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Annual Report
and Accounts
2019
Contents
Strategic Report
03-100
Highlights
At a Glance
Chairman’s Statement
Key Performance Indicators
03
04
06
09
12 Our Market
16 Our Business Model
17 Our Performance Framework and
Strategic Priorities
Strategy Implementation
Chief Executive’s Review
Divisional Reviews
Finance Review
Risk Management
Principal Risks and Uncertainties
Viability Statement
Corporate Responsibility
Section 172 (1) Statement
20
22
35
42
60
62
74
76
96
Corporate Governance
101-154
102 Board of Directors
104 Chairman’s Governance Overview
107 Board and Governance
109 Group Risk Committee Report
112 Audit Committee Report
118 Nomination Committee Report
120 Corporate Responsibility
Committee Report
122 Compliance with the UK Corporate
Governance Code
124 Remuneration Report
149 Directors’ Report
154 Directors’ Responsibility Statement
Financial Statements
155-240
Independent Auditor’s Report
156
167 Consolidated Income Statement
Consolidated Statement of
168
Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Cash Flow Statement
Notes to the Consolidated Financial Statements
169
170 Consolidated Balance Sheet
171
172
228 Company Balance Sheet
229
230
234 Appendix: List of Subsidiaries
237
238 Shareholder Information
239 Useful Contacts
Company Statement of Changes in Equity
Notes to the Company Financial Statements
Appendix: Supplementary Information
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
50,000+
EMPLOYEES
For more and the latest information
please visit our website at:
www.serco.com
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Highlights
Revenue
£3,248m
2018: £2,837m
Order Book
£14.1bn
2018: £12.0bn
Underlying Trading Profit
Reported Operating Profit
£120.2m
2018: £93.1m
£102.5m
2018: £80.5m
Underlying EPS, diluted
Reported EPS, diluted
6.16p
2018: 5.21p
Underlying ROIC
15.4%
2018: 13.6%
4.21p
2018: 5.99p
Free Cash Flow
£62.0m
2018: £16.3m
Employee Engagement
Major Incident Frequency
71 points
2018: 67 points
0.39 per
1m hours
2018: 0.50 per 1m hours
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P.09-11
See KPIs on
pages 09-11
for definitions
Annual Report and Accounts 2019
Serco Group plc
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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 2019 of £3,248m or, including
our share of joint ventures and associates to reflect our total scale in each sector, of £3,643m.
Defence
Justice &
Immigration
Transport
Health
Citizen
Services
£1,170m
£591m
£569m
Key services
£428m
£885m
Base and
operational support
Engineering,
management and
information services
Nuclear, space and
maritime services
Custodial services
Immigration
detention services
Detainee transport
and monitoring
Rail, ferry and cycle
operations
Integrated facilities
management
Contact centres and
case management
Road traffic
management
Air traffic control
Pathology and
non-clinical support
services
Patient
administration and
contact
Middle, back office
and IT services
Employment and
skills services
Our fundamental role in the functioning of an orderly society
Defence
Protecting national
and international
security interests
Justice &
Immigration
Safeguarding those
in our care and
beyond
Transport
Health
Citizen Services
Facilitating safe and
efficient movement
of people and
goods
Enhancing patient
experience and care
quality
Contributing to the
wellbeing of citizens
and communities
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Annual Report and Accounts 2019
Where we operate
Serco’s operations are across four geographic regions:
Americas
£916m
UK & Europe
£1,756m
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Asia Pacific
£621m
Middle East
£350m
Revenue in 2019 (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%
10%
48%
25%
12%
32%
16%
16%
Total revenue £3,643m
Total revenue £3,643m
Defence
Transport
Justice & Immigration
Health
Citizen Services
Americas
Middle East
UK & Europe
Asia Pacific
P.16
See page
16 for more
information on
our business
Revenue in 2019 (including share of joint ventures and associates).
Annual Report and Accounts 2019
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05
Financial StatementsCorporate Governance
Chairman’s Statement
Sir Roy Gardner
Chairman
2019 Highlights
• Underlying Trading Profit of
£120m, an increase of 29%.
• Order intake of £5.4bn, a
book-to-bill ratio of 170%.
• Acquisition of NSBU, adding
materially to the scale and
capability of Serco’s defence
business.
• Further development of risk
management and governance
effectiveness.
• Good engagement with
customers and proposition
development to continue
succeeding in the market for
complex public services.
• After a strong year of progress
in 2019, positive outlook for
2020 and beyond.
• The recent performance, and
the health of our balance sheet
gives us the confidence to
resume paying dividends to our
shareholders for the first time in
six years.
“I am pleased to report that 2019 has been a year of
very strong progress, building on that achieved in
2018 which marked an inflection point for Serco and
the shift from the ‘Transform’ stage of delivering our
turnaround to the ‘Grow’ stage.
“Not only have we delivered financially and improved
operationally in almost all of our key performance metrics in 2019,
but we have also completed a substantial acquisition, achieved a
record level of order intake, and continued to develop and
strengthen across all areas of our corporate responsibilities. We
have maintained our absolute focus on the importance of
governance and transparency, and, as we hope is evident in this
document, we are responding to the demand on companies for
more extensive corporate reporting.”
Delivering on our strategy implementation
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 following the recruitment of a new
management team, recapitalisation of the business and delivery of a corporate
renewal programme. Transformation then started in earnest, with this stage largely
concluding in 2019 whilst also ensuring it is embedded in the Company as ‘business as
usual’. 2018 marked the start of delivering the third phase – Growth – with Underlying
Trading Profit increasing for the first time in five years. 2019 has built upon this, with
growth and improvements across virtually every metric.
In terms of financial performance, revenue growth of 15% (the first time revenue has
grown in five years), combined with margin improvement from 3.3% to 3.7%, has led to
Underlying Trading Profit increasing by 29% to £120m. After the Group’s financing and
tax costs, and taking into account the increased number of shares following the
funding of the NSBU acquisition, Underlying Earnings Per Share increased by 18% to
6.16p. The strength of Serco’s balance sheet also remains clear: Adjusted Net Debt of
£215m results in leverage broadly unchanged from a year earlier and therefore
remaining comfortably at the lower end of our normal target range of 1-2x; our
pension schemes are in a strong funding position with balance sheet accounting
surplus; and we pay our supply chain promptly and do not utilise working capital
facilities to do so.
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Annual Report and Accounts 2019
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Operationally, the confidence that customers have in Serco
to deliver critical, sensitive and complex public services is
reflected in the record order intake of £5.4bn for the year, taking
our order book to its highest ever level of £14.1bn. Over 40% of
this order intake comprised new business, with the balance
being order intake to secure existing work. Of particular note,
the latter included the successful rebids of the UK asylum
accommodation contracts and the prisoner escorting contracts,
with these being previously loss-making operations which have
been rebid to be appropriately profitable under the new
contracting terms. I am also delighted that our employee
engagement scores, which have risen steadily since 2013,
climbed further year-on-year from 67 to 71 points in 2019.
This measure is one of a number of non-financial KPIs which
drive our performance, more of which can read about on pages
9 to 11.
In terms of our strategy, I would highlight two aspects. First, the
advantage of Serco’s broad international footprint has remained
clear. Our North America and Asia Pacific regions
demonstrated the strongest organic revenue performances,
but we have also moved the UK back into organic growth for the
first time since 2013 and, pleasingly, around 55% of our order
intake came from the UK, with the balance from our
international customers. Secondly, we have demonstrated the
ability to successfully execute and integrate material
acquisitions such as NSBU in the US. This leading provider of
ship and submarine design and engineering services adds
materially to the scale of our defence business and brings with it
further opportunities to leverage capabilities across our
international platform. We funded the acquisition in the most
part through an Equity Placing which was very well supported
by our institutional shareholders, which was gratifying to see.
Having already made the two smaller acquisitions in 2018 which
have gone on to perform well in their first full financial year as
part of Serco, we continue to see acquisitions as a key part of
sustainable value creation – in terms of better-service to
customers, improving opportunities for our employees and
business partners, and enhancing returns for our shareholders.
I would also draw your attention to our announcement in July
2019 that one of our subsidiaries, Serco Geografix Ltd, reached
a Deferred Prosecution Agreement with the UK Serious Fraud
Office, which concluded the SFO’s investigation into Serco
companies announced in November 2013. An exceptional
charge has been taken in the 2019 financial results for the
£19.2m fine together with £3.7m for the SFO’s investigation
costs. The fine reflected a discount of 50% as a result of Serco’s
self-reporting, as well as our significant and substantial
cooperation with the investigation. The SFO also recognised
the significant steps Serco has taken to reform itself, including
the thorough implementation under independent supervision
of a comprehensive Corporate Renewal Programme approved
by the UK Government in 2014.
You can read more about all of these points in the Chief
Executive’s Review on pages 22 to 34.
Our Board, governance and evolving
corporate responsibilities
Serco’s Board has seen considerable change since I became
Chairman in July 2015. In previous years we have brought in new
Non-Executive Directors with a mix of backgrounds and
experience to ensure a balanced, dynamic and effective Board.
As previously reported, Eric Born joined the Board on 1 January
2019 and at the same time John Rishton assumed the role of
Senior Independent Director. Whilst the Board has become
more balanced over recent years, culminating in 33% gender
diversity, we recognise we still have much more to do, not least
with regard to other areas of diversity at Board level. Whilst
good progress is being made across the Group on all aspects
of diversity and inclusion, sustainable change requires a
long-term perspective and this remains a key focus for the
Company. There were changes to the membership of most of
the Board’s Committees, and 2019 has been a year of continued
developments to drive effectiveness and support our clear
belief that strong governance is a vital component in the
long-term success of the Company.
In our Corporate Governance Report on pages 101 to 154, you
will read that we have fully complied with the provisions of the
UK Corporate Governance Code during 2019, and I would draw
your attention to the s172 statement we make on pages 96 to
100 as this is the first time we have put this in our Annual Report
and it shows how the Board has engaged with our stakeholders
and approached the decisions we have made during the year.
We have thoroughly reviewed and revised the Terms of
Reference of each of the Board’s Committees, ensuring the
consideration of all relevant matters and the appropriateness of
all lines of communication, and these are also described in each
individual Committee Report. As part of this process, I would
also draw your attention to our commitments to diversity, to
shareholder engagement and to your Board’s active
involvement in evaluating bids and contracts, meeting regularly
with senior management responsible for operational delivery
and business development, as well as visiting contracts and
engaging with the wider management team, including
participation in Serco’s Management training courses.
The Corporate Responsibility Committee has seen its remit
evolve significantly during 2019, and you can read more on this
on pages 120 to 121 and the summary Corporate Responsibility
Report on pages 76 to 95. This includes details of our chosen
approach to Employee Voice, the ‘Colleague ConneXions’
programme, led by our designated Non-Executive Director
Kirsty Bashforth, through which we will ensure employee views
and interests are factored into our decision-making. The
programme – shaped and led by our frontline colleagues in
close collaboration with the Board – has been warmly
welcomed to help us amplify employee voice and strengthen
dialogue between the Board and all employees. Further details
are available on page 81. In 2020, as part of our focus on ESG
matters, we will be increasing our approach to environmental
issues as we appreciate there is more that we can do in that
area as you will see from the Committee’s report.
Annual Report and Accounts 2019
Serco Group plc
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07
Financial StatementsCorporate Governance
Chairman’s Statement continued
I would also like to draw your attention to our Corporate
Responsibility framework on pages 77 to 92, which we created a
few years ago to make the principles of our approach to
Corporate Responsibility more actionable and meaningful. This
framework is structured around our four core stakeholders –
owners, customers, employees and the wider world – and this
year we have aligned it with areas of responsibility in terms of
Environmental, Social and Governance (ESG) factors, and have
also recognised the alignment with each of the relevant UN
Sustainable Development Goals (SDGs). Our summary
Corporate Responsibility Report contained within this Annual
Report and Accounts, and our full Corporate Responsibility
Report which can be accessed on www.serco.com, sets out in
detail Serco’s aims and actions to be a sustainable business that
makes a positive difference to society.
Looking ahead
This time last year, we set out in considerable detail our views on
our markets, including refreshing our strategic review, our
evaluations of the potential impacts of Brexit, and the
developments following a period of notable further distress to the
UK Government’s supply chain given the fates of Carillion and
Interserve. Most of these views have not subsequently changed to
any great extent, other than to note that the final resolution of the
Brexit decision brings helpful clarity around which we can plan.
We still see attractive, long-term structural drivers – what we term
the ‘Four Forces’ – which should lead to governments demanding
additional support in the delivery of public services. We have also
welcomed the progress made by the UK Government to
recognise that it needs a healthy relationship with its supply chain
for effective and efficient public service delivery. It is worth noting
of course, that Serco’s particular areas of service delivery, being
more non-discretionary and critical in nature, can offer us stability
in uncertain political times as well as the potential for attractive
long-term growth. We have seen the benefit even more so from
Serco’s portfolio of sectors and particularly across geographies
that have afforded us protection against the vagaries in any
single market.
Looking specifically at 2020, we expect revenue to grow by
6-8% to £3.4-3.5bn, and, with further progress on increasing
our profit margin, Underlying Trading Profit to grow by about
20% to around £145m. We also anticipate Adjusted Net Debt
to reduce even while taking into account a resumption of
dividend payments to our shareholders.
Resumption of dividend
When dividend payments were suspended in 2014, the Board
committed to resuming dividend payments to Serco’s
shareholders as soon as it judged it prudent to do so. 2019 has
been a year of very strong performance. It is also the last year
of significant outflows of cash related to loss-making contracts
and restructuring costs. Our expectations for 2020 are for
further good progress in increasing underlying earnings and
reducing financial leverage.
The Board is therefore recommending the payment of a final
dividend in respect of the 2019 financial year. Our intention
going forward is to weight dividend payments roughly
one-third: two-thirds between interim and final payments. The
Board considers it appropriate to reintroduce the dividend
payments at a level of underlying EPS cover initially of around
four times, equivalent to a payout ratio of approximately 25%.
Taking this into account, the Board is therefore recommending
the payment of a final dividend in respect of the 2019 financial
year of 1.0p. The dividend, subject to shareholder approval at
the Annual General Meeting on 14 May 2020, would be paid
on 5 June 2020.
The Board will keep the dividend under regular consideration
as we continue to drive forward with the growth stage of our
strategy. This will consider views of the Group’s underlying
earnings, cash flows and financial leverage, together with the
prevailing market outlook. The Board is mindful of the
requirement to maintain an appropriate level of dividend
cover, the potential alternative uses of capital to generate
incremental value for shareholders, and the desire to maintain
financial flexibility and a strong balance sheet that is
considered appropriate for Serco’s ability to deliver
sustainable value for all of the Group’s stakeholders.
Securing our future success
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.
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 great progress in recent years turning the
business around and I am delighted to report that 2019 has
seen excellent growth in revenues and profits, a record order
intake and order book, a strong balance sheet maintained, a
strategically important acquisition completed, the confidence
to recommend a resumption of dividends to shareholders and
a continued focus to positively shape the business and its
market positioning for the benefit all our stakeholders.
Furthermore, we expect to build on this in 2020, as outlined
with our guidance for further growth in our revenues and
Underlying Trading Profit.
I would like to thank all colleagues in the business for their
efforts in achieving a very successful 2019, and for their
continued support in helping Serco to be a superb provider
of public services that we can all be proud of.
Sir Roy Gardner
Chairman
25 February 2020
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Annual Report and Accounts 2019
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.
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For each KPI we explain the definition,
relevance to our strategy and the
performance in 2019. We have made no
changes in 2019 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 and a large number of
other corporate responsibility Key
Performance Indicators can be found
within our Corporate Responsibility
Report on pages 93 to 95, as well as
in our more detailed corporate
responsibility report for the year which
is available on our website
www.serco.com.
1. Underlying Trading Profit (UTP)
2. Underlying Earnings Per Share
(EPS), diluted
2019
£120.2m
2018
£93.1m
2017
£69.3m
2016
£82.1m
2015
£95.9m
2019
6.16p
2018
5.21p
2017
3.36p
2016
4.06p
2015
3.44p
Definition
Underlying EPS reflects the Underlying
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.
Relevance to strategy
EPS builds on the relevance of UTP, and
further reflects the achievement of being
‘profitable and sustainable’ by taking
into account not just our ability to grow
revenue and margin but also the strength
and costs of our financial funding and tax
arrangements. EPS is therefore a measure
of financial return for our shareholders.
Performance
The 18% increase on 2018 reflects the
strong 29% UTP growth as described, the
increase in net finance costs and lower
underlying effective tax rate which broadly
offset each other, and the increase in
number of shares in issue resulting from
the Placing in May 2019 of additional
shares to fund the NSBU acquisition.
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 42 to 59.
Relevance to strategy
The level of absolute UTP and the
relationship of UTP with revenue – ie 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 17 that the delivery of
strategic success, after the 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 £105m we
expected at the start of the year. The
29% increase on 2018 was driven by new
contract awards and growth in volume-
related work which drove particularly
strong organic revenue growth in the
Americas and AsPac Divisions, the
contributions from acquisitions, the
new contract structure and workload
on the CMS contract, and a generally
strong operating performance
across the Group. The underlying
margin rose from 3.3% to 3.7%.
Annual Report and Accounts 2019
Serco Group plc
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Financial StatementsCorporate Governance
Key Performance Indicators continued
3. Free Cash Flow (FCF)
4. Underlying Return on Invested
Capital (ROIC)
5. Pipeline of larger new bid
opportunities
£62.0m
£16.3m
2019
2018
2017
2016
2015
(£6.7m)
(£33.0m)
(£35.5m)
2019
15.4%
2018
13.6%
2017
9.6%
2016
10.7%
2015
11.1%
2019
£4.9bn
2018
£5.3bn
2017
£4.4bn
2016
£8.4bn
2015
£6.5bn
Definition
Free Cash Flow is the net cash flow from
operating activities before exceptional
items as shown on the face of the Group’s
Consolidated Cash Flow Statement,
adding dividends we receive from joint
ventures and associates, and deducting
net interest paid and net capital
expenditure on tangible and intangible
asset purchases. FCF for 2018 has been
restated for a change to accounting
for leases, as described on page 47.
Relevance to strategy
FCF is a further reflection on how
‘sustainable’ our profits are, as well
as the sustainability of the overall
business, by showing a measure of
how much of our effort turns into cash
to reinvest back into the business or
to deploy in other ways. Furthermore,
‘winning good business’ should reflect
that which generates appropriate cash
returns, and ‘executing brilliantly’ should
include appropriate management of
our working capital cash flow cycles.
Performance
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 movement was broadly neutral
compared to an outflow of £22m the
prior year, and the Group has continued
to not utilise any factoring or other
working capital facilities during 2019.
Definition
ROIC is calculated as UTP for the period
divided by the invested capital balance.
Invested capital represents the assets
and liabilities considered to be deployed
in delivering the trading performance of
the business. Invested capital assets are:
goodwill and other intangible assets;
property, plant and equipment; interests
in joint ventures and associates; contract
assets, trade and other receivables; and
inventories. Invested capital liabilities
are contract liabilities, trade and other
payables. Invested capital is calculated as
a two-point average of the opening and
closing balance sheet positions. Invested
Capital and Underlying ROIC for 2018 has
been restated for a change to accounting
for leases, as described on page 48.
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 in UTP as described,
together with a slightly lower invested
capital base excluding the impact of
acquisitions; the effect of consolidating
five months of contribution from the
NSBU acquisition and its increase in the
closing balance of Invested Capital had
a downward impact on ROIC. We expect
further growth in ROIC to be driven by
additional improvement in profit margin
from making continued progress with
the ‘Grow’ phase of our strategy.
Definition
The estimated aggregate value at the
end of the reporting period of new bid
opportunities with Annual Contract
Value (ACV) greater than £10m and
which we expect to bid and be awarded
within a rolling 24-month timeframe. It
does not include rebids 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 ‘ID/IQ’ –
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 ongoing progress in the
third and final stage of our strategy
implementation – the ‘Grow’ stage.
Performance
The pipeline at 31 December 2019 had
decreased by a net £0.4bn on the position
a year earlier, reflecting a greater value
of opportunities exiting the pipeline
versus those coming in. In January and
February 2019, Serco had 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 opening
pipeline as at 31 December 2018 would
have reduced it down to around £3.6bn.
The pipeline increased in the second
half of the year. 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 and the NSBU acquisition.
Going forward, Serco will change
its pipeline definition to no longer
exclude opportunities for new business
that have an estimated ACV smaller
than £10m. At around £1.6bn, smaller
opportunities in aggregate are a
significant component of the pipeline
and potential growth, and likely to be
increasingly so given the use of task
orders under framework contracts; the
pipeline on this basis therefore increases
from £4.9bn to approximately £6.5bn.
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6. Order book
2019
£14.1bn
2018
£12.0bn
2017
£10.7bn
2016
£9.9bn
2015
£10.0bn
7. Major incident frequency rate,
per 1 million hours worked
8. Employee engagement
2019
0.39
2018
0.50
2017
0.45
2016
0.40
2015
0.43
2019
71 points
2018
67 points
2017
56%
2016
54%
2015
53%
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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 £14.1bn would be £15.3bn 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 very strong order intake of £5.4bn
there has been growth in the order book
through a book-to-bill ratio of around
170%, the third year in a row in which order
intake has exceeded revenues. This was
further enhanced by adding to the order
book through the acquisition of NSBU.
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. During 2019 we reviewed
the classification of incidents reported
through workers’ compensation insurance
in the AsPac and Americas Divisions.
Several incidents were identified in
claims where the severity of injuries met
the criteria for what Serco defines as a
‘Major Injury’ but the incidents had not
been recorded as such. This resulted
in an increase in incidents classified
as major. To ensure completeness, a
review of all incidents from 2015 to date
was undertaken. This is reflected in
restating the historical frequency rates.
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 93 million hours worked
in 2019 there were 36 major incidents
reported. This resulted in a frequency
rate of 0.39 per 1 million hours worked.
This exceeded our target of 0.34,
however, pleasingly, it is well below
the 2018 performance of 0.50. The
improvements primarily result from
our continued focus on reducing
violence and aggression within the UK
custodial environment and reductions
in associated serious physical assaults.
Further performance data and details
of initiatives implemented to improve
performance 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. Post-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, although
analysis performed by the new provider
in 2018 indicated that the engagement
level for that year was broadly stable
on the previous year’s score which was
already the highest since we started
measuring engagement in 2011.
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 was our target for 2020, which
aligns with the global cross-sector
benchmark provided by the specialist
third party provider of our survey.
Performance
The 2019 Viewpoint survey was based
on some 27,000 employees responding,
representing a response rate once again
of over 70% which is considered very
strong versus the benchmark from the
specialist third party provider of the
survey. The result for 2019 has achieved
the targeted improvement in overall
employee engagement a year earlier
than aimed for. 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
50,000 individual comments were
submitted, with 56% of respondees
choosing to do so, which is considered to
be a very positive reflection of the culture
of openness and care of our employees.
Annual Report and Accounts 2019
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Financial StatementsCorporate Governance
Our Market
Our core sectors
We believe that fundamental drivers will continue to
increase demand for our services.
Defence
Justice &
Immigration
Transport
Health
Citizen
Services
Our markets
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.
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 – employing more people than any other sector or
organisation. For example, according to the United States Bureau of Labor Statistics,
nearly twice as many people (22.7 million as at January 2020) are employed by
government bodies as are in manufacturing (~12.9 million as at January 2020) across
the US.
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
mangers 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 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.
United
Kingdom
Continental
Europe
North
America
Asia
Pacific
Middle
East
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“The challenge facing governments
worldwide can, like our strategy,
be simply expressed: to deliver
more, and better, for less.”
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
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.
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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 often 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 UK government services outsourcing industry
has been one of acute difficulty for much of the period since
2010. Over-supply, 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 that it could attract new international
competition into the market because barriers to entry seemed
low, it has subsequently discovered that the barriers to exit
from the market 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, 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 fair
returns to suppliers which will in turn ensure that government
has choice from a vibrant supply chain containing companies
both large and small.
Drivers of demand
Notwithstanding some unique difficulties in the UK market in
recent years, the business of providing services to government
remains 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 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.
Annual Report and Accounts 2019
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Financial StatementsCorporate Governance
Our Market continued
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, IT,
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 some 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 Serco 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.
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 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.
Research on UK outsourced services, commissioned by the
Serco Institute, and carried out by Capital Economics, the
independent economic research consultancy, has found that:
• “The evidence from areas that have been subject to
competition suggests that it is possible to deliver
services more cost efficiently without damaging
service quality...”
• “Our analysis on prison management, soft facilities
management in healthcare and air traffic control
suggests that potential average savings to the
government of between five and fifteen per cent from
introducing competitive markets is a relatively
conservative estimate…”
• and perhaps most importantly, that: “…the private
sector typically delivers services to the same standard
or better than the public sector.”
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. We know of no other company in
our market which offers services covering front, middle, and
back office requirements across our 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.
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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 previously 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 – around 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 revised our view to be
that market growth was likely to be running at around 2-3% as
a weighted average across our markets. We saw little
likelihood that blended rates of growth across our markets
would 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. Indeed, despite an outlook of increased political
stability following the General Election in December, overall
2019 brought no discernible improvement in market
conditions in the UK, although Serco itself achieved strong
order intake and a return to organic growth for the first time in
over five years. We were also able to deliver very strong
organic growth in Australia, well ahead of market growth, and
also very strong growth in North America where we
capitalised on the uptick in US defence spending.
Whilst clearly experiencing some differing cycles in terms of
Serco’s own particular geographies and sectors, we see no
reason to believe that, in the longer term, the rate of market
growth might not revert to the previous levels of 5%+.
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
the Middle East or indeed, the UK. 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 and 2018, 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.
Annual Report and Accounts 2019
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Financial StatementsCorporate Governance
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, and the criticality of their behaviour. So the answer
to ‘how?’ is: ‘by being the best-managed business in our sector’.
Our drivers:
Values…
Trust
Care
Innovation
Pride
What we do:
How we add value:
c if i c
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Citizen Servic
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Superb
public
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n
u stice &
m igratio
J
I m
Efficiency & commercial nous
Public service ethos
Transferable global experience
Full service integration
Purpose…
Transport
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
UK & E u r o p
e
Expert & empowered people
Longer-term deliverables…
Revenue growth
5%+
Trading margin
5%+
Employee engagement
70 points or above
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.
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Annual Report and Accounts 2019
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 Serco.
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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
A place people are proud to work
Executing brilliantly
Profitable and sustainable
Being the best-managed company
in the sector
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.
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Financial StatementsCorporate Governance
Our Performance Framework
and Strategic Priorities continued
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.
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, and we can reliably say that
around the world, every day, at least one of our employees or
subcontractors is not doing the right thing; this is one of the
reasons why we invest so much time and effort into controls
and assurance processes. 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 controls and assurance roles, as well as certain specialist
consolidation and functional roles in Finance, Legal, Risk,
Insurance 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 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.
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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. We can also continue to enhance our
controls, assurance and compliance processes, and the
robustness of our ‘three lines of defence’. 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
Our revenues were in organic decline for each of the five years
of 2014 through to 2018, turning to growth in 2019, whilst our
underlying trading margin declined to a nadir of 2.3% in 2017
and has now had two years of improving. 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 – around 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
revised our view to be that market growth was likely to be
running at around 2-3% as a weighted average across our
markets. We saw little likelihood that blended rates of growth
across our markets would 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. Indeed, despite an outlook of increased
political stability following the General Election in December,
overall 2019 brought no discernible improvement in market
conditions in the UK, although Serco itself achieved strong
order intake and a return to organic growth for the first time in
over five years. We were also able to deliver very strong
organic growth in Australia, well ahead of market growth, and
also very strong growth in North America where we
capitalised on the uptick in US defence spending.
Whilst clearly experiencing some differing cycles in terms of
Serco’s own particular geographies and sectors, we see no
reason to believe that, in the longer term, the rate of market
growth might not revert to the previous levels of 5%+, and
similarly that Trading Profit margins of 5% can be achieved.
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Financial StatementsCorporate Governance
Strategic 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
Grow: 2018 and beyond
• Rebuild confidence and
trust
•
Improve risk management
• Rationalise portfolio
• Mitigate loss-making
contracts
• Rebuild business
development and pipeline
• Strengthen sector
propositions
• Build differentiated capability
•
Improve execution and cost
efficiency
• 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
>70 points
(equivalent to
previous >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, has
continued through 2019, and has been an essential underpin as
we have moved progressively 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 for the next few years the market may well
only be more likely to grow at a low single-digit percentage
rate, but Serco can challenge itself to grow in line with this or
better, and our margins can still increase as we fully transition
from our Transformation phase and see more benefit from cost
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.
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 1.31x, with period-end net
debt reduced from £745m at the end of 2013 to £215m at the
end of 2019.
• Portfolio rationalisation has been carried out, including the
disposal of the majority of our private sector BPO business
at the end of 2015.
• We have made further excellent progress rebuilding
confidence and trust with our major customers, in large part
due to greatly improved operational performance. In regard
to the UK Government in particular, the SFO’s investigation
as announced in November 2013 into Serco companies with
regard to the Electronic Monitoring contract was concluded
in July 2019. Over the last six years we have worked
extremely hard to regain the trust and confidence of the UK
Government, implementing a Corporate Renewal
Programme which was approved by the UK Government and
which has helped us to transform our corporate culture,
processes and governance. The management and culture of
Serco, and the transparency with which we conduct our
affairs, have changed beyond all recognition, and we are
pleased that this has been acknowledged by both the SFO
and by the UK Government.
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• After three years of outflows, positive Free Cash Flow was
achieved in 2018 and improved significantly in 2019. The
outflows related to onerous contracts reduced by two-thirds
between 2015 and 2019 and will be substantially down again
in 2020, while working capital and cash flow management
have 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 2018 and 2019 have seen Underlying Trading
Profit grow by 34% and 29% respectively; in 2019 we have
achieved organic revenue growth of 8%. But the long-term test
of the strategy will be our ability to deliver further margin
increases, together with continued profitable revenue growth.
The market is currently growing at rates below historic trend,
and our progress in 2019 has been driven more by our own
success in driving order intake and making good operational
progress. Looking ahead to 2020, we expect further organic
revenue growth, the annualised contribution from the NSBU
acquisition and additional improvement in our margin towards
our target level.
In summary, our plan, first devised in 2014, seems to be working.
• We have continued 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 2019, actual expenditure against the £447m of
Onerous Contract Provisions has been very close to the
original estimate and the closing balance is now just £17m.
In 2019, we successfully rebid two of the largest previously
onerous contracts, COMPASS and PECS, while also
increasing our market share.
• We have strengthened our sector propositions, including
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
Clarence Correctional Centre (previously known as Grafton
prison) in Australia (won in 2017). Developing service
innovations and transferring skills and capabilities have also
been clear in awards such as the CMS rebid (secured in 2018)
and the new Australia defence healthcare services contract
(won in 2019).
• Our order intake has grown very substantially, such that
in each of 2017, 2018 and 2019 it was ahead of revenue,
the first time since 2012 that book-to-bill had been greater
than 100%; at the end of 2019, our order book stood at a
record £14.1bn.
Grow: progress to date
We are now making significant progress in growing the
business again, with key achievements being:
• After five years of decline, in 2019 the Group achieved
organic revenue growth of 8% and is expecting around 4%
for 2020. Improving our win rates and retention of work in
our focused sectors and geographies has been paramount
to achieving this.
• Two small bolt-on acquisitions were completed in 2018, BTP
Systems (deepening our satellite and radar capabilities) and
a portfolio of six Carillion health facilities management
contracts (adding significant scale to our UK health
business). In 2019, the acquisition of NSBU, a leading
provider of ship and submarine design and engineering
services, has added materially to the scale and capability of
Serco’s defence business, enhancing our current and future
growth prospects further.
• Profits and margin grew significantly in both 2018 and 2019,
and further progress is expected in 2020. 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 over £100m removed through
our programmes to deliver overhead savings by reducing
the number of management layers, implementing better
procurement and driving greater efficiency in the operation
of shared services.
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Financial StatementsCorporate Governance
Chief Executive’s Review
Rupert Soames
Chief Executive
“The results for 2019 represent the first
year of revenue growth since 2013 and
the second successive year of growth
in profits, and we expect continued
strong progress in 2020. 15% revenue
growth of which 8% was organic, 29%
underlying profit growth and £5.4bn of
order intake compares favourably with
a market growing at 2-3%.
“Free Cash Flow has increased significantly, and
our leverage ratio is at the lower end of our
target range. All this indicates that we have finally
achieved escape velocity, leaving behind the
gravitational pull of past mis-steps, and gives the
Board confidence to recommend paying a
dividend for the first time since 2014, which is an
important milestone. We are immensely grateful
to our committed and hardworking colleagues,
our patient shareholders and our supportive
customers who have helped us reach this point.
“The benefits of having a broad international
presence, with over 60% of our revenues and
50% of our employees outside the UK, are once
again evident. We have delivered double-digit
organic revenue growth in both our North
Summary table of financial results
America and Asia Pacific Divisions, and
demonstrated the ability to execute strategically
important acquisitions such as NSBU in markets
with premium rates of growth. But 2019 is also
notable as being the first time since 2013 that
revenues have grown in the UK.
“Perhaps the most significant aspect of 2019,
however, was the record £5.4bn of order intake,
representing 170% of annual revenues, and
which resulted in our order book increasing to
£14.1bn, an increase of around 40% over the last
three years. This is the third successive year our
order intake has exceeded our revenues, and
underlines the confidence governments have in
Serco’s ability to deliver critical, sensitive and
complex public services.”
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
Dividend Per Share (recommended re-instated)
Free Cash Flow(4)
Adjusted Net Debt(5)
Reported Net Debt(6)
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2019
2018
£3,248.4m
£2,836.8m
£120.2m
£102.5m
6.16p
4.21p
1.0p
£62.0m
£214.5m
£584.4m
£93.1m
£80.5m
5.21p
5.99p
n/a
£16.3m
£173.2m
£188.0m
Change at
reported
currency
Change at
constant
currency
+15%
+29%
+27%
+18%
+13%
+25%
+22%
+15%
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2018 Highlights
• Revenue(1) of £3.2bn increased by 14.5%, comprising
8.2% organic growth, 4.8% contribution from
acquisitions and 1.5% currency benefit. Very strong
constant currency growth in Americas (+35%, of
which +19% was organic) and Asia Pacific (+16%).
UK & Europe (+5%) grew revenues for the first
time since 2013; Middle East (-2%) did well in a
difficult market.
• Underlying Trading Profit(2) of £120.2m increased by
£27.1m or 29% (25% at constant currency); the NSBU
acquisition contributed £8.6m of the increase. The
Group’s Underlying Trading Profit margin increased
by 40 basis points to 3.7%.
• Reported Operating Profit increased by £22.0m,
£5.1m less than the increase in UTP as a result of the
net impact of various non-trading items including
£22.9m related to the conclusion of the SFO
investigation and £9.6m related to the commercial
settlement received from the MoD as a result of the
Defence Fire and Rescue Project tender. Exceptional
items included in Reported Operating Profit, at
£23.4m, were £8.5m lower than the prior year.
• Onerous Contract Provisions (OCPs) have run off
broadly as we expected, with the remaining liability
now just £17m. We estimate the total value of OCPs
will have been within 2% of the original £447m as at
December 2014.
• Underlying EPS of 6.16p increased by 18%,
reflecting the growth in Underlying Trading Profit,
together with the benefit of the tax rate reducing
from 26% to 25%, but with this partially offset by
the increase in the number of shares following the
Equity Placing in May 2019 to fund the Naval
Systems Business Unit (NSBU) acquisition. Reported
EPS in the prior year benefited from a number of
non-underlying tax credits totalling £11.8m which
did not recur in 2019.
• Free Cash Flow(4) improved sharply to £62m (2018:
£16.3m), due to the increase in underlying profits,
neutral working capital movement and lower cash
outflows on the residual OCP portfolio. The number
of supplier invoices in the UK paid within 30 days
increased to 86% (2018: 85%).
• Adjusted Net Debt(5) at £215m increased over the
year by £41m, as the £62m of positive Free Cash
Flow was offset by the £55m of acquisition
consideration not covered by the Equity Placing
relating to the NSBU acquisition; in addition there
was a £49m outflow related to exceptional items
(2018: £19m).
• Leverage for covenant purposes was 1.17x;
underlying leverage was 1.31x. Daily Average
Adjusted Net Debt was broadly unchanged at
£231m (2018: £219m).
• Acquisition of NSBU, a leading provider of ship and
submarine design and engineering services to the
US Navy that adds materially to the scale and
capability of Serco’s defence business, completed in
August 2019. Integration progressing smoothly and
the business has traded to plan. The acquisitions
completed in 2018 of BTP Systems (deepening our
satellite and radar capabilities) and of six Carillion
health facilities management contracts (adding
significant scale to our UK Health business) have
performed in line with our expectations.
• Order intake was very strong at a record £5.4bn,
representing around 170% of revenues; the three
largest awards were for asylum accommodation and
support services in the UK valued at £1.9bn, Prisoner
Escort and Custody Services also in the UK valued
at £0.8bn, and defence healthcare provision in
Australia valued at £0.6bn; over 40% of the order
intake comprised new business, and the balance
was existing work being rebid or extended.
• Order book increased by £2.1bn to £14.1bn,
predominately reflecting the strong order intake.
Since the start of 2017 the value of our order book
has increased by around 40%.
• The Pipeline of larger new bid opportunities closed
2019 at £4.9bn; it was £5.3bn at the start of the year,
but reduced to £3.2bn at the half-year stage,
reflecting in large part the very strong result of
contract awards, followed by good progress in
replenishing the pipeline during the second half
of 2019.
• Revenue guidance for 2020 is £3.4-3.5bn,
representing total growth of 6-8%, which assumes
organic growth of around 4%, an acquisition
contribution of 5-6% from the annualisation of
NSBU, and a currency headwind (based upon recent
rates(8)) of 2-3%. Underlying Trading Profit is
expected to grow by about 20% to around £145m.
This guidance is unchanged from that given at the
Closed Period trading update issued on 12
December 2019(7).
• The Board recommends restarting dividends, last
paid to Serco shareholders in 2014, with a payment
of 1.0p in respect of the 2019 financial year.
Assuming this payment and an interim dividend for
2020 in line with our approach, Adjusted Net Debt
guidance at the end of 2020 is approximately
£200m, with leverage expected to be towards the
lower end of our normal target range of 1-2x.
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Financial StatementsCorporate Governance
Chief Executive’s Review continued
Notes to financial results summary table and highlights:
(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 2019 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 and one-time items
Settlement received re DFRP tender
Trading Profit
Amortisation of intangibles arising on acquisition
Operating Profit before exceptional items
Operating exceptional items
Reported Operating Profit (after exceptional items)
2019
£m
120.2
3.6
9.6
133.4
(7.5)
125.8
(23.4)
102.5
2018
£m
93.1
23.6
-
116.7
(4.3)
112.4
(31.9)
80.5
(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 Consolidated Cash Flow
Statement, adding dividends we receive from joint ventures and associates, and deducting net interest and net capital expenditure on tangible and
intangible asset purchases. The results for the year ended 31 December 2018 have been restated to include within Free Cash Flow the capital repayment of
finance lease liabilities of £8.7m (2019 includes an equivalent £5.9m accounted for in accordance with IFRS16); as this was previously included beneath Free
Cash Flow, there is no impact on net cash flow.
(5) Adjusted Net Debt has been introduced by Serco as an additional non-IFRS Alternative Performance Measure (APM) used by the Group. This measure
more closely aligns with the covenant measure for the Group’s financing facilities than Reported Net Debt because it excludes all lease liabilities including
those newly recognised under IFRS16. The results for the year ended 31 December 2018 have been restated to exclude from Adjusted Net Debt £14.8m of
obligations under finance leases accounted for in accordance with the previous standard for leases, IAS17 (2019 excludes an equivalent £8.9m accounted
for in accordance with IFRS16).
(6) Reported Net Debt includes all lease liabilities, including those newly recognised under IFRS16. In accordance with the Group adopting the modified
retrospective transition approach for IFRS16, comparative information such as net debt and other financial performance measures are not restated for the
effect of this new accounting standard; instead, the cumulative effect of initially applying IFRS16 is reflected as an adjustment to opening equity at the date
of initial application, which for Serco is 1 January 2019. A reconciliation of Adjusted Net Debt to Reported Net Debt is as follows:
As at
Adjusted Net Debt
Include: all lease liabilities accounted for in accordance with IFRS16
Include: lease liabilities accounted for in accordance with IAS17
Reported Net Debt
(7) Our outlook for 2020 is summarised as follows:
2020 outlook
Revenue
UTP
Closing Adjusted Net Debt
31 Dec 2019
£m
31 Dec 2018
£m
214.5
369.9
n/a
584.4
173.2
n/a
14.8
188.0
Latest view
£3.4-3.5bn
~£145m
~£200m
As at
12 December
2019
£3.4-3.5bn
~£145m
~£200m
(8) Our outlook for 2020 is based upon currency rates as at 31 January 2020. The rates used, along with their estimated impact on revenue and UTP are as
follows:
Year ended 31 December
Average FX rates:
US Dollar
Australian Dollar
Euro
Year-on-year impact:
Revenue
UTP
2020 outlook
2019 actual
2018 actual
1.31
1.95
1.19
1.28
1.83
1.14
1.34
1.78
1.13
(£80-90m)
~(£5m)
+£42m
+£3.7m
(£65m)
(£4.0m)
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Reconciliations and further detail of financial performance
are included in the Finance Review on pages 42 to 59.
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
167 to 227. Further details regarding the impact of the
adoption of IFRS16 are included in note 2 to the consolidated
financial statements on pages 173 and 174.
Summary of financial performance
Revenue and Trading Profit
Reported Revenue increased 14.5% to £3,248m (2018:
£2,837m); in accordance with IFRS this measure excludes
Serco’s share of revenue from joint ventures and associates of
£395m (2018: £375m). Net currency movements increased
revenue by £42m or 1.5%, whilst the net revenue contribution
from acquisitions added £140m or 4.8% which splits
approximately 1% from the Carillion health facilities
management contracts that transferred to Serco between
June and August last year and 4% from Naval Systems
Business Unit (NSBU) which completed at the start of August
2019. At constant currency, the organic revenue growth was
therefore £230m or 8.2%, accelerating from 4% in the first half
of the year to 12% in the second half. The very strong growth
rate in the second half included the start of the two
particularly large contract awards (the AASC asylum
accommodation and support contract in the UK, and the
AHSC defence garrison healthcare services contract in
Australia) and better-than-expected short-term volume
related work, notably from our customers on US defence
frameworks, the US Federal Emergency Management Agency
(FEMA) contract, as well as certain Citizen Services
operations in Australia. This has resulted in particularly strong
organic growth in each of our Americas and AsPac Divisions,
and, after several years of organic decline in the UK & Europe
Division, we saw encouraging organic growth in the second
half of 2019.
