astfinancial.com
Brokers
JP Morgan Cazenove
Bank of America Merrill Lynch
Auditor
KPMG LLP
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. For further
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
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
C
o
r
p
o
r
a
t
e
G
o
v
e
r
n
a
n
c
e
i
F
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
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 54 to 63.
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.
Annual Report and Accounts 2018
Serco Group plc
|
233
Notes
234 | Serco Group plc
Annual Report and Accounts 2018
This report has been printed on material which is certified by the
Forest Stewardship Council®. The paper is made at a mill with
ISO 14001 Environmental Management System accreditation.
Printed by CPI Colour using vegetable oil based inks, CPI is a
CarbonNeutral® printer, certified to ISO 14001 Environmental
Management System and registered to EMAS, the Eco
Management and Audit Scheme.
S
e
r
c
o
G
r
o
u
p
p
l
c
A
n
n
u
a
l
R
e
p
o
r
t
a
n
d
A
c
c
o
u
n
t
s
2
0
1
8
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:
investorcentre@serco.com