Underlying Trading Profit (UTP) increased by £27.1m or 29% to
£120.2m (2018: £93.1m); excluding the £3.7m favourable
impact of currency and the £1.2m increase from the adoption
of IFRS16, the increase in UTP was £22.2m or 24%. Profit
growth was driven by the Americas Division in the first half by
the CMS contract, which experienced an unusually high
volume of fixed-price variable work in the first few months of
the year, and in the second half of the year from the NSBU
acquisition. Profits in the UK benefited from the Carillion
health facilities management acquisition; successful
mobilisation of the AASC contract saw mobilisation costs,
expensed largely in the first half of the year, being offset by
its move into profitability in the second half. Profits also
increased in the AsPac Division, again driven by its
particularly strong organic growth performance, whilst profits
fell in the Middle East Division, which largely reflects the
significant reduction in the defence logistics MELABS
contract as described a year earlier. The Group’s Underlying
Trading Profit margin was 3.7%, an increase of 40 basis points.
Trading Profit was £133.4m (2018: £116.7m), £13.2m higher than
UTP, which reflects a net £3.6m credit in Contract & Balance
Sheet Review and one-time items (2018: net credit of £23.6m),
and £9.6m of the commercial settlement received by Serco
regarding the Defence Fire and Rescue Project (DFRP) tender.
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 £40.9m utilised on losses in
2019 (excluding IFRS16-related accelerated utilisation) was in
line with expectations and lower than the prior year utilisation
of £51.8m; we expect utilisation to drop further in 2020. The
closing balance of OCPs now stands at £17m, compared to
£82m at the start of the year and the initial charge of £447m
taken at the end of 2014; we estimate the total value of OCPs
will have been within 2% of that original estimate.
Reported Operating Profit and Exceptional Costs
Reported Operating Profit of £102.5m (2018: £80.5m) was
£30.9m lower than Trading Profit as a result of, first, £7.5m
(2018: £4.3m) of amortisation of intangibles arising on
acquisition, and second, operating exceptional costs of
£23.4m (2018: £31.9m). The latter includes the £22.9m for the
fine and costs regarding the conclusion of the SFO
investigation, restructuring programme costs of £12.8m (2018:
£32.3m) related to the final steps in the implementation of the
Transformation stage of our strategy, and a £19.3m non-cash
release of a provision that had been originally charged in 2014
in relation to commercial disputes. After exceptional net
finance costs of £nil (2018: £7.5m net credit) and an exceptional
tax charge of £2.7m (2018: credit of £2.1m), total net
exceptional costs were £26.1m (2018: £22.3m).
Financing and pensions
Pre-exceptional net finance costs were £21.8m (2018: £13.9m),
with the increase driven by £6.9m (2018: £0.6m) of the interest
component of leases as required under IFRS16, and £3.0m of
non-cash credits no longer earned following the repayment
of the Intelenet loan note in October 2018. On a daily average
basis, Adjusted Net Debt was broadly unchanged at £231m
(2018: £219m). Cash net interest paid was £22.2m
(2018: £18.1m).
Serco’s pension schemes are in a strong funding position,
resulting in a balance sheet accounting surplus, before tax, of
£54m (31 December 2018: £71m) on scheme gross assets and
gross liabilities each of approximately £1.4bn. The opening net
asset position led to a net credit within net finance costs of
£2.1m (2018: £0.8m). For the Group’s main scheme, the Serco
Pension and Life Assurance Scheme (SPLAS), the purchase of a
bulk annuity from an insurer, has the effect of fully removing
longevity, investment and accounting risks for around half of
all scheme members; 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.
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Tax
The underlying effective tax cost was £24.4m (2018: £20.6m),
representing an underlying effective rate of 25% (2018: 26%)
based upon £98.4m (2018: £79.2m) 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 in 2019 is lower than the prior year
reflecting the improvement in, and changing mix of, the
Group’s profitability; we expect the rate to continue at around
25%, which reflects our updated expectations for the
proportions of profits coming from our UK and international
operations, and the anticipated tax rates in each jurisdiction.
Tax on non-underlying items was a net charge of £3.0m (2018:
credit of £11.8m), which includes an additional £0.8m (2018:
£2.9m) of deferred tax asset in relation to UK losses to reflect
the improved forecast of UK taxable income; the prior year
credit related predominantly to deferred tax movements
associated with changes in the valuation of the Group’s
defined benefit pension schemes. Total pre-exceptional tax
costs were £27.4m (2018: £8.8m). Tax on exceptional items was
£2.7m (2018: tax credit of £2.1m). The total tax charge was
therefore £30.1m (2018: £6.7m) and net cash tax paid was
£31.2m (2018: £10.6m), which includes the effect of tax paid in
2019 on non-underlying items that were credits in the prior
year, as well as the timing of tax payments on account.
Reported result for the year
The reported result for 2019, as presented at the bottom of the
Group’s Consolidated Income Statement on page 167, is a
profit of £50.6m (2018: £67.4m). This comprises Reported
Operating Profit of £102.5m (2018: £80.5m), Reported Profit
Before Tax of £80.7m (2018: £74.1m) and Tax of £30.1m (2018:
£6.7m). The reported tax charge increased by £23.4m in 2019
as a result of increases in tax on non-underlying and
exceptional items of £19.6m in addition to the £3.8m increase
in tax on underlying profit.
Earnings Per Share (EPS)
Diluted Underlying EPS, which reflects the Underlying Trading
Profit measure after deducting pre-exceptional net finance
costs and related tax effects, increased by 18% to 6.16p (2018:
5.21p). The improvement reflects the 29% increase in
Underlying Trading Profit and the lower tax rate, partially
offset by the increase in net finance costs; EPS growth was
tempered by the 6% increase in the weighted average number
of shares in issue, after the dilutive effect of share options, to
1,199.0m (2018: 1,125.4m), with the increase largely as a result
of the approximate seven-month effect of the additional
Placing shares from 28 May 2019. Diluted Reported EPS, which
includes the impact of the other non-underlying items and
exceptional costs, was 4.21p (2018: 5.99p).
Cash Flow and Net Debt
Free Cash Flow improved to £62.0m (2018: £16.3m), which
included the effect of the increase in underlying profits as
described above as well as receipt of the £9.6m DFRP
settlement. The cash outflows related to loss-making
contracts subject to OCPs (principally the Caledonian Sleeper,
COMPASS and PECS) reduced, reflected in the lower rate of
provision utilisation of £40.9m (2018: £51.8m). Working capital
movements were also broadly neutral, with a net outflow of
just £0.1m compared to an outflow of £21.6m in the prior year.
The Group did not utilise any working capital financing
facilities in 2019 or the prior year, and has no such facilities in
place. Average working capital days for the year were broadly
unchanged; we are proud to say that 86% of UK supplier
invoices were paid in under 30 days, up from 85% in 2018, and
96% were paid in under 60 days. Of other movements within
Free Cash Flow to note, cash tax paid was higher but capital
expenditure was lower, both of which include some timing
effects.
Adjusted Net Debt at 31 December 2019 increased to £214.5m
(31 December 2018: £173.2m); our key measure of Adjusted
Net Debt excludes all lease liabilities, which now total £370m
including those newly recognised under IFRS16, and the
Adjusted measure more closely aligns with that for covenant
purposes of our financing facilities. The increase of £41.3m
includes the Free Cash inflow of £62m, offset principally by
three sources of outflow: first, the £55m net outflow for
acquisitions (2018: £31.3m), driven by the consideration
payment of £184m for NSBU and the £139m of Equity Placing
proceeds; second, £22.9m relating to the conclusion of the
SFO investigation; and thirdly an outflow of £26.3m related to
other exceptional items (2018: £19.2m). The closing Adjusted
Net Debt of £214.5m compares to a broadly unchanged daily
average of £231m (2018: £219m) and a peak net debt of £357m
(2018: £292m), with this increase reflecting the timing of the
payment of exceptional costs and acquisition consideration.
Reported Net Debt was £584m (2018: £188m), which includes
the £370m (2018: £15m) related to leases. The increase in
leases was largely related to the mobilisation of the 10-year
AASC contract in 2019.
At the closing balance sheet date, our leverage for debt
covenant purposes was 1.17x EBITDA (2018: 1.06x). This
compares with the covenant requirement to be less than 3.5x.
Our underlying net debt leverage, which excludes non-
underlying items within covenant EBITDA such as the DFRP
settlement and OCP releases, was 1.31x (2018: 1.23x), which is
in the lower half of our normal target range of 1-2x underlying
net debt to EBITDA.
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.
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Dividend recommendation
When dividend payments were suspended in 2014, the Board
committed to resuming dividend payments to Serco’s
shareholders as soon as it judged it prudent to do so. 2019
has been a year of very strong operational and financial
performance. It is also the last year of significant outflows of
cash related to OCPs and restructuring exceptional costs.
Our expectations for 2020 are for further good progress
in increasing underlying earnings and reducing
financial leverage.
The Board is therefore recommending the payment of a final
dividend in respect of the 2019 financial year. Our intention
going forward is to weight dividend payments roughly
one-third : two-thirds between interim and final payments.
The Board considers it appropriate to reintroduce the
dividend payments at a level of underlying EPS cover initially
of around four times, equivalent to a payout ratio of
approximately 25%. The Board is therefore recommending the
payment of a final dividend in respect of the 2019 financial
year of 1.0p. The dividend, subject to shareholder approval at
the Annual General Meeting on 14 May 2020, would be paid
on 5 June 2020.
A combination of this final dividend in respect of the 2019
financial year, together with an interim dividend in respect of
2020 aligned to the recommended dividend and outlook as
described, would result in a cash outflow for dividend
payments to shareholders of around £20m in 2020. This has
been taken account of in our guidance for 2020 Adjusted Net
Debt and leverage.
The Board will keep the dividend, including the payout ratio,
under regular consideration as we continue to implement the
growth stage of our strategy. This will consider views of the
Group’s underlying earnings, cash flows and financial
leverage, together with the prevailing market outlook. The
Board is mindful of the requirement to maintain an
appropriate level of dividend cover, the potential alternative
uses of capital to generate incremental value for shareholders,
and the desire to maintain financial flexibility and a strong
balance sheet that is considered appropriate for Serco’s ability
to deliver sustainable value for all of the Group’s stakeholders.
Contract awards, order book, rebids and Pipeline
Contract awards
2019 was a record year for order intake, with almost all regions
performing very strongly. At £5.4bn, order intake represented
a book-to-bill ratio (the relationship between orders received
and revenue recognised) of around 170%, and 2019 was the
third year in succession that the book-to-bill ratio exceeded
100%, which helped to drive our order book to record levels.
There were over 50 contract awards worth more than £10m
each, but there were four particularly large awards which
accounted for approaching two-thirds of the intake for
the year.
In the UK, we won our largest ever contract, being an
estimated £1.9bn over 10 years for AASC (providing asylum
accommodation and support services). As previously set out,
the AASC contracts are particularly significant, as they replace
the COMPASS contracts which had been incurring losses
(offset in the P&L by the utilisation of the OCP) of around
£15-20m on average per year for the last five years.
Under the new AASC contracts, we did not retain the Scotland
& Northern Ireland region, but gained the much larger
Midlands & East of England region, whilst retaining our other
previous COMPASS region of the North West; as a
consequence, we are now 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.
The Group’s second largest contract award for the year was
also in the UK, where the UK Ministry of Justice (MoJ) selected
Serco to continue operating the Prisoner Escort & Custody
Services (PECS) in a contract valued at £0.8bn over 10 years.
Similar to COMPASS/AASC, this is a successful rebid of a
contract previously incurring losses that were being offset by
an OCP, and also similar to AASC in that Serco was selected to
provide these sensitive and demanding services over a
significantly increased geographical area.
The next two largest contract awards were in Australia. Serco
won a new AU$1.01bn (around £560m) contract over an initial
six-year term to provide health services personnel to the
Australian Defence Force at garrisons across the country,
working as a sub-contractor to BUPA. We also secured a
two-year extension for immigration services with an estimated
value of £0.4bn.
We have not included within our order intake the contract to
continue operating the Northern Isles Ferry Services, which
was announced by the customer in September 2019 and has
an estimated total contract value of £450m, as we have not yet
signed the contract due to a procurement challenge by the
unsuccessful bidder. In early February 2020 the Scottish
Government announced that all barriers to the award of the
contract had been resolved, and that signing the definitive
contract is anticipated to occur in the coming months.
Other notable contract awards included, in the UK & Europe
Division: rebid and expansion of our work on the Skills Support
for the Workforce Programme; a new environmental services
contract with the Royal Borough of Windsor and Maidenhead,
together with numerous other contract extensions for similar
services; extending defence support contracts for the UK
MOD and the US Air Forces in Europe; and securing our
contact centre operations for Companies House and our
support services to the European Organisation for Nuclear
Research (CERN).
Americas had a strong year of order intake, including: a new
win for field office services to the US Pension Benefit Guaranty
Corporation worth up to $200m; extending work we perform
for the Federal Retirement Thrift Investment Board (FRTIB);
support to transitioning military service members valued at
$95m; an $82m award for NexGen IT solutions US Air Force
Civil Engineering; increased task orders on ship and shore
modernisation and hardware frameworks totalling over $250m
as well as those for our support services to the Federal
Emergency Management Agency (FEMA) totalling over
$100m; and the acquired businesses of NSBU and BTP
Systems also achieved pleasing contract awards as referred to
in the Acquisitions section below.
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In AsPac, a new AU$115m contract to operate the Adelaide
Remand Centre on behalf of the South Australia Department
for Correctional Services was won, we extended our contract
for South Queensland Correctional Centre and successfully
rebid our contract for traffic camera services in the State of
Victoria. In the Middle East, we signed the contract extension
to continue operating the Dubai Metro, as well as extensions
for air traffic control services in Dubai and Iraq, several
facilities management awards in Abu Dhabi, and a new
contract for public infrastructure advisory services for
Mashroat in Saudi Arabia.
Of the total order intake, over 40% comprised new business,
with the balance represented by the value of rebids and
extensions of existing work. Reflecting the scale of the AASC
and PECS awards, around 55% of order intake came from the
UK, with the remaining 45% from customers of our Americas,
AsPac, Middle East and continental European businesses.
Bids for new work that were unsuccessful in the year included
the defence deployable health opportunity in Australia, the
Eastern Harbour Crossing and the Tsing Ma Control Area
transport operations in Hong Kong, and environmental
services and health facilities management tenders in the UK
and AsPac. Of existing work, the largest loss was for the
Scotland & Northern Ireland region of the COMPASS contract,
however this was more than offset by winning the new larger
region of the Midlands & East of England, whilst keeping our
existing North West of England region. The next largest rebid
loss was that for transport management of the Tsing Sha
Control Area in Hong Kong which had annual revenue of
around £20m, equivalent to around 0.6% of the Group overall;
as this was an onerous contract it does not impact UTP. The
next two largest rebid losses each had annual revenue of
£10-15m, which were the Cleveland Clinic healthcare facilities
management contract in Abu Dhabi and traffic management
services to the US state of Georgia Department of
Transportation.
The win rate by value for new work, which has been 20-25% for
the last four years, increased to around 40% particularly as a
result of the value of the new AASC Midlands & East of
England region and the new Australia defence health contract.
The win rate by value for securing existing work was around
65%, which is lower than the 75-90% trend in recent years, but
which is reflective of losing the existing Scotland COMPASS
region; if the Scotland COMPASS region were excluded, the
win rate by value for existing work would have been over 90%.
Win rates by volume were over 50% for new bids and over 90%
for rebids and extensions.
2019’s £5.4bn of order intake was an exceptional performance.
However, in our business, order intake is lumpy, and we expect
in 2020 that order intake will be significantly lower than that
which we saw in 2019.
Order book
Driven by the very strong order intake, the Group’s order book
closed the year at an estimated £14.1bn, up by £2.1bn versus
the £12.0bn at the start of 2019. The order book takes into
account any required changes in assumptions for existing
contracts including currency movements, as well as the
addition through the acquisition of NSBU which has visibility of
around $700m of future revenue but only $200m is taken into
the order book as the balance is unexercised options.
This order book definition is therefore aligned 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 as it excludes
unsigned extension periods; the £14.1bn would be £15.3bn 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, but in
accordance with IFRS15 we do not include them in the order
book until they are exercised. Furthermore, the order book
definition excludes our share of expected revenue from
contractual arrangements of our joint ventures and associates
which would add a further £1.5bn if included within our order
book, driven by the current pricing period of the AWE
operations and the Merseyrail franchise.
There is £2.6bn of revenue already secured in the order book
for 2020, equivalent to around 75% visibility of our £3.4-3.5bn
revenue guidance; the ‘gap’ in visibility is typically closed by
our US business receiving the exercise of contract option
periods and through short-term task order work on framework
contracts, together with the necessary securing of contract
extensions or rebids across the rest of the Group.
Rebids
As we look ahead the customary three years through to the
end of 2022, across the Group there are over 70 contracts in
our order book with annual revenue of over £5m where an
extension or rebid will be required, representing current
annual revenue of around £1.5bn in aggregate or over 40% of
the Group’s 2020 revenue guidance. The proportion of
revenue that requires securing at some point over the next
three years is normal 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 and at the start of 2019 it was £1.2bn.
Contracts that could potentially end at some point before the
end of 2020 have aggregate annual revenue of around £300m,
though none individually exceed £50m. In 2021, the aggregate
annual value of contracts due for extension or recompete is
currently around £800m, with this including our operations for
the Dubai Metro and Fiona Stanley Hospital in Australia, each
of which account approximately for 3% of Group revenue. In
2022, the aggregate annual revenue due for extension or
recompete at some point in that year is around £400m; this
includes the Australian immigration services contract due to
end in December 2021 unless the option for a further
extension is exercised or a rebid is won, and which currently
accounts for over 5% of Group revenue.
Pipeline
As we have previously described, Serco’s 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) greater than £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
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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 £4.9bn at the close of 2019. At the beginning of 2019 it was £5.3bn, however, as we noted
at the time of reporting the results for the 2018 financial year back in February 2019, we had already won in the first month of the
year the two largest opportunities in this Pipeline which reduced it by £1.7bn. Other wins, losses and a small number of
removals due to opportunities no longer meeting our definition reduced the Pipeline further, such that it stood at £3.2bn at the
half-year stage. With a number of opportunities maturing to the stage where they meet our Pipeline definition, together with
our ongoing Business Development progress to reload the Pipeline with new opportunities, we therefore saw the Pipeline
increase in the second half of the year. The closing position consisted of around 30 bids that have an ACV averaging
approximately £30m and a contract length averaging around six years. The UK & Europe and Americas Divisions each represent
around 40% of the Group’s pipeline, with the AsPac and Middle East Divisions the balance.
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. Whilst the
second half of 2019 did produce an expected increase in the Pipeline, and market conditions may over time become more
favourable, it does not particularly support that Pipeline progress is either ‘straight line’ nor strongly predictive of future revenues.
Going forward, Serco will change its Pipeline definition to no longer exclude opportunities for new business that have an
estimated ACV smaller than £10m. At around £1.6bn, smaller opportunities in aggregate are a significant component of the
Pipeline and potential growth, and likely to be increasingly so given the use of task orders under framework contracts; the
Pipeline on this basis therefore increases from £4.9bn to approximately £6.5bn.
Operational progress, transformation and innovation
We have an ambition to be the best-managed business in our sector. Achieving this will require investment in people, processes
and systems. Each are described below.
People
Serco is a business that provides people-enabled public services. In nearly all our contracts, what government customers are
buying is the service and expertise of people who are knowledgeable, disciplined, reliable, committed to delivering public
services, appropriately paid and well led and managed. It therefore is central to our ability to deliver effectively to our customers
that our colleagues within the business feel engaged.
Since 2011, Serco has carried out an employee survey every year, to which a large majority of the eligible workforce respond –
around 27,000 people in 2019. The survey has about 50 questions covering everything from attitudes to health and safety,
relationships with peers, respect for diversity and many other dimensions. We also test an “engagement score” which is a standard
method of allowing companies to measure and benchmark from year to year what in olden times would have been called “morale”.
The progression of these scores in the run-up to the disastrous years of 2013 and 2014, and our subsequent recovery, tell the tale
of Serco’s turnaround as eloquently as any financial metrics:
2011
2012
2013
April
2014*
Oct
2014*
2015
2016
2017
2018**
2019
Leaders
Managers
All employees
65
54
45
56
51
45
51
49
42
38
n/a
42
51
58
51
55
59
53
72
62
54
71
65
56
69
70
67
77
73
71
Notes:
*
**
in 2014 two surveys were done.
in 2018, the methodology for calculating employee engagement changed, aligned to the new specialist third party provider of the survey. As reported at
the time, it is not possible to adjust historic data to restate to the new methodology, but analysis performed by the new provider in 2018 indicated that the
engagement level for that year was broadly stable on the previous year’s score.
Two things shine out from these numbers: in 2011 and 2012, there was a huge difference in the experience as an employee of
Serco to the experience of the 300 or so leaders. And in 2018 and 2019, not only are the scores much higher, they are much
more tightly grouped, which says that the morale of the workforce is similar to that of managers and leaders. It is a good thing,
and actually quite rare, to find such close correlation between leaders’ and employees’ morale in companies in our industry and
with our scale.
One other fact worth mentioning: in 2019 we opened up the questionnaire to allow free-text answers to questions, with specific
opportunities to make comments to the Board. To our amazement, the 27,000 respondents made some 50,000 individual
comments, and ever since we have been trying to work out how we can digest that much feedback. Our solution has been to
pick at random 500 of them – the good the bad and the ugly – and publish them. If anyone has any doubt as to the fact that
Serco colleagues are a feisty, fearless and passionate lot who care deeply about their work delivering public services and about
Serco, we need look no further than those comments.
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Three other data points are worth mentioning as regards
people: in 2019, we estimate that over 500,000 people applied
to work for Serco, so it appears that our ambition to make
Serco an employer of choice seems to be working. And in the
last three years, from a senior management cohort of around
350, the rate of annual voluntary turnover has been around 3%.
Finally, in 2019, we launched our first graduate recruitment
scheme in the UK; bearing in mind that Serco’s reputation,
particularly in the UK, was so badly damaged a few years ago,
it was gratifying to see that around 1,000 graduates applied,
over 400 sat the aptitude tests, 45 attended a selection day,
and we hired 14.
We continue to make significant investment in training. At a
Group Level, we have continued to run our highly successful
Serco Senior Management Programme. This course, exclusive
to Serco, and designed and delivered by us and Saïd Business
School, Oxford, has been an outstanding success, and so far
some 11 courses, embracing 330 senior managers, have been
run. In 2019, we added a specific Contract Managers’ course,
which also runs at Oxford. Within the businesses, Operational
Excellence practices continue to be embedded across the
business, with 2 Master Black Belts, 9 Black Belts and 154
Green Belts now supporting the 3,471 Yellow Belts that have
been trained over the last four years. And in addition, our
Divisional Chief Executives are encouraged to develop their
own regional courses, and we have a plethora of different local
courses available to management.
Systems and processes
However well trained the people, they need the tools to do
the job, and these are in part processes, and in part systems.
Significant progress has been achieved on our core IT systems;
in 2018, we migrated our SAP system into the cloud, thereby
avoiding the multi-million pound investment we would have
had to have made in upgrading our IBM servers, and allowing
us to vacate our largest server farm. In 2019, we followed this
up by upgrading our SAP versions from the heavily customised
2009 release to the latest version. Few companies can claim to
have their core ERP system both cloud-based and on current
release. We also did extensive and complex work migrating a
large number of specialist applications to the cloud, which has
allowed us to close the second of our two large server centres
in the UK in December. We will also be upgrading our core US
ERP system to latest version in 2020.
Many contracts are supported by IT systems we have
developed. In the US, we have used sophisticated Robotic
Process Automation and Artificial Intelligence tools to
transform the speed and efficiency of key processes on our
CMS contract, which has allowed us to handle large variations
in volumes of work without hiring and firing people. In the UK,
using the latest workflow tools we have completely re-written
the systems used to manage the AASC and PECS contracts.
Similarly, in Australia, we have created a highly efficient set of
systems which have allowed us to recruit and manage over
1,000 healthcare professionals to serve the Australian Defence
Force; we have also developed and launched a combined
online and call centre application which allows citizens to
report non-urgent issues to the Victoria Police. So far, we have
taken over 500,000 calls to this service.
A key priority for the Company is to improve the productivity
and efficiency of our workforce, and to streamline processes
such as payroll and absence management. Whilst this sounds
straightforward, in a company employing over 50,000 people,
many on terms and conditions inherited from previous
employers, it has proved to be a major task, on which we have
so far spent not far short of £10m. However, we are now rolling
out workforce management systems, and have around 13,000
users on various levels of system, ranging from simple
clock-in-clock-out time management, to full rostering,
absence management and workforce planning.
In the critical area of cyber security we continue to invest, and
regularly achieve the accreditations and standards demanded
by our various government clients of their contractors. Our
hopes that we would be able to reduce our IT costs as we shed
old server farms and systems have been largely set to nought
by the inexorable increase in investment we need to make on
protecting our IT systems and data from those who would do
us and our customers harm.
A major challenge for the IT team was the integration of
around 1,000 NSBU employees onto our systems. Both Serco
North America and NSBU work on highly classified contracts,
and managing the task of migration whilst maintaining the
appropriate security was complex. Rather than try and merge
the two environments, we have given all NSBU employees new
laptops which meet our security requirements and “lifted and
shifted” all the NSBU data onto our proven Serco
secure network.
The basic operational transformation of Serco is now largely
complete in terms of HR, IT, Procurement and Finance. But
much work still remains to bring systems and processes from
“acceptable” up to “best-in-class” in our industry, and we
intend to continue to invest, with the priority in 2020 being the
creation of a new front-end to our HR systems outside North
America (“Project Goldfinch”) and beginning to use the
analytics available in our workforce management systems to
improve efficiency and productivity and create sustainable
competitive advantage. A business which employs over 50,000
people, receives over 500,000 job applications and recruits
over 15,000 new hires a year has the scale to be efficient.
Innovation does not only come from IT. The new Clarence
prison in New South Wales, which opens in mid-2020, is a
minor miracle of innovation and stands in sharp contrast to
prisons built 20 years ago, let alone 100 years ago. Advances
in materials – specifically strengthened glass, have allowed us
to create a prison where there is barely a steel bar to be seen.
Cells are airy and light, with large windows, likewise visiting
areas; prisoners will have their own tablets which allow them to
communicate with family, read books and watch films. And yet
security is world class. Our new Caledonian Sleeper trains,
running between Scotland and London, have replaced
notoriously shabby 40-year old rolling stock, and have double
beds and ensuite showers and toilets. Our Northlink ferries
have introduced disabled changing and toilet facilities that
transform the experience of disabled people who travel
between the mainland and the Northern Isles. In Australia, we
have developed an “e-order” mobile trolley system for
ordering and tracking clinical pathology tests in Fiona Stanley
Hospital, which other hospitals are considering adopting.
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The Serco Institute
In 2019, we relaunched Serco Institute. Originally active in the
early days of outsourcing as a way to encourage thinking and
research about the delivery of government services, it had a
reputation for providing interesting and challenging articles
for those interested in public service delivery. After 2011 it was
left to wither, and has been dormant for several years.
However, at a time when the idea that private companies can
deliver public services is being widely questioned, when
citizens’ expectations of public services continue to increase
and evolve, and where over-aggressive risk-transfer has led in
the UK to huge damage to the UK Government’s supply chain,
we feel that there is need for a forum in which ideas about the
delivery of public services can be expressed.
We have brought together people to discuss ways of
capturing social value in government contracts; we have
commissioned independent research from Capital Economics
on the economics of outsourcing, as well as work in
conjunction with Kings College on the Whole Force approach
for the British military; we have commissioned research on why
rates of violence are so much lower in Australian prisons than
UK prisons. The Serco Institute works to help governments
understand what works in service delivery; what sets it apart
from other think tanks is the international dimension, access to
colleagues’ deep operational expertise, and the live public
service environment we have to conduct studies and run trials.
It is early days, but we believe that the Serco Institute can
make a meaningful contribution to understanding what works,
and why, in policy delivery, and disseminating knowledge of
innovations in public services.
Acquisitions
Acquisitions can have an important role in sustainable value
creation by bringing new capabilities and skills to our
customers, enhancing returns for our shareholders and
improving opportunities for the employees and business
partners of Serco. Generally speaking, we regard acquisitions
as higher risk than organic growth, so any candidates have to
meet our stringent criteria of being both strategically and
financially compelling. In 2019 we undertook a major
acquisition (described below) in the form of NSBU, having
made two much smaller ‘bolt on’ acquisitions of BTP Systems
and the Carillion health facilities management contracts
in 2018.
In May 2019, Serco announced that it had entered into a
definitive Asset Purchase Agreement to acquire for $225m the
Naval Systems Business Unit and a small number of related
contracting entities (collectively, ‘NSBU’), from Alion Science &
Technology Corporation. NSBU is a leading provider of naval
design, systems engineering, as well as production and
lifecycle support services to the US Navy, US Army and Royal
Canadian Navy. In the 12 months to September 2018 NSBU
had revenues of $336m, which compares with Serco’s North
American Defence revenues in 2018 of $453m.
The acquisition marked an important step for Serco, materially
adding to the scale and capability of our US defence business,
and in particular to the maritime support segment. Prior to the
acquisition, Serco employed some 6,000 people in North
America, of whom 2,300 worked in defence, and Serco has
been providing services to the US Navy for nearly 30 years.
NSBU, which employs around 1,000 people, has brought
world-class ship and submarine design, systems, and
engineering services, production support and in-service
sustainment capabilities, which are highly complementary to
Serco’s existing skills in ship modernisation, hardware
integration and naval logistics.
As well as broadening capabilities, the acquisition increases
significantly the scale of our international Defence businesses.
Serco Group’s revenue mix from Defence has increased from
30% in 2018 to around 35% of 2019 revenues on a pro forma
basis, which is equivalent to approximately $1.7bn (£1.3bn),
while the Americas Division as a proportion of the Group has
increased from 20% in 2018 to around 29% on a pro forma
basis, equivalent to approximately $1.4bn (£1.1bn).
The combined business is a top tier supplier of services to the
US Navy, and increases our exposure to US Navy fleet
expansion, which is one of the fastest-growing areas of public
procurement. The US Navy has announced plans to increase
the fleet from 280 to 355 ships by 2034, and we see a long-
term and growing demand for the capabilities that the
combination of Serco and NSBU will be able to provide.
The acquisition was financed through a combination of a new
£45m debt facility together with an Equity Placing for cash of
10% of existing share capital that raised gross proceeds of
around £140m on the day that the transaction was announced.
As stated at the time of the acquisition, in 2020, NSBU is
expected to contribute revenue of approximately $370m
(£285m), EBITDA of $28m (£21m) and Underlying Trading Profit
of $27m (£20m), resulting in transaction multiples of 0.6x, 8.1x
and 8.3x, respectively. This includes the benefit of sharing
Serco’s fixed overheads across a wider revenue base in North
America, which we expect to be worth $3-4m of UTP in the
first year.
Serco received all necessary regulatory approvals, including
customary Hart-Scott-Rodino (‘HSR’) and Committee on
Foreign Investments into the United States (‘CFIUS’), and
completed the transaction at the start of August 2019. The
integration has progressed well and the business has traded
to plan. This has included good progress on contract awards
such as the $162m contract to continue the support to the US
Navy’s Amphibious Warfare Program Office (PMS 377) and the
$43m five-year contract to deliver design and engineering
services for the US Navy’s next generation of unmanned and
small surface combatant vessels.
The businesses acquired in 2018 have also performed well in
2019, their first full year under Serco ownership. BTP Systems
deepens the Group’s satellite and radar capabilities, and it too
has achieved good progress on contract awards such as
successfully rebidding and expanding its largest operation
with the $49m five-year contract for system engineering
technical services on the Submarine High Data Rate (SubHDR)
program. The acquisition of the six Carillion health facilities
management contracts added significant scale to our UK
health business, and has contributed to improved profit
performance of the UK business in 2019.
Annual Report and Accounts 2019
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Financial StatementsCorporate Governance
Chief Executive’s Review continued
Electronic Monitoring investigations
In 2013, the UK Serious Fraud Office (SFO) opened an
investigation following allegations of overcharging on our
Electronic Monitoring (EM) contracts for the UK Ministry of
Justice (MoJ). The investigations related to these allegations
were finally concluded with the announcement on 3 July 2019
that one of Serco’s UK subsidiaries, Serco Geografix Ltd (SGL),
had reached an agreement to a Deferred Prosecution
Agreement (DPA); the agreement received final judicial
approval the following day. The DPA related to three offences
of fraud and two of false accounting committed between 2010
and 2013 associated with the reporting to the UK Ministry of
Justice (MoJ) of the levels of profitability of Serco’s EM
contract. Investigations into allegations of wrongful billing
which were the subject – understandably – of significant public
and Parliamentary ire in 2013 were concluded without any
criminal charges against Serco. An investigation by the
Financial Reporting Council into misconduct by the Group’s
auditors at the time concluded with sanctions and penalties
imposed against Deloitte and two of its audit engagement
partners. Nothing in these matters impacts the previously
reported statutory accounts of Serco Group.
The DPA concludes the SFO’s investigation into Serco
companies. As noted in the summary of financial performance
above, and in note 10 to the financial statements on page 193
regarding exceptional items, a £22.9m charge was taken to
reflect the payment of the £19.2m fine together with £3.7m
related to the SFO’s investigation costs. The fine reflected a
discount of 50% as a result of Serco’s self-reporting and
significant and substantial cooperation with the investigation.
The SFO determined that no further damages or
disgorgement of profit was payable to the MoJ because
Serco had already fully compensated the Department in
December 2013.
As noted in the announcements made in July, the SFO
recognised the significant steps Serco has taken to reform
itself, including the thorough implementation under
independent supervision of a comprehensive Corporate
Renewal Programme approved by the UK Government. This
programme included over 80 actions and initiatives, and
included rewriting our system of management control, as well
as strengthening our bidding, contract management, internal
audit and management assurance processes. Nobody who sat
on the Board of Serco Group, or who was part of the Executive
Management Team at the time these offences were
committed, works for Serco today.
•
Whilst all financial liability is considered to now have been
extinguished following the SFO’s long and very detailed
investigation into Serco companies, as well as the internal and
customer-led investigations and reviews which preceded and
ran in parallel with the SFO, Serco has subsequently received a
claim seeking damages for alleged losses following the
reduction in Serco’s share price in 2013. This claim will be
energetically and robustly resisted. As referred to in our
contingent liabilities note on page 208, the merit, likely
outcome and potential impact on the Group of any such claim
is subject to a number of significant uncertainties.
Market outlook
Our approach to strategy planning is to conduct annual
planning exercises, updating five-year forward plans, using
internal resources. Every 4-5 years we conduct a root-and-
branch review, with external help, of our markets. The last such
review was in 2018, and in our 2018 results announcement, we
set out our views on our markets. Other than a new and much
stronger Government in the UK, and certainty that the UK will
leave the EU, nothing has happened to change our previous
assessment. In summary:
• 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’).
In 2018 we estimated that the weighted average rate of
growth across all our geographies and sectors was running
at 2-3%, which was lower than the 5%+ seen several years
earlier and which we think the market could revert to in the
longer term; the reduction was in large part because of the
conditions in the UK, which represents around 40% of our
revenues. A year passing has not changed our view on
market growth.
•
• The UK Government has been commissioning very little
which is new in the world of public service outsourcing, as it
deals with other priorities such as Brexit. New contracts have
tended to be rebids of existing work, and whilst this may
have increased Government spend, this will be because
previous contracts were loss-making and on re-bid the
Government is having to spend more; this represents an
adjustment to the market value, not volume growth.
Examples of such “value resets” would be the AASC and
PECS tenders, which Serco won at increased value
compared to the previous generation of contracts following
years of losses. There have been some new opportunities in
UK Central Government – notably new MOD programmes
around training and fire services, the new prisons build
programme and electronic monitoring for immigration
applications – but they have been few and far between.
In terms of life post-Brexit, the determination of the UK
Government to “take back control” from the EU and to have
its own standards and regulation is in effect insourcing
regulation on a national scale. The UK will have to invest in
rebuilding the regulatory capability that for the last 40 years
has been outsourced to the EU. Supporting Government in
this work may produce opportunities for companies like
Serco in the longer term. The Government is also
determined to simplify procurement regulations, which may
make bidding a little less expensive and long-winded, and
the new Playbook for outsourcing is a genuine attempt by
Government to procure services contracts in a more
effective and balanced way. Our direct exposure to Brexit is
small as Serco neither exports nor imports to any significant
degree; our business in continental Europe is conducted
through long-established local subsidiaries, and we employ
relatively few continental European citizens in the UK.
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• Elsewhere, US defence spending, and particularly Navy
procurement, is very robust, and the Department of Defense
is busy trying to work out how they will fulfil the requirement,
mandated by Congress with bi-partisan support, to increase
the Navy from around 280 ships to 355. The startling
increase in the valuations accorded to our quoted peers in
the US in the last 12 months suggests that there is
confidence that demand will remain strong; our view is that
the rate of growth in US defence spending will likely slow,
but that there is plenty of work to bid for, and the main
constraint for us is availability of labour. If finding welders in
the US is difficult at a time of 3.5% unemployment, finding
welders with the security clearances required to work on
sensitive defence contracts is doubly so.
• Australia remains a diverse market in that different states
elect governments who have sharply different views about
the private provision of public services. But overall, the
competition amongst different administrations in the
Commonwealth to provide improved services provides a
healthy back-drop to the market, and the Federal
Government remains a major purchaser of public services in
defence and immigration.
• We are continuing to search for opportunities to grow our
•
position in Europe; we have energetic and effective
management who have won us our first European defence
contracts, and we are hopeful we can grow our position.
In Serco Middle East, we also have new management who
are bringing new dynamism and ambition to the business.
We have just signed a large and significant new contract with
Dubai airport; our contract in Saudi Arabia with the
Government to provide a framework and processes and
procedures for asset and facility management across the
whole of Government is of great significance to our position
in that market. Whilst the Middle East will always be a
volatile and difficult market, we believe that it will continue
to grow.
• Although we have not yet seen any material impact on our
business, we are closely monitoring the developing situation
relating to the Coronavirus (COVID-19). As a major employer
and provider of essential frontline services, the health and
safety of our colleagues and service users is paramount, and
supporting our government customers, frequently in very
challenging situations, is at the heart of what Serco does.
There is limited necessity for travel of our employees, and,
given the nature of our services, we consider any supply
chain risk to be small at the current time. We will continue to
evaluate this situation and provide any update to our
stakeholders at the appropriate time.
Guidance for 2020
At our Closed Period trading update on 12 December 2019, we
provided our initial outlook for 2020 and remarked that we
anticipated continued progress and further strong growth in
line with analyst consensus expectations, taking into account
the previously announced PECS transition costs and recent
currency movements at that time. No element of guidance has
changed since that date, except for more recent currency
rates and to take into account the impact of the resumption of
dividend payments to Serco’s shareholders announced with
our 2019 results.
Revenue in 2020 is expected to be £3.4-3.5bn, which would
represent total growth of 6-8%. This assumes organic growth
of around 4%. Within this, the performance of the Americas
Division is more susceptible to the volumes of task order work,
such as in our Ship & Shore modernisation operations and the
FEMA contract, which have been particularly strong in 2019,
and this creates a tough comparative for 2020. The acquisition
of NSBU is expected to add to revenue growth by about 5-6%,
representing the seven months through to the anniversary of
completion of the transaction in August. If recent currency
rates were to prevail throughout 2020, there would be a
currency headwind across the Group of estimated at £80-90m
or 2-3% of revenues.
Underlying Trading Profit is expected to be around £145m,
which would represent growth of about 20%, and includes an
assumed currency headwind of approximately £5m. 2020 will
benefit from the full-year contribution of the AASC and AHSC
contracts, as well as the annualisation of the NSBU acquisition.
The transition of the recently awarded PECS contract is
expected to cost around £4m in 2020, as set out in our
announcement of 30 October, and, as previously indicated, we
expect a significant reduction in contribution from the US
CMS contract.
Net Finance Costs, as previously indicated, are expected to
increase by approximately £5m, which includes the full-year
impact of new property leases related to the AASC contract.
The underlying effective tax rate is expected to continue at
around 25%, which reflects the higher proportion of our
pre-tax profits now coming from our international operations,
particularly the US. The weighted average number of shares
for diluted EPS purposes, fully annualising for the Equity
Placing conducted in May 2019, is expected to be
approximately 1,250m.
A broadly similar level of Free Cash Flow is anticipated in 2020,
and closing Adjusted Net Debt is expected to reduce to
approximately £200m, resulting in leverage towards the lower
end of our normal target range of 1-2x; this guidance now
includes an assumed outflow of around £20m to take account
of the assumption for the resumption of dividend payments if
approved by Serco’s shareholders as described above.
Our outlook for 2020 is based upon recent currency rates. The
rates used, along with their estimated impact on revenue and
UTP, are shown in the table on page 24.
Serco gives unusually detailed forward guidance across a
large number of key metrics, giving numbers rather than
opaque words, so that investors and other stakeholders have a
clear idea of what we think will happen at a given point of time.
The disadvantage of this approach is that it is almost
inevitable that events will prove us wrong on one or more
metrics. We believe however that transparency and clarity is
helpful, albeit that, as we always point out, our profits can be
affected by small percentage changes in revenues and costs,
as well as currency rates.
Annual Report and Accounts 2019
Serco Group plc
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Financial StatementsCorporate Governance
Chief Executive’s Review continued
Summary and concluding thoughts
If 2018 marked an inflection point, where we moved into growth
after five years of declining trading profit, 2019 can perhaps be
described as the year we achieved escape velocity, being the
point at which we were able to leave behind the gravitational drag
of previous missteps, and become a “normal” company again. By
“normal”, we mean a company with growing revenues, profits and
cash flows; producing good returns on capital; winning profitable
business; executing well; valued by its customers; being a place
people want to work; and a company which has enough
confidence in its future to pay shareholder dividends. From
fighting for survival, we can now spend more time plotting how to
find new sources of growth; new ways to build sustainable
competitive advantage; new ways to deliver public services. We
also perhaps have a bit more space to think about how to adapt to
a world where a company’s approach to Environmental, Social
and Governance (ESG) issues has become so much more
important to many stakeholders than they were even twelve
months ago.
Our position on ESG issues has, for many years, been a strong
one, and is at the very heart of what we do: Serco has a clear
social Purpose – “to be a trusted partner of governments,
delivering superb public services, that transform outcomes
and make a positive difference for our fellow citizens”. Our
Values of Trust, Pride, Innovation and Care are embedded
deeply in our culture. We have a good track record of
delivering high quality services to often vulnerable individuals
on behalf of governments. We have strong governance and
invest heavily in it as well as in the skills of our people. For the
last five years, we have worked hard to make Serco a business
which is both profitable and sustainable.
Notwithstanding this strong position, the fact is that some of
the work governments are expected to do is controversial, and
doubly so when they ask private companies to carry this work
out on their behalf. Be it running prisons, or supporting
immigration policy, or helping to deliver strategic nuclear
deterrence the work we do is seen by some as wrong, either
because people object in principle to private companies
delivering public services, or because people object to the
nature of the work government asks us to do. Furthermore, as
a provider of public services, and paid for by taxpayers’
money, we are regularly (and rightly) challenged to justify
either the quality of service we deliver and / or the value for
money we provide to the taxpayer.
In short, what we see as a strong Purpose – delivering social
value by supporting governments in providing essential
services to protect and support their citizens – others see as
its antithesis. This presents a complex and confusing picture
to investors and ESG analysts who are having to consider
these matters ever more carefully, and part of our job is to
help them make informed judgements. It is our responsibility
to ensure that Serco continues to behave in a sensible,
thoughtful, transparent and responsible way towards all its
stakeholders, whilst making a positive difference to the lives of
people who access or pay for public services.
requires constant diligence, strong execution, an
understanding that no deal is better than a bad deal, and a
willingness to say no. On the other hand, unlike many other
sectors, we can wake up each morning without the fear that
our customers may not be able to pay their bills, or that
demand for our services might evaporate, or that our services
might be disintermediated by a start-up. And running these
businesses does not require large amounts of capital, so slim
margins can still deliver attractive returns.
The election of a Government in the UK – our largest market –
with a large majority and a determination to deliver renewal,
re-order and change is a good thing for our market as the more
governments want to do, and the more they care about value for
money, the more they need a strong private sector to help them.
The UK Government will need to resolve how it wants to finance
new infrastructure and other initiatives (PFI being, unjustly in our
view, the scoundrel du jour) and how to balance expenditure on
new assets with maintaining existing assets. In the NHS alone,
there is a backlog of £6.5bn on maintenance, as funds are diverted
from capital and maintenance budgets to day-to-day service
delivery. But those who provide public services, be they civil
servants or suppliers, tend to thrive when governments know
what they want and have the determination to get it.
2020 will be a busy year for Serco: there are some very large
contracts such as PECS, Clarence Correctional Centre and
Dubai Airport Services which need to be transitioned; we will
also be handing over the world’s most advanced icebreaker
vessel to the Australian Government. We need to rebuild our
pipeline, denuded (the right way) by three years of strong
order intake. And we need to continue to invest in making our
internal systems and processes sing for their supper.
And we intend to stick with the strategy we developed in 2014,
and which has so far served us well:
What we do: we are an international business providing
people-enabled services, supported by best-in-class systems
and processes, to governments.
How we do it: we use a management framework, as set out
below.
Our Values: Trust, Care, Innovation, Pride
Our Purpose: 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: loose-tight, disciplined
entrepreneurialism
Our Method: being the best-managed business in
the sector.
Our Deliverables: high and rising employee engagement,
margins of ~5%, growing revenues at ~5%.
We intend to continue working hard to deliver this strategy.
Returning to the operational management of the business,
one of the lessons of the last five years is that providing
services to governments is not easy. By their nature, margins in
the sector are slim, and risks are high; the relationship
between risk and reward is asymmetrical. Being successful
Rupert Soames
Group Chief Executive
Serco – and proud of it.
25 February 2020
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Annual Report and Accounts 2019
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 (UTP). 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).
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Year ended 31 December 2019
Revenue
Change
Change at constant currency
Organic change at constant currency
UTP excluding the effect of IFRS16 adoption
Change
Change at constant currency
Margin excluding the effect of IFRS16
Change
Effect of IFRS16 adoption on UTP
UTP
Margin
Contract & Balance Sheet Review adjustments
Other one-time items – DFRP settlement
Trading Profit/(Loss)
Amortisation of intangibles arising on acquisition
Operating profit/(loss) before exceptionals
Year ended 31 December 2018
Revenue
UTP
Margin
Contract & Balance Sheet Review adjustments
Trading Profit/(Loss)
Amortisation of intangibles arising on acquisition
Operating profit/(loss) before exceptionals
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
1,361.7
+5%
+5%
+2%
40.6
+4%
+4%
3.0%
0bps
(2.2)
38.4
2.8%
0.3
9.6
48.3
(1.2)
47.1
915.7
+42%
+35%
+19%
79.2
+73%
+64%
621.4
+13%
+16%
+16%
31.1
+16%
+19%
349.6
+2%
(2%)
(2%)
13.6
(37%)
(39%)
8.6%
+150bps
5.0%
+10bps
3.9%
(240bps)
2.9
82.1
9.0%
9.5
–
91.6
(6.2)
85.4
0.2
31.3
5.0%
–
–
31.3
(0.1)
31.2
0.3
13.9
4.0%
–
–
13.9
–
13.9
Corporate
costs
£m
–
(45.5)
+13%
+13%
n/a
–
(45.5)
n/a
(6.2)
–
(51.7)
–
(51.7)
Total
£m
3,248.4
+15%
+13%
+8%
119.0
+28%
+24%
3.7%
+40bps
1.2
120.2
3.7%
3.6
9.6
133.4
(7.5)
125.9
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Corporate
costs
£m
Total
£m
1,300.7
645.6
548.2
342.3
–
2,836.8
39.2
3.0%
12.4
51.6
(0.5)
51.1
45.7
7.1%
(2.5)
43.2
(3.2)
40.0
26.8
4.9%
13.7
40.5
(0.6)
39.9
21.5
6.3%
–
21.5
–
21.5
(40.1)
n/a
–
(40.1)
–
(40.1)
93.1
3.3%
23.6
116.7
(4.3)
112.4
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 42 to 59. 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 167 to 227. Included in the accompanying notes are the Group’s policies on
recognising revenue across the various revenue streams associated with the diverse range of goods and services discussed
within the Divisional Reviews. The various revenue recognition policies are applied to each individual circumstance as relevant,
taking into account the nature of the Group’s obligations under the contract with the customer and the method of delivering
value to the customer in line with the terms of the contract.
Annual Report and Accounts 2019
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Financial StatementsCorporate Governance
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UK & Europe
Sectors we operate in:
• Defence
• Justice &
• Health
• Citizen
Services
Immigration
• Transport
Revenue
£1,361.7m
2018: £1,300.7m
Percentage of Group revenue
42%
Underlying Trading Profit (UTP)
£38.4m
2018: £39.2m
Percentage of Group UTP
(before Corporate costs)
23%
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| Serco Group plc
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, the reduction of
reoffending, and the effective
management of the UK’s immigration
system, and includes prison management
as well as the provision of 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 our
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
international organisations across Europe,
including the European Patent
Organisation and the European Space
Agency. On a Reported Revenue basis,
Serco’s operations in the UK represent
approximately 39% of the Group’s reported
revenue, and those across the rest of
Europe approximately 3%.
Revenue for 2019 was £1,361.7m (2018:
£1,300.7m), an increase of 4.7%. Reported
Revenue excludes that from our joint
venture and associate holdings which
largely comprise the operations of AWE,
Merseyrail and Viapath. At constant
currency, the growth in Revenue was also
4.7%, or £62m. The net contribution to
revenue from the acquisition of the Carillion
health facilities management contracts that
transferred to Serco between June and
August 2018 was £32m, therefore the
organic growth was £30m or 2.4%. Within
the organic growth, the largest contributor
was from the expanded operations of
Asylum Accommodation and Support
Services Contracts (AASC) which replaced
the previous COMPASS contracts in the
second half of the year. Other examples of
contracts with growth included those for
the Skills Support for the Workforce (SSW)
Programme and services to the
Department for Work & Pensions (DWP),
and the start of our new contract for
environmental services for Hart District
Council and Basingstoke & Deane Borough
Council; there was partial offset to this
growth from the early exits of the
previously onerous contracts for East Kent
Hospitals University NHS Foundation Trust
and for the Anglia Support Partnership, and
lower revenue in our European operations.
Underlying Trading Profit (UTP), excluding
the effect of IFRS16 adoption, was £40.6m
(2018: £39.2m), representing an implied
margin of 3.0% (2018: 3.0%) and growth of
4% at constant currency. Trading Profit
includes the profit contribution (from which
interest and tax have already been
deducted) of joint ventures and associates;
if the £395m (2018: £374m) proportional
share of revenue from joint ventures and
associates was also included and if the
£6.4m (2018: £5.7m) share of interest and
tax cost was excluded, the overall Divisional
margin would have been 2.7% (2018: 2.7%).
The joint venture and associate profit
contribution was modestly lower at £27.3m
(2018: £28.1m), largely as a result of the start
of a new three-year pricing period at AWE.
On the AASC contracts, the transition costs
that were expensed as they were incurred
largely in the first half of the year were more
than offset with the move to profitability in
the second half. There was also improved
profit performance in the healthcare
business, driven by the Carillion acquisition.
Within UTP there was a reduced rate of
OCP utilisation (excluding IFRS16-related
accelerated utilisation) of £33m (2018:
£47m), which served to offset the Division’s
loss-making operations, principally the
Caledonian Sleeper, COMPASS and
Prisoner Escort & Custody Services (PECS)
contracts. Excluded from UTP is £9.6m of
the commercial settlement received from
the Ministry of Defence (MOD) in relation to
the Defence Fire and Rescue Project
tender, together with Contract & Balance
Sheet Review and other one-time items
that resulted in a £0.3m net credit (2018:
£12.4m net credit) to Trading Profit.
Together with the adverse net effect of
IFRS16 implementation of £2.2m (2018: n/a),
this resulted in Trading Profit of £48.3m
(2018: £51.6m).
The UK & Europe Division’s order intake
was more than £3bn, or over 50% of that for
the whole Group. By far the largest element
of this was the estimated £1.9bn ten-year
value for the AASC contracts. As previously
set out, these are very significant for the
Division, and indeed for the Group. AASC
supersedes the prior COMPASS contracts
which incurred losses (offset in the P&L by
the utilisation of the OCP) of around
£15-20m on average per year for the past
five years. Under the new AASC contracts,
we did not retain the Scotland & Northern
Ireland region, but gained the much larger
Midlands & East of England region, whilst
retaining our other previous COMPASS
region of the North West; as a
consequence, we are now the largest
Annual Report and Accounts 2019
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Of existing work where an extension or
rebid will be required at some point before
the end of 2022, there are around 25
contracts with annual revenue of over £5m
within the UK & Europe Division; in
aggregate, these represent approximately
25% of the current level of annual revenue
for the Division; this excludes the Northern
Isles operations, which would represent a
further 5%. The largest to further secure in
2021 include our strategic partnership
contract supporting Hertfordshire County
Council, and in 2022 our UK Navy fleet
support contract known as Future Provision
of Marine Services (FPMS) and our UK
MOD Skynet satellite support operations.
The rebid profile and the new bid Pipeline
both reduced with the successful outcome
of our bidding for AASC. Opportunities in
the new bid Pipeline at the end of 2019
include several defence support
opportunities, together with other tenders
such as the first of the new build prison
manage and operate contracts (HMP
Wellingborough), in immigration services
and in environmental and other Citizen
Services support services. On 20 February
2020, Serco announced that we had signed
a new contract to manage the Gatwick
Immigration Centres valued at
approximately £200m. Following a string of
important contract wins, replenishing the
UK & Europe pipeline across each of our
five sectors of operation remains a key
focus of the business in 2020.
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.
The second largest contract award in the
year was with the UK Ministry of Justice
(MoJ) for PECS, estimated at approximately
£800m over the ten-year term which starts
on 29 August 2020. Similar to COMPASS/
AASC, this is a successful rebid of a
contract previously incurring losses that
were being offset by an OCP, and also
similar to AASC is that Serco was selected
to provide these sensitive and demanding
services over a significantly increased
geographical area. Other contract awards
included: significantly expanding on rebid
our operations for the SSW programme
which provides training and related
employment services to Local Enterprise
Partnership areas; a new environmental
services contract with the Royal Borough of
Windsor and Maidenhead, together with
extensions for our services to numerous
other similar contracts; we have also
extended during the year contracts such as
for defence support services to the UK
MOD and the US Air Forces in Europe
(USAFE), contact centre operations for
Companies House and our operations at
the European Organisation for Nuclear
Research (CERN).
We have not included within our order
intake the contract to continue operating
the Northern Isles Ferry Services, which
was announced by the customer in
September 2019 and has an estimated total
contract value of £450m, as we have not yet
signed the contract due to a procurement
challenge by the unsuccessful bidder. In
early February 2020, the Scottish
Government announced that all challenges
had been resolved, and that they would be
proceeding to sign the contract with Serco
in the coming months.
Annual Report and Accounts 2019
Serco Group plc
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37
Financial StatementsCorporate Governance
Divisional Reviews continued
Americas
Sectors we operate in:
• Defence
• Transport
• Citizen Services
Revenue
£915.7m
2018: £645.6m
Percentage of Group revenue
28%
Underlying Trading Profit (UTP)
£82.1m
2018: £45.7m
Percentage of Group UTP
(before Corporate costs)
50%
38
| Serco Group plc
Our Americas Division accounts for 28%
of Serco’s reported 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 2019 was £915.7m (2018:
£645.6m), an increase of 42% in reported
currency. In US dollars, the main currency
for operations of the Division, revenue for
the year was equivalent to approximately
US$1,172m (2018: US$860m). The
strengthening of local currency against
Sterling increased revenue by £43m or
7%; as the Naval Systems Business Unit
(NSBU) acquisition completed at the start
of August 2019, it contributed five months
of revenue which drove the Divisional
growth from acquisitions of 16%; the
organic change at constant currency was
therefore growth of 19%, or £119m. A key
driver of this was a significant increase in
task order volumes and related
procurement services for our Ship &
Shore modernisation and hardware work
for the US Navy, with particularly strong
demand and new task order wins under
the Consolidated Afloat Networks
Enterprise Services (CANES) Indefinite
Delivery / Indefinite Quantity (ID/IQ)
multiple-award contract for various naval
vessel classes. There was also increased
task orders on the US Federal Emergency
Management Agency (FEMA) contract
framework, as well as growth from new
contract awards started in the year such
as support services to the US Pension
Benefit Guaranty Corporation (PBGC) and
deploying IT solutions for the US
Air Force.
Underlying Trading Profit, excluding the
effect of IFRS16 adoption, was £79.2m
(2018: £45.7m), representing a margin of
8.6% (2018: 7.1%) and growth of 73%;
excluding the favourable currency
movement of £4.3m, growth at constant
currency was 64%. Whilst revenue was
broadly flat on our health insurance
eligibility support contract for the Center
for Medicare & Medicaid Services (CMS),
profitability benefited from an unusually
high volume of fixed priced variable work,
particularly in the first half of the year; as
previously described, we do not expect
margins to recur at these levels in the
future, and profits on this contract are
expected to be noticeably lower in 2020.
The increase in profits also included the
£8.6m contribution from the NSBU
acquisition, as well as the benefit from the
growth in short-term volume related work
on various frameworks and new contracts
started in the year.
Within Underlying Trading Profit there
was £4m of OCP utilisation required to
offset the previously loss-making Ontario
Driver Examination Services (DES)
contract (2018: n/a); an OCP is no longer
required on this contract. Contract &
Balance Sheet Review adjustments
resulted in a £9.5m net credit (2018: £2.5m
net charge) to Trading Profit which,
together with the beneficial effect of
IFRS16 implementation of £2.9m (2018:
n/a), increased to £91.6m (2018: £43.2m).
Americas represented around £1.1bn
($1.4bn) or 20% of the Group’s order
intake. The largest award for new work
was that for field office services to the US
PBGC with a first task order valued at
$112m over five years and a total potential
value of $200m. Other new contracts
included career training and counselling
services to transitioning military service
members valued at $95m over five years,
and a five-and-a-half year task order
valued at $82m was awarded by the US
Air Force to enhance NexGen IT solutions
for US Air Force Civil Engineering, which
includes deploying TRIRIGA, an
integrated workplace management
system owned by IBM. Across our Ship &
Shore modernisation and hardware
services, including the CANES, Naval
Electronic Surveillance Systems (NESS)
the Global Installation Contract (GIC) ID/
IQ frameworks, the cumulative value of IT,
engineering, maintenance and
sustainment support task orders totalled
over $250m. Serco also received 15 task
orders for our Public Assistance Technical
Assistance Contract for the Federal
Emergency Management Agency (FEMA)
totalling over $100m.
Within awards that were rebid or
extended were those for our support to
the Federal Retirement Thrift Investment
Board (FRTIB), motorist assistance patrol
operations in Louisiana and for our
support to psychological health outreach
services to the US Navy. Serco also
resecured places on the ID/IQ frameworks
for both ship and shore-based C4ISR
systems modernisation services over the
next ten years that replace the previous
GIC frameworks.Serco also secured a
place on a similar ID/IQ framework but
Annual Report and Accounts 2019
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which it was not previously on the
predecessor contract; this covers C4I
Testing, Integration and Installation (CTII)
services for the Carrier and Air Integration
Program Office (PMW 750).
The progress on contract awards of the
businesses recently acquired have also
been pleasing. These include for NSBU
the $162m contract to continue the
support to the US Navy’s Amphibious
Warfare Program Office (PMS 377) and
the $43m five-year contract to deliver
design and engineering services for the
US Navy’s next generation of unmanned
and small surface combatant vessels; and
for BTP, a $49m five-year contract for
system engineering technical services
on the Submarine High Data Rate
(SubHDR) program.
Of existing work where an extension or
rebid will be required at some point
before the end of 2022, there are around
25 contracts with annual revenue of over
£5m within the Americas Division; in
aggregate, these represent around 40%
of the current level of annual revenue for
the Division. Those coming up for rebid or
extension in 2020 include the Federal
Aviation Administration’s (FAA) Contract
Tower (FCT) Program; in 2021, the
Anti-Terrorism/Force Protection (ATFP)
framework contract for the US Naval
Facilities Command and our support to
support services at the 5 Wing Canadian
Forces Base in Goose Bay; and in 2022,
resecuring a position on the successor
framework for CANES. Of the NSBU
business, it has a number of contract
option periods, extensions or rebids to
secure, including in 2020 its support to
the US Navy Surface Warfare Directorate
and in 2021 to the Shipbuilding
Command for surface ships.
Our Pipeline of major new bid
opportunities due for decision within the
next 24 months includes a broad spread
of defence support functions, including
those added with the NSBU acquisition,
as well as others such as air traffic control
support within our Transport business.
Our Citizen Services business unit has
also had a number of wins during the year,
and building further the Pipeline in this
area also remains a target.
Annual Report and Accounts 2019
Serco Group plc
|
39
Financial StatementsCorporate Governance
Divisional Reviews continued
AsPac
Sectors we operate in:
• Defence
• Justice &
• Health
• Citizen
Services
Immigration
• Transport
Revenue
£621.4m
2018: £548.2m
Percentage of Group revenue
19%
Underlying Trading Profit (UTP)
£31.3m
2018: £26.8m
Percentage of Group UTP
(before Corporate costs)
19%
40
| Serco Group plc
Serco operates in Australia, New Zealand
and Hong Kong in the Asia Pacific region,
providing services in each of the Justice,
Immigration, Defence, Health, Transport
and Citizen Services sectors. The AsPac
Division accounts for 19% of the reported
revenue for the Group.
Revenue for 2019 was £621.4m (2018:
£548.2m), an increase of 13% in reported
currency. In Australian dollars, the main
currency for operations of the Division,
revenue for the year was equivalent to
approximately A$1,137m (2018: A$980m).
The weakening of local currency against
Sterling reduced revenue by £15m or 3%;
the organic change at constant currency
was therefore growth of 16%, or £88m. The
largest contributor to this growth was the
start of operations on 1 July 2019 of the
AHSC defence garrison healthcare services
contract in Australia. There was also strong
growth in our Citizen Services operations,
including further expanding our support to
the Department of Human Services and
Australia’s National Disability Insurance
Agency, together with new contact centre
services to the Victoria Police Assistance
Line for non-emergency incidents. There
was also an increase in workload in
Immigration Services.
Underlying Trading Profit, excluding the
effect of IFRS16 adoption, was £31.1m (2018:
£26.8m), representing a margin of 5.0%
(2018: 4.9%) and an increase of 16%;
excluding the adverse currency movement
of £0.9m, the increase at constant currency
was 19%. The improvement in profitability
includes the benefit of the growth in our
Citizen Services operations, as well as the
AHSC contract moving to its full operational
stage quicker than anticipated, with
profitability in the second half of the year
more than offsetting the transition costs
mainly incurred in the first half.
Within Underlying Trading Profit there was
£3m of OCP utilisation required to offset
the loss-making operations in Hong Kong
(2018: £5m). Contract & Balance Sheet
Review adjustments were £nil (2018: £13.7m
net credit), therefore Trading Profit, taking
into account the beneficial effect of IFRS16
implementation of £0.2m (2018: n/a), was
£31.3m (2018: £40.5m).
AsPac represented around £1.1bn or 20% of
the Group’s order intake. The largest was
the AHSC contract for the provision of
healthcare services personnel at defence
garrisons across Australia, which was valued
at AU$1.01bn (around £560m) over the initial
six-year term; working as a sub-contractor
to BUPA, Serco will source and manage
more than 1,200 professional healthcare
staff to support the delivery of on-base
integrated health care to over 80,000
Australian Defence Force members and
reservists across Australia. A further new
contract was the AU$115m seven-year
contract to operate Adelaide Remand
Centre on behalf of the South Australia
Department for Correctional Services.
Important extensions were also secured
during the year, including the two-year
extension for Australian immigration
services with an estimated value of £0.4bn,
and South Queensland Correctional Centre
also for two years. Serco was also successful
in our rebid for the Victorian Department of
Justice and Community Safety to continue
operating the road traffic camera program
across the State. The one rebid of note that
was lost in 2019 is that for transport
management of the Tsing Sha Control Area
in Hong Kong which had annual revenue of
around £20m but was an onerous contract
and therefore does not impact UTP.
Of existing work where an extension or
rebid will be required at some point before
the end of 2022, there are around 10
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 further extension or rebid again at
the end of 2021, with this accounting for
around 30% of current Divisional revenue.
Others that will require extending or
rebidding in 2020 are the Australian
Department of Human Services framework
contract, while Fiona Stanley Hospital,
Acacia Prison, South Queensland
Correctional Centre and the Tax Office
framework contract all become potentially
due in 2021. In October 2019, AsPac
responded to the tender for the Royal
Australian Navy contracts to replace to the
existing Fleet Marine Services contracts (to
be known as the Defence Marine Support
Services (DMSS) contracts). The DMSS
contacts awards are anticipated to be
announced in the first half of 2020. Serco’s
current Fleet Marine Services contract will
continue to operate until 30 September
2021.
As set out above, the largest opportunity in
our Pipeline of major new bid opportunities
at the start of 2019 was won – defence
health support in Australia. A number of
other opportunities were either lost or
removed from the Pipeline during the year.
Rebuilding the Pipeline saw progress in the
second half with a small number of
opportunities added across the Justice &
Immigration, Defence and Citizen Services
sectors, with further progress across these
and the Transport and Health sectors
anticipated in 2020.
Annual Report and Accounts 2019
Middle East
Sectors we operate in:
• Defence
• Transport
• Health
• Citizen
Services
Revenue
£349.6m
2018: £342.3m
Percentage of Group revenue
11%
Underlying Trading Profit (UTP)
£13.6m
2018: £21.5m
Percentage of Group UTP
(before Corporate costs)
8%
Corporate costs
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Operations in the Middle East Division
include Transport, Defence, Health and
Citizen Services, with the region accounting
for approximately 11% of the Group’s
reported revenue.
Revenue for 2019 was £349.6m (2018:
£342.3m), an increase of 2% in reported
currency. The strengthening of local
currency against Sterling increased revenue
by £15m or 4%; the organic change at
constant currency was therefore a decline of
2%. There was growth from expanded
services at the Dubai Metro and from the
new contracts for fire and rescue services at
King Fahd International Airport (KFIA),
support services at Dr. Soliman Fakeeh
Hospital (DSFH) and advisory services to
Mashroat in Saudi Arabia. These were offset
by reduced revenue on the rebid of the
MELABS contract providing defence base
logistics and support services, the loss of
the Bahrain air navigation services contract
and a reduction in our Saudi rail operations.
Underlying Trading Profit, excluding the
effect of IFRS16 adoption, was £13.6m (2018:
£21.5m), representing a margin of 3.9%
(2018: 6.3%) and a decline of 37%; excluding
the favourable currency movement of
£0.4m, the decline at constant currency was
39%. As expected, this decline was driven
by the significant reduction in margins on
the MELABS contract, following the
successful rebid which has extended the life
of the contract for a further five years
including option periods. 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. Trading Profit, after the beneficial
effect of IFRS16 implementation of £0.3m
(2018: n/a), was therefore £13.9m (2018:
£21.5m).
The Middle East represented £0.2bn of the
Group’s order intake. Included in the 2018
order intake following receipt of a letter of
intent was the two-year extension to
continue operating and maintaining the
Dubai Metro until September 2021. Intake in
the year included new contracts for advisory
services to Mashroat (Saudi Arabia’s
National Program to Support the
Management of Projects in Public Entities),
facilities management and patient-facing
services to DSFH in Jeddah, and several
other facilities management contracts in
Abu Dhabi. During the year Serco also
secured further contract extensions for our
Air Navigation Services (ANS) support in
Dubai and Baghdad.
Of existing work where an extension or
rebid will be required at some point before
the end of 2022, there are around 15
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. The relatively high proportion
reflects that the Dubai Metro contract
becomes due for rebid in September 2021,
with this accounting for around 30% of
current Divisional revenue. Further
extensions or rebids will also be required for
each of the Dubai and Baghdad ANS
contracts, together with the MELABS and
Saudi rail operations.
Our Pipeline of major new bid opportunities
in the Middle East includes a small number
in the Transport sector. The Pipeline
remains significantly lower than in prior
years, and effort is ongoing to rebuild it
across all Serco’s sectors of operation in the
region. We still believe that the dynamism
and ambition of governments in the GCC
offers the opportunity to deliver truly
innovative and world-leading services.
Therefore, we have recently established a
new ExperienceLab, mirroring what we have
in the UK, for user-centred design to deliver
exciting improvements to existing and new
customers in 2020.
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.
While there are ongoing actions to deliver savings and improve
efficiencies of our central functions, in 2019 there were some areas
of investment and increases in costs which resulted in overall
corporate costs at the Underlying Trading Profit level that were
£5.4m higher at £45.5m (2018: £40.1m).
The Group operates a large number of long-term contracts at
different phases of their contract life cycle. Within the Group’s
portfolio, there are a small number of contracts where the balance
of risks and opportunities indicates that they might be onerous if
transformation initiatives or contract changes are not successful.
The Group has concluded that these contracts do not require an
onerous contract provision on an individual basis. Following the
individual contract reviews, the Group has also undertaken a top
down assessment which assumes that, whilst the contracts may
not be onerous on an individual basis, as a portfolio there is a risk
that at least some of the transformation programmes or customer
negotiations required to avoid a contract loss, will not be fully
successful, and it is more likely than not that one or more of these
contracts will be onerous. Therefore, in considering the Group’s
overall onerous contract provision, the Group has made a best
estimate of the provision required to take into consideration this
portfolio risk. As a result, the risk of OCPs and the monitoring of
individual contracts for indicators remains a critical estimate for
the Group. The amount recognised in the year is £6.2m at the
Trading Profit level within the Corporate costs segment, which
after this charge is therefore £51.7m (2018: £40.1m).
Annual Report and Accounts 2019
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Financial StatementsCorporate Governance
Finance Review
Angus Cockburn
Group Chief Financial Officer
Revenue of £3,248.4m
increased 15% from the
prior year which included
8.2% organic growth at
constant currency.
Underlying Trading Profit
increased to £120.2m
driven by revenue growth
and margin improvement
from 3.3% to 3.7%. Positive
Free Cash Flow of £62.0m.
All contributing to the
Board supporting
restarting the dividend.
In summary
• Strong revenue growth during the year with a significant portion being
from organic business
• Margin improvements driven by strong cost control while achieving
significant revenue growth and successfully completing our first
significant acquisition
• Exceptional restructuring costs £20m lower than prior year as
transformation activity related to the Strategy Review comes to an end
• Positive Free Cash Flow of £62.0m due to increase in underlying profits,
neutral working capital movement and lower cash outflow from OCPs
For the year ended
31 December 2019
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 per share – basic (pence)
Earnings per share – diluted (pence)
Underlying
£m
3,248.4
(2,941.5)
306.9
(214.2)
27.5
120.2
3.7%
(21.8)
98.4
(24.4)
(24.8%)
74.0
0.2
6.31
6.16
Non
underlying
items
£m
–
13.2
13.2
–
–
13.2
–
13.2
(4.5)
8.7
Trading
£m
3,248.4
(2,928.3)
320.1
(214.2)
27.5
133.4
4.1%
(21.8)
111.6
(28.9)
(25.9%)
82.7
0.2
7.05
6.89
Amortisation
and
impairment
of intangibles
arising on
acquisition
£m
Statutory pre
exceptional
£m
Exceptional
items
£m
–
–
–
(23.4)
–
(23.4)
–
(23.4)
(2.7)
(26.1)
–
–
–
(7.5)
–
(7.5)
–
(7.5)
1.5
(6.0)
3,248.4
(2,928.3)
320.1
(221.7)
27.5
125.9
3.9%
(21.8)
104.1
(27.4)
(26.3%)
76.7
0.2
6.54
6.39
Statutory
£m
3,248.4
(2,928.3)
320.1
(245.1)
27.5
102.5
3.2%
(21.8)
80.7
(30.1)
(37.3%)
50.6
0.2
4.31
4.21
42
Annual Report and Accounts 2019
Serco Group plc i
S
t
r
a
t
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e
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o
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t
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 per share – basic (pence)
Earnings 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)
–
–
2,836.8
(2,546.6)
–
(4.3)
–
(4.3)
–
(4.3)
3.1
(1.2)
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
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.
With effect from 1 January 2019, the Group has applied IFRS16
Leases in the preparation of its financial results. The prior
period financial information has not been restated under
IFRS16 in accordance with the modified retrospective
approach to transition taken by the Group. This approach has
been taken as it most closely aligns to the full retrospective
approach without requiring an extensive review of historical
changes to lease agreements within the Group. The following
APMs have been redefined to take into consideration the
impact of IFRS16 and to ensure they continue to be useful
measures for investors and readers of the accounts, and the
impact of the definition change has been illustrated within the
Finance Review: Free Cash Flow; Trading Cash Flow; and
Invested Capital. A new APM has been introduced which has
been termed Adjusted Net Debt, the definition of which is
provided below.
Certain APMs for the current period have been provided on a
basis consistent with the accounting standards applied for the
prior period to illustrate the impact of IFRS16 and to assist with
comparability. This information has been provided at the end
of this Finance Review.
The methodology applied to calculating the APMs has not
changed during the year for any measure other than those
outlined above.
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.
Annual Report and Accounts 2019
43
Financial StatementsCorporate GovernanceSerco Group plc
Finance Review continued
Alternative revenue measures
Reported revenue at constant currency
Reported revenue, as shown on the Group’s Consolidated Income Statement on page 167, 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 2019 into Sterling at the average exchange
rate for the year ended 31 December 2018.
For the year ended 31 December
Reported revenue at constant currency
Foreign exchange differences
Reported revenue at reported currency
2019
£m
3,206.2
42.2
3,248.4
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 2019:
• 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.
• The acquisition of the Naval Systems Business Unit (NSBU) from Alion Science and Technology Corporation on 1 August 2019.
An adjustment is required for one disposal:
• The disposal of certain contracts within the Anglia Support Partnership on 31 October 2018.
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
2019
£m
3,014.1
34.5
3,048.6
199.8
3,248.4
2018
£m
2,784.5
52.3
2,836.8
Revenue plus share of joint ventures and associates
Reported revenue, as shown on the Group’s Consolidated Income Statement on page 167, excludes the Group’s share of revenue
from joint ventures and associates, with Serco’s share of profits in joint ventures and associates (net of interest and tax)
consolidated within reported operating profit as a single line further down the Consolidated Income Statement. The alternative
measure includes the share of joint ventures and associates for the benefit of reflecting the overall change in scale of the Group’s
ongoing operations, which is particularly relevant for evaluating Serco’s presence in market sectors such as Defence and
Transport. The alternative measure allows the performance of the joint venture and associate operations themselves, and their
impact on the Group as a whole, to be evaluated on measures other than just the post-tax result.
For the year ended 31 December
Revenue plus share of joint ventures and associates
Exclude share of revenue from joint ventures and associates
Reported revenue
2019
£m
3,643.0
(394.6)
3,248.4
2018
£m
3,211.9
(375.1)
2,836.8
44
Annual Report and Accounts 2019
Serco Group plc Alternative profit measures
For the year ended 31 December
Underlying Trading Profit
Non-underlying items:
OCP charges and releases
Other Contract & Balance Sheet Review adjustments and one-time items
Total non-underlying items
Trading Profit
Operating exceptional items
Amortisation and impairment of intangibles arising on acquisition
Operating profit
i
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t
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a
t
e
g
c
R
e
p
o
r
t
2019
£m
120.2
0.8
12.4
13.2
133.4
(23.4)
(7.5)
102.5
2018
£m
93.1
12.8
10.8
23.6
116.7
(31.9)
(4.3)
80.5
Underlying Trading Profit (UTP)
The Group uses an alternative measure, Underlying Trading Profit, to make adjustments for unusual items that occur and to 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) that arose during the 2014 Contract & Balance Sheet Review are
excluded from UTP in the current and prior years. Charges associated with the creation of new OCPs identified are included within
UTP to the extent that they are not considered sufficiently material to require separate disclosure on an individual basis. 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 £53.6m in
2019 (2018: £51.8m). The utilisation, which neutralises the in-year losses on previously identified onerous contracts, consists of £12.7m
accelerated utilisation associated with the impairment of right of use assets on onerous contracts created during the period, in
accordance with IFRS16, and £40.9m against other contract losses. In addition, an amount of £3.8m in respect of impairment of right
of use assets was recognised outside underlying profit.
Revisions to accounting estimates and judgements which arose during the 2014 Contract & Balance Sheet Review are reported
alongside other one-time items where the impact of an individual item is material. Items in 2019 which were recorded within this
category included the impairment of assets created in accordance with IFRS16 on the Caledonian Sleepers contract for which the
provision had been fully utilised, the receipt of an insurance claim for costs previously reported outside of UTP recognised in the
2014 Contract & Balance Sheet Review and monies in respect of the DFRP settlement amounting to £9.6m.
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 statutory revenue.
The non-underlying column in the summary income statement on pages 42 and 43 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 167, by making two adjustments.
Firstly, Trading Profit excludes exceptional items, being those considered material and outside of the normal operating practices
of the Group to be suitable for separate presentation and detailed explanation.
Secondly, amortisation and impairment of intangibles arising on acquisitions are excluded, because these charges are based on
judgements about the value and economic life of assets that, in the case of items such as customer relationships, would not be
capitalised in normal operating practice.
Annual Report and Accounts 2019
45
Financial StatementsCorporate GovernanceSerco Group plc
Finance Review continued
Alternative profit measures 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 2019
into Sterling at the average exchange rate for the year ended 31 December 2018.
For the year ended 31 December
Underlying Trading Profit at constant currency
Foreign exchange differences
Underlying Trading Profit at reported currency
Alternative Earnings 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
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
Reported EPS, diluted
2019
£m
116.5
3.7
120.2
2018
pence
5.36
2.84
8.20
(2.04)
6.16
2018
pence
5.21
2.76
7.97
(1.98)
5.99
2019
pence
6.31
0.23
6.54
(2.23)
4.31
2019
pence
6.16
0.23
6.39
(2.18)
4.21
EPS before exceptional items
EPS, as shown on the Group’s Consolidated Income Statement on page 167, includes exceptional items charged or credited to the
income statement in the year. EPS before exceptional items aids consistency with historical operating performance.
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 pages 42 and 43.
46
Annual Report and Accounts 2019
Serco Group plc Alternative cash flow and Net Debt measures
Free Cash Flow (FCF)
We present an alternative measure for cash flow to reflect cash flow from operating activities before exceptional items, which is
the measure shown on the Consolidated Cash Flow Statement on page 171. This IFRS measure is adjusted to include dividends we
receive from joint ventures and associates and deducting net interest paid, the capital element of lease payments and net capital
expenditure on tangible and intangible asset purchases. This is a change to the definition applied in the prior year, where the
capital element of finance leases was excluded from FCF. The adjustment has been made following the implementation of IFRS16,
under which all leases, excluding short term and low value leases, are accounted for as lease liabilities under the new standard and
cash payments associated with the lease liabilities include a capital and interest component. The previous definition of FCF would
result in the capital component of leases being excluded from FCF which is not considered to be reflective of the operating cash
flow of the Group.
i
S
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a
t
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c
R
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p
o
r
t
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 capital element of lease repayments
Exclude proceeds received from exercise of share options
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
2019
£m
62.0
(25.4)
21.0
1.2
70.2
(0.2)
23.3
152.1
(49.2)
102.9
2018
(*restated)
£m
16.3
(29.7)
16.1
2.0
8.7
–
29.5
42.9
(40.2)
2.7
* Following the implementation of IFRS16 Leases, the definition of Free Cash Flow has been amended to include the capital element of lease payments
in 2018.
For the year ended 31 December
Free Cash Flow under previous definition
Include capital element of lease payments
Free Cash Flow
2019
£m
132.2
(70.2)
62.0
2018
£m
25.0
(8.7)
16.3
The high Free Cash Flow in 2019 under the previous definition excludes the cash payments associated with operating leases which
are cash outflows associated with a combination of capital and interest payments under IFRS16 Leases. This supports the rationale
behind the change in definition for Free Cash Flow adopted in 2019.
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
2019
£m
62.0
31.2
0.1
21.0
1.2
115.5
120.2
96%
2018
(*restated)
£m
16.3
10.6
0.1
16.1
2.0
45.1
93.1
48%
* Following the implementation of IFRS16 Leases, the definition of Free Cash Flow has been amended to include the capital element of lease payments
in 2018.
Annual Report and Accounts 2019
47
Financial StatementsCorporate GovernanceSerco Group plc
Finance Review continued
Alternative cash flow and Net Debt measures continued
Net Debt and Adjusted 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 170 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. Net Debt includes all lease liabilities recognised under IFRS16 and therefore the Group has
introduced the alternative measure of Adjusted Net Debt which excludes all lease liabilities recognised under IFRS16 for the year
ended 31 December 2019. For the year ended 31 December 2018, liabilities for leases previously categorised as finance leases are
excluded in arriving at Adjusted Net Debt.
The Adjusted Net Debt measure has been introduced because it more closely aligns to the Consolidated Total Net Borrowings
measure used for the Group’s debt covenants, which is prepared under accounting standards applicable prior to the adoption of
IFRS16. Principally as a result of the Asylum Accommodation and Support Services Contract (AASC), the Group has entered into a
significant number of leases which contain a termination option. The use of Adjusted Net Debt removes the volatility that would
result from estimations of lease periods and the recognition of liabilities associated with such leases where the group has the right
to cancel the lease and hence the corresponding obligation. Though the intention is not to exercise the options to cancel the
leases, it is available unlike other debt obligations.
For the year ended 31 December
Cash and cash equivalents
Loans payable
Lease liabilities
Derivatives relating to Net Debt
Net Debt
Add back: Lease liabilities
Adjusted Net Debt
2019
£m
89.5
(305.0)
(369.9)
1.0
(584.4)
369.9
(214.5)
2018
£m
62.5
(239.5)
(14.8)
3.8
(188.0)
14.8
(173.2)
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.
The definition of Invested Capital has been adjusted from the prior year to exclude right of use assets recognised under IFRS16
Leases. This is because the Invested Capital of the Group are those items within which resources are, or have been, committed,
which is not the case for many leases within the Group, which would previously have been classified as operating leases, where
termination options exist and commitments for expenditure are in future years. The impact of the change in the alternative
performance measure has been set out below. In the prior year only finance lease assets have been removed as no right of use
assets existed for operating leases prior to the adoption of IFRS16.
48
Annual Report and Accounts 2019
Serco Group plc For the year ended 31 December
ROIC excluding right of use assets
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interest in joint ventures and associates
Trade and other receivables
Current assets
Inventory
Contract assets, 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%
For the year ended 31 December
ROIC including right of use assets
Invested Capital including right of use assets
Impact of including right of use assets
Invested Capital
ROIC% including right of use assets
Impact of including right of use assets
ROIC%
Underlying ROIC% including right of use assets
Impact of including right of use assets
Underlying ROIC%
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2019
£m
2018
(*restated)
£m
671.2
96.5
47.3
23.6
26.5
18.3
609.2
579.6
63.7
44.3
20.6
30.3
22.9
543.8
1,492.6
1,305.2
(555.8)
(494.0)
(72.7)
(628.5)
864.1
782.7
133.4
17.0%
120.2
15.4%
(109.9)
(603.9)
701.3
686.3
116.7
17.0%
93.1
13.6%
2019
£m
2018
(*restated)
£m
1,209.4
(345.3)
864.1
13.8%
3.2%
17.0%
12.4%
3.0%
15.4%
725.4
(24.1)
701.3
16.4%
0.6%
17.0%
13.1%
0.5%
13.6%
* The ROIC calculation at 31 December 2018 has been restated to exclude right of use assets. The measure at 31 December 2018 has been adjusted from
that disclosed within the 30 June 2019 Stock Exchange Announcement so the 31 December 2017 balance sheet, used in the two-point average, is in
accordance with IFRS15. For reference, using the same principles for the calculation as at 30 June 2018 yields a ROIC of 7.9%
Annual Report and Accounts 2019
49
Financial StatementsCorporate GovernanceSerco Group plc
Finance Review continued
Overview of financial performance
Revenue
Reported revenue increased by 14.5% in the year to £3,248.4m (2018: £2,836.8m), a 13.0% increase in constant currency. Organic
revenue growth at constant currency was 8.2%.
Commentary on the revenue performance of the Group is provided in the Chief Executive’s Review and the Divisional Reviews.
Trading Profit
Trading Profit for the year was £133.4m (2018: £116.7m).
Commentary on the trading performance of the Group is provided in the Chief Executive’s Review and the Divisional Reviews.
Underlying Trading Profit
UTP was £120.2m (2018: £93.1m), up 29.1%. At constant currency, UTP was £116.5m, up 25.1%.
Commentary on the underlying performance of the Group is provided in the Chief Executive’s Review and the
Divisional Reviews.
Excluded from UTP were net releases from OCPs of £0.8m (2018: net releases of £12.8m) following the detailed reassessment
undertaken as part of the budgeting process. Also excluded from UTP were net releases and additional profits of £12.4m
(2018: net releases and additional profits of £10.8m) relating to items identified during the 2014 Contract & Balance Sheet
Review, and other one-time items.
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 within 2% of the 2014 total charge to Trading Profit arising
from the review.
The tax impact of items in UTP and other non-underlying tax items is discussed in the tax section of this Finance Review.
Joint ventures and associates – share of results
In 2019, the most significant joint ventures and associates in terms of scale of operations were AWE Management Limited
and Merseyrail Services Holding Company Limited, with dividends received of £17.6m (2018: £20.0m) and £7.8m (2018: £8.7m)
respectively. Total revenues generated by these businesses were £1,065.4m (2018: £1,024.7m) and £177.9m (2018: £160.8m)
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.
For the year ended 31 December
Revenue
Operating profit before exceptional items
Net investment revenue
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
2019
£m
394.6
33.8
0.3
(6.6)
27.5
–
27.5
25.4
2018
£m
375.1
34.6
0.3
(6.1)
28.8
(0.3)
28.5
29.7
Revenue across both of the Group’s material joint ventures has increased during the year due to changes in the volumes
transacted by the underlying contracts. Profitability on both remained consistent with the prior year.
50
Annual Report and Accounts 2019
Serco Group plc i
S
t
r
a
t
e
g
c
R
e
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o
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t
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 on disposal of subsidiaries and operations
Other exceptional operating items
Restructuring costs
Increase in onerous lease provision
Costs associated with SFO investigation
Reversal of impairment of interest in joint venture and related loan balances
Reversal of impairment on loan balances
Cost of Guaranteed Minimum Pension equalisation
Release of/(increase in) other provisions and other items
Costs associated with the acquisition of Naval Systems Business Unit
Other exceptional operating items
Exceptional operating items
Exceptional finance income
Exceptional tax
Total operating and financing exceptional items net of tax
2019
£m
2018
£m
–
(0.5)
(12.8)
–
(25.2)
–
–
–
19.3
(4.7)
(23.4)
(23.4)
–
(2.7)
(26.1)
(32.3)
(1.8)
0.4
0.8
13.9
(9.6)
(2.8)
–
(31.4)
(31.9)
7.5
2.1
(22.3)
Other exceptional operating items
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 2019, a charge of £12.8m (2018: £32.3m) 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 pages 20 to 21. The transformation activities associated with this are complete and, as such, all exceptional restructuring
costs related to this programme have ended in 2019. Non-exceptional restructuring charges are incurred by the business as part of
normal operational activity, which in the year totalled £8.9m (2018: £6.3m) and were included within operating profit before
exceptional items.
There was an exceptional charge totalling £25.2m (2018: credit of £0.4m) associated with the SFO’s investigation and the
programme of Corporate Renewal. These costs have historically been treated as exceptional and consistent treatment is applied
in 2019. During the year the Group paid £22.9m in penalties and legal costs associated with the SFO’s investigation. The final
judgement was provided on 4 July 2019. The credit in 2018 reflects the recovery of costs from the Group’s insurance providers. The
remaining £2.3m relates to legal costs incurred by the Group in respect of the investigation.
In 2018, an exceptional charge of £9.6m was recorded 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. There was no equivalent charge in 2019.
The decrease in other provisions and other items of £19.3m (2018: increase of £2.8m) predominantly relates to a commercial
dispute which was settled in 2019. The treatment of the reduction as exceptional is consistent with the recognition of the original
charge associated with the same matter in 2014.
The Group completed the acquisition of the Naval Systems Business Unit (NSBU) from Alion Science and Technology Corporation
in 2019. The acquisition achieved final regulatory approvals and completed in August 2019. The transaction
and implementation costs of £4.7m have been treated as exceptional costs in line with the Group’s accounting policy.
An exceptional profit of £13.9m was recognised in 2018 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. No such transactions took place in 2019.
Annual Report and Accounts 2019
51
Financial StatementsCorporate GovernanceSerco Group plc
Finance Review continued
Exceptional items continued
Exceptional finance costs
There were no exceptional finance costs in the year ended 31
December 2019. During 2018, 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
was unwound 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 was outside the normal
financing arrangements of the Group and significant in size it
was recorded as exceptional finance income.
Exceptional tax
Exceptional tax for the year was a charge of £2.7m (2018: credit
of £2.1m) which arises on exceptional items within operating
profit. This charge arises mainly in connection with the
decrease in provisions in respect of commercial disputes and
legal claims for which a tax credit had been recorded when the
provisions were originally recognised. This charge is partially
offset by tax deductions in respect of the global restructuring
programme and in the US on acquisition costs.
No tax credit arises on the exceptional charge associated with
the costs in connection with the SFO investigation.
Pre-exceptional finance costs and investment
revenue
Investment revenue of £2.7m (2018: £4.3m) includes interest
accruing on net retirement benefit assets of £2.1m (2018:
£0.8m), interest earned on deposits and other receivables of
£0.5m (2018: £2.3m) and the movement in discounting of other
receivables of £0.1m (2018: £1.2m). The decrease in the year is
the result of the repayment of the loan note, as noted above,
which was previously accruing interest and did so for nine
months during 2018. No such interest income arose during
2019.
Finance costs of £24.5m (2018: £18.2m) includes interest
incurred on the USPP loans and the Revolving Credit Facility of
£13.9m (2018: £13.8m), facility fees and other charges of £1.7m
(2018: £3.1m), lease interest payable of £6.9m (2018: £0.6m)
which has increased as a result of the adoption of IFRS16
Leases, the movement in discount on provisions of £1.2m
(2018: £0.5m) and a loss for foreign exchange on financing
activities of £0.8m (2018: £0.2m).
Tax
Tax charge
Underlying tax
In 2019 we recognised a tax charge of £24.4m on underlying
trading profits after finance costs. The effective tax rate
(24.8%) is slightly lower than in 2018 (26.0%). This is due to a
relative reduction in permanent disallowable items which is
only partially offset by the geographic mix of where profits
have been made, notably the substantial increase in profits in
the US.
Pre-exceptional tax
We recognised a tax charge of £27.4m (2018: £8.8m) on
pre-exceptional profits which includes underlying tax (£24.4m),
tax credit from amortisation on intangibles arising on
acquisition of £1.5m and a £4.5m charge arising on non-
underlying items. This £4.5m charge consists of the tax impact
on non-underlying items together with tax items, that are in
themselves considered to be non-underlying:
• The tax on non-underlying items which consists of Contract
and Balance Sheet Review adjustments and other material
one-time items during the period, totalled a charge of £2.6m
reflecting the impact of current or future tax charges
(2018: £3.2m charge).
• During the current period we have recognised an additional
£0.8m of deferred tax asset in relation to UK losses to reflect
the improved forecast taxable income of our UK operations
(2018: £2.9m).
• 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 decrease in the deferred tax liability
associated with the pension scheme (with the benefit
reported in the SOCI) leads to a corresponding decrease in
the deferred tax asset to match the future profit forecasts.
Such a decrease in the deferred tax asset therefore leads to
a charge to tax in the income statement. Where deferred tax
charges or releases are the result of movements in the
pension scheme valuations rather than trading activity, these
are excluded from the calculation of tax on underlying profit
and the underlying effective tax rate. These amounted to a
£2.7m charge for 2019 (2018: £9.0m credit).
The tax rate on profits before exceptional items, at 26.3%, is
higher than the UK standard corporation tax rate of 19%. This
is due to the impact of the absence of any deferred tax credit
for current year losses incurred, predominantly in the UK, and
the impact of higher rates of tax on profits arising on our
international operations which is only partially offset by the
impact of our joint ventures whose post-tax results are
included in our pre-tax profits. Our tax charge in future years
could continue to be materially impacted by our accounting
for UK deferred taxes. To the extent that future UK tax losses
are incurred and are not recognised, our effective tax rate
will be driven higher than prevailing standard corporation
tax rates.
52
Annual Report and Accounts 2019
Serco Group plc Exceptional tax
Analysis of exceptional tax is provided in the Exceptional
items section above.
Taxes by region
For the year ended 31
December 2019
Taxes
borne
£m
80.8
37.9
39.1
2.5
160.3
Taxes
collected
£m
251.1
131.6
79.6
3.1
465.4
Total
£m
331.9
169.5
118.7
5.6
625.7
i
S
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a
t
e
g
c
R
e
p
o
r
t
UK & Europe
AsPac
Americas
Middle East
Total
Contingent tax assets
At 31 December 2019, the Group has gross estimated
unrecognised deferred tax of £1.1bn (tax effected £195m
asset), which are potentially available to offset against future
taxable income. These principally relate to tax trading losses
of £900m. Of these tax losses, £760m have arisen in the UK
business (tax effected £129m).
A £21.1m UK tax asset has been recognised at 31 December
2019 (2018: £20.3m) on the basis of forecast utilisation against
future taxable income.
Taxes paid
Net corporate income tax of £31.2m (2018: £10.6m) was paid
during the year, relating primarily to our operations in AsPac of
£19.4m (2018: £8.7m), North America of £12.1m (2018: nil),
Europe of £1.1m (2018: £4.1m) and Middle East of £1.1m (2018:
£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 £2.5m (2018: £3.3m).
The amount of tax paid (£31.2m) differs from the tax charge in
the period (£30.1m) 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.
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 2019, Serco globally contributed £625.7m of tax
to government in the jurisdictions in which we operate.
Taxes by category
For the year ended 31
December 2019
Corporation tax
VAT and similar
People taxes
Other taxes
Total
Taxes
borne
£m
33.5
9.6
109.6
7.6
160.3
Taxes
collected
£m
–
173.0
291.9
0.5
465.4
Total
£m
33.5
182.6
401.5
8.1
625.7
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 £3.78 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 £2.90
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
When dividend payments were suspended in 2014, the Board
committed to resuming dividend payments to Serco’s
shareholders as soon as it judged it prudent to do so. 2019 has
been a year of very strong operational and financial
performance. It is also the last year of significant outflows of
cash related to OCPs and restructuring exceptional costs.
Our expectations for 2020 are for further good progress in
increasing underlying earnings reducing financial leverage.
The Board is therefore recommending the payment of a final
dividend in respect of the 2019 financial year of 1.0p, aligned
to the recommended dividend and outlook as described in
the Chief Executive’s Review. The dividend, subject to
shareholder approval at the Annual General Meeting on 14
May 2020, would be paid on 5 June 2020.
Share count and EPS
The weighted average number of shares for EPS purposes was
1,171.4m for the year ended 31 December 2019 (2018: 1,094.4m)
and diluted weighted average number of shares was 1,199.0m
(2018: 1,125.4m).
In May 2019, the company completed a placement of
111,216,400 new ordinary shares of 2p each raising net
proceeds of £138.7m (2018: nil). Additionally, in March 2019,
13,600,000 shares were issued to the Employee Share
Ownership Trust to satisfy awards under the Group’s share
award schemes.
Basic EPS before exceptional items was 6.54p per share (2018:
8.20p); including the impact of exceptional items, Basic EPS
was 4.31p (2018: 6.16p). Basic Underlying EPS was 6.31p per
share (2018: 5.36p).
Diluted EPS before exceptional items was 6.39p per share
(2018: 7.97p); including the impact of exceptional items,
Diluted EPS was 4.21p (2018: 5.99p). Diluted Underlying EPS
was 6.16p per share (2018: 5.21p).
Annual Report and Accounts 2019
53
Financial StatementsCorporate GovernanceSerco Group plc
The movement in Adjusted Net Debt is an increase of £41.3m
in 2019, a reconciliation of which is provided at the bottom of
the following table. The movement includes a net inflow of
£138.7m from the placement of 111.2m new shares in May 2019
and exceptional items of £49.2m (2018: £19.2m).
The net cash outflow on acquisition includes a net cash outflow
on the acquisition of NSBU of £183.9m and £9.3m of deferred
consideration paid in respect of historic acquisitions. In addition,
£4.7m of acquisition related costs associated with the NSBU
acquisition were recognised as exceptional in the year.
Exceptional cash outflows are higher than the exceptional
income statement charge largely due to the provision release
of £19.4m seen in the income statement which was a
non-cash item.
Finance Review continued
Cash flows
The UTP of £120.2m (2018: £93.1m) converts into a trading cash
inflow of £115.5m (2018 restated: £45.1m). The improvement in
2019 cash conversion reflects the increase in profitability from
revenue growth and cost efficiencies. In 2019, operating profit
for the year has increased by £22.0m, the working capital outflow
was £0.1m (2018: £21.6m) and OCP utilisation was £53.6m (2018:
£51.8m), although in 2019, £12.7m of the utilisation was not
related to a cash cost but rather was related to the impairment of
right of use assets created on adoption of IFRS16 within onerous
contracts.
The table below shows the operating profit and FCF reconciled
to movements in Net Debt. FCF for the year was an inflow of
£62.0m compared to £16.3m in 2018. The improvement in FCF is
largely as a result of improved trading cash inflows as discussed
above. Offsetting the improvement in trading cash inflows is an
increase in tax outflows of £20.6m principally arising in our AsPac
and Americas operations as described above.
For the year ended 31 December
Operating profit
Remove exceptional items
Operating profit before exceptional items
Less: profit from joint ventures and associates
Movement in provisions
Depreciation, amortisation and impairment of leased property, plant and equipment and
intangible assets
Depreciation, amortisation and impairment of owned 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
Capital element of lease repayments
Capitalised finance costs paid
Purchase of intangible and tangible assets net of proceeds from disposals
Proceeds received from exercise of share options
Free Cash Flow
Net cash outflow on acquisition and disposal of subsidiaries
Issue of share capital
Other movements on investment balances
Capitalisation and amortisation of loan costs
Unwind of discounting and capitalisation of interest on loans receivable
Exceptional items
Cash movements on hedging instruments
Foreign exchange gain /(loss) on Adjusted Net Debt
Movement in Adjusted Net Debt
Opening Adjusted Net Debt
Closing Adjusted Net Debt
Lease liabilities
Closing Net Debt at 31 December
2019
£m
102.5
23.4
125.9
(27.5)
(43.1)
75.6
43.3
9.3
183.5
(0.1)
(31.2)
(0.1)
152.1
25.4
0.4
(21.4)
(70.2)
(1.2)
(23.3)
0.2
62.0
(193.2)
138.7
0.2
0.1
–
(49.2)
(2.0)
2.1
(41.3)
(173.2)
(214.5)
(369.9)
(584.4)
2018
(*restated)
£m
80.5
31.9
112.4
(28.8)
(68.1)
6.8
36.4
16.5
75.2
(21.6)
(10.6)
(0.1)
42.9
29.7
0.6
(16.7)
(8.7)
(2.0)
(29.5)
–
16.3
(31.3)
–
(0.3)
1.3
3.0
(19.2)
0.2
(22.3)
(52.3)
(120.9)
(173.2)
(14.8)
(188.0)
* Following the implementation of IFRS16 Leases, the definition of Free Cash Flow has been amended to exclude the capital element of lease payments.
In addition, proceeds from the exercise of share options has been included within Free Cash Flow.
54
Annual Report and Accounts 2019
Serco Group plc Net Debt
As at 31 December
Cash and cash equivalents
Loans payable
Lease liabilities
Derivatives relating to Net Debt
Net Debt
Exclude Lease Liabilities
Adjusted Net Debt
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2019
£m
89.5
(305.0)
(369.9)
1.0
(584.4)
369.9
(214.5)
2018
£m
62.5
(239.5)
(14.8)
3.8
(188.0)
14.8
(173.2)
Average Adjusted Net Debt as calculated on a daily basis for the year ended 31 December 2019 was £231.0m (2018 restated:
£218.7m). Peak Adjusted Net Debt was £356.8m (2018 restated: £292.0m).
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 2019, the Group had committed funding of £508m (2018: £492m), comprising £213m of private placement
notes, a £45m acquisition loan facility which was fully drawn and a £250m revolving credit facility (RCF), of which £200m
was undrawn. In addition, during December 2019, the Group cancelled its receivables financing facility of £30m
(2018: facility of £30m which was unutilised).
The Group’s RCF provides £250m of committed funding for five years from the arrangement date in December 2018.
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 Adjusted Net
Debt and for this proportion to increase as the ratio of EBITDA to interest expense falls. As at 31 December 2019, 99% of the
Group’s Adjusted Net Debt was at fixed rates.
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.
Annual Report and Accounts 2019
55
Financial StatementsCorporate GovernanceSerco Group plc
Finance Review continued
Debt covenants
The principal financial covenant ratios are consistent across the private placement loan notes 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.
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.
For the year ended 31 December
Operating profit before exceptional items
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 owned property, plant and equipment and
non-acquisition intangible assets
Add back: Depreciation, amortisation and impairment of property, plant and equipment and
non-acquisition intangible assets held under finance leases – in accordance with IAS17 Leases
Add back: Foreign exchange credit on investing and financing arrangements
Add back: Share based payment expense
Other covenant adjustments to EBITDA
2019
£m
125.9
7.5
133.4
(27.5)
25.4
7.2
35.8
5.8
(0.8)
11.6
9.8
2018
£m
112.4
4.3
116.7
(28.8)
29.7
–
32.1
6.8
(0.2)
14.7
–
Covenant EBITDA
200.7
171.0
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 resulting from IFRS16
Covenant net finance costs
Adjusted Net Debt
Obligations under finance leases – in accordance with IAS17 Leases
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)
21.8
2.1
0.1
(0.8)
(1.2)
(6.6)
15.4
214.5
8.9
223.4
4.1
7.6
235.1
1.17x
13.0x
13.9
0.8
1.2
(0.2)
(0.5)
–
15.2
173.2
14.8
188.0
2.3
(8.8)
181.5
1.06x
11.2x
56
Annual Report and Accounts 2019
Serco Group plc 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
Lease obligations
Loans
Total current liabilities
Non-current liabilities
Contract liabilities, trade payables and other non-current liabilities
Deferred tax liabilities
Provisions
Lease obligations
Loans
Retirement benefit obligations
Total liabilities
Net assets
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2019
£m
671.2
96.5
392.6
50.1
63.9
78.3
1,352.6
18.3
612.2
6.8
89.5
726.8
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
2,079.4
1,553.6
(557.7)
(18.7)
(58.4)
(84.6)
(56.1)
(775.5)
(72.7)
(26.7)
(103.4)
(285.3)
(248.9)
(24.0)
(761.0)
(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)
(1,536.5)
(1,166.8)
542.9
386.8
At 31 December 2019 the balance sheet had net assets of £542.9m, a movement of £156.1m from the closing net asset position
of £386.8m as at 31 December 2018. The increase in net assets is mainly due to the following movements:
• A decrease in provisions of £77.6m. Further details on provision movements is provided below.
• Adjusted Net Debt increased by £41.3m. Further details of these movements are provided in the cash flow and
Net Debt sections above.
• An increase in property, plant and equipment of £327.8m, which includes right of use assets with a net book value
of £345.3m at 31 December 2019 following the adoption of IFRS16 Leases, although this is offset by a combined increase in
lease liabilities of £355.1m. Of the total increase in the lease liability, £78.9m is recognised in current liabilities which has
contributed to the increase in net current liabilities to £48.7m.
• An increase in goodwill and intangibles of £115.3m and £52.6m respectively as a result of the acquisition of NSBU,
offset by movements in exchange rates and amortisation of intangibles charged in the year.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Finance Review continued
Provisions
The total of current and non-current provisions has decreased by £77.6m since 31 December 2018. The movement is
predominantly due to:
• A decrease in onerous contract provisions of £65.6m.
• A £19m net release of other provisions excluded from UTP as the provisions related to items created as an exceptional cost.
• £7m net charges on end of contract employee related provisions and other items, none of which were individually material.
Movements in onerous contract provisions since the 31 December 2018 balance sheet date, are as follows:
At 1 January 2019
Opening adjustment – IFRS16
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 2019
Onerous
Contract
Provisions
£m
82.1
(13.3)
10.6
(9.6)
(53.6)
0.2
0.1
16.5
The balance of OCPs at 31 December 2019 was £16.5m (2018: £82.1m). OCP balances are subject to ongoing review and a full
bottom-up assessment of the forecasts that form the basis of the OCPs is conducted as part of the annual budgeting process.
The net non-exceptional charge to OCPs was £1.0m (2018: £12.8m release) and utilisation was £53.6m (2018: £51.8m).
In 2019, the release from OCPs is reflective of the Group’s ability to forecast the final years of contracts which are nearing
completion. Additional charges of £10.6m (2018: £3.4m) have been made in respect of future losses on new and existing onerous
contract provisions to reflect the updated forecasts and releases of £9.6m (2018: £16.2m) as settlements are agreed and contracts
near completion. The Group undertakes a robust assessment at each reporting date to determine whether any individual
customer contracts, which the Group has entered into, are onerous and require a provision to be recognised in accordance
with IAS37.
The Group operates a large number of long-term contracts at different phases of their contract life cycle. Within the Group’s
portfolio, there are a small number of contracts where the balance of risks and opportunities indicates that they might be onerous
if transformation initiatives or contract changes are not successful. The Group has concluded that these contracts do not require
an onerous contract provision on an individual basis. Following the individual contract reviews, the Group has also undertaken a
top down assessment which assumes that, whilst the contracts may not be onerous on an individual basis, as a portfolio there is a
risk that at least some of the transformation programmes or customer negotiations required to avoid a contract loss, will not be
fully successful, and it is more likely than not that one or more of these contracts will be onerous. Therefore, in considering the
Group’s overall onerous contract provision, the Group has made a best estimate of the provision required to take into
consideration this portfolio risk. As a result, the risk of OCPs and the monitoring of individual contracts for indicators remains a
critical estimate for the Group. The amount recognised in the year is £6.2m at the Trading Profit level within the Corporate costs
segment, which after this charge is therefore £51.7m (2018: £40.1m).
Acquisitions
On 1 August 2019, the Group acquired the Naval Systems Business Unit and a small number of related contracting entities
(collectively, ‘NSBU’), from Alion Science & Technology Corporation. Serco acquired the net assets of the business as well as the
Alion Canada and Alion IPS legal entities. The acquired business contributed £109.8m of revenue and £7.2m of operating profit
before exceptional items to the Group’s results during the year to 31 December 2019. As a result of the acquisition, Alion Canada,
now known as Serco Canada Marine, and Alion IPS are 100% owned, indirect subsidiaries of Serco Group plc.
NSBU is a leading provider of naval design, systems engineering, as well as production and lifecycle support services to the US
Navy, US Army and Royal Canadian Navy. The combined business will be a top tier supplier of services to the US Navy, and
increases our exposure to US Navy fleet expansion, which is one of the fastest-growing areas of public procurement. The US Navy
has announced plans to increase the fleet from 280 to 355 ships by 2034, and we see a long-term and growing demand for the
capabilities that the combination of Serco and NSBU will be able to provide.
The total annual revenue of NSBU in 2020 is expected to be around $370m (£285m) and the estimated operating profit before
exceptional items, including an appropriate allocation of charges for shared support services and fully allocated overheads, of
around $27m (£20m).
58
Annual Report and Accounts 2019
Serco Group plc IFRS16
A new leasing standard, IFRS16 Leases was adopted by the Group with effect from 1 January 2019. IFRS16 requires the recognition
of a lease liability and corresponding right of use asset for any lease not covered by a low-value or short-term exemption.
The following table illustrates the impact which IFRS16 has had on the results for the year ended 31 December 2019 for key
Alternative Performance Measures. This has been provided to assist the reader in understanding the business performance
outside of changes to accounting standards.
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p
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No restatement has been made to the results for the year ended 31 December 2018 in accordance with the modified retrospective
approach to transition adopted by the Group.
Underlying Trading Profit (£m)
Trading Profit (£m)
Operating Profit (£m)
Net Finance Costs (£m)
Profit Before Tax (£m)
Diluted Underlying EPS (p)
Net Debt (£m)
As reported
31 December
2019
Impact of IFRS16
31 December
2019
APM pre-IFRS16
31 December
2019
31 December
2018
120.2
133.4
102.5
21.8
80.7
6.16
584.4
1.2
2.3
2.3
6.6
(4.3)
(0.46)
360.9
119.0
131.1
100.2
15.2
85.0
6.62
223.5
93.1
116.7
80.5
6.4
74.1
5.21
188.0
Serious Fraud Office Investigation
On 4 July 2019, Serco Geografix Ltd, a wholly owned subsidiary, received judicial approval of a Deferred Prosecution Agreement
(DPA) with the UK Serious Fraud Office (SFO). This ruling concluded the SFO’s investigation into Serco companies as announced
in November 2013. As part of the DPA, the Group has paid a fine of £19.2m during the year and also paid SFO investigation costs
of £3.7m.
Claim for losses in respect of the 2013 share price reduction
The Group has received a claim seeking damages for alleged losses following the reduction in Serco’s share price in 2013.
The merit, likely outcome and potential impact on the group of any such litigation that either has been or might potentially
be brought against the group is subject to a number of significant uncertainties and, therefore, it is not possible to assess the
quantum of any such litigation as at the date of this disclosure.
Angus Cockburn
Group Chief Financial Officer
25 February 2020
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Risk Management
Risk Management
Our risk management process does not eliminate risk, it
identifies risks, thoroughly understands them and their
potential impact, and devises strategies for mitigating and
managing them.
In common with other large businesses which operate
internationally, Serco has to manage and mitigate a large
number of potential risks. As a business which serves
Governments, we have greater exposure than many to some
potential risks such as changes in Governments, but less than
many to other risks such as Brexit, as we import and export very
little across borders. As a business, we take risk management
extremely seriously, and invest significant effort into identifying
and managing risks.
Our business risks can be categorised and described in many
different ways, but at the highest level can be thought of as
external – essentially those risks that relate to the landscape in
which we do business – and internal risks – those which arise as
a consequence of the way we deliver our services. In the former,
we would put political risks such as Brexit, changes in
Governments and regulation; in the latter we would put risks
such as cyber security, health and safety and growing our profits
in a sustainable way. Environmental, Social and Governance
(ESG) risks, which we acknowledge are of a concern to many
stakeholders, span both internal and external risks, by virtue of
the fact that the external risk of regulation impinges on our
internal risks of the way we run our business. Whilst Governance
and Social risks apply to all our businesses, our Environmental
footprint varies enormously between our businesses.
In the following pages we describe in considerable detail how
we think about risk and manage it.
Risk management life cycle
CORPORATE RISK REPORTING TOOL
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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.
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Annual Report and Accounts 2019
Serco Group plc
Risk management response
We recognise the challenge created by both the external and
internal risks outlined and our response to them is captured in
the Principal Risks and Uncertainties on page 62 and in the
Strategic Report on page 18. Our sustainability commitments
and approach to ESG matters are documented in the
Corporate Responsibility Section of the Strategic Report on
page 91 and in our full Corporate Responsibility Report which is
available on the Company’s website.
Although our core risk processes and risk lifecycle have
remained fundamentally unchanged in 2019, steps have been
taken to strengthen the Group Enterprise Risk Management
function through the bringing together of Risk, Compliance
Assurance, Insurance and Business Continuity teams and by
strengthening our risk management capability.
Looking forward to 2020, our priority will be the continued
evolution of an Enterprise Risk Management strategy. Our initial
focus is to drive improved consistency across each of the
divisions, deliver refreshed standards, polices and training and
to make improvements to our risk management tools.
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Risk management approach
Our risk management process seeks to identify, understand,
mitigate and manage risks at all levels of our business,
reflecting the nature of the activities being undertaken and the
level of control considered necessary to protect our interests
and those of our stakeholders.
We undertake a bottom-up review of risks, with our Business
Units identifying the main threats to achievement of their
objectives, documenting and analysing their potential impact,
and defining clear actions to reduce the likelihood of those
risks materialising and/or the financial impact if they should
still occur. This exercise is completed using the Serco risk
management lifecycle process which is mandated throughout
the company to ensure a consistent approach to identifying,
analysing, monitoring and reporting risks and to provide
assurance that the risk mitigation in place is effective
and appropriate.
The Business Unit risks are consolidated and reported to
Divisional leadership teams in a check and challenge capacity
to ensure that risks on the Business Unit risk registers accurately
reflect the concerns of local senior leadership.
Once approved, the Divisional Risks are reviewed by the Group
ERM team and help inform the principal risk updates which are
presented quarterly to the Group Risk Committee (“GRC”). The
Board are updated after each meeting. The Executive
Committee reviews risk themes regularly throughout the year
and conducts an annual risk workshop that includes a review of
the principal risks as well as a review of emerging risk topics and
their impact on our risk profile.
For our principal risks we have Subject Matter Experts (SMEs)
and a nominated Executive Committee sponsor allocated to
each, supporting their review and management. Detailed
reviews of our principal risks are carried out as part of the GRC
reporting schedule, as well as divisional “deep-dives” delivered
by our divisional CEOs.
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 for mitigation. 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.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Principal Risks and Uncertainties
We have also assessed our external and internal environment to
anticipate both risks and opportunities and to increase our
ability to pre-empt, convert or exploit them. As part of this
review we continue to monitor the potential implications of the
UK’s withdrawal from the European Union (“Brexit”) and its
impact on Serco.
Reiterating our position outlined in our 2018 Annual Report, we
do not believe that Brexit will directly impact Serco to a material
extent. This is based on regular assessment and review of our
UK and EU contracts, our supply chain, workforce requirements
and regulatory obligations. By operating many contracts across
diverse geographies outside of Europe, Serco has a natural
hedge from material Brexit risks that may arise.
In addition to the principal risks and uncertainties already
identified, 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.
Summary of principal risks and uncertainties
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 principal risks and the mitigation
priorities to improve the effectiveness of the controls. We have
included the residual risk trend indicator for each risk, together
with a brief commentary to contextualise these trends.
Principal risks are considered over the same three-year
timeframe as the Viability Statement set out on page 74,
which takes account of the principal risks in its assessment.
We have removed the Failure to deliver expected benefits from
transformation risk from our principal risk profile to reflect good
progress made and in recognition of the benefits returned to
the organisation. In addition, we have included a new people
risk acknowledging the value we place on our workforce and
the importance of succession planning for business-critical roles
on both the Executive Committee and across the business.
Particular focus has been given to the management and
oversight of our Health and Safety priorities, currently captured
under Catastrophic risk, to ensure that they retain appropriate
visibility and priority .
Summary of principal risks
Strategic risks
Failure to grow profitably
Failure to manage our reputation
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
Failure to attract, engage and
retain key talent
Hazard risks
Catastrophic incident
Legal and
compliance risks
Material legal and regulatory
compliance failure
62
Annual Report and Accounts 2019
Serco Group plc Winning good business
Executing brilliantly
A place people
are proud to work
Profitable and sustainable
Increasing risk
Decreasing risk
No change
New
The trend indicator depicts the trend of our residual
risk rating internally over the course of 2019.
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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 win important re-bids and gain sufficient new business to stabilise our revenue. With a
reasonable pipeline of opportunities ahead 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 policy 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.
• 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.
• Investment Committees.
• Serco Management System
(“SMS”).
• Sector-specific Centres of
Excellence (“CoEs”) and Value
Propositions.
• 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 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 process so that
Business Development resources
are focused on the most attractive
opportunities.
• 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.
• Review and consider appropriate
inorganic growth opportunities as
the market continues to develop.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
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.
• Customer and stakeholder
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.
• Continual refinement and
improvement of existing
communication and marketing
controls and approaches.
• Continued and heightened efforts
to explain and evidence the
benefits and innovations that
Serco brings to the provision of
public services.
• Serco Institute to trial and publish
innovative thinking in public
service delivery.
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Annual Report and Accounts 2019
Serco Group plc 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 2019 the new finance operating model within our UK and AsPac Divisions was being embedded, and as a result of
progressing through three reporting periods with the transformed model being operational, management believe that the risk
of financial control failure has reduced from the higher levels which existed during the transformation phase. Work continues to
ensure that the new operating model is sustainable and effective, and the Company is working closely with its third-party service
provider to ensure this is the case.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
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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.
Challenges of new finance operating model
– poor service delivery may lead to an unstable
financial control environment due to an increased
workload on the Serco finance community.
• Group Governance and Finance
• Continue to embed transformed
strategy.
• 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.
• Governance and review
procedures associated with
managing the quality of finance
services delivered by the
Company’s third-party supplier.
new finance operating model 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.
• Further embed billing assurance
programme.
• Ensure talent is retained within the
finance function through initiatives
such as opportunities for personal
development and improved
training.
• Continuously improve the
Company’s financial assurance
programme.
Annual Report and Accounts 2019
65
Financial StatementsCorporate GovernanceSerco Group plc
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. In addition, the GDPR legislation has introduced unprecedented scrutiny and associated fines in relation to
data protection issues. Serco has continued to implement robust internal controls and process improvements 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.
Unauthorised use of systems – if we do not
implement effective personnel vetting and access
restriction processes and controls, then
unauthorised use of our systems may occur.
Inadequate incident monitoring and response –
if we do not monitor our systems and remediate
and repel attacks, then we may fail to minimise the
impact of any breach.
Increased regulatory scrutiny – if we do not
manage our data obligations and educate our
workforce then we may be in breach of GDPR.
• Enterprise Architecture Boards &
• Retooling for our Security
Operations Centres to maintain
effective risk identification.
• Continued routine vigilance and
proactive vulnerability
identification coordinated through
our Security Operations Centres.
• Continued use of global key
security risk indicators to support
mitigation priorities.
• Leveraging Cloud adoption to
ensure standardised control
mechanisms.
Solution Review meetings.
• Serco Management System
(“SMS”).
• IT security infrastructure,
processes and controls.
• Privileged User Management and
Two Factor Authentication for our
centralised managed systems.
• External assessments and scenario
based cyber security testing.
• Third-party due diligence checks
for key suppliers.
• Active monitoring by our Security
Operations Centres and Computer
Security Incident Response Team
processes.
• Standardised HR processes.
• Cyber security awareness training
part of our Serco Essentials
training programme.
• Regular Phishing and Executive
Committee training exercises.
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Annual Report and Accounts 2019
Serco Group plc OPERATIONAL RISKS CONTINUED
Contract non-compliance, non-performance or misreporting
Failure to deliver contractual 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.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
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• Contract Management Application
(“CMA”).
• Continued Contract Management
training (Global and Divisional).
• Contract governance including
• Ongoing development and
Monthly Contract Reviews,
Business Unit reviews and
Divisional Performance Reporting
(“DPR”) process.
continued exercise to roll out and
embed use of contract
performance dashboard
(“Gauge”).
• Business Life cycle Review Team
• Continued process improvement
(“BLRT”) process.
• Serco Management System
(“SMS”).
activity to drive consistent
approach to risk assessment.
• Continued execution of divisional
• Leadership Development
Programme and Contract Manager
training.
• Ethics training programme.
• Communication of Our Values and
Code of Conduct.
• Speak Up process (“Ethicspoint”).
operational excellence
improvement plans.
• More in depth contract KPI
reviews.
• Ongoing and continued ethics,
business conduct and compliance
training.
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.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Principal Risks and Uncertainties continued
OPERATIONAL RISKS CONTINUED
Failure of business-critical partner, sub-contractor or supplier
As a result of the failure of a business-critical 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.
A programme for quantifying our supplier exposure and establishing appropriate mitigation actions was initiated with an
extensive exercise identifying the business-critical suppliers across all divisions in 2018. This programme has continued to
mature through 2019 with delivery of targeted reviews across the business.
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.
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.
• Serco Management System
• Plan to roll out enhanced
(“SMS”) – Procurement policy,
standards and procedures.
• Sourcing standards and
procedures in each region.
• Identification and maintenance of
business-critical partner,
sub-contractor and supplier list.
• Contracts with appropriate Key
Performance Indicators /Service
Level Agreements etc.
• Financial and ethical health checks
and monitoring in the UK, North
America and AsPac.
processes to critical suppliers
including contract compliance, risk
management and supplier
performance management.
• Improve auditing of business-
critical sub-contractor and supplier
business continuity plans.
• Ongoing monitoring of impact of
Brexit on supply chain and working
with the Cabinet Office on risk
mitigation and contingency
against critical goods and services.
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Annual Report and Accounts 2019
Serco Group plc
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. 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.
Building on work in 2018 we have rolled out improved ethics training, strengthened our internal capability through professional
qualifications and reinforced our strong tone at the top.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
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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 behaviour 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
• Delivery of the Deferred
the top.
• Strong, meaningful and
understood Values.
• Code of Conduct.
• Corporate Governance with
oversight by the Corporate
Responsibility Committee (“CRC”).
The CRC has explicit responsibility
to oversee how we embed our
values across the business.
• Delegated Authority Matrix
Prosecution Agreement project
plan with oversight from DPA
project steering group.
• Formal separation of Group HSE
from Ethics function.
• Implementation of improved
divisional ethics and compliance
risk management processes.
• Further development of Speak Up
dashboard and reporting.
• Embed use of Conflict of Interest
(“DAM”).
registers.
• Serco Management System
• Refinement of divisional ethics and
(“SMS”).
• Financial controls and processes,
with segregation of duties for core
financial controls.
compliance risk assessments.
• Implementation of improved due
diligence processes.
• Continued refresh of Serco
• Gifts and Hospitality process and
Essentials training.
• Evaluate effectiveness of internal
culture assessment processes.
registers.
• Risk management procedures.
• Third-party due diligence.
• Leadership Academy.
• People development and
remuneration.
• Corporate investigations.
• Speak Up process (“Ethicspoint”).
Annual Report and Accounts 2019
69
Financial StatementsCorporate GovernanceSerco Group plc
Principal Risks and Uncertainties continued
PEOPLE RISKS CONTINUED
Failure to attract, engage and retain key talent
It is our ambition to be one of the best managed companies in the sector and, notwithstanding our framework of people
processes, systems and controls, there is a risk that we are unable to attract, engage and retain an appropriately sized, qualified
and competent workforce and Management Team. This would restrict Serco’s ability to deliver on its customer obligations,
execute its strategy and achieve its business objectives whilst driving employee pride in the organisation.
This risk specifically includes consideration of key people reliance in our leadership and executive teams including succession
planning for our senior management team and other business critical roles.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
Development – failure to develop leadership and
management capability resulting in regretted
attrition.
Talent & Succession – failure to identify and
develop talent and, as a result, talent pools do not
support succession planning.
Engagement – failure to engage with and listen to
staff, particularly those in critical roles.
Reward – remuneration packages fail to keep pace
with external markets.
Recruitment – failure to attract and recruit the
right people with appropriate skills and experience
leads to early attrition.
Attraction – failure to attract suitable and diverse
candidates of the right calibre with the required
experience/qualifications.
• Talent Management & Succession
• Continued development of
Processes.
• Leadership capability
development.
detailed succession plans for all
identified business critical roles.
• Take action on areas of
• Targeted retention arrangements.
• Critical Resource Planning.
• Annual Performance Management
improvement identified in 2019
engagement survey.
• Continue to improve
process.
• Exit Interviews.
• Viewpoint survey and action plans.
• Technology to support
recruitment, onboarding and
induction.
• Structured and targeted training
and development processes.
• Annual engagement survey to all
employees.
understanding of local
employment markets.
• Complete benchmarking activity to
ensure market competitive reward
packages.
• Continue to monitor channels to
access external talent in chosen
markets.
• Ongoing use and analysis of exit
interviews for senior regretted
leavers.
• Continued use of Colleague
Connexions.
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Annual Report and Accounts 2019
Serco Group plc 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.
Management of our health, safety and environmental commitments remains a core priority and so whilst the nature of this risk
is broad and focuses on a significant event it is important to highlight that it also includes mitigations to secure the safety and
wellbeing of every employee, service user and relevant third party and to execute our duty of care obligations.
Each Division is continuing to assess risks at a contract level to ensure that all relevant material risks have been identified and to
assess and assure mitigations, including insurance cover, are appropriate. Contracts considered inherently high risk have been
reviewed. Significant work has also been completed in the review of and testing of business continuity plans.
Key risk drivers:
Material controls:
Mitigation priorities:
Risk trend:
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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 to 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
Environmental) HSE Strategy.
• Effective and engaged safety
culture.
• Continue to embed updated
health and safety strategy.
• Continue to embed ‘just’ culture
• Deliver 2020 high visibility safety
• Regular safety communications
campaign in all divisions.
and maintenance of safety
awareness.
• Competency-based recruitment
programme.
• Role description and competency
definition.
• Serco Essentials training.
• Safety training and individual
development plans and processes
based on role and operational risk.
• Access to subject matter expertise.
• Safety Management System (policy
and procedures).
• Maintain divisional safety tours
and safety moments.
• Formal split of Group HSE from
Ethics function and creation of
global Head of Health & Wellbeing
role to drive wellbeing agenda and
to ensure the Safety element of
this risk receives appropriate focus
at a corporate level.
• Continued training in insurance
and contractual risk management.
• Complete second phase controls
review and alignment of insurance.
• Planned and preventative
• Review levels and adequacy of
compliance assurance.
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.
• Risk transfer via insurance where
appropriate.
Annual Report and Accounts 2019
71
Financial StatementsCorporate GovernanceSerco Group plc
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 Regulation, Data and Privacy laws, Modern Slavery, Trade Compliance and
Human Rights.
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.
• Automated alerts on material legal
and regulatory obligations and
changes.
• Legal and contracts experts
aligned to various specialist areas
across the business.
• Investment Committee and
• Delivery of Deferred Prosecution
Agreement project plan with
oversight from DPA project
steering group.
• Horizon scanning on key potential
new laws and regulations,
including Brexit.
Business Life Cycle Review Team
(“BLRT”) bid process and
governance.
• Greater use of data and trend
analysis to inform Key Risk
Indicators.
• Embedding risk-based third party
due diligence.
• Improve review of key controls
within SMS as the basis for
ongoing compliance assurance.
• Continuing development of Serco
Essentials training programmes.
• Continue and improve key contract
and compliance assurance reviews
on legal compliance.
Failure to identify and respond to material
changes in legal and regulatory requirements,
including Brexit – complex and emerging new
laws 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.
Class action litigation and increasing regulatory
fines – particularly in relation to data privacy,
employment/pensions.
Compliance with SFO DPA obligations
• 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 and
analytics.
• Legal training.
• Serco Essentials training.
• External and Internal audits.
• Compliance assurance processes
and procedures.
• Regular reporting to Board and
Executive Committee on legal
issues and new laws across the
Group.
• Speak Up process and case
management system
(“Ethicspoint”).
• EU-Exit Working Group reviewing
Brexit related risks.
• Oxford Saïd Business School
Senior Management and Contract
Director training on legal and
contract issues and best practice.
• Group and Divisional Standard
Operating Procedures.
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Annual Report and Accounts 2019
Serco Group plc We are focused on the delivery of our obligations under the
DPA and Undertaking. Board oversight of our DPA and
Undertaking commitments has been strengthened and both
the Board and GRC regularly review the DPA plan.
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SFO investigation
Our 2018 Annual report documented the ongoing investigation
by the UK Serious Fraud Office (“SFO”) which was announced
in November 2013. This investigation concluded on 4 July 2019
when Serco Geografix Ltd (“SGL”), one of the subsidiaries of
Serco Group plc (“Serco”, “Serco Group” or “the Group”),
entered into a Deferred Prosecution Agreement (“DPA”)
with the SFO following the full cooperation with the
SFO’s investigation.
Serco Geografix Ltd has taken responsibility under the terms of
the DPA for three offences of fraud and two of false accounting
committed between 2010 and 2013 related to the reporting to
the UK Ministry of Justice (“MoJ”) of the levels of profitability of
Serco’s Electronic Monitoring (EM) contract. These issues were
reported by Serco to the SFO and the MoJ in November 2013.
SGL paid a fine of £19.2m together with £3.7m related to the
SFO’s investigation costs. The DPA lasts for three years until
July 2022. The fine reflected a discount of 50% as a result of
Serco’s self disclosure of the conduct, as well as its significant
and substantial cooperation with the investigation. No
compensation or disgorgement of profit were payable to the
MoJ because the SFO agreed that Serco had already fully
compensated the Department in respect of the offences as
part of a £70m settlement paid by Serco to the MoJ in
December 2013.
The SFO recognised the significant steps Serco took to reform
itself, including the thorough implementation under
independent supervision of a comprehensive Corporate
Renewal Programme approved by the UK Government. This
programme included over 80 actions and initiatives, and
included rewriting its system of management control, as well as
strengthening its bidding, contract management, internal audit
and management assurance processes. The DPA is
accompanied by an undertaking by SGL’s ultimate parent
entity, Serco Group plc, with the SFO (“the Undertaking”), to
guarantee SGL’s performance of its obligations including
payment of the fine, full cooperation with the SFO and other
foreign and domestic law enforcement and regulatory
authorities, self-reporting of any evidence or allegation of
serious or complex fraud, and ethics and compliance
programme enhancements of a type largely identical to those
agreed to by SGL as well as agreeing to report annually to the
SFO and the Cabinet Office on the Group’s ethics and
compliance programme.
Annual Report and Accounts 2019
73
Financial StatementsCorporate GovernanceSerco Group plc
Viability Statement
In accordance with provision 31 of the UK Corporate Governance Code
published by the Financial Reporting Council in July 2018, the Directors have
assessed the prospects of the Group over the three year period to
31 December 2022.
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 52% (2018: 50%) of the current year revenue
relates to contracts where the contract term potentially
comes to an end within three years.
The strategic plan set out in March 2015 significantly changed
the direction of the Group as explained in previous shareholder
communications and the Group has prepared an updated
five-year business plan each year to establish whether it is on
target to achieve its long term strategic 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 definitive conclusions on the
future prospects of the Group and challenging to develop
appropriate sensitivities and mitigation strategies. Therefore,
whilst the five year business plan continues to be developed, its
nature is more akin to a strategic goal rather than a forecast
based on known assumptions; this makes assessing the longer
term viability of the Group a challenge.
Good progress continues to be made on implementing the
Group’s strategy. However, market conditions remain
challenging in the UK, the Group’s largest market, and this has
acted as a drag on the Group’s estimate of the weighted
average rate of market growth in the medium term. We have
previously highlighted the importance of the external market on
our ability to win new contracts. Whilst we expect to continue to
grow revenue and profit over the next two year Budget period
based on recent new contract wins and order book, growth
thereafter is more difficult to assess given the nature of the
market. However, we will continue to focus on margin
improvement through improved efficiency whilst focusing
business development investment on the most attractive
market opportunities.
During the period of assessment, £121.9m of the Group’s US
Private Placement loan notes and the acquisition facility of £45m
mature. The long term forecasts supporting this statement
assume that if these are not refinanced there is still sufficient
liquidity headroom. However the intention is for these to be
refinanced with long term funding. The Group refinanced its
bank debt at the end of 2018 and this new five year funding
facility will provide the financial platform to continue to invest
in the growth of the Group. The Group’s financial position has
also been enhanced by its improved ability to generate Free
Cash Flow from its growing profits and the significant reduction
in cash outflow from 2020 associated with historic loss
making contracts.
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 assessing the future viability of the Group.
The Group’s principal risk review, as set out on pages 62 to 73,
considers the impact of these principal risks and the mitigating
controls that are in place.
In assessing the prospects of the Group over the 3 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 2020 and 2021 which has been approved by the Board, and
an extrapolation to 2022 using higher level assumptions based
on local market growth rates and identified opportunities.
The Group’s covenant net debt balance at 31 December 2019
is £235m. The Group’s base projections indicate that debt
facilities and projected headroom are adequate to support the
Group over the next 3 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 has
insufficient liquidity available in November 2022, on the
assumption that none of the debt which matures during the
period of assessment is refinanced, nor does the Group have
access to any other sources of funding. November 2022 is the
point with the lowest amount of liquidity headroom using the
sensitivities outlined above against which the forecast has been
stress tested. As context, rebids have a more significant impact
on the Group’s revenue than new business wins, as contracts
accounting for 35% of total revenue are expected to be rebid in
the next three years. The Group’s rebid win rate has been in
excess of 65% over the last two years. While these sensitivities
will change in line with the 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.
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Annual Report and Accounts 2019
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It is unlikely, but not impossible, that the crystallisation of a
single risk would test the future viability of the Group; however,
unsurprisingly, and as with many companies, it is possible to
construct scenarios where either multiple occurrences of the
same risk, or single occurrences of different significant risks,
could put pressure on the Group’s ability to meet its financial
covenants. At this point, the Group would look to address the
issue by exploring a range of options including, amongst
others, a temporary or permanent renegotiation of the financial
covenants, disposals of parts of the Group’s operations to
reduce net debt and/or raising additional capital in the form of
equity, subordinated debt or other such instruments.
Subject to these risks and on the basis of the analysis
undertaken, the Directors have a reasonable expectation that
the Group will be able to continue in operation and meet its
liabilities as they fall due over the three-year period of their
assessment. In doing so, it is recognised that such future
assessments are subject to a level of uncertainty that increases
further out in time and, therefore, future outcomes cannot be
guaranteed or predicted with certainty. The Directors have
made the following key assumptions in connection with this
assessment:
• there is no significant unexpected contract attrition of
existing work that becomes due for extension or rebid over
the next three years;
• there is no significant reduction in scale of existing contract
operations 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 continue the execution of its strategy
growing revenue and profits; and
• the Group is not subject to any material penalties or direct
and indirect costs and/or debarment from bidding for new
contracts.
Annual Report and Accounts 2019
75
Financial StatementsCorporate GovernanceSerco Group plc
Corporate Responsibility
Our principal areas of environmental, social and
governance responsibility
As a public company our job is to deliver to our owners attractive returns on
their capital, and they expect our profits to increase over time. However, for
those returns to be sustainable the Company needs to behave in a way that
is responsible and consistent with the broader interests of society. We take
this responsibility very seriously.
We are employed to make money for the owners of the business. Without profits we could not
generate or attract investment or deliver services or employ people. But we do not regard this
as inconsistent with making a positive contribution to society or behaving responsibly. To the
contrary, it is the sine qua non of the Company’s reputation as a trusted organisation providing
public services and its ability to secure and retain business from Governments into the future.
Fourthly, the Company and its employees pay tens of millions of
pounds in taxes. In so doing we support the UN Sustainable
Development Goals 12 (Responsible Consumption and
Production) and 16 (Peace, Justice and Strong Institutions).
Talking about these things runs the risk of leaving the
impression that we believe our behaviour and thinking is always
perfect. In a company employing more than 50,000 people
worldwide, someone, somewhere is probably doing something
stupid or behaving badly. From the Board down, we will make
mistakes or take decisions which time judges harshly. We are
often faced with situations where there is no clear answer to
what is ‘doing the right thing’. Regulation and rules cannot
provide the answer to everything and we are paid to use our
judgement. But just because we are imperfect humans in an
imperfect world does not mean that we should not set
ourselves high standards of behaviour, and try to make a
positive difference, every day.
Here we summarise our progress and performance in delivering
our Corporate Responsibility (CR) agenda which includes
recognition of our environmental, social and governance (ESG)
responsibilities. Further information is available in the CR
Committee Report on pages 120 to 121 and our full CR Report,
available on the Company’s website, at
www.serco.com/about/corporate-responsibility
We recognise that if we do not behave in a responsible way the
value of the Company could be severely impacted and indeed
we have experience of this behaviour. We have, through this
experience, learned the importance of being very thoughtful
about the way we conduct ourselves (see page 90).
Our Values of Trust, Care, Innovation and Pride help us to stay
grounded and sit at the heart of how we operate.
We do not believe that it is for Serco to opine on morality, but
whilst making money for our shareholders, we serve society in
four main ways.
First, by helping Governments to deliver reliable, high-quality
services which represent good value for the taxpayer; in many
cases this involves providing citizens (or people who aspire to
be citizens) with services at difficult times in their lives, or
providing services which support critical national infrastructure
and assets. Doing these things well is an important contribution
to society, and in so doing we support the UN Sustainable
Development Goals 11 (Sustainable Cities and Communities)
and 16 (Peace, Justice and Strong Institutions).
Secondly, we serve society by employing more than 50,000
people, and giving them jobs which are fairly paid, a safe and
healthy workplace where diversity is positively valued, careers
which allow them to develop and achieve to the best of their
abilities, and ensuring that they are treated with respect. In so
doing we support the UN Sustainable Development Goals 1
(No Poverty), 3 (Good Health and Wellbeing), 4 (Quality
Education), 5 (Gender Equality), 8 (Decent Work and Economic
Growth) and 10 (Reduced Inequalities).
Thirdly, in our interactions with others – be they suppliers,
politicians, competitors, lenders or investors – we contribute to
society by being straightforward, transparent, respectful and
fair. In so doing we support the UN Sustainable Development
Goals 12 (Responsible Consumption and Production) and 16
(Peace, Justice and Strong Institutions).
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Annual Report and Accounts 2019
Serco Group plc Our Corporate Responsibility framework
In order to make the principles outlined above actionable and
meaningful, a few years ago we created a CR framework, which
is structured around our four core stakeholders: owners,
customers, employees and the wider world.
This framework defines our principal areas of responsibility and
sustainability and helps to guide practice and behaviour whilst
facilitating measurement of performance. Our efforts are not
limited to these items, but this is where we focus our attention
and ambitions most closely. Each component in our framework
represents a continuously improving system of people, projects
and processes – managed by global teams and fulfilled by
our employees.
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based on the outcomes of an independent
materiality assessment.
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Our people
Our customers
Our world
Our owners
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information.
P83
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P85
See page 85 for
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Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Corporate Responsibility continued
Our principal areas of environmental, social and
governance responsibility continued
Our principal areas of responsibility
and sustainability
To identify and prioritise our principal areas of responsibility
and sustainability, and ensure they are appropriately
embedded in our framework, we use an independent
materiality assessment, aligned to external best practice
sustainability principles, indices and frameworks1 and based on:
• the material relevance of all potential sustainability issues to
our business model, corporate strategy, Principal Risks and
Key Performance Indicators; and
• the material importance of those issues for our business and
operations as perceived and experienced by our key
stakeholder groups (employees; shareholders; customers;
communities and society; government and regulators;
partners; and suppliers).
For example:
• Protecting the environment: Our impact and opportunity to
create value from an environmental perspective varies in
each market and is dependent on the nature of services we
deliver and the level of operational control we hold at any
given contract. More than two thirds of our operations are
on our client sites where we do not always control the main
environmental aspects, such as managing building services,
energy and waste. It is on this basis that our assessment has
been made. However, there are ways in which we can control
and are working to reduce the environmental impact of our
operations, such as robust environmental governance,
measuring and managing supply chain impacts, reducing
business travel and fostering positive environmental
behaviours among employees;
• Duty of care / Social outcomes: The majority of the services
we provide involve direct human interaction and care, such
as patients in the hospitals where we provide healthcare
support services, or offenders in the prisons where we
provide rehabilitative psychological services, so not only is
service user wellbeing important to us, it is integral to many
of the services we provide.
Our 2019 materiality matrix:
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1 Behaving with integrity and
treating people with respect
Our customers
2 Duty of care/Social outcomes
3 Quality service delivery
4 Value for public money
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Our owners
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Transparency
Governance
Managed risk
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Contributing to communities
and society
Fair competition
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Responsible relationships
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Protecting the environment
Our people
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Safe operations
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Employee engagement
and development
Diverse workforce and
inclusive workplace
MODERATE
HIGH
Relevance to Serco
VERY HIGH
Note:
1.
Including the Global Reporting Initiative (GRI) Standards, Dow Jones Sustainability Index (DJSI), the Sustainability Accounting Standards Board (SASB)
guidelines and the UN Sustainable Development Goals (SDGs).
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Behaving with integrity and treating people
with respect
Corporations should not be arbiters of morals and ethics; however, they can set
standards of behaviour for themselves, and in our case these are reflected in our
Values of Trust, Care, Innovation and Pride.
Across all our regions, we strive to behave with integrity and
treat people with respect, 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.
It is inevitable in any company employing more than 50,000
people that from time to time individuals or small groups
behave inappropriately. Our task is to give people a framework
and a clear understanding of our Values to minimise the risk of
them going outside those boundaries, and also to have a
comprehensive and effective compliance and reporting system
so that if they do, we find out about it quickly.
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.
We have continued to drive our Ethics Compliance agenda,
including human rights, with focus and resolve:
• evolving our Group Ethics Compliance framework and
strategy to provide a more standardised, structured
blueprint for future evolution and impact;
Next steps
To deepen our global Ethics Compliance maturity and overall
capability, we plan to:
• drive greater coherency and collaboration by replicating our
•
UK ‘Values and Integrity Network’ in every Division;
launch enhanced training for the Board, Executive
Committee and Divisional Executive Management Teams,
including at our annual leadership conferences;
• enhance Board and Executive oversight and challenge for
Ethics Compliance, including:
– annual reporting by Divisional Ethics Compliance and
Compliance Assurance Leads to the CR Committee and
Risk Committee respectively without Executive
Management present;
– annual review of Ethics Compliance and compliance
assurance governance and capability, Three Lines of
Defence, and reporting of findings to the CR, Risk and
Audit Committees of the Board; and
– the continued evolution of the CR Committee of the
Board with a principle focus on holding the organisation
firmly to its Values and standards of behaviour, with
particular emphasis on our principal areas of social
responsibility: our people, our world and our
commitment to behave with integrity and treat people
with respect;
• ensure coverage of this area as part of the wider Compliance
Assurance Programme to deliver the following benefits:
– standardised approach and testing of critical controls
across the Group;
• strengthening Ethics Compliance leadership and capability
– development of assurance maps mapping the Three
at Divisional levels by:
– updating and standardising organisational structures
and roles;
– undertaking a programme of professional certification;
•
five out of eight Ethics Compliance Leads are now CCEP-I
certified – the remainder to complete in 2020;
• developing a real-time Ethics Compliance dashboard for
Lines of Defence;
– assurance reporting improvements to align and support
integration with Enterprise Risk Management (ERM);
incorporate within relevant Internal Audits, tests of the
design and operating effectiveness of controls established
by management to ensure compliance with Serco’s Ethics
Compliance requirements;
more consistent and responsive monitoring;
• conducting a Group-wide review of our global ethics
helpline and investigation process, Speak Up, to inform
improvement plans;
• strengthening our compliance assurance, including:
– increased focus on critical controls within the Serco
Management System (SMS) and SMS Self-Assessments;
– reporting changes to bring greater focus to the closure of
actions and overdue actions from SMS Self-Assessments
and Compliance Assurance Reviews; and
• reviewing and updating policies and procedures to ensure
compliance with the Australian Modern Slavery Act (2018)
and Whistleblower Reform (2019).
• deliver a consistent approach to the assessment of Ethics
Compliance risks in line with our ERM framework; and
• act on the findings of our Speak Up review and further
strengthen our Speak Up oversight and investigations
capability, and improve communications and awareness.
Our Group Slavery and Human Trafficking Statement 2019 is
available at www.serco.com/slaverystatement
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Fair competition
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Responsible relationships
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Corporate Responsibility continued
Our people
We are committed to promoting and enabling the diversity, development,
wellbeing and safety of our people.
Our people are very proud of all that they do, and we are very
proud of them. In 2019 we published our first People Report,
with an ambition to publish it annually, highlighting the work of
our frontline colleagues and providing insights into their
motivations. The report, available on the Company’s website at
www.serco.com/about/people-report, also sets out our
ambition for making Serco a great place to work and the steps
we are taking to achieve this.
In the People Report, we explore how our people support and
enable patient care in hospitals and we hear from our
employees about how they make a difference for asylum
seekers and ex-offenders in the UK, military personnel in the
US, aspiring air traffic controllers in Iraq, and disadvantaged
members of the public in Australia. Men and women around the
world of Serco share their experiences of inclusive support,
development and career opportunities for all, including our
LGBT+ colleagues, those with disabilities and all cultural
backgrounds. We also explore what we are doing to promote
and support wellbeing for all – working to keep our people
healthy, fit and thriving whether on the streets, in our call
centres, returning to work after parental leave or living and
working for Serco thousands of miles from home.
Safe operations
Our vision is zero harm. We want no one to come to harm
because of the work we do. Wherever we work, we are
committed to the prevention of injury and promoting a
just safety culture.
We have:
• strengthened safety leadership:
– appointing Anthony Kirby, Group HR Director, our Group
Executive Sponsor for Health, Safety & Environment
(HSE);
– renewing procedures for, and our commitment to,
leadership safety tours as a means of reinforcing safety
culture and driving safety behaviours;
• continued to increase the depth, breadth and rigour of our
governance and reporting at all levels:
– establishing proportionate cross-Divisional oversight
across safety-critical areas;
– increasing the frequency of Divisional HSE reporting;
– launching a new ‘Hazard Management and Risk
Assessment’ module for our HSE reporting system,
Assure;
– deploying and embedding our new near-miss reporting
tool in all Divisions;
– setting new three-year targets for Safety Key
Performance Indicators to focus on long-term trends
beyond year-on-year improvements;
• continued working to improve our capability, culture and
performance:
– publishing procedures for Just Culture Assessment to
support effective investigation and intervention;
– driving Divisional improvements in response to our 2018
safety culture survey;
• deepened focus on the HSE element in the Group Principal
Risk, ‘Catastrophic incident’ and associated mitigations.
Next steps
In addition to delivering our ongoing processes, programmes
and schedules of continuous improvement, we plan to:
• deploy our new high visibility safety awareness resources
across all regions;
• continue embedding our Just Culture processes;
• continue acting on our safety culture survey results whilst
undertaking pulse surveys in several areas;
• conduct deep dive reviews in the CR Committee on
selected key safety incidents to ensure learnings are
captured and gain assurance of progress on actions;
• explore application of our UK Citizen Services ‘Respect &
Protect’ campaign in other sectors and regions; and
• refresh policy and guidance for home working risk
assessments.
Employee health and wellbeing
We understand that healthier, happier employees go
hand-in-hand with strong business performance,
enhanced productivity and better outcomes for those we
serve. Wherever we work, we are committed to the
promotion of wellbeing and the prevention of ill health.
We have:
• strengthened health and wellbeing leadership:
– appointing our first Group Head of Workplace Health &
Wellbeing (H&W);
– ensuring all Divisions have a dedicated H&W Lead;
• elevated employee H&W as a Group strategic priority and
launched our first Divisional H&W strategy in our Asia Pacific
Division;
• continued to increase the depth, breadth and rigour of our
governance and reporting:
– introducing a new H&W Forum for global oversight;
– strengthening H&W elements across the SMS;
• continued working to improve our capability, culture and
performance:
– building our global network of local H&W Champions;
– reviewing third-party service provision to ensure the best
solutions support our employees; and
• celebrated World Mental Health Day in October.
Next steps
In addition to delivering our ongoing processes, programmes
and schedules of continuous improvement, we plan to:
• develop a dedicated H&W strategy for every Division;
•
focus on mental health, including access to mental health
education, manager training and support for all employees;
• develop standard policy and guidance for automated
external defibrillators in all Serco-controlled environments;
and
improve our process for assessing operational health risks.
•
– developing new ‘high visibility’ safety awareness
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Employee engagement and development
We want everybody who works for Serco to have a
positive experience and to have access to opportunities
to develop in their chosen careers. We track the
engagement of our employees and measure the trends
to determine where together we can improve further.
We have:
• continued to run our Company-wide annual engagement
survey (achieving an overall employee engagement score of
71, up four points from 2018), supplemented with more
frequent pulse surveying in selected parts of the business;
• taken on board the honest views of employees and, in
response to these, developed action plans and followed
through on their progress;
• worked to amplify employee voice and strengthen dialogue
between the Board and all employees:
– appointing Kirsty Bashforth, Non-Executive Director, and
Anthony Kirby, Group HR Director, our lead
representative on the Board and Group Executive
Sponsor for Employee Voice, respectively;
– introducing into our employee engagement survey an
– making it easier for employees to share their views;
– improving employee experience at key points in the
employee lifecycle;
– capturing feedback and sentiment on a real-time basis;
– updating our ‘Engagement Awards’ programme in line
with our evolving approach;
•
•
•
launch our new approach to performance management;
launch our graduate programme in North America and the
Middle East; and
increase interaction with our recognised UK trade unions
regarding health and wellbeing, Employee Voice and
diversity and inclusion.
Diverse workforce and inclusive workplace
Our business thrives because of our talented and diverse
workforce. We are constantly looking to improve our
ways of working in order to make Serco an even better
place to work for everybody. Not only do we firmly
believe this is the right thing to do, we believe that
diverse teams, reflecting the communities they serve,
outperform in their service delivery and provide greater
value to our customers.
opportunity for respondents to share feedback with the
plc Board;
We have:
• continued to expand our Diversity & Inclusion (D&I) activity
– appointing our first Group Colleague Communications
Manager to deliver our ambitions in this area through our
‘Colleague ConneXions’ programme, which will include:
hosting bi-annual discussion events with Kirsty Bashforth
on our internal social media platform; provision of online
resources and communication channels for employees;
supporting Non-Executive Director visits to our
operational sites and participation in each regional
leadership conference; and providing quarterly progress
reports to the CR Committee of the Board;
whilst embedding inclusion in our culture:
– appointing our first Group Head of D&I;
– working to deliver regional objectives aligned to our
global focus areas (Gender, Disability, Multicultural and
LGBT+) including: visible executive sponsorship of each
area; developing our employee networks and strategic
partnerships; promoting a culture of D&I; hosting or
participating in a schedule of events in each area to
celebrate and highlight diversity; and working to improve
diversity in senior appointments;
• continued investing in personal and professional
– launching a shared online environment, the Serco
development for our people to help them fulfil their
potential whilst developing capability to meet current and
future business needs, including:
– launching our new graduate programme, to identify and
develop our leaders of the future, initially in the UK and
Australia;
– developing a new approach to performance
management, focused on enabling more meaningful
performance and career conversations;
‘Inclusion Hub’, where our employee networks are each
their own unique community whilst benefiting from
collective coordination and collaboration;
• co-hosted a D&I conference with The Whitehall & Industry
Group (www.wig.co.uk) to share experience and learn from
other organisations;
• published our People Report, featuring a dedicated section
on D&I and sharing our commitments to:
– increase female representation amongst senior leaders
– delivering our Management and Contract Manager
to 35% by 2023;
programmes with University of Oxford, Saïd Business
School, for a further 116 members of our global
management population, bringing the cumulative total to
441;
– maintaining Divisional development programmes for
talented employees at earlier stages of their careers,
providing the skills and opportunities to grow within
Serco; and
• continued managing relations and building partnerships
with our recognised trade unions in all regions.
Next steps
In addition to delivering our ongoing processes, programmes
and schedules of continuous improvement, we plan to:
• embed our new Employee Voice governance and Colleague
ConneXions programme;
• continue the evolution of our approach to monitoring
– reduce our UK Gender Pay Gap (GPG) to below 10% by
2022; and
• reported our UK GPG for 2018 (11.9%) and 2019 (10.2%).
Next steps
We plan to:
• assess our D&I culture and performance in every region
against a standard best practice framework;
• continue to embed and empower our employee networks in
all regions and connect them in our Inclusion Hub to drive
greater value Group-wide;
increase the coverage and accuracy of our people data to
enable more meaningful value generation for our employee
communities whilst improving our performance monitoring
and reporting capability; and
•
• put in place practical plans to improve our attraction,
development and retention for all diversity groups.
engagement by:
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Corporate Responsibility continued
Our customers
We understand the complex social challenges that shape our chosen markets
and strive to help our customers address them. We are driven by our public
service ethos to help our customers create positive and sustainable outcomes
for society.
Duty of care
We place human rights and the health, safety and
wellbeing of the public at the heart of service design
and delivery.
Social outcomes
We aim to enhance social outcomes by designing and
delivering frontline public services that make a real
difference to people’s lives.
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.
Value for public money
Along with quality of delivery, we seek to enable
governments to deliver better for less.
We have, and will continue to:
•
invest in, develop and improve citizen-centric, outcome-
focused service solutions, informed by:
– service users – integrating citizen and user-centred
design and feedback into our services, such as the Serco
Cares programme and the capabilities of our customer
experience and service design agency, Serco
ExperienceLab;
– our people – cultivating more opportunities to harness
their ideas and expertise; for example, through our
Oxford Management programmes, evolving employee
engagement survey capability, development of a new
innovation strategy and creating better networks across
the business;
– our Values and public service ethos – ensuring all
colleagues are clear that we are a company who often
seek to go beyond the requirements of our contracts to
do the right thing and improve social outcomes; and
– the non-governmental organisations with whom we
partner for service delivery – through strong consultative
and collaborative relationships;
• contribute more to social outcomes and social value within
our contracts, through the continuing development of our
new Social Value strategy;
• contribute more to social outcomes outside the remit of our
business through the rebirth in 2019 of the Serco
Foundation, whose mission is to enhance public service
outcomes for vulnerable citizens;
• work to create positive, safer service environments through
our focus on the wellbeing of employees, service users and
others, and our commitment to a vision of zero harm (see
‘Our People’, page 80);
• deliver and refine policy and processes to maintain a
workforce who reflect the communities we serve,
understand our expectations of caring behaviour and are
bound by a strong set of Values; and
• work to deliver all contracted duty of care requirements and
address service-specific risks and challenges at all stages of
our business lifecycle.
We have, and will continue to:
• work to improve the efficiency and productivity of our
service delivery through our new Contract Productivity
Community of Practice and the work it is doing to
understand different levers we can pull globally to make
improvements in this area;
improve the efficiency and effectiveness with which we
manage our workforce; for example, through the increased
rollout of workforce management systems across our
contracts;
identify new technologies to improve both our back office
and customer delivery; for example, through our work with
incubators and start-ups;
•
•
• deliver our annual schedule of formal Contract, Business
Unit and Divisional performance reviews;
• deliver key transformation programmes to enhance our
internal capabilities whilst maintaining or improving our
overhead efficiency;
• deploy our global sector Centres of Excellence (CoEs) to
develop global best practice and innovation in public
service delivery; for example, our Internet of Things pilots,
global efficiency benchmarks and new service offers
developed by our Healthcare CoE;
• expand our Operational Excellence (OE) programme –
cultivating continual improvement and efficiency creation by
successfully training our employees in OE (1,318 employees
trained during 2019);
• deploy the Serco Institute as a mechanism for researching
and developing innovative public service solutions for the
future; for example, through our work in 2019 on Social
Value, Whole Force by Design, and violence reduction in
prisons; and
• develop new global Communities of Practice in areas with
international synergies and where improved knowledge-
sharing could reap benefits, including maritime and aviation
services.
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Serco Group plcOur worldOur ownersOur peopleOur customers Our world
We strive to be responsible in how we manage our impact on the communities,
economies and environments in which we operate – working to make a positive
and sustainable difference wherever possible and limiting any other impact we
may have.
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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 have:
•
launched and begun to embed our new Organisational
Conflicts of Interest procedure and Register;
• developed and launched a new Personal Conflicts of Interest
Register, embedding it in our onboarding process for new
starters and in annual declarations by management and
those in specific roles; and
• developed targeted training for high-risk roles.
Next steps
In addition to delivering our ongoing processes, programmes
and schedules of continuous improvement, we plan to deploy
our new training for high-risk roles.
Contributing to communities and society
Operating amongst and on behalf of our communities,
we have a deep understanding of the complex social
challenges that impact them. We encourage and facilitate
community initiatives and charitable giving, both from
employees and from the Serco Foundation. Beyond this,
as an active and community-minded employer and
participant in national infrastructure, we contribute to the
sustainability and wellbeing of society and the economy
wherever we operate.
We have:
• continued positive and meaningful engagement locally with
our communities, charities and other causes in all regions;
• engaged with the business to consider options for
overcoming challenges in capturing the full extent of our
community investment;
• hosted an event focused on the UK Government ‘Social
•
Value’ agenda through the Serco Institute, ‘How to achieve
real Social Value in public sector outsourcing’, with
participants from a number of relevant sectors; and
formally relaunched the Serco Foundation, an independent
charitable organisation aiming to support non-profit
organisations in the delivery of public services through
awarded grants and the secondment of Serco employees.
– For example, £19,878.00 has been awarded to the Royal
British Legion Industries to fund one of the charity’s
‘Lifeworks’ programmes, supporting veterans to find and
maintain paid employment after military service.
Next steps
We plan to:
• agree and implement improvements that will enable us to
resume reporting our global community investment
performance; and
• continue helping to facilitate government and industry
dialogue and direction regarding the UK Government ‘Social
Value’ agenda.
In addition, the Serco Foundation will focus on increasing the
number of grants awarded to non-profit organisations and
support the fundraising initiatives of Serco employees.
Annual Report and Accounts 2019
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Corporate Responsibility continued
Our world continued
Responsible relationships
We seek to build honest, respectful and transparent
relationships with customers, partners and suppliers –
requiring that they follow regulatory compliance and
share our ethical standards and commitment to
sustainability throughout the supply chain.
Protecting the environment
We are committed to limiting the impact of our
operations on the environment through more
sustainable business practice for our customers
and wider stakeholders.
We have:
• transformed our global procurement function, which will
help us mitigate supplier risks more effectively, partly by
enabling us to leverage the strategic capabilities and global
scale of a new third-party procurement delivery partner;
• reported our Serco Limited supplier payment performance
– as reported, we paid 88% of invoices on time in 2019, up 5
percentage points from 2018;
• commenced a review of our small and medium-sized
suppliers to identify opportunities for improved
management in line with new UK regulations;
We have:
• strengthened our environmental leadership across the
organisation, appointing Anthony Kirby, Group HR Director,
our Group Executive Sponsor for HSE;
• continued to monitor emerging environmental risks and
reviewed our strategy to ensure our environmental
management remains adequate and relevant, and that we
are building a culture of environmental stewardship that
drives improvements proportionate to the risks and impacts
of specific operations. Our main areas of focus remain:
– driving decarbonisation and building climate change
resilience;
• upgraded our third-party due diligence process to adopt a
– sustainable resource use, resource efficiency and waste
risk-based approach and implemented a revised screening tool
to enable more proportionate due diligence per third party;
• revised procedures for the due diligence and monitoring of
suppliers, agents and strategic partners, and published new
due diligence guidance for new country entry;
• reviewed our management approach to company agents,
identifying opportunities for improvement;
• strengthened our Tier 1 supplier reviews and enhanced our
onboarding questionnaire;
• developed a more in-depth due diligence questionnaire for
high-risk suppliers regarding modern slavery; and
• worked with Stronger Together (www.stronger2gether.org),
to validate our high-risk supply categories and identify
opportunities for improved supply chain management.
Next steps
In addition to delivering our ongoing processes, programmes
and schedules of continuous improvement, we plan to:
• complete the implementation of our new third-party due
diligence process and screening tool, including improved
customer segmentation;
• conduct a compliance review of all joint venture and
strategic partner management;
• continue cleansing our supplier base and revisit our plans to
implement a supplier relationship management solution
across the Group;
• continue working with Stronger Together on how we engage
Tier 1 suppliers regarding their Tier 2+ suppliers and their
management of modern slavery risks; and
• explore how we can better adopt sustainable procurement
principles such as: use of whole-life costing and accounting,
reducing energy consumption in operation and reduced
packaging, and purchasing products that meet minimum
environmental standards.
reduction;
– local environment protection and enhancement,
including pollution prevention;
• benchmarked our approach to climate change via the annual
Carbon Disclosure Project (CDP) climate change
questionnaire, achieving a score of C;
• commenced reporting in line with The Companies
(Directors’ Report) and Limited Liability Partnerships (Energy
and Carbon Report) Regulations 2018;
• continued working with our supply chain partners to improve
practice regarding measuring, managing and reporting on
the Scope 3 (indirect emissions) products and services
category; and
• celebrated World Environment Day in June with the
cross-Divisional theme of tackling air pollution.
Next steps
In addition to delivering our ongoing processes, programmes
and schedules of continuous improvement, we plan to:
• update our environmental strategy – sharpening our focus
on delivering Group energy, environment and sustainability
commitments at Business Unit level and through our supply
chain;
• explore new opportunities to enhance the depth and
breadth of our environmental reporting, including our
compliance and performance against the Task Force on
Climate-related Financial Disclosures, building on
preliminary analysis undertaken in 2019;
• review our approach to categorising our contracts for
environmental reporting; and
• continue reviewing Group-level carbon target opportunities
whilst monitoring Divisional action planning and delivery to
ensure we continue to drive improvement in our most
energy and carbon intensive contracts.
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Our owners
We are determined to protect our shareholders’ interests and create
long-term, sustainable value for them.
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.
As shareholders have not received dividend income in recent
years, total shareholder return (TSR) is reflected in share price
performance (SPP) only. Point-to-point SPP has been -31%, -3%
and +69% from start to end of the financial years 2017, 2018 and
2019, respectively.
SPP is influenced by many factors: financial and non-financial,
historic and prospective, and related specifically to Serco and to
the wider stock market. However, the earnings and returns on
invested capital delivered are considered important to SPP.
Underlying diluted earnings per share (EPS) performance was
-17%, +55% and +18% for 2017, 2018 and 2019, respectively,
whilst underlying return on invested capital (ROIC) has been at
9.6%, 13.6% and 15.4% for these three years. The Group’s order
book was £10.7bn at the end of 2017, increasing to £12.0bn for
2018 and £14.1bn for 2019.
Next steps
As set out in our guidance and outlook, we expect to deliver
further strong growth in 2020, with Revenue of £3.4–3.5bn
expected, which would represent total growth of 6–8%, and
Underlying Trading Profit forecast to increase by about 20% to
around £145m. 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.
For more information and broader discussion and analysis on
our progress and performance in 2019, as well as our guidance
and outlook, see Key Performance Indicators on pages 9 to 11,
Chief Executive’s Report on pages 22 to 34, Directors’ Report
on pages 149 to 153 and Financial Statements on pages 155 to
240.
Governance
We work within a structure of governance that seeks to
enable effective direction, control and assurance of the
business, including where and how we operate and how
we manage our responsibilities to stakeholders.
For Serco, governance is not an exercise in compliance, nor is it
a specific form of management – it is an essential part of our
public service ethos and ensuring we fulfil our purpose. We have
a comprehensive corporate governance framework, with clearly
defined responsibilities and accountabilities to safeguard
long-term shareholder value. Below this our management
framework, the Serco Management System, defines ‘what’ we
do through policies, standards and procedures whilst our Code
of Conduct defines our expectations of ‘how’ we do it,
underpinned by our Values and commitment to behave with
integrity and treat people with respect.
In 2019 we completed the transfer and embedding of the core
elements of our Corporate Renewal programme into our
business as usual processes, controls and governance.
For more information, see our Corporate Governance Report
on pages 104 to 123 and our full Corporate Responsibility
Report which is available on the Company’s website.
Transparency
With investors, as with customers, we seek long-term
relationships based on transparency, honesty and clarity
– all of which are critical for building trust. We are
therefore committed to open and regular engagement
with our shareholders.
We have:
•
issued regular trading updates in addition to the
requirement to report half- and full-year results;
issued more than 30 announcements regarding contract
awards or corporate transaction news;
•
• engaged with around 150 different investment funds –
holding meetings with institutional investors and attending
investor conferences as part of our programme of post-
results roadshows and corporate access activity;
• hosted other events, such as meetings for analysts to
engage with the wider operational management team of the
business, or to hear broader perspectives on our sectors and
markets, such as through the work of the Serco Institute; and
• were recognised for our commitment to transparency in
rankings and awards including those for Institutional Investor
magazine, the Investor Relations (IR) Society award for best
IR relating to a corporate transaction and in Management
Today’s Most Admired Companies Awards – named leading
Support Services business.
Next steps
We will continue to deliver a comprehensive annual schedule of
internal and external reporting, shareholder engagement and
reporting assurance.
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.
For more information and our progress and performance in
2019, see Principal Risks and Uncertainties on pages 62 to 73
and our Group Risk Committee report on pages 109 to 111.
Annual Report and Accounts 2019
85
Financial StatementsCorporate GovernanceSerco Group plc Our worldOur ownersOur peopleOur customers
Corporate Responsibility continued
Corporate Responsibility in action at Serco
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.
Here we share headline examples of how our people have brought our commitments to life in the
last 18 months.
CR IN ACTION… FOR OUR PEOPLE
Improving everyday safety
in every workplace
through our new ‘high-
visibility’ safety campaign.
Celebrating National Inclusion
Week and empowering our
employee networks with the Serco
Inclusion Hub.
Training our team of Fire and Rescue
Service firefighters at King Fahd
International Airport to an internationally
accredited standard.
Cultivating
community spirit
and wellbeing in
Serco Middle East
with Serco Sports.
Building frontline
capability to have
challenging
conversations about
mental health.
Identifying and
developing our leaders
of the future with the
new Serco Global
Graduate Programme.
Winning a National Inclusion
Standard Bronze Award for
our commitment to
promoting inclusion in the
workplace.
Using Virtual Reality
technology to
enhance training
and improve safety
for the Dubai Tram.
Improving team
health, wellbeing and
performance through
our Fit For Life – Park
Athlete programme.
Inspiring a dynamic
culture of wellbeing
through our Serco
Wellness
programme.
Building, developing and
maintaining a workforce that
represents equal opportunity
for all at the National Disability
Insurance Scheme in Australia.
Equipping our operational
leaders in North America with
essential knowledge and
resources at our ‘Program
Manager Plus Boot Camp’.
Creating unique specialist training
and career progression
opportunities through
international collaboration with
Serco Marine Services.
Facilitating dialogue across national
industry on common diversity and
inclusion challenges with the
Whitehall & Industry Group.
Celebrating diversity
and supporting our
LGBT+ community at
Pride 2019 in the US
and UK.
Keeping our
people safe on
the streets with
Serco Respect
and Protect.
Celebrating our female
Emirati staff and creating
more opportunities for
their employment and
development.
Celebrating and inspiring
career progression at the
Dubai Metro with our Track
to Success programme.
To find out more, please see our full Corporate Responsibility Report.
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Annual Report and Accounts 2019
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CR IN ACTION… FOR OUR CUSTOMERS
Embracing innovation
to safeguard society
and reduce
reoffending through
our Accelerate@
Serco programme.
Helping to promote
industrial and
technological progress
at the United States
Patent and Trademark
Office.
Helping to rebuild civil
aviation in Iraq by training
aspiring Iraqi air traffic
controllers in our Aviation
Academy in Baghdad.
Rolling out the Red
Cross Community-
Based Health and
First Aid programme
at Acacia Prison in
Western Australia.
Helping a local
community to recover
from a natural disaster
that destroyed a town
and surrounding area.
Challenging conventional
practices to reduce
reoffending and remove
barriers for disadvantaged
communities with Serco
Alternative Justice.
Enabling continuous
improvement across Serco
and providing rehabilitative
development for prisoners
through our Operational
Excellence programme.
Helping Dubai
Metro
passengers to
become more
safety conscious.
Delivering
award-winning
innovation to
enhance service
provision at the
Dubai Metro.
Designing and
developing rapid
prototype solutions to
enable the US Navy to
determine manpower
requirements.
Making Northlink Ferries
as accessible as possible
for passengers with
additional support
needs.
Helping to reduce
reoffending through
cost-effective prisoner
reintegration support
services at the Adelaide
Remand Centre.
Enabling Victoria Police to
focus on core policing
activities whilst making it
easier for citizens to access
non-emergency services.
Improving patient
care in UK
hospitals through
our Serco Cares
programme.
Enabling innovative
energy efficiency in
facilities
infrastructure with
Serco Insights.
Helping local government
to meet the needs of
society through citizen-
centred design at Serco
ExperienceLab.
Collaborating across
contracts to save the
US Navy money and
time while delivering
high quality security
solutions.
Reducing the risk of
prisoner self-harm
and suicide in UK
prisons with our
Vulnerability
Prediction Tool.
Overcoming
exceptional challenges
in order to maintain
quality patient care at
University Hospital
Southampton, UK.
Pushing the boundaries of
technology to develop new
capabilities even more
closely aligned to evolving
customer needs.
To find out more, please see our full Corporate Responsibility Report.
Annual Report and Accounts 2019
87
Financial StatementsCorporate GovernanceSerco Group plc
Corporate Responsibility continued
Corporate Responsibility in action at Serco continued
CR IN ACTION… FOR OUR WORLD
Helping prisoners’
families access local
health services at
Kohuora, Auckland
South Corrections
Facility.
Celebrating an
award-winning supply
chain service
partnership at United
Arab Emirates
University.
Delivering social and
environmental
benefits through our
insurance investments
with Premiums4Good.
Helping to fight the
Australian bushfire crisis
through charity, volunteering
and supporting national
disaster relief efforts through
our operations.
Building stronger relationships
between asylum seekers and
local communities through
volunteering and non-profit
partnerships.
Sharing leadership, expertise and
resources to help social and
environmental responsibility to
flourish in the United Arab
Emirates.
Helping to upskill Small and
Medium Enterprise workforces and
boost local economies in England
with Serco Employment, Skills &
Enterprise.
Recycling to reduce landfill
and support the Western
Australian disabled community
at Fiona Stanley Hospital.
Helping to minimise costs and
protect the environment
through the management of
hazardous materials for the US
Department of Defense.
Supporting the tribally owned services
company, Puyenpa through the US Small
Business Administration ‘All Small
Mentor-Protégé program’.
Embedding ‘everyday green
thinking and behaviour’ across
the business with our Serco
Europe Goes Green programme.
Achieving a new standard of
energy management for efficiency,
sustainability and resilience in
Serco Leisure.
Reducing waste to landfill whilst
contributing to Red Crescent by
recycling textiles at United Arab
Emirates University.
To find out more, please see our full Corporate Responsibility Report.
88
Annual Report and Accounts 2019
Serco Group plc Our approach to determining where we operate,
what we do and who we serve
We support governments in delivering their public policy commitments, often in
very sensitive areas. Our role is to deliver specific elements of those policies in
the most effective, efficient and caring manner, working with our customers to
maximise the value generated for society, in whose best interest those policies
are developed.
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Everything we do is motivated by our desire to be a trusted
partner of governments, delivering superb public services that
transform outcomes and make a positive difference for our
fellow citizens. However, what we do – including where and how
and who we serve – is also carefully governed by
Serco – approached with conscience, caution and with
uncompromising adherence to our Values and commitment
to behave with integrity and treat people with respect.
We work to identify, create and earn business opportunities
where we believe we can achieve an optimal balance of
sustainable value creation for our stakeholders. Our potential
involvement in activities on behalf of our customers is
subjected to a rigorous process of review and qualification
which seeks to enable transparent and well-informed decision-
making, and seeks to ensure compliance with our strategy,
Policies and Standards. It also aims to ensure due consideration
of salient adverse impact risks, including those from
environmental, social and governance (ESG) perspectives.
Our Business Lifecycle
Embedded within the Serco Management System (SMS) is
our Business Lifecycle, which describes the core processes
that apply throughout every business activity, from the
identification of geographies and markets, business
development and bidding, through operations and
eventual closure of our contracts.
The Serco Business Lifecycle constitutes several stages
which follow the maturity of any business opportunity,
controlled through a series of ten mandatory governance
Gates (Gates 0-9). Each Gate Review represents a key
decision point and requires formal assessment and
approval by senior management.
A set of governance themes is considered in Gate Reviews,
including: material legal, ethical and human rights risks; health,
safety and environment risks; and other salient adverse impact
risks from an ESG perspective.
The requirements and spirit of the SMS must be met,
including Policies, Standards and controls relevant to
management of our principal areas of ESG responsibility
and sustainability. A business opportunity that cannot satisfy
such criteria will not be pursued.
Our Business Lifecycle decision-making governance
Our Business Lifecycle is supported by a robust governance
framework and Delegated Authority Matrix which prescribes
the level of oversight and approvals required.
Divisional Chief Executives establish a Business Lifecycle
Review Team (BLR Team) to review opportunities. The BLR
Team provides direction for each opportunity whilst ensuring
appropriate governance and Gate authorisation throughout its
lifecycle. BLR Teams are led by Divisional Chief Executives and
comprise business and functional specialists whose collective
experience and expertise seeks to ensure the opportunity is
directed to an appropriate outcome, which includes ensuring
compliance with Gate governance in accordance with the SMS.
Divisional Executive Management Teams provide oversight of
the Business Lifecycle at the Divisional level. BLR Teams are
responsible for determining whether a decision exceeds their
Limits of Authority and requires scrutiny and oversight by the
Investment Committee and/or the Serco Group plc Board.
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.
Any decision exceeding the authority of the Investment
Committee requires Serco Group plc Board review
and approval.
Our Business Lifecycle decision-making tools
The SMS features several tools which directly support Business
Lifecycle decision-making. These include:
• Our New Country Due Diligence guidance – which
prescribes the extent and depth of due diligence required
for entry into a new country based on a range of service,
customer and geographical criteria.
• Our Human Rights Standard and supporting Human Rights
Decision Tree procedure – which describes and enables the
identification and assessment of any actual or potential
Adverse Human Rights Impacts in which Serco might be or
become involved, either through its own activities or
business relationships.
• Our Third Party Due Diligence processes and controls –
which apply to customers, suppliers, agents and other third
parties, and mergers and acquisitions, and enable
assessment of whether a third party relationship will
increase our exposure to ethical and legal liability.
Rebids, extensions and material contract variations
Decisions made are revisited at natural intervals in the contract
lifecycle. Rebids, extensions and material contract variations
are approached in the same way as new business
opportunities.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Corporate Responsibility continued
Our approach to determining where we operate,
what we do and who we serve continued
Our Business Lifecycle decision-making governance structure
Board of Directors
Approvals and
Allotment
Corporate
Responsibility
Audit
Group Risk
Remuneration
Nomination
Executive Committee
Investment
Committee
Divisional Executive
Management Team
Business Lifecycle
Review Team
Business Unit
Management Team
Contract
Management
Key
Internal governance structure
Supporting committee
structure
Performance reviews and
other operational Business
Lifecycle reviews
Bids, programmes and other
investment decisions
escalated in accordance with
governance thresholds
Doing the right thing across a complex global
ecosystem of stakeholder dynamics
We are proud of our involvement in the delivery of complex
government policy – for example: running prisons to reduce
reoffending, supporting individuals seeking asylum through
housing and community integration, and strengthening the
fulfilment of the UK Government’s nuclear defence policy
through our interest in AWE. We believe we have the right
combination of experience, expertise and ethos to provide
our customers the support they need to fulfil their missions –
all of which are considered vital to the sustainable wellbeing
of the nations they serve and, in some cases, global society –
in areas defined by delicate and constantly shifting
stakeholder dynamics.
Doing our job well requires us to balance diverse stakeholder
interests. Doing the right thing across a complex global
ecosystem of stakeholders is not always comfortable or
popular, but it is seeking to deliver consistently and with
quality, holding ourselves to account, standing by our Values
and heeding our lessons that most clearly defines us today.
We continually challenge ourselves to make sure we
understand and provide appropriately for what matters most
regarding our role in society, the impact that we have and the
value we create. We know we work in many difficult areas and
we focus on trying to do it well, with respect and with fairness.
In deciding what types of work we should or should not do and
where we might do it, we take into account many issues
including ESG considerations. There are some countries where
the risks are unacceptable, so we decide not to do business or
certain types of business in those countries. Even where there
are areas in which democratically elected Governments have
decided something is acceptable, we may decide that we are
uncomfortable doing that particular type of work and do not
believe it is in accordance with our Values. There are a number
of examples of types of business opportunities in countries and
sectors where we have been unable to get ourselves
comfortable. In those cases, we have not bid and refused
opportunities on ethical grounds or set conditions that would
have allowed us to be comfortable that ethical issues would be
dealt with, but that have not been accepted by the potential
customer. We will continue to do the same in the future.
Our involvement in the UK Atomic Weapons
Establishment (AWE)
One area of our work which some stakeholders find challenging
is our involvement with AWE, where we oversee maintenance of
the UK’s nuclear warhead arsenal. Nobody could be involved in
this work without asking themselves questions around the
ethics of working on nuclear warheads. The reason why we are
proud to be part of the AWE operation is that the UK’s
possession of nuclear weapons has been an established part of
the country’s defence policy for decades; it has had the
support of every Government elected since 1945; it has been
repeatedly shown to have the support of the majority of people
in the UK; and we believe that we can and do contribute to the
safety and efficiency of AWE. We understand that some people
may object to our involvement in this area, but we believe it is
appropriate for our Company to work with our largest customer
on its most important strategic programme.
90
Annual Report and Accounts 2019
Serco Group plc Our approach to reporting on our environmental,
social and governance responsibilities
We strive to ensure that our reporting is as comprehensive and informative
as possible, aligned to the principal interests of our key stakeholder groups,
whilst holding ourselves to account for mitigating risks and driving meaningful
improvements with transparency.
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Our approach to reporting across our CR framework is determined not only by specific reporting
obligations but also to provide insight into what matters most to our business and our stakeholders
and to share the progress we are making in each area. This provides assurance that we are properly
addressing our environmental, social and governance (ESG) responsibilities and communicating our
position and performance across ESG criteria.
We recognise that, in common with most other public
companies, we are on a journey as far as ESG reporting is
concerned. The ESG landscape is evolving at a rapid rate, and
we will work to keep our own reporting at a level which we
believe is appropriate for our business and useful for our
stakeholders.
However, in order to most appropriately define the relationship
between our work and the UN SDGs, we have chosen to
highlight here those goals where we perceive that we are
making contributions. All of these are underpinned by our
Values and our commitment to behave with integrity and treat
people with respect.
UN SDGs where we perceive that we are making
contributions:
• Goal 1. End poverty in all its forms everywhere
• Goal 3. Ensure healthy lives and promote wellbeing for all at
all ages
• Goal 4. Ensure inclusive and equitable quality education and
promote lifelong learning opportunities for all
• Goal 5. Achieve gender equality and empower all women
and girls
• Goal 8. Promote sustained, inclusive and sustainable
economic growth, full and productive employment and
decent work for all
• Goal 9. Build resilient infrastructure, promote inclusive and
sustainable industrialisation and foster innovation
• Goal 10. Reduce inequality within and among countries
• Goal 11. Make cities and human settlements inclusive, safe,
resilient and sustainable
• Goal 12. Ensure sustainable consumption and production
patterns
• Goal 13. Take urgent action to combat climate change and
its impacts
• Goal 16. Promote peaceful and inclusive societies for
sustainable development, provide access to justice for all
and build effective, accountable and inclusive institutions at
all levels
This year, we have introduced the following new elements into
our reporting:
• a simple guide to how our principal areas of responsibility
align to ESG criteria and where we perceive that we are
contributing to the United Nations Sustainable
Development Goals (UN SDGs) (see next page); and
• an overview of our approach to determining where we
operate, what we do and who we serve (see pages 89
to 90).
We are also conducting a detailed review of the ESG reporting
landscape as it applies to our business and stakeholders, which
will inform the evolution of our reporting in the future, including
targeted exploration of which external sustainability standards
we report against. This will include consideration of the Global
Reporting Initiative (GRI) standards and the Task Force on
Climate-related Financial Disclosures, among others.
Our contribution to the United Nations Sustainable
Development Goals
The UN SDGs are one of a number of initiatives and goals that
help inform our thinking and approach. We recognise that
positive relationships can be drawn between the majority of
the UN SDGs, our operations and the action we take to deliver
on our ESG commitments. For example:
• where we operate marine-based services, we are mindful of
our impact on the seas and oceans, which contributes to UN
SDG 14, ‘Life below water’;
• where we provide catering in our hospitals, we focus on
meeting the specific nutritional needs of all patient care
groups, reducing the risks of malnutrition and enhancing
care outcomes, which contributes to UN SDG 2, ‘Zero
hunger’; and
• throughout our business, our local contributions to
individual charities and communities support a multitude
of causes that contribute to UN SDGs.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Corporate Responsibility continued
Our approach to reporting on our ESG responsibilities continued
UN SDGs we contribute to
through our commitment to
limit our environmental impact
Our contribution is through
limiting the impact of our
operations on the
environment through more
sustainable business
practice for our customers
and wider stakeholders.
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we attract, select, manage,
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employees, particularly through
our focus on:
• the health, safety and
wellbeing of our people;
• employee engagement and
development; and
• building a diverse workforce
and creating inclusive
workplaces.
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UN SDGs we contribute to as a
participant in global industry,
infrastructure and economy
Our contribution is through how we manage,
grow and govern the business, particularly
through our focus on:
• protecting stakeholder interests and creating
long-term, sustainable value;
• effective and transparent direction, control
and assurance of the business at all levels; and
• ethical standards and sustainability
throughout the business and our supply chain.
For additional information about our people and how
we support and enable them, please see our People
Report at www.serco.com/about/people-report.
UN SDGs we contribute to as a public
service provider
Our contribution is through the services we
provide to citizens and society, and how we
provide them, particularly through our focus on:
• the health, safety and wellbeing of the public
and making a real difference to people’s
lives; and
• helping governments to raise standards of
public service whilst enabling them to deliver
better for less.
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Transparency
Go v e r n a n c e
92
Annual Report and Accounts 2019
Serco Group plc
Key Performance Indicators
2015
2016
2017
2018
2019
2018
vs
2019
Var %
Notes
Our Values
Employee engagement:
Our Values
15–17: %
18–19: Avg.
score
77
79
81
81
82
1
1.2
1, 2
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Behaving with integrity and treating people with respect
Employee engagement:
Business Integrity
15–17: %
18–19: Avg.
score
Upheld cases of corrupt
behaviour
Upheld cases of human rights
violations
Number
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
%
69
69
69
73
75
0
0
96
63
24
6
48
0
0
97
53
16
6
64
0
0
90
42
9
5
89
0
0
94
54
18
11
75
0
0
92
52
24
8
89
2
0
0
-2
-2
2.7
1, 2
—
—
-2.1
-3.7
3
6
33.3
-3
14
-27.3
18.7
Speak Up: cases closed
(substantiation rate)
Number (%)
450
(43%)
498
(40%)
454
(37%)
-44
-8.8
Our people
Safe operations
Employee engagement:
Safety
15–17: %
18–19: Avg.
score
71
73
75
77
79
2
3
1, 2
Lost Time Incident Frequency
Rate
Per 1m hrs
worked
Lost Time Incident Severity Rate %
6.16
17.46
5.01
22.53
4.41
23.74
5.30
27.80
5.69
-0.39
23.38
4.42
-7
16
4, 5
4
0.43
0.40
0.45
0.50
0.39
0.11
22
4, 6
7.32
7.04
8.96
13.13
8.09
5.04
38
7, 8
Per 1m hrs
worked
Per 1m hrs
worked
Per 1m hrs
worked
Number
£’000
Major Incident Frequency Rate
Physical Assault Frequency Rate
Serious Physical Assault
Frequency Rate
Prosecutions
Fines paid
Employee health and wellbeing
Proportion of days lost to
sickness
%
3.2
3.2
Employee engagement and development
Employee engagement
People manager engagement
15–17: %
18–19: Avg.
score
15–17: %
18–19: Avg.
score
53
59
54
62
0.50
1
200
0.95
0
0
0.87
0
116
3.1
56
65
1.32
0.63
0.69
0
0
0
0
0
0
52
—
—
7, 8
9
10
12.3
5.2
7.1
57.7
11
67
70
71
73
4
3
5.9
4.3
2
2
Annual Report and Accounts 2019
93
Financial StatementsCorporate GovernanceSerco Group plc
Corporate Responsibility continued
Key Performance Indicators continued
2015
2016
2017
2018
2019
2018
vs
2019
Var %
Notes
Employee engagement and development continued
Leadership engagement
Employee engagement:
Learning & Development
15–17: %
18–19: Avg.
score
15–17: %
18–19: Avg.
score
55
46
72
48
71
49
Staff turnover
%
32.8
33.8
30.6
Diverse workforce and inclusive workplace
Employee engagement:
Diversity & Inclusion
Number of women:
15–17: %
18–19: Avg.
score
67
69
70
69
77
60
27.0
64
29.3
74
79
Serco Group plc Board
Number (%)
3 (30.0)
2 (22.2)
3 (30.0)
3 (33.3)
3 (33.3)
8
4
-2.3
5
0
11.6
2
6.7
-8.5
1, 2
12
6.8
1, 2
—
Executive Committee and
Direct Reports
Number (%) 13 (16.7)
12 (17.1)
15 (21.7)
28 (31.8)
24 (31.6)
-4
-14.3
All other employee levels
Number (%)
21,165
(42.6)
18,798
(41.9)
18,129
(41.6)
18,960
(42.4)
20,896
(43.1)
1,936
10.2
Number of men:
Serco Group plc Board
Number (%)
7 (70.0)
7 (77.8)
7 (70.0)
6 (66.7)
6 (66.7)
0
—
Executive Committee and
Direct Reports
Number (%) 65 (83.3)
58 (82.9)
54 (78.3)
60 (68.2)
52 (68.4)
-8
-13.3
All other employee levels
Number (%)
28,531
(57.4)
26,054
(58.1)
25,435
(58.4)
25,757
(57.6)
27,634
(56.9)
Number of employees with
disclosed disabilities
Number (%)
468
(1.3)
516
(1.2)
425
(1.0)
343
(0.8)
847
(1.7)
1,877
7.3
504
146.9
Our world
Fair competition
Upheld cases of anti-
competitive behaviour
Responsible relationships
Third-party due diligence
screening:
Number
0
0
0
0
0
0
—
Third parties validated
Number
Third parties pending review Number
Third parties disqualified
Number
—
—
—
—
—
—
28,066
1,143
3
7,867
191
1
5,253
1,092
2,614
33.2
901
471.7
0
-1
-100
Protecting the environment
Carbon dioxide equivalent
(Scope 1+2)
UK
Rest of world
Scope 1 – Combustion of fuels
and operation of facilities
UK
Rest of world
Scope 2 – Grid electricity
purchased for own use
(location-based)
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
tCO2e
298,986
291,883
253,655
259,814
266,894
-7,080
–
–
–
–
189,059
191,329
193,387
-2,058
64,596
68,485
73,507
-5,022
162,197
182,819
174,289
176,254
181,413
-5,159
–
–
–
–
164,663
169,759
175,681
-5,922
9,626
6,496
5,732
764
-2.7
-1.1
-7.3
-2.9
-3.5
11.8
136,789
109,064
79,366
83,560
85,481
-1,921
-2.3
13
13
13
13
14
15
16
17
18
19
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Annual Report and Accounts 2019
Serco Group plc 2015
2016
2017
2018
2019
2018
vs
2019
Var %
Notes
UK
Rest of world
tCO2e
tCO2e
Energy consumption used to
calculate Scope 1+2 emissions Mwh
UK
Rest of world
Headcount intensity (Scope
1+2)
Carbon Disclosure Project
Prosecutions
Fines paid
Enforcement notices
Mwh
Mwh
tCO2e/FTE
Score
Number
£’000
Number
–
–
–
–
–
5.16
99%
0
0
0
–
–
–
–
–
23,900
55,466
21,308
62,252
17,707
3,601
67,774
-5,522
873,287
891,931
918,740 -26,809
763,268
772,007
792,086
-20,079
110,019
119,924
126,654
-6,730
16.9
-8.9
-3.0
-2.6
-5.6
5.98
5.56
5.80
5.87
-0.07
-1.2
B
0
0
0
B
0
0
0
C
0
0
0
C
0
0
0
—
0
0
0
—
—
—
20
21
22
23
i
S
t
r
a
t
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c
R
e
p
o
r
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Notes:
Performance is based on data reported as at 17/02/20, unless otherwise stated. Additional data may arise after this date. Where this occurs, numbers will be
corrected in the following year’s 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 performance 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 targets are managed at local and regional levels.
1. Represents employee engagement scores per one or more specific questions within our employee engagement survey.
2. 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 remained broadly stable.
3. Where anonymous cases provide insufficient information, we are unable to investigate.
4. A review of workers compensation insurance in Asia Pacific and Americas identified misalignment between reported incidents data and that held by
insurers. Definitions have been aligned and historical data corrected (2015 – 2018). Correction in incident numbers has also impacted incident severity rate.
5. Slips and trips remains the most common cause of Lost Time Incidents outside those related to violence and aggression. This has been an area of focus
throughout 2019 and while there has been improvement within Health and Transport, challenges remain within Citizens Services, Defence and Justice &
Immigration. This will remain an area of focus for 2020.
Improvements primarily result from a continued focus on reducing violence and aggression within the UK custodial environment and reductions in
associated Serious Physical Assaults.
6.
7. A review of reporting accuracy against Group Standard Operating Procedure definitions has resulted in minor adjustments to historical data (2015 – 2018).
2019 has been checked. Significant improvement in 2019 against 2018 reflects the impact over time of a range of initiatives. This work will continue in 2020.
8. Significant improved performance following a lot of effort and several initiatives throughout 2019. Several initiatives established in 2018 were widened and
a relationship between UK & Europe and Asia Pacific Justice & Immigration teams was established, seeking to share best practice. Initiatives have included
the ‘Key worker’ scheme, five-minute interventions, supported by use of batons and body worn cameras. This work will continue into 2020 with further
rollout of devices to support control and restraint and establishment of drug misuse teams to reduce the impact of illegal substances on staff.
9. 2015 data relates to an incident in 2011.
10. 2017 data relates to 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.
11. Increase in 2018 reflects introduction of new absence management system and subsequent planned improvement in absence capture.
12. Diverse workforce data is representative only of employees for whom relevant data is available.
13. As of 2018, this data is based on that submitted to the annual Hampton-Alexander Review, UK. For 2019, the data was submitted in June 2019.
14. 2018 and 2019 data reflect business as usual addition of third parties following initial due diligence review of all third parties completed in 2016 and 2017.
15. Additional organisations disqualified because they are no longer used by Serco or there is a gap of 2+ years in the relationship: 173 in 2018; 136 in 2019.
16. 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 2018 to 30 September 2019. We quantify and report to ISO 14064-1 2012, using an
operational control approach to define 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: Mwh = megawatt hours of energy; tCO2e = Tonnes Carbon Dioxide Equivalent; FTE = Full Time Employee.
17. Reduction of c.1,000 tCO2e from NorthLink Ferries contract. Increase of c.3,000 tCO2e from increased operations in Future Provision of Marine Services
contract.
18. New Hong Kong tunnel contract added c.4,500 tCO2e. Increased scope of reporting in Americas added c.1,000 tCO2e.
19. UK & Europe reporting system changed for company car / private mileage, more precision to identify type of fuel / size of vehicle which has changed
conversion factors applied.
20. UK electricity conversion factors reduced by 10%.
21. 2017 and 2018 restated to exclude Scope 3 electricity.
22. 2018 re-stated to 5.80 from 5.53 to include Middle East residential consumption.
23. New scoring mechanism introduced in 2015.
Annual Report and Accounts 2019
95
Financial StatementsCorporate GovernanceSerco Group plc
Section 172 (1) Statement
Board Engagement with Stakeholders
The Board is committed to enhancing engagement with all our
stakeholders. In addition to the methods of engagement
described over the following pages, the interests of our
stakeholder groups are considered by the Board through a
combination of:
• Regular reports and presentations at scheduled Board and
Committee meetings, including operational reports
presented by the Chief Executive and updates from senior
management on health and safety, ethics and compliance,
people matters (including employee engagement) and
investor feedback.
• A rolling agenda of matters to be considered by the Board
and Committees throughout the year, including a strategy
review which considers the purpose of the Company and
strategy to be followed by the Group, which is supported
by a budget for the following year and a medium-term
financial plan.
• Formal consideration of large bids and other matters,
including any factors which are relevant to major decisions
taken by the Board through the year in line with the regularly
reviewed Delegation of Authority and Terms of Reference
for each Board Committee.
• The risk management process and other routine Audit
Committee, Corporate Responsibility Committee, Group
Risk Committee and Remuneration Committee agenda
items, as described later in this report on pages 109 to 121
and 124 to 129.
As with other large and complex companies, the Directors fulfil
their duties partly through a governance framework that
delegates day-to-day decision-making to the Executive
Directors. The Board recognises that such delegation needs to
be much more than simple financial authorities. You will find
detailed in the Annual Report a summary of the governance
structure which covers the values and behaviours expected of
our employees; the standards they must adhere to; how we
engage with stakeholders; and how the Board looks to ensure
that we have a robust system of control and assurance
processes (see pages 76 to 95).
Our Corporate Responsibility (CR) framework is structured
around our key stakeholders and we summarise our progress
and performance in delivering our CR agenda in the CR section
of this Annual Report on pages 76 to 95.
The following disclosure describes how the Board has had
regard to the matters set out in section 172(1) (a) to (f), and forms
the Directors’ statement required under section 414CZA of the
Companies Act 2006.
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Stakeholder group
Our Owners
Engagement with and receiving
the support of our owners is a key
factor in achieving our ambitions.
We seek long-term relationships
based on transparency, honesty
and clarity – all of which are
critical for building trust.
Details of notifiable interests in
the shares of the Company are
set out on page 153 of the
Directors’ Report.
Stakeholder concerns
Our owners are concerned with a
broad range of issues, including
operational and financial
performance, developments in
our markets for public services,
the execution and delivery of our
strategy, the sustainability of our
business, and the impact Serco
has on the communities we serve
and the environment in which we
operate.
Our performance developments
are comprehensively assessed in
this Annual Report, including the
Key Performance Indicators
section and the broader
discussion and analysis in the
Strategic Report, Directors’
Report and Financial Statements.
Further metrics are also set out in
our Corporate Responsibility
report on pages 93 to 95.
How the Board engages with
stakeholders
Key topics of engagement
How stakeholder interests influence
Board discussions and principal
decisions
• Serco’s performance
against our strategy.
• Developments in our
customer markets and
the competitive
landscape.
•
• Opportunities for
acquisitions.
• Capital allocation
considerations.
Implementation of the
Remuneration Policy.
• Market soundings with
major shareholders
sought their views and
support for the Naval
Services Business Unit
(NSBU) acquisition in
May 2019.
• Owners of the business
receive our regular trading
updates in addition to the
half- and full-year results
reports and accompanying
presentations.
• Attendance by the Chief
Executive and Group Chief
Financial Officer and other
members of the Serco senior
management team to discuss
relevant developments in the
business at our post-results
road shows and programme
of investor conferences.
• Regular updates with proxy
advisers and major
shareholders where we seek
views and feedback on
specific topics.
• We issued more than 30 other
announcements regarding
contract awards or corporate
transaction news throughout
the year, which also drives ad
hoc engagement with
investors.
• The Investor Relations team
provides regular reports to the
Board.
• Board attendance at the AGM
provides the opportunity to
communicate with private and
institutional investors and for
them to raise any other topic
they feel relevant.
• Shareholders’ opinions were, and
continue to be, taken into
consideration when developing
and reviewing the Company’s
strategy and performance,
Directors’ remuneration policy,
and our capital structure and
dividend policy.
• The feedback received from
major shareholders informed the
Board’s decision to approve the
NSBU acquisition during 2019.
We subsequently received very
strong demand for shares and
share price support in the Equity
Placing we launched to part-fund
the transaction.
• The Board’s decision to
recommend resuming the
payment of dividends to
shareholders took account of the
views expressed by investors
regarding their support to
maintaining an appropriate level
of dividend cover, the potential
alternative uses of capital to
generate incremental value for
shareholders and the desire to
see Serco maintain financial
flexibility and a strong balance
sheet.
• Our engagement activities and
level of transparency with
shareholders was also recognised
by the investment community
during the year, including the
receipt of an award from the IR
Society for ‘Best IR relating to a
Corporate Transaction’.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Section 172 (1) Statement continued
Board Engagement with Stakeholders continued
Stakeholder group
Our People
Our people are at the heart of
our business and, as a Company,
we are the sum of the efforts,
energy and values of our people,
who are critical to achieving our
mission of improving the lives of
citizens and service users around
the world.
Stakeholder concerns
Through our annual Viewpoint
survey and other dialogue with
our colleagues, we know that our
people feel passionately about
the place they work and the
services that they deliver. As you
would expect for a business as
diverse as Serco, our colleagues
express their opinions across a
very wide range of areas.
However there are currently
three main areas of concern
raised by colleagues on a regular
basis: connection and
collaboration within Serco,
individual recognition, and
having a voice in the decision
making within business.
Our People Report, available on
our website, sets out the work
we are undertaking to make
Serco a better, safer and more
inclusive place to build a career.
How the Board engages with
stakeholders
Key topics of engagement
How stakeholder interests influence
Board discussions and principal
decisions
• Global focus areas for
diversity and inclusion:
Gender, Disability,
Multicultural and LGBT+.
• Matters impacting
employees on the frontline
of our contracts.
• Talent and leadership
•
succession.
Integration of staff
transferring to Serco as part
of the NSBU acquisition.
• The Board considered the
impact to employees of
restructuring activities that have
taken place during the year,
such as the IT and Procurement
Transformation programmes,
the development opportunities
that potential acquisitions and
contract bids would afford our
employees, and the impact on
the Company’s ability to attract
and retain staff.
• Review of pension
• The Board endorsed the
provisions.
• Feedback received from
employees through the
Viewpoint survey and the
actions proposed by
management in response.
introduction of the Employee
Voice and Colleague
ConneXions initiatives, and the
Serco Inclusion Hub.
• The Board approved
management’s
recommendations to appoint
an independent chair of the
Pensions Policy Committee, and
the closure of the existing
stakeholder plan and its
replacement with a new
workplace pension.
• Discussions at the Board have
been better informed due to
the deeper understanding of
the work undertaken by our
employees, which has been
developed during contract visits
undertaken by the Board in
each Division, At these contract
visits and events, the Directors
meet and hear directly from
Serco employees on a variety
of topics.
• We seek feedback from our
people annually through the
Company-wide engagement
survey, Viewpoint,
supplemented with more
frequent ‘pulse’ surveying in
selected parts of the
business.
• Kirsty Bashforth, Non-
Executive Director, was
appointed as our lead
representative on the Board
for Employee Voice and
reports the feedback
received from our people at
engagement activities
attended throughout the
year as part of the Employee
Voice and Colleague
ConneXions initiatives.
• We introduced the Serco
Inclusion Hub during the year
to provide a platform for our
employee networks, Serco
Inspire, Serco Unlimited,
Serco Embrace and
In@Serco, to better
coordinate and collaborate.
Regular reports on the
activities of each network are
received by the Board
through the regular People
reports provided by the
Group HR Director.
• Members of the Board meet
with employees during
contract visits and with
management at Board
meetings and events, such as
Town Hall meetings, and
attendance at Divisional and
Leadership Conferences
during the year.
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Stakeholder group
Our Customers
As an international B2G business
our customers are many and varied,
consisting of local, regional,
national governments and
agencies, those receiving our
services at a contract level versus
those procuring the services, and
those who use the services we
provide on behalf of our customers.
Our business is built on our ability
to retain existing and win new
customers. As such, understanding,
engaging with, and responding to
customer needs is a critical priority.
Stakeholder concerns
While the demands vary
significantly, at the most basic level
our customers seek to procure from
us quality public service delivery, at
a price they feel represents value
for money. This requires us to have
both deep understanding of their
sector specific needs, as well as
technical and commercial nous as
to how to deliver public services
most efficiently.
In addition, there are significant
regional and sector specific
priorities, that vary enormously and
also change over time. For
example, the increasing demand
for the employment of nationals in
the Middle East, the increasing
drive for social value outcomes in
the UK, and the importance of
supporting aboriginal communities
more effectively in Australia. It is
critical that we maintain a detailed
appreciation of these so that we
can respond accordingly.
How the Board engages with
stakeholders
Key topics of engagement
How stakeholder interests influence
Board discussions and principal
decisions
• The Chief Executive and
Group Chief Financial
Officer meet directly with
different customers across
all our regions on a regular
basis.
• Members of the Board
regularly, and throughout
the year, visit our different
international operations and
contracts where they
engage directly with
customers.
• Our ‘Operational Report’
gives updates and feedback
on our markets, customers,
and operational
performance to the Board at
every meeting. Our
Divisional Chief Executives
present regularly to the
Board on the same. Other
colleagues also present
regularly on operations,
customer satisfaction and
Business Development.
• Our annual Strategy
Planning process is a
bottom-up exercise
including every part of the
business, taking into account
both existing and future
customer needs and trends
over the next 5 years. This
process culminates in a
day-long Board Strategy
Day during which the Board
debate current and future
customer requirements at
length.
• Attendance by the Board at
Serco-led and other industry
events, including events run
by the Serco Institute on
public policy priorities such
as Social Value, which
customers both attend and
speak at.
• Customer and Serco
• Customer insight
strategy and operational
performance.
• The procurement
processes employed by
key customers, such as the
Outsourcing Playbook in
the UK.
• The potential impact to
the relationship with
customers following the
conclusion of the Serious
Fraud Office (SFO)
investigation.
• New and future customer
requirements and trends,
such as focus on
environmental, social, and
governance matters.
• Specific business
development
opportunities.
• The overall performance of
the sector.
• Serco innovations in
response to customer
trends and needs.
demonstrating the
attractiveness of the market and
our capabilities were key in
giving the Board confidence in
the acquisition of Alion’s NSBU
in 2019.
• Amongst other things, our
substantial remediation, prompt
self-disclosure of the DPA
conduct and co-operation with
the SFO throughout the
investigation resulted in the
decision by the SFO to
conclude the investigation with
a Deferred Prosecution
Agreement
• The Board deployed their
customer insight to positive
effect in decisions relating to
our submission of our largest
bids over the year and the
nature of our proposals, which
they scrutinise.
• Following customer
engagement and insight
gathered from the annual
strategy process, the Board
provided guidance on our
strategy, strategic decisions, as
well as resource allocation, and
prioritisation across our markets
and customers in 2019-20.
• The Board continued to drive
the Executive Directors to act
on new customer trends and
priorities as a result of
engagement in 2019. For
example, our plans on
sustainability, social value, and
voluntary, community, and social
enterprise organisations.
• The Board deployed customer
insight to input into our Global
Centres of Excellence’s plans for
innovation and new adjacencies
in 2019-20.
Annual Report and Accounts 2019
99
Financial StatementsCorporate GovernanceSerco Group plc
Section 172 (1) Statement continued
Board Engagement with Stakeholders continued
Stakeholder group
Our Suppliers
Suppliers have an important role to play
in Serco being a superb provider of
public services. We aim to build honest,
respectful and transparent relationships
with suppliers who follow regulatory
compliance and share our ethical
standards and commitment to
sustainability throughout the
supply chain.
Stakeholder concerns
Our suppliers are concerned with the
ease of doing business with Serco,
responsible business practices, conduct
and ethics, driving innovation, building
long-term relationships, fair business
terms, and receiving prompt payment.
Our Communities and Environment
Our communities comprise those living
and working in close geographic
proximity to our operations, those for
whom we provide services on behalf of
our government customers, and those
who represent the needs of our
communities, including charities and
local government.
Operating amongst and on behalf of
our communities, we strive to maintain
a deep understanding of the complex
social challenges that impact them,
whilst recognising our responsibility to
contribute to the sustainability and
wellbeing of society and the economy
wherever we operate.
We are also committed to limiting the
impact of our operations on the
environment through more sustainable
business practices for our customers
and stakeholders, including our
communities.
Stakeholder concerns
Our communities are primarily
concerned with the impact of our
operations on the local society, the
economy, and the environment - locally
and beyond - and that we operate and
conduct our business as a respectful
and responsible neighbour.
How the Board engages with
stakeholders
Key topics of engagement
How stakeholder interests influence
Board discussions and principal
decisions
• Direct engagement via
the Chief Executive and
Group Chief Financial
Officer.
• Reports concerning
operational matters from
senior management on
specific business units.
• Regular reports from the
Group Director,
Enterprise Risk, the
Group Director, Business
Compliance and Ethics,
and the Director of
Procurement concerning
management and
assessment of suppliers.
• Regular reports from the
Chief Financial Officer,
including creditor
payable days.
• Regular operational
reports from the Chief
Executive.
• Reports concerning
operational matters from
senior management on
specific business units.
• Meetings with users of
the services we provide
on behalf of our
customers during
contract visits by the
Board.
• Attendance by the Board
at Serco Institute events.
• Due diligence processes.
• Supplier relationships.
• Supply chain
management.
• Fair payment practices.
• The management of suppliers
has been discussed at the Board
and the Procurement
Transformation programme was
endorsed in recognition of the
need to improve supplier
management processes.
• Key risks in relation to the supply
chain were considered when
approving the approach to due
diligence of suppliers, which was
revised during the year.
• Feedback on the performance of
key financial suppliers was
considered periodically during
the year, with performance being
discussed at the Audit and
Group Risk Committees, and
feedback provided to the Board
concerning the discussions.
• Further information on our
engagement concerning
Corporate Responsibility
(CR) matters is provided in
the CR Report on pages 76
to 95.
• Political environment.
•
Impact to the community
of pursuing business
development
opportunities.
• Careful consideration was given to
issues under our immigration
contracts in the UK and Australia,
including asylum seekers who are
housed under the Home Office
COMPASS contract and the
situation of managing those
individuals that overstay beyond
the permitted terms of their
asylum application.
• Regular discussion on the issues in
prisons under our justice contracts
in the UK, Australia and New
Zealand including physical
assaults, violence and impact on
communities.
• Meeting with users of the services
we provide on behalf of our
customers during contract visits by
the Directors facilitates a deeper
discussion of operational matters.
In considering business
development proposals from
senior management, this also
enables the Board to better assess
service user needs and the ability
to provide the services under the
contract to the standards
expected, and identify any gaps in
capabilities.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
25 February 2020
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Annual Report and Accounts 2019
Serco Group plc Contents
102 Board of Directors
104 Chairman’s Governance Overview
107 Board and Governance
109 Group Risk Committee Report
112 Audit Committee Report
118 Nomination Committee Report
120 Corporate Responsibility Committee Report
122 Compliance with the UK Corporate
Governance Code
124 Remuneration Report
149 Directors’ Report
154 Directors’ Responsibility Statement
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Annual Report and Accounts 2019
101
Serco Group plc
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
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A N
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A N
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A N
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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 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
Chairman of Pressure
Technologies plc.
Senior Independent Director
of Mainstream Renewable
Power Limited.
Chairman of the Board of
Governors at St. Albans
School.
Chairman of R.A.G.
Associates Limited.
Appointed to the Board
May 2014
Appointed to the Board
October 2014
Appointed to the Board
September 2016
Appointed to the Board
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.
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, is an Honorary
Professor at the University of
Edinburgh and a member of
the Institute of Chartered
Accountants of Scotland.
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
Senior Independent Director
and a member of the Audit,
Nomination and
Remuneration Committees of
DS Smith Plc.
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
Senior Independent Director,
Chair of the Audit Committee
and a member of the
Nomination and
Remuneration Committees of
Ashtead Group plc.
Skills and experience
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.
Skills and experience
Kirsty Bashforth is an
experienced board member
within the construction,
services, consumer goods 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.
Non-Executive Director, Chair
of the Remuneration and
People Committee and a
member of the Audit & Risk
and Reputation & Ethics
Committees of GEMS
MENASA Holdings Limited.
Governor of Leeds Beckett
University and Ashville
College.
Current external
commitments
Non-Executive Director, Chair
of the Safety, Health and
Environment Committee and
a member of the Nomination,
Remuneration, Risk
Management and Audit
Committees of Kier Group
plc.
Non-Executive Director
and a member of the
Remuneration and
Good4Business Committees
of PZ Cussons plc.
Non-Executive Director and
Chair of the Remuneration
Committee of Diaverum AB.
Director of QuayFive Limited.
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Annual Report and Accounts 2019
Serco Group plc Key to Committee membership (Red highlight denotes Chair)
A
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Audit Committee
Nomination Committee
Remuneration Committee
C
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Corporate Responsibility Committee
Group Risk Committee
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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
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Appointed to the Board
January 2019
Appointed to the Board
July 2017
Appointed to the Board
March 2014
Appointed to the Board
July 2017
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.
Skills and experience
Ian El-Mokadem is an
experienced chief executive
officer with international
experience in business
transformation and in
acquisitions and disposals.
He has a BSc (Hons) in
Economics and Statistics from
University College London
and an MBA from INSEAD.
Previous roles
Chief Executive Officer of V.
Group and 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
Director of Roegate
Consulting Limited.
Skills and experience
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.
Director of SETL Development
Limited.
Non-Executive Director of
Heathrow Airport Holdings
Limited.
Current external
commitments
Non-Executive Director of
Resolution Life Group
Holdings LP.
Governor of the Ditchley
Foundation.
Member of the Board of
Breugel.
Deputy Chair of the British
Council.
Skills and experience:
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.
Non-Executive Director and
Chair of the Audit Committee
of Scottish Water.
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.
Chief Executive of Woolwich
plc and National Australia
Bank Limited’s UK businesses.
Current external
commitments
Non-Executive Director and
Chair of the Remuneration
Committee of Royal Mail plc.
Chair of Trustees of the
Westminster Society for
People with Learning
Disabilities.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Corporate Governance Report
Chairman’s Governance Overview
Sir Roy Gardner
Chairman
2019 Highlights
• Continued reinforcement of Committee
membership with appointments to the Audit,
Corporate Responsibility, Group Risk and
Nomination Committees
• Further improvements to internal procedures to
improve Board effectiveness following the
external Board evaluation undertaken in 2018
• Implementation of “Employee Voice” initiatives
• Evolution of the remit of the Corporate
Responsibility Committee
This report sets out how Serco is
governed and the key activities of the
Board of Directors in promoting
effective governance during 2019.
Further information on how the
Company complied with the UK
Corporate Governance Code during
2019 is set out on pages 122 and 123.
Dear Shareholders
I am pleased to present the Corporate Governance Report for
2019. 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.
This year, we report against the UK Corporate Governance
Code published by the Financial Reporting Council in July 2018
(“the Code”). I confirm that, during 2019, the Company has
complied fully with the principles and provisions of the Code.
Details of how the Company has complied with the Code are
set out on pages 122 to 123.
One of the most significant changes to the Code affecting the
Company is in respect of workforce engagement. As reported
in last year’s Annual Report, Kirsty Bashforth – a Non-Executive
Director and the chair of our Corporate Responsibility
Committee – was appointed as the lead “Employee Voice”
representative.
There is also a greater focus on Environmental, Social and
Governance (“ESG”) factors.
You will see our approach to the increased focus on employee
engagement, in particular “Employee Voice”, and ESG factors,
both as part of the evolution of the responsibilities of the
Corporate Responsibility Committee and the Corporate
Responsibility Framework in the Committee’s report on pages
120 to 121 and the Corporate Responsibility section of the
Strategic Report on pages 76 to 95.
104
Annual Report and Accounts 2019
Serco Group plc In addition, and as I have referred to in my Chairman’s
statement, this is the first time we have included a s172
statement in our Annual Report and it shows how the Board has
engaged with our stakeholders and its approach to the
decisions it has made during the year.
During the year the Terms of Reference of each of the Board’s
Committees were thoroughly reviewed to ensure that they were
appropriate to meet the requirements of the Code. As part of
this review, the schedules of matters considered on an annual
basis by the Board and each of its Committees were revised to
ensure that all relevant matters are considered at the correct
forum and that there are lines of communication between the
Committees themselves and between each Committee and
the Board.
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 John Rishton
who was appointed our Senior Independent Director on 1
January 2019. 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 undertaken
internally and 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 externally facilitated evaluation
undertaken in 2018, are set out on page 108.
Changes in the Board
As already reported, Eric Born joined the Board on 1 January
2019 and became a member of the Audit and Corporate
Responsibility Committees. At the same time John Rishton
assumed the role of Senior Independent Director and joined
the Nomination Committee and Kirsty Bashforth was appointed
Chair of the Corporate Responsibility Committee.
Following a review of the Board’s Committees, Rachel Lomax
was appointed a member of the Nomination Committee on 1
March 2019 and Kirsty Bashforth was appointed a member of
the Group Risk Committee on 1 May 2019.
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Contract site visits
Non-Executive Directors are encouraged to continually increase
their knowledge of the operations of the Company, its
customers, its employees, end users and the communities it
works in. This includes visits to contract sites which enable them
to witness the day-to-day service provided by our contract
teams as well as meeting customers and other stakeholders,
and holding “town hall” sessions to hear the views of our
employees. 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 visited each of the Company’s
Divisions, attending over 30 site visits.
Members of the Board have also attended the Serco
Leadership Programme which is run for our senior leadership
teams, divisional leadership conferences, Serco Institute events,
and training courses.
During site visits and visits to the Group’s international offices,
Non-Executive Directors take the opportunity to discuss issues
with the wider workforce and senior management, including the
management of the newly acquired NSBU business.
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.
Whilst the Board has become more balanced over recent years,
culminating in 33% gender diversity, we recognise we still have
more to do, not least with regard to other areas of diversity at
Board level. Whilst good progress is being made across the
Group in all aspects of diversity and inclusion, sustainable
change requires a long-term perspective and this remains a key
focus for the Company.
More information is provided in the Nomination Committee
Report on pages 118 to 119 and in the Strategic Report on
pages 80 to 81.
Shareholder engagement
The Board continued to engage in an open and meaningful
way with its shareholders during the course of 2019. In addition,
I attend the results announcements in the City and meet many
of our stakeholders and make myself available to our
shareholders on a regular basis. I hope shareholders will take
the opportunity to meet with Board members at the 2020
Annual General Meeting.
Sir Roy Gardner
Chairman
25 February 2020
Annual Report and Accounts 2019
105
Financial StatementsCorporate GovernanceSerco Group plc
Corporate Governance Report continued
Chairman’s Governance Overview continued
What the Board has achieved in 2019
• Reviewed and challenged the strategy of the Group and
supported management in the Group’s strategic
development.
• Received, discussed and reviewed regular reports from
the Chief Executive Officer and Chief Financial Officer.
• Regularly reviewed financial performance.
• Reviewed and approved the NSBU acquisition, including a
placing as part of the financing, meetings with the new
management team as well as other merger and
acquisition opportunities and a review of transition and
integration activities.
• Reviewed and agreed budgets.
• Focused on the ongoing performance of the Group.
• Reviewed employee engagement including the
introduction of “Employee Voice”, as well as receiving and
discussing regular People reports.
• Updated the Corporate Responsibility Framework to
incorporate independent review recommendations.
• Evolved the Corporate Responsibility Committee to
reflect evolution of the Company and to underpin the
focus on Values as core to how the Company conducts its
business.
• Embedded the Group Transformation Programme.
• Reviewed and challenged management on the progress
• Received operational “deep dives” from across the
Divisions as part of the monitoring of the ongoing
transformation and strengthening of the Group.
• Reviewed and challenged the Centres of Excellence.
• Considered succession planning both for the Board
and the senior management team, including discussion
on diversity.
• Reviewed the Gender Pay position.
• Reviewed, challenged and refreshed the Tax and Treasury
Policy, including review of current and future financing.
• Engaged with the Company’s stakeholders.
• Considered the UK political environment and its potential
impact on the Company.
• Received regular reports from the Head of Investor
Relations.
• Received regular reports on ethics, compliance and
Health, Safety and Environment.
• Received detailed reports of the proceedings of each of
the Board’s Committees and approved recommendations
where appropriate.
• Continued enhancement of risk management.
• Considered and implemented recommendations arising
from Board performance evaluation.
• Focused on embedding the Serco Values within the
of the Group’s business development pipeline.
Group.
• Received regular legal and governance reports, including
• Reviewed and updated the schedule of matters reserved
diversity and governance developments.
for the Board.
• Focused on and reviewed key individual material bids and
• Reviewed and updated the Terms of Reference of the
acquisitions over the year.
Board Committees.
• Continued to drive improvements in Health and Safety,
including a review of initiatives to reduce violence in
prisons.
• Changes to Board and Committee membership.
• Spent time with the Divisional management teams and
• Regularly reviewed the SFO investigation and approved
the final DPA and Undertaking entered into with the SFO,
and considered the action to be taken to ensure
compliance with the DPA.
• Considered the Company’s approach to sustainability and
met regularly with senior management responsible for the
delivery of the Group’s key opportunities and existing
contracts, including over 30 contract visits and reviews
over the year covering all of the Group’s Divisions.
ESG factors.
• Received an update on the Company’s pension schemes.
Board priorities for 2020
• Focus on the Company’s approach to ESG factors.
• Continue to focus on employee engagement and, in
particular, to monitor the effectiveness of new initiatives.
• Continuing support of and challenge to management on
embedding the Group’s transformation initiatives.
• Continue to assess the Company’s financing needs and
• Continue to assess and challenge the Group’s strategy,
other tax and treasury issues.
including potential merger and acquisition opportunities.
• Continue to support and challenge improvements in
• Budget and financial performance reviews.
• Monitor changes to relevant legal, regulatory and
contract execution and cost efficiency, 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.
governance areas.
• Continue to oversee employee engagement.
• Continued focus on governance developments and
training.
• Continue to oversee ethics, compliance, safety,
environment, health and wellbeing, with a specific focus
on updating the environmental strategy.
Implementation of recommendations arising from Board
evaluations.
•
• Monitor and report on compliance with the DPA and
• Further review of Divisional operations and ensuring the
ongoing transformation and strengthening of the Group.
Undertaking.
• Continue to monitor the Company’s pension schemes.
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Serco Group plc Board and Governance
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.
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Board and Governance structure
Board of Directors
Audit
Committee
Corporate
Responsibility
Committee
Group Risk
Committee
Nomination
Committee
Remuneration
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 the 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 Allotment 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
delegated to it by the Board and to finalise matters already approved in principle, including the approval of documentation for
shareholders, the declaration of interim and the recommendation of final dividend payments and the allotment of shares.
The table below gives details of attendance of Board and Committee meetings during 2019. On those few occasions when
Directors were unable to attend meetings due to conflicting appointments, their views are sought by the Chair of the Board or the
relevant Committee in advance of the meeting to ensure they are taken into account at the meeting,
Sir Roy Gardner
Rupert Soames
Angus Cockburn
Kirsty Bashforth
Eric Born
Ian El-Mokadem
Rachel Lomax1
Lynne Peacock2
John Rishton3
Board
12/12
12/12
12/12
12/12
12/12
12/12
11/12
11/12
12/12
Audit
Corporate
Responsibility
Group Risk
Nomination
Remuneration
–
–
–
–
5/5
–
5/5
5/5
5/5
3/3
3/3
–
3/3
3/3
3/3
–
–
–
–
–
–
3/3
–
4/4
4/4
–
3/4
4/4
–
–
–
–
–
3/3
4/4
4/4
4/4
–
–
4/4
–
–
–
4/4
4/4
Notes:
1. Rachel Lomax was unable to attend the board meeting on 25 September 2019, a date on which she had another commitment.
2. Lynne Peacock was unable to attend the board meeting convened at short notice for 3 December 2019, a date on which she already had a prior commitment.
3. John Rishton was unable to attend the Group Risk Committee meeting on 1 May 2019, a date on which he had another commitment.
Annual Report and Accounts 2019
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Board and Governance continued
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 Senior Independent Director, Chair of
the Audit Committee and a member of the Nomination and
Remuneration Committee of Ashtead Group plc throughout
the year.
Rupert Soames was appointed as a Non-Executive Director and
a member of the Audit, Nomination and Remuneration
Committees of DS Smith Plc on 1 March 2019 and became
Senior Independent Director on 3 September 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 undertakes regular
reviews of the external positions and interests held in and
arrangements with third parties made by each Director and,
where appropriate, to authorise such conflicts. Notwithstanding
the above, each Director is aware of their duty to notify the
Board should there be any material change to their positions or
interests during the year. Directors do not participate in Board
discussions or decisions which relate to any matter in which they
have, or may have, a conflict of interest.
Board evaluation
During 2019, in response to recommendations arising from the
external Board evaluation undertaken in 2018 by ICSA Board
Evaluation Limited (with which the Company has no other
connection), a number of changes of a procedural nature were
made to improve Board effectiveness. This included the more
detailed feedback to the Board of the appraisals of Non-
Executive Directors and the Chief Executive, a review of those
processes, procedures and policies requiring Board review and
the scheduling of their regular review and a review of the
matters discussed by the Nomination Committee which led to
its role being broadened.
An internal evaluation was undertaken in 2019 using a
questionnaire based on the UK Corporate Governance Code.
This evaluation, acknowledging progress on areas identified in
previous external and internal evaluations, concluded that the
Board and its Committees continued to operate effectively. It
was, however, agreed that further formalisation of some of the
activities of the Nomination Committee would be beneficial. It
was also agreed that there is a need to ensure that the revised
Corporate Responsibility Framework continues to address the
promotion of the Company’s contribution to wider society,
ensure that workforce policies continue to support long-term
sustainable success, and that they evolve as necessary and
enable greater assessment and monitoring of culture, and a
check that policy, practices and behaviour remain aligned with
the Company’s purpose, values and strategy.
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’s policies and
procedures, meetings with senior management and contract
site visits.
Training is made available to and provided to the Board on a
range of governance and other issues.
Individual training needs are identified as part of the annual
appraisal process and Directors are encouraged to take
advantage of externally provided training opportunities.
In addition, several Non-Executive Directors attended parts of
the Oxford Management Programme for senior management
and Divisional management meetings, on an observational
basis, and met with members of the senior management team.
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Serco Group plc Group Risk Committee Report
Group Risk Committee members
Rachel Lomax (Chair)
Kirsty Bashforth
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. We have continued to review the risk profile
on a quarterly basis and during these sessions have focused
on having action orientated discussions around our principal
risks and their mitigations.
Throughout 2019 the Committee has continued to
concentrate 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;
• hearing from each principal risk subject matter expert to
gain deeper understanding of risk status;
• 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.
During the year we have challenged the Group risk function
to drive process improvements and endorse the
developments towards more integrated Enterprise Risk
Management methodology. The Group Enterprise Risk
Management function underwent structural transformation in
2019 and a review of divisional enterprise risk management
capabilities is underway.
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Following a review by the Executive Committee, including a
review of external and emerging risk trends it was agreed
that we would retire the Transformation risk from the principal
risks reported in 2018 and that a new People risk would be
included that recognises the need for succession plans for
our senior management team and other business
critical roles.
Our governance of principal risks has remained unchanged
since 2018, and we have agreed to extend our oversight over
Compliance Assurance in 2020.
The Committee recognises the commitments made under
the DPA and notes that elements of the planned
improvements associated with the DPA are included in a
number of the mitigations captured against our principal
risks. We will continue to oversee execution of these
mitigations via our risk management process outlined on
pages 60 to 61 and through regular review of the DPA plan.
Rachel Lomax
Chair of the Group Risk Committee
25 February 2020
Annual Report and Accounts 2019
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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 Committee’s Terms of Reference 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. Biographical
details for each member of the Committee are provided on
pages 102 and 103. The Committee met four times during the
year and details of Committee membership and attendance at
meetings are set out on page 107 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 are attended by the Chief
Executive, the Group General Counsel and Company Secretary
and the Group Director Enterprise Risk.
Activities of the Committee during 2019
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,
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 act with integrity was reviewed by
our Corporate Responsibility Committee; Financial Control
Failure by our Audit Committee; and Failure to Grow
profitably by the Board;
• 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;
• ongoing challenge and support of the Group Director
Enterprise Risk to improve, enhance and embed the risk
management framework.
2020 priorities and focus
During 2020, the Committee will continue its focus on
undertaking detailed “deep dive” reviews into Group principal
risks, which may not be classified as such but nonetheless
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, to
develop our Enterprise Risk Management approach and refresh
the supporting policies, standards and reporting. We will also
extend our oversight to include governance of our Group-wide
compliance assurance activity including greater oversight of the
three lines of defence and how they interrelate and work
effectively. The Committee will retain time at the end of each
meeting to meet separately without management present and
invite one of the Divisional Heads of Compliance Assurance to
attend for part of this session. The Committee will also meet
privately with the Group Director Enterprise Risk.
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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”).
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
lines of defence” compliance assurance model to test
business compliance.
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.
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 2019 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.
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 misstatement or loss, this
cannot be absolute.
Second line of defence – The Group Enterprise Risk
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.
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.
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.
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
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.
Annual Report and Accounts 2019
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Audit Committee Report
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 102 and 103.
The Committee met five times during the year and details of
Committee membership and attendance at meetings are set
out on page 107. In addition to the members of the Committee,
the Chief Financial Officer, the Director of Finance, the Group
Head of Reporting and Financial Assurance, 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 retains time at the end of meetings to
meet without management present for discussion with either
the Head of Internal Audit or KPMG LLP. 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. The findings from the
review were largely positive with it being noted that the Audit
Committee is effective in its role and that improvements have
been made during the year in terms of the Committee’s
understanding and oversight of internal controls including the
delivery of finance and accounting services from the Group’s
outsourced service provider, Accenture. Also seen as a positive
for the Committee was the continued inclusion of specific
agenda items focused on significant internal audit findings
which enabled the Committee to challenge management on
the resolution of specific issues identified, and improved the
Committee’s understanding of the underlying culture of the
organisation through management’s commitment to address
the issues identified. Improvements suggested in relation to the
Audit Committee’s performance, which the Committee will
seek to implement throughout 2020, included expanding the
nature of ‘deep-dives’ undertaken for the benefit of the
Committee’s understanding of key issues, the use of data
analytics across the Group and the ongoing requirement for
post investment reviews.
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 2019. An insight into how the
Committee addressed significant issues during 2019,
which were reported to the Board as a matter of course,
and how other responsibilities of the Committee were
discharged, are described in this report. 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.
During the year the Committee also undertook a broad
range of finance, accounting and control related reviews
including post investment reviews of the Group’s 2018
acquisitions of certain Carillion healthcare contracts and
BTP Systems LLC.
Throughout 2020, the Committee will continue to
focus on the critical accounting judgements made,
the effectiveness of the Group’s financial controls and
assurance programme, the operating performance of the
finance operating structure, specifically the outsourced
operating model and any emerging risks arising from it,
compliance with the Deferred Prosecution Agreement
for items under its terms of reference, and the delivery
and effectiveness of the Group’s Internal Audit function.
Also during 2020, the Committee will monitor
developments from independent reviews such as
the review led by Sir Donald Brydon, and the impact
the recommendations have on the Group’s current
internal control framework and the audit profession.
The Committee will challenge and review how the
Group adapts to address any legislative changes
which arise from these recommendations.
John Rishton
Chair of the Audit Committee
25 February 2020
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 the Group’s Internal Audit function.
The Terms of Reference for the Committee are available on the
Group’s website.
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Activities of the Committee during the year
During the year, the Audit Committee carried out core duties
alongside the work required on significant judgements and
issues. The core activities undertaken during the year included:
• reviewing the integrity of the half-year and annual financial
As well as carrying out the core duties above, the Audit
Committee received the following key business updates which
assisted the Committee in understanding the framework in
place to mitigate the specific risks associated with these
aspects of the business:
statements and the associated significant financial reporting
judgements and disclosures including;
– that the information presented in the Annual Report and
Accounts, when taken as a whole, is fair, balanced and
understandable and contains the information necessary
for shareholders to assess the Group’s position and
performance, business model and strategy;
– the effectiveness of the disclosure controls and
procedures designed to ensure that the Annual Report
and Accounts complies with all relevant legal and
regulatory requirements;
– 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;
– the management representation letter to the External
Auditor; and
– the findings and opinions of the External Auditor.
• 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;
• reviewing the Viability Statement to ensure that it is
appropriate and balanced in respect of highlighting the risks
the Group is exposed to and the assumptions being made in
assessing its viability;
• 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 acquisition accounting
of the Group’s acquisition of NSBU and the new accounting
standard on leases (IFRS16);
• reviewing the effectiveness of the Group’s financial controls
and financial assurance programme, including a deep-dive
into the management of the Financial Control Failure
principal risk and performance of the Group’s provider of
outsourced finance activities following the finance
transformation programme;
• overview of the Group’s Tax strategy, including how
provisions for uncertain tax positions are derived, the status
of tax audits being undertaken and the Group’s position in
relation to historic tax losses;
• reviewing the effectiveness and independence of the
Group’s Internal Audit function including obtaining
functional or contract level feedback for Internal Audit
reviews receiving a ‘red’ rating outlining the actions and
responses subsequent to the audit; and
• maintaining the Group’s relationship with the external
auditor, including assessing the audit plan and monitoring
both independence and effectiveness.
– An update on the Group’s insurance strategy following a
restructuring of the internal team and change in the
principal insurance broker;
– A review of the Group’s bid and performance related
bonds and bank guarantees; and
– Post investment reviews of the Group’s acquisitions of
certain Carillion healthcare contracts and BTP Systems
LLC in 2018 including a review of the key learnings.
Internal control environment
The Committee is responsible for monitoring the Group’s
internal control environment and assessing its effectiveness. As
part of this assessment the Committee receives regular updates
on internal controls and in forming an opinion on effectiveness
it also considers the requirement to make relevant
recommendations to the Board.
The Group has both a financial assurance function and an
Internal Audit function, with both making regular contributions
to meetings of the Audit Committee. The findings of financial
assurance are assessed, and guidance is given to direct their
work. Similarly, Internal Audit reports are received by the
Committee on a regular basis and if it is deemed relevant, the
management teams from central functions, divisions or
individual business units are invited to the meeting to discuss
the findings arising from Internal Audit reviews. The Audit
Committee also has responsibility for reviewing the annual
Internal Audit plan and assessing both the adequacy of
resources of the Internal Audit plan and the scope of the
Internal Audit programme.
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.
Annual Report and Accounts 2019
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During 2019, Internal Audit has delivered a full programme of
audits making recommendations to management for
improvements to risk, governance and controls. Reports are
discussed with the parts of business they relate to and
management actions agreed are then 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.
Also, in conjunction with the Group Risk Committee, the Audit
Committee considers whether the Internal Audit programme is
aligned to the Group’s key risks.
A review of the effectiveness of Internal Audit was undertaken
during the year with the function scoring well in most of the
areas considered. Amongst the areas identified for potential
improvement were the ability of junior team members to grasp
complex issues within some of the Group’s more challenging
contracts and an appreciation by Internal Audit of the
operational impact of implementing certain recommendations
which may be challenging from a practical perspective. The
Committee has acknowledged the results of the review and will
take action to address concerns through its oversight of the
Internal Audit function.
The 2020 Internal Audit programme will continue to focus on
the key risks across the business.
Financial controls
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.
Financial control risk is monitored through one of the Group’s
Principal Risks, ‘financial control failure’. The Committee has
reviewed this risk during 2019 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; and
• management’s review of the output and adequacy of the
Group’s financial assurance programme, with a focus to
deliver better assurance through system controls and
data analytics, with key improvements made in this area
during 2019.
Following review and challenge, the Committee believes that,
to the best of its 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 were being addressed.
Finance transformation
Management has completed the transition to a new finance
operating model following the Group’s Finance Transformation
programme. The new operating model, which is now in place
across the UK and AsPac has transitioned to the Group’s
outsourced finance service provider the responsibility for
preparing financial and management accounting reports and
profit and cash forecasts via its Centre of Excellence as well
as the Group’s transaction processing. The objective is that
processes, once centralised, can be both standardized and
improved in their effectiveness and efficiency.
Due to the nature of the Finance Transformation programme,
the Audit Committee has been kept informed of progress and
receives regular briefings on risks and issues arising while the
model continues to be embedded. In considering the potential
risks and issues, the Committee has provided challenge to
management on the processes and controls put in place to
mitigate them. The Committee has received updates on the
ongoing implementation of third-party services and the
effectiveness of those services. Presentations during the year
have highlighted operational issues that the Group is working
through with its service provider. These operational issues
include higher than anticipated staff turnover within the
centre of excellence, slower than anticipated benefits of
standardisation arising from centralisation and a delay in
the implementation of certain Service Level Agreements.
The Committee continues to remain abreast of the issues
identified within the programme and receive regular updates
on the implementation from members of the senior
management team.
The Committee, through its review and challenge, has
concluded that the new finance operating model is appropriate
and despite certain delays and operational inefficiencies is
progressing at an acceptable level. The Committee is also
satisfied that sufficient steps have been taken by management
to mitigate identified risks and issues.
Significant financial judgements
Contract performance, including Onerous Contract
Provisions (OCPs)
During 2014, as part of the Group’s Strategy Review, the
Contract & Balance Sheet Review saw the creation of a material
level of OCPs. The measurement of those OCPs required
significant judgement that the Audit Committee has kept
under review, providing challenge to the assumptions used
by management and key judgements used in assessing the
performance of the Group’s contracts.
The Audit Committee gives particular focus to material OCP
positions, as well as the portfolio of OCPs across the Group.
The Committee agreed, with the support of the External
Auditor, that the view formed by management regarding
each individual material OCP, as well as the aggregate view,
was reasonable. The Committee was satisfied that the work
undertaken by management to monitor existing contracts and
identify contracts where a new OCP may be required and
associated allocation of central costs was sufficiently robust.
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Viability and going concern
The Group has assessed its ongoing viability and the
applicability of the use of the going concern assumption in
preparing its financial results. In assessing viability,
management use the Group’s anticipated future cash flows and
undertake a range of sensitivities to identify any plausible
situations which could cause the viability of the Group to be of
concern. Additionally, management perform a going concern
assessment twice annually to ensure the assumption that the
Group will continue in operational existence for the foreseeable
future is appropriate.
In challenging management’s assessment, the Committee
focused on the Group’s headroom within its financial covenants,
particularly in relation to the likely severity of risk crystallization.
The Committee concurred that whilst in severe scenarios the
ability of the Group to stay within its agreed headroom may be
put under pressure, the Group remains viable and key
assumptions supporting this assessment be disclosed within
the viability statement on pages 74 and 75.
The Committee also reviewed management’s assessment of
going concern and found that sufficient evidence existed to
support the Going Concern basis of preparation. This was
based on anticipated future cash flows agreed by the Board as
part of the Group’s budgeting process. The Committee has
also considered the commitments made under the Deferred
Prosecution Agreement (DPA) entered into with the Serious
Fraud Office (SFO), and assessed the impact this has on the
Group’s disclosures in relation to these statements.
The Committee further considered management’s assessment
of the claim seeking damages for alleged losses following the
reduction of Serco’s share price in 2013. The Committee
concurred with management’s assessment that due to the
stage of the matter and the uncertainties regarding the
outcomes, no provision was required, and disclosure as a
contingent liability at the year end was appropriate. See note 29
to the financial statements.
Both the proposed Viability Statement, and results prepared
using the going concern assumption, were approved by the
Committee for recommendation to the Board.
Use of alternative profit measures (APMs) and
exceptional items
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 Group also uses the term Exceptional
Items to meet the requirements of IAS1 para 97 which requires
the nature and amount of material items of income and
expense to be disclosed separately, and includes costs arising
from the restructuring programme initiated after the 2014
Strategy Review.
The Audit Committee continues to consider the disclosure of
performance measures used by management and whether they
continue to provide meaningful insights into the results of the
Group. The Committee also considers the treatment of
Exceptional Items and whether they are appropriate to be
classified as such.
The Committee has agreed with management that Underlying
Trading Profit continues to be a reasonable basis on which to
compare the relative performance of the business year on year.
The Committee also, following challenge of each individual
item, agrees with management’s classification of items as
exceptional and requiring separate disclosure. After review of
the disclosure of APMs in the Half and Full Year 2019 results and
the 2019 Annual Report, the Committee concluded that the
descriptions for each individual APM used were clear and
meaningful, and that the relationship between them and the
nearest relevant statutory IFRS measure was clearly explained
and supported. The Committee was also satisfied with the
controls management has put in place to identify Exceptional
Items and to ensure that costs which should be recorded within
Underlying Trading Profit are not inappropriately classified as
Exceptional Items. As a result, the use of APMs and Exceptional
Items in the Half and Full Year 2019 results and the 2019 Annual
Report was recommended to the Board for approval.
The Committee also supported the changes to measurement
of APMs following the adoption of IFRS16, as disclosed on
page 43.
The adoption of new accounting standards in 2019
The Annual Report and Accounts for the year ended 31
December 2019 is the first prepared by the Group in
accordance with IFRS16 ‘Leases’. In applying IFRS16 for the first
time management has been required to make decisions related
to the method of adoption and the application of judgement
relating to exemptions and other options contained in the new
accounting standard. Management have opted to apply the
modified retrospective approach to transition and following the
change in requirements relating to the measurement and
disclosure of leases, have also implemented a new piece of
software and associated processes to identify, track and
account for all leases.
During 2018 the Audit Committee took part in an IFRS16
education session held with senior members of the Group
Finance team and the External Auditors. The Committee then
challenged management on the manner of the transition
approach adopted, the application of elements of the standard
as they relate to leases exempt from application of the standard
and the ongoing implementation of the new software required
to assist management in tracking and accounting for leases.
The Committee is satisfied with the policy choices made by
management and the associated changes made to the Group’s
accounting policies for leases as a result. The Committee is also
in agreement with management over the disclosures made in
relation to the adoption of IFRS16 for the first time and the
changes to disclosures required as a result of the new
accounting standard.
The impact of IFRS16 is disclosed within note 2 of the
Financial Statements.
Annual Report and Accounts 2019
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Corporate Governance Report continued
Audit Committee Report continued
Goodwill impairment
During 2014, 2015 and 2016, following the annual goodwill
impairment review, management proposed impairment
charges to certain of the Group’s goodwill balances.
In performing the impairment reviews, management uses
information on anticipated future cash flows and discount
rates to assess whether the carrying value of goodwill is
appropriately measured.
The valuation formed using the anticipated future cash flows,
discount rates and terminal values has a number of key
judgements associated with it, and the Audit Committee has
received key information associated with these. The Committee
challenged management on the discount rates and terminal
values used in the review noting that they had been sourced
by a third party expert, and ensured that the underlying cash
flows were consistent with those included in Board
approved forecasts.
The Committee reviewed the resulting disclosures proposed
by management and found them to be transparent,
appropriate and in compliance with applicable financial
reporting requirements.
Defined benefit pension schemes
The Group’s defined benefit pensions schemes include
a number of significant judgements and areas of
management focus, principal amongst which are the
identification of obligations arising from contracts with
customers and calculation of the financial impact of
defined benefit obligations.
The Committee has considered both the process undertaken
by management to finalise key assumptions underlying the
valuation of defined benefit obligations, and those processes
associated with identifying obligations arising, and is satisfied
that they remain appropriate. In forming their opinion on the
judgements applied to valuing liabilities, the Committee
considered how those judgements compared to observable
benchmarks in the market, and advice has been taken from
independent actuaries on the ongoing appropriateness of
assumptions used. The Committee is satisfied that the
processes followed are appropriate and that the
conclusions reached, and calculations performed are
appropriately balanced.
Financial Reporting Council
During the year, the Financial Reporting Council (‘FRC’) wrote to
the Company in relation to the thematic review of IFRS15
disclosures in the Company’s annual report for the year ended
31 December 2018. No questions or queries were raised as part
of the review, however some other matters were raised in
relation to the annual report which management have
considered and, where material and of relevance, enhanced
disclosures within the 2019 Annual Report and Accounts. The
FRC’s review only covered the specific disclosures relating to
this thematic review and provides no assurance that the report
and accounts are correct in all material respects; the FRC’s role
is not to verify the information provided but to consider
compliance with reporting requirements.
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 three 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.
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. Foremost
amongst the areas which could be enhanced within the External
Audit process was the visibility of the External Auditor’s
technological and data analytic driven procedures
In addition to the evaluation of the effectiveness of the external
audit, the Audit Committee has responsibility for certain core
decisions relating to the external audit process that include:
• considering and approving the audit approach and scope of
the audit undertaken by KPMG LLP as External Auditor and
their fees;
• agreeing reporting materiality thresholds;
• reviewing reports on audit findings and assessing their
impact on the Group’s internal control environment;
• considering and approving letters of representation issued
to KPMG LLP;
• considering the independence of KPMG LLP and their
effectiveness, considering:
– non-audit work undertaken by the External Auditor;
–
feedback from a survey targeted at various stakeholders;
and
– the Committee’s own assessment.
• making a recommendation to the Board on the appointment
of the External Auditor.
The Committee 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 2020 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 156 to 166.
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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 2019, the
non-audit fees paid to KPMG LLP were £26.5k (2018: £0.1m). The
majority of the fees relate to the SFO investigation 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 prior to the
DPA being agreed.
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 pages 194 to 195. 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.
Annual Report and Accounts 2019
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Corporate Governance Report continued
Nomination Committee Report
Nomination Committee members
Sir Roy Gardner (Chair)
Rachel Lomax
Lynne Peacock
John Rishton
Dear Shareholders
During the year, the Committee regularly 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.
Following review of Board composition, it was concluded
that, following changes made during the two previous
years, the Board currently has the appropriate breadth
of experience.
As part of the Committee’s objectives to ensure the Board
and its Committees are continually refreshed, the
Committee recommended that Rachel Lomax should be
appointed as a member of the Nomination Committee
and that Kirsty Bashforth should be appointed as a
member of the Group Risk Committee during the year.
Sir Roy Gardner
Chair of the Nomination Committee
25 February 2020
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% (2018: 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 Committee’s Terms of Reference are available on the
Company’s website.
Membership and attendees
The Committee is chaired by the Company’s Chairman and 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 is set out on page 107. 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 102 and 103.
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 further
formalisation of some of the activities of the Committee would
be beneficial.
Activities of the Committee during 2019
During the year the Committee’s key activities included:
• Changes to the Committee’s membership
As part of the ongoing process of ensuring the continuing
refreshment of the Board and its Committees, the
Committee recommended that its composition should be
further strengthened by the appointment of Rachel Lomax,
particularly given her experience in senior government roles.
Accordingly, she was appointed a member of the
Committee on 1 March 2019.
The Committee also recommended the appointment of
Kirsty Bashforth to the Group Risk Committee, particularly
given her role as Chair of the Corporate Responsibility
Committee. Accordingly, she was appointed a member of
the Group Risk Committee on 1 May 2019.
• Executive Succession Planning
The Committee reviews succession for key executive roles
annually to ensure plans are in place for both planned and
unintended vacancies, including the identification of suitable
internal candidates and their development requirements,
including their exposure to the Board at Board meetings.
• Review of external commitments
A review of the Non-Executive Directors’ external
commitments, taking account of the views of institutional
investor bodies, was undertaken from which it was
concluded that each of the Company’s Non-Executive
Directors was able to dedicate sufficient time to undertake
their duties on behalf of the Company.
• Non-Executive Director training
During the review of training requirements, although no
particular needs had been identified, it was agreed that a
more coordinated approach would be taken to visits by
Non-Executive Directors to the Company’s contracts,
leadership conferences and management meetings to
increase Non-Executive Directors’ awareness of the
Company’s operations and to increase their accessibility to
the Group’s employees. This has resulted in an increased
number of such contract visits, as detailed in the
Governance overview. Training is made available to and
undertaken by Directors throughout the year and there will
be an increased focus on training in 2020.
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• 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 recommendations in the
Hampton-Alexander Review and the Parker Report 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 81.
Gender diversity: Board
Whilst the Board has become more balanced over recent
years, culminating in 33% gender diversity, we recognise we
still have more to do, not least with regard to other areas of
diversity at Board level. Whilst good progress is being made
across the Group in all aspects of diversity and inclusion,
sustainable change requires a long-term perspective and
this remains a key focus for the Company.
67%
Gender diversity: Board
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Gender diversity: Senior Management
70%
33%
Male
Female
Gender diversity: Senior Management
70%
30%
Male
Female
2020 priorities and focus
During 2020, the Committee will continue to focus on
developing its approach to succession planning for the Board,
its Committees and the wider management team, as well as a
greater focus on training and consideration of ESG matters.
30%
Male
Female
33%
Male
Female
Annual Report and Accounts 2019
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Corporate Governance Report continued
Corporate Responsibility Committee Report
Corporate Responsibility Committee members
Kirsty Bashforth (Chair)
Eric Born
Ian El-Mokadem
Sir Roy Gardner
Rupert Soames
Dear Shareholders
Serco operates public services on behalf of governments
around the world and therefore its most precious asset is
the behaviour of its people, both as individuals and
collectively. We have developed a stable foundation of
mature Values, clear purpose, diligent governance and
robust, responsible relationships.
This year has proved an inflection point for the Corporate
Responsibility Committee in its remit, rhythm and maturity.
It has overseen the evolution of the Corporate Renewal
programme into business as usual, which it has been
monitoring and governing since 2014, and the
development of Serco’s approach to Employee Voice,
‘Colleague ConneXions’, ensuring employee views and
interests are factored into Board-level decision-making.
Now in its sixth year of operation, the Committee has
reflected on its role to ensure it continues to support
delivery of the Group’s strategy and its environmental,
social and governance responsibilities in the most relevant
and efficient way.
Our conclusion: that our principal focus going forward
should be on holding the organisation firmly to its Values
and standards of behaviour, with particular emphasis on
our principal areas of social responsibility: our people, our
world and our commitment to behave with integrity and
treat people with respect. This evolution in our purpose is
complemented by additional steps by the Committee
following the approval of the Deferred Prosecution
Agreement (DPA) with the SFO.
Going forward, the Committee will meet four times per
year, continue to oversee HSE, culture and engagement,
ethics assurance and compliance across the Company, as it
has done since its inception, but also welcomes
responsibility for hosting our new Colleague ConneXions
agenda. Input from our people is critical to our success,
and I am proud of my fellow Board members and frontline
colleagues for how they are working together to forge
stronger connections and facilitate valuable dialogue. I am
confident that significant value will emerge from our
reinvigorated partnership and look forward to reporting
our progress.
Kirsty Bashforth
Chair of the Corporate Responsibility Committee
25 February 2020
Committee’s responsibilities
The Committee is responsible for assisting the Board in
providing independent oversight and guidance as to the
impact of the Company’s Corporate Responsibility framework
and, based on this agreed framework, consider related strategy,
policies and practices on how the Company conducts its
business, through the lens of how the organisation lives and
breathes its Values of Trust, Care, Innovation and Pride.
The Committee’s Terms of Reference are available on the
Company’s website.
Membership and attendees
The Committee is comprised of both Executive and
Non-Executive Directors. Biographical details for each
member of the Committee are provided on pages 102 and 103.
The Committee met three times during the year and details of
Committee membership and attendance at meetings are set out
on page 107. Meetings of the Committee are normally attended
by the Group General Counsel and Company Secretary, the
Group HR Director, the Group Director, Business Compliance
and Ethics, and the Managing Director, Group Operations.
Standard annual activities of the Committee
Each year the Committee:
• reviews the Committee Terms of Reference to ensure they
remain appropriately aligned to the purpose of the
Committee;
• reviews the Committee’s position, focus and approach
regarding Corporate Responsibility to ensure it remains
appropriate, embedded in the business and conducive to
the ongoing delivery of the Group strategy;
• supports embedding the Serco Corporate Responsibility
Framework whilst ensuring it remains integral to the Group’s
purpose, strategy and material responsibilities;
• prepares the Group’s annual Corporate Responsibility
Report and Modern Slavery Statement;
• undertakes deep dives into key areas within its remit to
ensure appropriate focus, control and rigour throughout the
Group; and
• oversees the effective delivery of the:
– Group Ethics Compliance strategy and Speak Up
process, including: monitoring and reviewing progress
and performance across the Group; capability and
assurance processes; and in-depth analysis of the Group
principal risk, ‘Failure to act with integrity’;
– Group HSE strategy, including: monitoring and reviewing
progress and performance across the Group; and
in-depth analysis of the Group principal risk,
‘Catastrophic incident’;
– Group People strategy, including: in-depth analysis of
employee engagement survey results, with particular
emphasis on Company culture; and
– Employee Voice approach, which includes the Colleague
ConneXions programme, connecting the workforce with
the Board to generate value through discussion.
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Additional activity undertaken in 2019
• Monitoring and reviewing the progress of the Corporate
Renewal Programme (including in-depth analysis of progress
in our Middle East Division) and reviewing how core
elements of the programme should be reported going
forward following their transfer into business as usual;
• review and approval of the Ethics Compliance elements of
our ongoing plans to improve the Group compliance and
ethics programme, and accepted oversight responsibility for
the same;
• ratification of the refreshed Group Ethics Compliance
framework and strategy;
• accepted responsibility from the Board for hosting the
Company’s evolving approach to ensuring that employee
views and interests are factored into Board-level decision
making;
• reviewed and approved the establishment of three-year
safety targets; and
• renewal and update of the remit and Terms of Reference of
the Committee to ensure it continues to support delivery of
the Group’s strategy and its environmental, social and
governance responsibilities in the most relevant and
efficient way.
Additional activity planned for 2020
• Group Ethics Compliance strategy and Speak Up process:
review of Ethics Compliance maturity and ongoing fulfilment
of the Company’s DPA obligations; and review of the Code
of Conduct and associated mandatory training for all
employees;
• Group HSE strategy:
– Safety: review of progress in embedding mature safety
culture;
– Environmental: in-depth review of updated
environmental strategy;
• Group People strategy: in-depth review of the wellbeing
elements within the Group People strategy; and in-depth
analysis of Diversity and Inclusion;
• Employee Voice: directly supporting the ongoing
implementation of the Colleague ConneXions programme
and working with the Group Colleague Communications
Manager to direct its evolution in the longer term;
• expanding the annual schedule of the Committee to a new
rhythm of four quarterly meetings;
• creation of a dashboard of CR Key Performance Indicators to
track maturity of overall CR across Serco; and
• the Committee will retain time at the end of each meeting to
meet separately without management present and invite one
of the Divisional Heads of Ethics and Compliance to attend for
part of this session. The Committee will also meet privately
with the Group Director, Business Compliance and Ethics.
Annual Report and Accounts 2019
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Corporate Governance Report continued
Compliance with the UK Corporate Governance Code
This section of the Corporate Governance Report describes how the
Company has complied with the principles and provisions of the UK
Corporate Governance Code (“the Code”) published by the Financial
Reporting Council in July 2018 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 101 to 123.
2. Division of responsibilities
The roles and responsibilities of the Chairman, Chief Executive,
Senior Independent Director, the Board and its Committees are
clearly defined, documented, approved by the Board and are
available on the Company’s website.
The Chairman leads and is responsible for the operation of
the Board. The Chief Executive is responsible for the leadership
and management of the business within the authorities
delegated by the Board.
The Board regularly reviews the overall balance of skills,
experience, diversity, independence and knowledge of Board
and Committee members and undertakes an annual review of
the independence of its Non-Executive Directors.
As at the date of this report, with six Non-Executive Directors, in
addition to the Chairman, and two Executive Directors on the
Board, over half of the Board, excluding the Chairman, are
independent Non-Executive Directors.
The Non-Executive Directors approve the objectives of the
Executive Directors annually and assess their performance
against these objectives, and the Non-Executive Directors meet
regularly without the Executive Directors present.
The time commitment of Non-Executive Directors is defined on
appointment and regularly evaluated.
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 has complied in full with the Code during 2019.
1. Board leadership and Company purpose
The Board is collectively responsible to the Company’s
shareholders for promoting the long-term sustainable success of
the Company, generating value for shareholders and
contributing to wider society through the fundamental role it
plays in the functioning of an orderly society through the
services it provides. It oversees and agrees the Group’s purpose,
values and strategy at its annual strategy review and at each
Board meeting, and ensures that necessary resources are
available, and that the appropriate risk management controls
and processes are in place by regular review of such matters at
Board and Committee meetings.
The Board is mindful of the need to create value whilst taking
account of the wider interests of other stakeholders and, when
taking decisions, balances the impact on suppliers,
communities, the environment, employees, and customers with
the objective of securing long-term sustainable growth for
shareholders. New business and the renewal of existing
contracts above an agreed level is considered at divisional level
and then by the Investment Committee, prior to review by the
Board which is undertaken having regard to the Company’s four
principle values of Trust, Care, Innovation and Pride, and the
impact on its workforce. The ways in which the interests of the
Company’s stakeholders and the matters set out in section 172
of the Companies Act 2006 have been considered are set out on
pages 96 to 100 and the details of the manner in which
engagement with the workforce is achieved is set out on page
81. The Board is conscious of the benefits of aligning its culture
with its strategy and is further embedding this through its
Corporate Responsibility Framework which has recently been
revised to reflect the progress made by the Company in recent
years through its Corporate Renewal Programme.
Regular engagement is sought with major shareholders,
primarily through executive management, following the
announcement of the full and half year results, and also through
the Chairman, who is available to major shareholders, and the
Chair of the Remuneration Committee who consults with
shareholders when appropriate to do so regarding remuneration
matters. As set out on page 81, the Company has established
“Employee Voice” to ensure employee engagement and
employees can raise concerns through the Company’s ethics hot
line, Speak Up.
Potential and actual conflicts of interest are reviewed at each
Board meeting.
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The Audit Committee annually reviews the external auditor’s
independence, the effectiveness of the external audit and the
provision of non-audit services. It also reviews and monitors the
effectiveness of the Company’s internal auditor.
5. Remuneration
The Remuneration Committee has delegated responsibility for
determining the policy on Executive Director remuneration,
which it does taking account of workforce remuneration and the
alignment of incentives and rewards with culture.
The Company’s share incentive schemes are designed to
promote long term shareholdings for Executive Directors to
provide alignment with shareholders’ interests.
Full details of how the Company has complied with the
principles and provisions of the Code as they relate to
remuneration are contained in the Directors’ Remuneration
Report on pages 124 to 148.
3. Composition, success and evaluation
The Chairman regularly 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.
The Nomination Committee is chaired by the Company’s
Chairman and comprises a majority of Non-Executive Directors.
It reviews succession for both Board and senior management
positions and, with the assistance of an external search
company, leads the process for Board appointments and makes
recommendations to the Board. All appointments are made on
merit against objective criteria including the promotion of
diversity of gender and ethnic and social background.
All Directors submit themselves for re-election at each annual
general meeting.
Following the annual evaluation of the Board and its
Committees, which is externally facilitated every three years, the
recommendations are considered by the Board and addressed
by the Chairman with the assistance of the Company Secretary.
Annual appraisals of Non-Executive Directors, including the
identification of training needs, are undertaken by the Chairman
to ensure continued effective contributions.
4. Audit, risk and internal control
The Annual Report and Accounts includes a statement of the
Directors’ responsibilities regarding the financial statements,
including the status of the Company as a going concern, with an
explanation of the Group’s strategy and business model
together with the relevant risks and performance metrics.
A further statement confirms 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 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.
The Board, through the Group Risk and Audit Committees, has
carried out a robust assessment of the emerging and principal
risks facing the Company, including those which would threaten
its business model, future performance, solvency or liquidity.
Further details about these risks and how they are managed and
mitigated are included in this Annual Report and Accounts
together with the Viability Statement which 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.
Annual Report and Accounts 2019
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Remuneration Report
Report on Directors’ remuneration
Remuneration Committee members
Lynne Peacock (Chair)
Kirsty Bashforth
Sir Roy Gardner
John Rishton
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 2019. Our 2019 Report sets out how
the Directors’ Remuneration Policy (the Policy), approved at the
2018 AGM, has been implemented for 2019 and how the Policy
will be implemented in 2020.
Our current Remuneration Policy was approved at the AGM in
May 2018 with high levels of support. Under this Policy we
simplified our long-term incentive arrangements, which also
resulted in a significant reduction in the remuneration
opportunity for both the CEO and CFO. With these changes
the maximum variable pay opportunity for the CEO reduced
from 500% of salary to 375%, and from 435% to 330% of salary
for the CFO. No changes to the Policy are proposed for the
coming year although we are making changes to the
implementation of the Policy in connection with the pension
for Executive Directors, the details for which we have set out in
the Implementation of Policy in 2020 on page 133 of this report.
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.
Another year of strong business performance
As set out in the Chairman’s Statement and Chief Executive’s
Review, 2019 saw a second successive year of strong growth in
revenue and profits, with revenue growth at 15% and a 29%
increase in Underlying Trading Profit (UTP) achieved for 2019. As
an organisation, we have made significant progress since 2014
when our current Executive Directors were appointed. Our CEO
and CFO have successfully led the Company through a major
transformation, delivering on the promises made to investors
back in 2014, which has resulted in the Company returning to
growth. The scale of the transformation achieved should not be
underestimated and while there is still further work to do to
deliver further savings and cost efficiencies we are pleased to
report the growth phase of our corporate strategy continues to
build on the green shoots seen in 2018. This is reflected in the
resumption of a dividend which, subject to approval by
shareholders at the Annual General Meeting, is being
recommended in respect of 2019.
Confidence in Serco and our leadership, as demonstrated
through the support of our customers, colleagues and
shareholders, is reflected in the growth achieved in 2019 across
the business. The year saw record order intake of £14.1bn, up
from £2.9bn in 2018 (the third year in a row in which order intake
has exceeded revenues); with key contract wins including the
AASC asylum accommodation and support contract in the UK
(the largest in Serco history valued at £1.9bn), and the NGHS
defence garrison healthcare services contract in Australia. A
string of successes has also been seen in contract extensions
and re-bids, including the Prisoner Escort and Custody Services
contract in the UK, and the extension of the Australian
immigration services contract. We also added to our business
through the significant acquisition and integration of the Naval
Systems Business Unit in the US, which complements and
significantly expands our capabilities in the defence space.
Summary of key decisions taken in 2019
• Confirmation of 2019 vesting of the 2016 Performance
Share Plan (PSP) awards which vested at 79.67% and the
2016 Deferred Bonus Plan (DBP) Matching Share
Awards which vested in full.
• Assessment of performance for the 2019 Annual Bonus.
It was determined that the CEO should receive a bonus
of 94.0% of maximum and the CFO a bonus of 93.3%
of maximum.
• Assessment of performance for the 2017 PSP and 2017
DBP Awards for which the performance periods ended
in FY19 and are due to vest in 2020.
• Determination of awards granted under the LTIP in
June 2019.
• Determination of a nil salary increase for the CEO and
a 2.5% increase for the CFO in 2020.
• Adjustment to the performance targets for in-flight
long term incentives to maintain the appropriate
performance “difficulty” following a significant
acquisition within the Group.
Corporate changes
As noted above, the Group completed a significant acquisition
of the Naval Systems Business Unit (NSBU) from Alion Science &
Technology Corporation on 1 August 2019. This was a material
acquisition for the Group, funded through an issue of new
shares (equal to about 10% of the Company’s issued share
capital) and new debt. The acquisition is anticipated to
generate a significant uplift to trading profit; as stated at the
time of acquisition, in 2020 NSBU is expected to contribute
Underlying Trading Profit of approximately $27m (£20m).
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Serco Group plc Our in-flight 2017, 2018 and 2019 long-term incentive awards
are, in part, assessed on EPS and ROIC performance. The
targets for these awards were set prior to this acquisition.
Analysis of the impact of the NSBU acquisition has shown this
has resulted in a small increase in EPS (making the targets
slightly easier to achieve) and will have a dilutive effect on ROIC
(making these targets slightly harder). To ensure the EPS and
ROIC performance conditions remain appropriate, accurately
reflect the true performance of the Group, and maintain the
performance “difficulty” required for vesting as originally
intended, in line with the discretion available under the
approved Remuneration Policy the Committee approved the
following adjustments:
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Award
2017 PSP
2018 PSP
2019 LTIP
Performance measures
and weightings
33.3% EPS
33.3% ROIC
33.3% TSR
28.3% EPS
28.3% ROIC
28.3% TSR
7.5% Employee Engagement
7.5% Order Book
28.3% EPS
28.3% ROIC
28.3% TSR
7.5% Employee Engagement
7.5% Order Book
Original EPS and
ROIC target range
EPS 13.5p – 16.5p
ROIC 8.4% – 10.2%
Adjusted EPS and
ROIC target range
EPS 13.63p – 16.63p
ROIC 8.2% – 10%
Variance
EPS +0.13p
ROIC -0.2%
EPS 13.7p – 16.7p
ROIC 9.9% – 12.2%
EPS 13.98p – 16.98p
ROIC 9.6% – 11.9%
EPS +0.28p
ROIC -0.3%
EPS 19p – 23.2p
ROIC 15.6% – 19%
EPS 19.69p – 23.89p
ROIC 15.2% – 18.6%
EPS +0.69p
ROIC -0.4%
For the avoidance of doubt, no changes will be made to the TSR, Employee Engagement or Order Book targets where applicable.
The corresponding EPS targets applicable to the legacy DBP awards are also adjusted in line with the EPS adjustments above.
In line with the approved Policy, the Committee does, and will continue to, consider the wider performance of the Group in
determining the overall vesting of each award.
Remuneration linked to delivery of the strategic plan – 2019 variable pay outcomes
Overall, the Company’s performance has delivered the incentive outcomes in 2019 summarised below.
KPI
Trading Profit
Revenue
Free Cash Flow
Relative TSR
Average ROIC
Aggregate EPS
Plan
Annual Bonus
Annual Bonus
Annual Bonus
2017 PSP
2017 PSP
2017 PSP & 2017 DBP
2019 performance
2019 incentive outcome
£116.7m 1
£3,103.0m 1
£67.9m 1
Ranked 119/176
12.9%
17.11p
Note:
1. Trading Profit, Revenue and Free Cash Flow adjusted for bonus purposes. At constant currency.
Below Threshold
Between Threshold and Target
Between Target and Max
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. Assurances are sought from the Audit
Committee (with regards to financial performance) as well as the
Risk and Corporate Responsibility Committees as required to
support these decisions. Following the conclusion of the SFO
investigation and the entry in July 2019 by Serco Geografix
Limited, a subsidiary of Serco Group plc, into a DPA with the SFO
in relation to offences committed between 2010 and 2013 and
Serco Group plc entering into an Undertaking with the SFO,
the Committee is satisfied that no actions were required in
connection with the pay review or incentive outcomes determined
for the current executives. Nobody who sat on the Board of Serco
Group plc, or who was part of the Executive Management Team
at the time the issues arose, works for Serco today. Furthermore, it
is the hard work and determination of our current Executive Team
and the changes that have been undertaken in the Group that
enabled the Group to reach the agreement for Serco Geografix
Limited to enter a DPA with the SFO. In determining the incentive
outcomes for 2019 no discretion was applied by the Committee.
The Committee will continue to monitor oversight by the other
Committees and the Board of compliance with obligations
agreed as part of the DPA and Undertaking, and take this into
consideration in determining any future pay decisions.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Remuneration Report continued
Report on Directors’ remuneration continued
Annual bonus payments are based on a combination of financial
targets (a mix of trading profit, free cash flow and revenue with
an overall 70% weighting) and personal objectives linked to the
delivery of the Group’s operational and strategic priorities (30%)
including targets relating to HSE and employee engagement
which are both critical to the success of our organisation. In
addition, the Committee will consider the appropriateness of
broadening the use of ESG metrics within the incentive
arrangements during the forthcoming Policy review.
The strong financial performance in the year saw significant
increases to trading profit in 2019 with trading profit for bonus
purposes assessed to be £116.7m, and a second year of positive
Free Cash Flow of £62.0m. For the first time since 2014 we are
also pleased to confirm strong revenue performance, with
revenues for 2019 at £3.248bn representing 15% total growth of
which around 8% is organic. The Committee also considered
the performance of the Executive Directors against their
personal objectives. Taking into consideration aggregate
performance against all measures, and the broader
performance of the Company, it was agreed that bonuses of
94.0% and 93.3% of maximum should be awarded to the CEO
and CFO respectively. These bonuses, to the extent they
exceed 100% of salary for the relevant Director, are subject to
mandatory deferral into shares for three years, therefore 39.2%
of the bonus awarded to the CEO, and 30.8% of the bonus
awarded to the CFO, will be deferred. Full details of the annual
bonus outcomes are set out on pages 134 to 136.
current 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 significant experience they both brought to the roles.
Given the circumstances at the time, and their positions as
experienced leaders of a FTSE100 business, the Committee
recognised that it would have to pay highly (relative to FTSE250
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.
In 2018, the third Executive Director (the Chief Operating
Officer) departed the business and a decision was made to not
replace this role; the duties and responsibilities were instead
split between the CEO, CFO and other Executive Committee
members. The current base salary for the CEO was set on
appointment and has been unchanged over the last five years.
The CFO has received one, workforce aligned, 2% increase in
2019 in recognition of his additional duties since the departure
of the COO and his contribution to the transformation of
the business.
Recognising the significant contribution he has made to the
Company, particularly in the context of his wider role following
the departure of the COO, the Committee has decided to
increase the base salary of the CFO by 2.5%, in line with the
increase for the wider workforce. No increase to base salary is
proposed for the CEO, for the sixth successive year.
The successful delivery of the corporate strategy over the last
few years is also seen in the strong performance against the
targets for the long-term incentives. The TSR performance
period in respect of this tranche of the 2016 PSP awards (which
vested in 2019) ended in 2019 and, due to good performance
over the relevant period, the TSR performance was above
median relative to our peers. In light of this performance the
Committee determined that 39% of this tranche should vest in
line with the performance condition. This resulted in an overall
vesting outcome for the 2016 PSP awards of 79.67% when
combined with the EPS and ROIC tranches which were
determined to vest in full as disclosed in our 2018
Remuneration Report.
The performance period for the 2017 PSP awards ended in 2019.
Despite the strong performance of the group, the TSR
performance did not reach the threshold for vesting. However,
the maximum EPS and ROIC targets were exceeded.
Recognising the achievements made by the Executive and
senior management teams in transforming the business and
delivering a return to growth, the Committee determined an
overall vesting outcome of 66.67% of maximum for the 2017 PSP
award. These awards will vest in 2020. The long-term incentive
outcomes are discussed further on pages 136 to 138.
Implementation of the approved remuneration
policy in 2019
Base salaries
In reviewing the base salaries of the Executive Directors, the
Committee takes into consideration a number of factors which
follow the same pay review principles as applied to all
colleagues across the Group. These include consideration of
the individual’s performance in their role, external market data
and the wider economic environment. Base salaries for our
Pensions
The Committee is very aware of the ongoing debate on pay
fairness and in particular the focus on Executive pension
opportunities. We are committed to aligning our pension
opportunities for our Executive Directors with those available to
our wider workforce. Our approved Remuneration Policy states
that, for new hires, the pension opportunity will be up to 20% of
salary. We wish to clarify that, should the event arise prior to a
new Policy being approved at the 2021 AGM, the pension
offered to any new Executive Director will be aligned to that of
our wider UK workforce.
In addition, it has been agreed with the current CEO and CFO
that their pension opportunities will be reduced by 10%, to 20%
of salary with effect from 1 April 2020, with a further reduction
to an amount commensurate with the opportunity available to
the wider workforce to take effect from 1 January 2023. Further
details may be found on page 133.
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. The Committee is aware of the importance of
health, safety and environmental risks associated with our
organisation and ensures that an appropriate blend of targets,
including those falling within these areas, are set each year. In
line with the approved Remuneration Policy, any bonus earned
over 100% of salary will be subject to compulsory deferral into
shares for three years.
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Serco Group plc
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LTIP
In line with the approved Remuneration Policy, LTIP awards will
be granted to Executive Directors which will be subject to a
combination of financial (85% weighting) and strategic (15%
weighting) measures. The financial targets will be set in relation
to EPS, ROIC and relative TSR (with equal weighting) as these
have been identified as key measures of the longer-term
delivery of our strategy, with relative TSR also providing a
measure aligned to the experience of you, our shareholders.
The strategic performance targets will be set against our Order
Book and Employee Engagement (equally weighted) which are
considered absolutely critical to the success of our organisation.
Targets are set taking into consideration market conditions
and consensus.
Our people and culture
As set out in our 2019 People Report (www.serco.com/about/
people-report), and echoed throughout this Annual Report, we
are a people business with a team of more than 50,000 people
responsible for delivering essential public services around the
world. Our people are therefore critical to the success of Serco.
As a Committee we have always been mindful of the
remuneration and working practices throughout the wider
Group and welcomed the Financial Reporting Council’s
revisions to the UK Corporate Governance Code encompassing
greater stakeholder focus. Throughout the year, and particularly
when decisions are being made on remuneration for
Executives, the Committee discuss oversight of key people
policy areas including diversity and gender pay reporting,
employee engagement and feedback from our Employee Voice
initiatives, together with the wider reward frameworks for
our people.
All Non-Executive Directors undertake contract visits during
the year to see first-hand the difference our colleagues make,
speaking directly with front-line colleagues across the business.
In addition, Kirsty Bashforth (who sits on the Remuneration
Committee) is the Non-Executive Director leading on our
Employee Voice initiatives at Board level including Colleague
ConneXions. Kirsty is supported by the Group HR Director and
our Colleague Communications Manager to ensure a dialogue
between the Board and all our colleagues across our
geographically diverse organisation. We utilise a number of
mechanisms to ensure every colleague is heard, and hears back
from the Board, and we were particularly pleased to have
received almost 50,000 individual comments from colleagues
via our annual Viewpoint employee survey, 13,467 of which were
specifically under “Tell the Board”. The Committee receives
regular updates from the Employee Voice initiatives to further
inform their decision-making.
We are confident that our remuneration policy for Directors,
and the remuneration of the Executive Committee, is strongly
aligned to our corporate strategy and our values of Trust, Care,
Innovation and Pride. This alignment will be reconfirmed as we
review our Policy over the coming year in anticipation of tabling
a new Directors’ Remuneration Policy for shareholders to
consider at the 2021 AGM.
Diversity
As reported in our 2019 Gender Pay Gap Report (www.serco.
com/genderpayreport) our 2019 consolidated UK median
gender pay gap is 10.2%, representing a reduction from the
11.9% and 12.9% we reported in 2018 and 2017 respectively.
Our gender pay gap is a measure of our wider talent gap and is
primarily caused by having fewer women than men in senior
leader positions, and fewer women in specialist and traditionally
male dominated roles (such as Prison Custody Officers and
engineers) – roles which tend to be more highly paid. We
continue to make good progress in these areas with a focus on
improving diversity across our whole organisation, of which
gender diversity is just one part.
Stakeholder engagement
The Remuneration Committee is keen to hear the views of all
stakeholders and as such, in addition to our engagement with
our colleagues within the business as summarised above, the
Committee regularly seeks input from shareholders in
connection with both the design of the Remuneration Policy
and the implementation of that Policy. In particular, we
contacted our top shareholders (covering approximately 77% of
the ownership of the Company) to share updates and invite
feedback on how we had implemented the approved Policy
during 2019, and our planned implementation in 2020. The
details of the Policy implementation in 2019, and the proposals
for 2020, are shared in this report in more detail. The outcome
of this engagement was that shareholders were supportive of
the Committee’s approach. In addition to the direct
engagement with shareholders, 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. We will be seeking further
consultation with our stakeholders as we review our Policy
during the course of 2020.
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 2019. The Committee believes that the Policy
has, and in 2020 will continue to, ensure that the executive
management team are rewarded for and incentivised to achieve
the strategic goals of the Company as we continue to embed
the Growth phase of the corporate plan. In the coming year, we
will review the Policy as the Company looks ahead to ensure
that our remuneration policies continue to robustly align to our
forward looking strategy, the interests of our shareholders and
colleagues, and reflects our culture while delivering good
corporate governance on remuneration practices.
Lynne Peacock
Chair of the Remuneration Committee
25 February 2020
Annual Report and Accounts 2019
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Remuneration Report continued
This remuneration report has been prepared in accordance with
the requirements of the Companies Act 2006 and the Large and
Medium-sized Companies and Groups (Accounts and Reports)
Regulations 2008 (as amended) (the “Regulations”). The report
also meets the relevant requirements of the Listing Rules of the
Financial Conduct Authority and describes how the Board has
complied with the principles and provisions of the UK
Corporate Governance Code relating to remuneration matters.
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 the 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 Company, 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
Lianne Dance
David Eveleigh
Stuart Haydon
Position
CEO
Group HR Director
Group Reward Director
Comments
Attends by invitation
Attends as an executive responsible for
advising on the People Strategy
Attends as an executive responsible for
advising on the Remuneration Policy
Group General Counsel & Company Secretary
Interim Deputy Company Secretary
Attends as the secretary to the Committee
PricewaterhouseCoopers LLP
External advisers to the Remuneration
Committee
Attend when required as the independent
advisers to the Committee
Note:
No person is present during any discussion relating to their own remuneration arrangements.
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Summary of the Committee’s activities during 2019
Meeting
Items covered
February
Considered feedback from the shareholder consultation on the implementation of the Remuneration Policy;
considered performance against 2018 targets and confirmation of 2018 bonus payable; reviewed and approved
the 2018 Remuneration Report; approved the performance framework for the 2019 bonus plan; reviewed and
adopted the 2019 Deferred Bonus Plan (a discretionary plan for below Board participants only) and revised Equity
Settled Bonus Plan rules; reviewed and approved new Long-Term Incentive Plan rules for approval by
shareholders; reviewed achievement of performance conditions for the LTI vesting in respect of awards granted
in 2014 and 2016.
May
Received a market practice and corporate governance update regarding executive remuneration; considered
AGM voting outcomes; approved the framework for retention awards to be granted in connection with a major
acquisition; set performance targets and objectives for 2019; and considered the forward agenda and timing of
meetings for 2019.
September Received a market practice and corporate governance update regarding executive remuneration; received an
update on the Employee Voice programme and wider workforce demographics, pay and reward, culture and
engagement; received the 2019 gender pay gap figures; considered the first draft of the 2019 Remuneration
Report; received an update on performance in respect of in-flight share awards; considered and approved the
approach to 2019/20 executive pay review; reviewed and approved revised Terms of Reference; considered the
forward looking programme of work for 2020.
December
Considered the Company’s 2019 Gender Pay Gap report; received an upate on the Employee Voice programme
and wider workforce demographics, pay and reward, culture and engagement to inform decision-making;
considered a further draft of the 2019 Remuneration Report; agreed the approach to shareholder engagement
in respect of the 2019 reporting; considered and approved pay review proposals for the Executive Directors and
Executive Committee members; considered and approved the approach to Executive Director pensions;
considered and approved the annual bonus structure (including performance framework principles) and
long-term incentive grant policy to apply in 2020 for Executive Directors and the Executive Committee members;
considered and approved adjustments to LTI targets for in-flight awards in respect of the 2019
NSBU acquisition; received an update on performance in respect of in-flight share awards.
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;
• review of incentives and pensions;
•
informing the Committee on market practice and
governance issues; and
• assistance with general and technical reward queries.
Fees paid to PwC as advisers to the Committee during the year
totalled £24,700. 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 are providing robust and professional advice. In the course
of its deliberations, the Committee considers the views of the
Chief Executive on the remuneration and performance of the
other members of the Executive Committee.
Annual Report and Accounts 2019
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Remuneration Report continued
At a glance: implementation of Remuneration Policy for 2020
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 2020 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
Note:
Chart is illustrative and is not to scale. Details of Executive Director remuneration for 2020 may be found on page 132. A summary of the Executive
Remuneration Policy that was approved by shareholders at the 2018 AGM can be found on pages 144 to 148, 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 2020
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 2020 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.
Financial
Trading Profit
Revenue
Free Cash Flow
Relative TSR
Average ROIC
Aggregate EPS
Core KPIs
Non-financial
Annual bonus
PSP
In-year non-financial objectives
Growth-aligned strategic objectives 1
Note:
1. For grants to be made in 2020 these will be based on Employee Engagement and Order Book targets (with equal weighting).
The following charts illustrate the value that may be delivered to Executive Directors under different performance scenarios for the
year ending 31 December 2020.
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Rupert Soames (£000s)
£6000
£5000
£4000
£3000
£2000
£1000
£0
5,103
17%
33%
4,253
40%
35%
29%
25%
22%
2,659
32%
28%
40%
1,065
100%
Minimum
Target
Maximum
Maximum
(including share
price appreciation)
Angus Cockburn (£000s)
3,500
3,000
2,500
2,000
1,500
1,000
500
0
2,402
38%
2,860
16%
32%
34%
28%
28%
24%
1,540
30%
26%
44%
677
100%
Minimum
Target
Maximum
Maximum
(including share
price appreciation)
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
The scenarios in the above graphs are defined as follows:
• Fixed elements of remuneration:
– Base salary as applicable from 1 April 2020.
– Estimated value of benefits to be provided in 2020 in line
with the Remuneration Policy (based on the value of
actual benefits provided in 2019).
– Pension contribution/cash supplement equal to 20% of
salary as applicable from 1 April 2020.
• 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 2019
131
Financial StatementsCorporate GovernanceSerco Group plc
Remuneration Report continued
Implementation of Remuneration Policy for 2020 – Executive Directors
Element
CEO (Rupert Soames)
CFO (Angus Cockburn)
Base salary from
1 April 2020
£850,000
£522,750
Pension from
1 April 2020 1
Annual bonus
20% of salary
20% of salary
Max 175% of salary
On-target 87.5% of salary
Max 155% of salary
On-target 77.5% of salary
Compulsory three-year deferral into Serco shares of bonus over 100% of salary
Annual bonus measures 2
28% Trading Profit
28% Cash Flow
14% Revenue 30% in year non-financial objectives
70% financial
30% non-financial
Performance Share Plan
(PSP)
PSP measures 3
Assessed over the
three-year performance
period
Maximum 200% of salary
Maximum 175% of salary
Awards granted under the LTIP in 2020 will be subject to Group performance over a three-year
period ending 31 December 2022.
For 2020, 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 2020 the remaining 15% will be based on Strategic Objectives – performance targets for the
awards granted in 2020 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.
Notes:
1. As the first step towards aligning the pension opportunities for the incumbent Executive Directors with that for the wider workforce, with effect from 1
April 2020 the pension opportunity for the incumbent CEO and CFO will be reduced from 30% to 20% of salary. The pension contribution rate for any new
Directors will be in line with the pension for the wider UK workforce. Further commentary regarding the pension opportunities available to Executive
Directors is set out on page 133.
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 to take into consideration market consensus
and forecast following the announcement of the prior year’s financial results to ensure that targets are sufficiently stretching 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.
132
Annual Report and Accounts 2019
Serco Group plc i
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Executive Directors’ pension opportunities
The Committee is mindful that the pension opportunities for
our incumbent Executive Directors are high, relative to our
wider workforce, and is committed to aligning these with the
opportunity available to the wider workforce. The pension
opportunities were set on the appointment of our Executive
Directors, to provide a market competitive package to secure
their employment (and at the same level as received at their
former employer, Aggreko plc) and were reflective of the size of
the Company at that time.
We note the recent guidance from both the organisations
representing investors, and key investors themselves,
regarding the opportunities available to incumbent directors.
Our Executive Directors are also mindful of the pension
opportunities available to the wider workforce and, with their
agreement, in order to comply with the recent guidance, the
Committee will implement a two-step reduction in their
pension opportunities so that by 1 January 2023 their pensions
will be broadly aligned with the wider workforce opportunity at
around 10%.
The first step will be a significant reduction from the current
opportunity of 30% of salary to 20% of salary to take place in
2020. The second step will be a further reduction from 20% to
around 10%, to take effect from 1 January 2023. Any new
appointment at Executive Director level between now and 1
January 2023 will be at around 10%. The Policy will be formally
updated to reflect this when a new Policy is presented to
shareholders at the 2021 AGM.
With a very diverse workforce employed in a variety of pension
arrangements (including defined benefit and defined
contribution schemes) we are also continuing to review the
arrangements for our wider workforce and we will report on this
work as appropriate.
Implementation of Remuneration Policy for 2020
– Non-Executive Directors
The Non-Executive Director fees were last changed with effect
from 1 January 2019. Following a review of the Non-Executive
Director fees it was agreed that these fees should remain
unchanged for 2020. In line with the approved Non-Executive
Directors’ Remuneration Policy, the fees for the period from 1
January 2020 will be as follows:
Element – Annual Board and Committee fees
Chairman
Senior Independent Director
Board fees
Chairmanship of a Board Committee (Audit, Corporate Responsibility, Group Risk
or Remuneration)
Membership of a Board Committee (Audit, Corporate Responsibility, Group Risk
or Remuneration)
Base fee to
apply from 1
January 2020
£
Base fee
1 January 2019
£
Change
£
250,000
250,000
No change
15,000
53,000
15,000
No change
53,000
No change
12,500
12,500
No change
5,000
5,000
No change
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 2019.
Director
Sir Roy Gardner
Rupert Soames
Angus Cockburn
Kirsty Bashforth
Eric Born
Ian El-Mokadem
Rachel Lomax
Lynne Peacock
John Rishton
Date of appointment to the Board
1 June 2015
8 May 2014
27 October 2014
15 September 2017
1 January 2019
1 July 2017
3 March 2014
1 July 2017
13 September 2016
Each Director is subject to election at the first AGM following their appointment and re-election at each subsequent AGM.
Annual Report and Accounts 2019
133
Financial StatementsCorporate GovernanceSerco Group plc
Remuneration Report continued
Annual Report on Remuneration
The implementation of the Remuneration Policy
for year ended 31 December 2019
The Remuneration Policy applied for the year ended 31
December 2019 was consistent with the policy approved
by shareholders at the AGM in 2018. We have not deviated
from the approved Policy in respect of any payments made
during 2019.
All figures in £
Salary 1
Taxable benefits 2
Pension 3
Total Fixed Remuneration
Bonus 4
Long-Term Incentives 5, 6
Total Variable Remuneration
Total
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 2019 for each Executive
Director, together with comparative figures for 2018.
Details of NEDs’ fees are set out in the next section.
Rupert Soames
Angus Cockburn
2019
850,000
44,197
255,000
2018
850,000
38,865
255,000
2019
507,500
49,831
152,250
2018
500,000
53,889
150,000
1,149,197
1,143,865
709,581
703,889
1,398,250
3,153,530
1,146,863
2,885,037
737,141
1,610,280
585,900
1,477,873
4,551,780
4,031,900
2,347,421
2,063,773
5,700,977
5,175,765
3,057,002
2,767,622
Notes:
1. As set out in our 2018 DRR, Angus Cockburn’s salary was increased to £510,000 p.a. with effect from 1 April 2019.
2. 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. The taxable benefits for 2019 includes an
individual benefit value of £25,744 in respect of Rupert Soames’ company car in the year.
3. 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.
4. Performance bonuses earned in the period under review and paid in the following financial year. For 2019 this figure includes £548,250 of Rupert Soames’
and £227,141 of Angus Cockburn’s 2019 bonuses which will be subject to mandatory deferral into Serco shares for a three-year period at the point the
bonuses are paid in 2020.
5. This is the estimated or actual value of Long-Term Incentives for which the performance period ended in the year. Note this includes sums in connection
with the legacy Deferred Bonus Plan which the Executive Directors can no longer participate in. Further details are provided on page 136 onwards.
6. The Long-Term Incentive values reported for 2018 have been restated to reflect the actual share price at the relevant vest dates for the awards (in respect
of the 2016 PSP Awards which vested on 8 April 2019: £1.2423, and in respect of the legacy 2016 DBP Awards which vested on 3 May 2019: £1.2497).
Variable pay outcomes (audited information)
Performance-related annual bonus
For 2019, 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 2019 annual
bonus were subject to an Underlying Trading Profit underpin
(after adjustment for in-year Onerous Contract Provisions (OCP)
items) of £94.6m 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
Note:
1. At constant currency.
Weighting
for 2019
(% maximum
bonus
opportunity)
14%
28%
28%
Threshold
target
(£m)
£2,958
£12.9
£94.6
Target
(£m)
£3,000
£27.7
£99.3
Maximum
target
(£m)
£3,050
£42.5
£108.7
Actual
performance1
(£m)
£3,103m
£67.9m
£116.7m
Achievement
against measure
(% maximum
opportunity for
this measure)
100%
100%
100%
134
Annual Report and Accounts 2019
Serco Group plc Non-financial performance
Weighting for 2019 (% maximum opportunity)
30%
Achievement against measure (% maximum opportunity for this measure)
Overall 2019 bonus outcome
Total bonus payable as % of maximum
Bonus opportunity as % of salary
Bonus amount achieved as % of salary
Bonus amount earned1
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Rupert Soames
Angus Cockburn
80.0%
77.5%
Rupert Soames
Angus Cockburn
94.0%
175%
164.5%
£1,398,250
93.3%
155%
144.5%
£737,141
Note:
1. Bonuses earned over 100% of salary are subject to mandatory deferral into Serco shares for three years.
Revenue of £3,248.4m has been reduced by -£42.2m to convert to 2018 constant currency, so that it is consistent with the targets
set at the beginning of the year, and a further -£103.1m to remove the results of the Alion acquisition (at 2018 constant currency),
resulting in Revenue for bonus purposes of £3,103.1m.
Free Cash Flow of £62.0m has been adjusted to exclude the capital element of finance leases of +£5.9m so that it is consistent with
the definition of Free Cash Flow when the targets were set at the beginning of the year, giving Free Cash Flow for bonus purposes
of £67.9m.
Trading Profit of £133.4m is adjusted by the Committee to arrive at a figure for Trading Profit for bonus purposes; shareholders
were consulted on the principles behind these adjustments in early 2015, and the bonus outcome for both 2015, 2016, 2017 and
2018 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 2019 in a
consistent manner to the principles established in 2015, 2016, 2017 and 2018.
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 -£4.1m decrease. The Committee then considers items to properly reflect management effort and in-year
operational performance. The Committee has concluded that a total of -£12.6m should be deducted from Trading Profit in
constant currency to arrive at a calculation of Trading Profit for bonus purposes in 2019; this compares with -£15.2m which was
deducted from Trading Profit in 2018.
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, 2018 and 2019.
£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
2019
133.4
(4.1)
129.3
(12.6)
116.7
116.5
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 2019
135
Financial StatementsCorporate GovernanceSerco Group plc
Remuneration Report continued
Rupert Soames
Rupert’s objectives included:
•
Improving Business Development
performance to deliver a reported pipeline
of at least £5.0bn.
• Lead the execution and subsequent delivery
of acquisitions.
• Supporting the achievement of a Group
Engagement Score of at least 66.
• Maintaining and strengthening the
reputation of Serco in the investment
community and in the wider world.
Angus Cockburn
Angus’s objectives included:
•
Improving Business Development
performance to deliver a reported pipeline
of at least £5.0bn.
• Bedding down and consolidating the
Finance Transformation, Purchase
Transformation and SAP migration.
• Delivery of financing required to support
acquisitions.
• Maintaining the reputation of Serco in the
investment community.
The Committee deemed performance to be very strong overall. Rupert has
continued to show highly effective and visible leadership throughout 2019,
and over the course of the last 12 months has delivered another year of strong
performance in line with the plan set out in 2015. Underlying Trading Profit
increased by 29% and 2019 saw revenue growth of 15% which is the first time
revenue has grown in 5 years. The year saw record order intake of £5.4bn and
book-to-bill at its highest level at 170%. Over 40% of the order intake was new
business wins which were coupled with successful rebids and extensions.
Notable wins include the UK asylum accommodation contracts and the
prisoner escorting contracts. In addition, in 2019, we successfully identified
and completed a material acquisition for the Group of NSBU, which has
significantly added to the scale and capability of our defence business. This
was achieved alongside the swift integration of the Carillion Health contracts
and the turnaround of the BTP acquisition, both acquired in 2018. Strong
performance has also been seen in other areas with the Group employee
engagement score increasing to 71 points as measured by our annual
employee engagement survey. Rupert is key to the reputation of Serco with
investors and the wider community on a global basis. The achievement of
new business wins in excess of £5bn is testament to the positive customer
perception of Serco. Based on Rupert’s achievement the Committee has
awarded 80% of maximum performance for the non-financial element relating
to his objectives.
Overall, the Committee deemed Angus’s performance to be very strong
against his objectives. He has successfully delivered against financial targets
and City expectations, culminating in the confidence to resume paying
dividends for the first time in 6 years. Angus has made a significant
contribution to the delivery of the strong performance in 2019 with a further
year of significant profit growth, revenue growth of 15% (for the first time in 5
years) and a book-to-bill ratio of 170% with order intake of over £5bn.
Adjusted net debt of £215m results in leverage broadly unchanged on last
year and at the lower end of our normal target range of 1-2x. Angus has
overseen the successful consolidation of the Global Finance Transformation
from which we are now realising the benefits of significantly improved
systems and processes. He has also delivered on the procurement
transformation and supported the successful SAP migration. The NSBU
acquisition was successfully completed in August 2019 and mainly funded
through an Equity Placing which was very well supported by our institutional
shareholders. The reputation of Serco within the wider investment community
is now much stronger than it has been in the past 5 years as is evident in our
share price performance and reflected in increased market capitalisation to
c.£2bn, and our ability to re-finance as seen in the successful Equity Placing
for the NSBU acquisition. Based on Angus’s achievement the Committee has
awarded 77.5% of maximum performance for the non-financial element
relating to his objectives.
Long-term incentives
The long-term incentives amount included in the 2019 single
total figure of remuneration includes the following Performance
Share Plan and legacy Deferred Bonus Plan Awards.
Performance share plan (PSP)
A number of Performance Share Plan awards are included in the
2019 single figure of remuneration for the Executive Directors:
• the TSR element of the 2016 PSP awards (33.3% of the
total award) with a performance period ending on the
announcement of the Company’s 2018 results on
21 February 2019; and
• all elements of the 2017 PSP awards which are subject
to TSR, EPS and ROIC performance in the period to
31 December 2019.
136
Annual Report and Accounts 2019
Serco Group plc The remainder of the 2016 PSP awards were subject to EPS
(33.3%) and ROIC (33.3%) performance conditions for which the
performance periods ended 31 December 2018. These tranches
were determined to vest in full, as disclosed in the 2018 DRR
and the single figure table for 2018.
the TSR, EPS and ROIC tranches as a whole and the
performance of the wider Group). The overall vesting of the 2017
PSP Awards was determined to be 66.67%. The 2016 and 2017
PSP awards were granted in the form of nominal cost options.
The overall vesting for the 2016 PSP Awards was determined to
be 79.67% (taking into consideration the performance against
The performance assessment and vesting outcomes for the 2016
PSP TSR tranche, and all tranches of the 2017 PSP award,
are as follows.
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Performance condition and
relative weighting
Threshold6 –
25% vesting
Performance measured
2016
PSP Relative TSR1 (1/3)
2017
PSP Relative TSR2 (1/3)
Median
ranking
Median
Rank: 84/184 Between median and upper quartile
ranking
Rank: 119/176 Below median
2017
PSP Aggregate EPS3,4 (1/3)
2017
PSP
Average pre-tax ROIC3,5
(1/3)
13.63p
8.2%
17.11p
12.9%
Result
vesting
(% of
maximum)
39%
0%
Maximum – 100%
Upper Quartile
ranking
Upper Quartile
ranking
16.63p
100%
10.0%
100%
Notes
1. For the 2016 PSP, the Company’s TSR performance was assessed relative to the constituents of the FTSE 250, excluding investment trusts, over the
period starting on the announcement of the Company’s 2015 results on 25 February 2016 and ending on 21 February 2019 with the announcement of
the Company’s results for the 2018 financial year. The Company’s TSR (29.3%) ranked between median and upper quartile giving a vesting outcome of 39%.
The Committee determined that this was an appropriate reflection of the Company’s performance and did not vary the formulaic vesting outcome.
2. For the 2017 PSP, the Company’s TSR performance was assessed relative to the constituents of the FTSE 250, excluding investment trusts, over the
three-year period ended 31 December 2019. The Company’s TSR (10.8%) ranked below median.
3. The 2017 EPS and ROIC performance targets are the adjusted targets following the NSBU acquisition. As set out in the Chair’s Statement, it was agreed
that the performance targets for these awards should be adjusted following this significant acquisition for the Group in order to ensure that the targets
accurately reflect the true performance of the Group, and that they maintain the performance “difficulty” required for vesting as originally intended.
The original 2017 target ranges were: for EPS, 13.5p (threshold) to 16.5p (max); and for ROIC, 8.4% (threshold) to 10.2% (max).
4. The financial outturns supporting the three year aggregate EPS performance of 17.11p reflect reported values; being pre-IFRS 15 for 2017, and post IFRS 15
for 2018 and 2019. 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 2017 PSP should vest in full. The impact of IFRS 15 was determined to be relatively minor, and did not impact
the vesting levels of 100% for the EPS tranche of the 2017 PSP award.
5. ROIC targets for the 2017 PSP award were also set pre IFRS 15. The financial outturn above reflects the average of reported ROIC; being pre IFRS 15 for
2017, and post IFRS 15 for 2018 and 2019. As for the EPS 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 not affect 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.
6.
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 2
Rupert
Soames
Angus
Cockburn
2016 PSP (TSR)
6 April 2016
589,971
230,088
8 April 2019
£1.2423
£281,237
£64,839
2017 PSP (TSR)
6 April 2017
501,475
0
6 April 2020
£1.5410 1
£0
£0
2017 PSP (EPS)
6 April 2017
501,475
501,475
6 April 2020
£1.5410 1
£762,767
£206,130
2017 PSP (ROIC)
6 April 2017
501,474
501,474
6 April 2020
£1.5410 1
£762,765
£206,129
2016 PSP (TSR)
6 April 2016
303,661
118,427
8 April 2019
£1.2423
£144,753
£33,373
2017 PSP (TSR)
6 April 2017
258,112
0
6 April 2020
£1.5410 1
£0
£0
2017 PSP (EPS)
6 April 2017
258,112
258,112
6 April 2020
£1.5410 1
£392,600
£106,096
2017 PSP (ROIC)
6 April 2017
258,112
258,112
6 April 2020
£1.5410 1
£392,600
£106,096
Notes:
1. As these awards are still to vest at the time of reporting the share price used (£1.5410) is the Q4 average closing share price to 31 December 2019.
2.
In respect of the 2016 PSP, the value included in the single figure reflects an increase in the share price from that at grant (£0.9605) to the share price at vest
(£1.2423). In respect of the 2017 PSP awards, the value included in the single figure reflects an increase in the share price from that at grant (£1.1300) to the
estimate of the share price at vest (based on the 2019 Q4 average share price). The Committee believes that the share price movement appropriately
reflects the broader performance of the Company and therefore did not make any discretionary adjustments to the vesting of these awards.
Annual Report and Accounts 2019
137
Financial StatementsCorporate GovernanceSerco Group plc
Remuneration Report continued
Deferred bonus plan (DBP)
This is a legacy element of remuneration for Executive
Directors, which was removed from the Remuneration Policy in
2018. As such the Executive Directors can no longer participate
in this arrangement but hold unvested awards granted under
the previous Remuneration Policy. The final payout to any
Executive Director under this element is due to be disclosed in
the 2020 DRR.
The performance period for the 2017 Deferred Bonus Plan
(DBP) Matching Share Award (a conditional share award) wholly
subject to EPS performance ended on 31 December 2019.
As set out on page 125, the 2017 EPS target was adjusted
following the acquisition of the NSBU business by the Group.
Based on the adjusted targets; 25% of this award vests for
threshold performance of an Adjusted EPS of 13.63p rising on a
straight-line basis to 100% vesting for at or above maximum
performance of an Adjusted EPS of 16.63p measured as an
aggregate over the three-year performance period. The original
target range was set at 13.5p (threshold) to 16.5p (max). The
Adjusted EPS for the period was measured as 17.11p. Having
considered the wider performance of the Company over the
three-year period the Committee is satisfied that the 2017 DBP
Matching Share Award should vest in full.
Executive Director
Date of grant
No. of shares
awarded
No. of shares
vesting
Vesting
date
Share price at
vest
Value of
vesting
Value
attributable to
share price
appreciation 2
Rupert Soames
Angus Cockburn
9 May 2017
9 May 2017
873,926
441,470
873,926
441,470
9 May 2020
9 May 2020
£1.5410 1
£1.5410 1
£1,346,761
£680,326
£297,438
£150,253
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 2019.
2. The value included in the single figure reflects an increase in the share price from that at grant (£1.2007) to the estimate of the share price at vest (based on
the 2019 Q4 average share price). The Committee believes that the share price movement appropriately reflects the broader performance of the Company
and therefore did not make any discretionary adjustments to the vesting of these awards.
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, 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 Gardner 1
Kirsty Bashforth 2
Eric Born3
Ian El-Mokadem 4
Rachel Lomax 5
Lynne Peacock 6
John Rishton 7
Total
Board fee (including
Chairmanship fees) (£)
Taxable benefits8 (£)
Total (£)
2019
2018
2019
2018
2019
2018
250,000
250,000
14,222
19,004
264,222
269,004
73,833
63,000
63,000
70,500
70,500
90,500
57,917
N/A
61,750
70,000
65,000
75,500
3,424
2,867
1,973
N/A
–
–
–
–
–
–
1,775
2,520
77,257
65,867
63,000
70,500
70,500
92,275
59,889
N/A
61,750
70,000
65,000
78,020
681,334
580,167
22,288
23,497
703,622
603,664
Notes:
1. Sir Roy Gardner is Chairman of the Board, Chair of the Nomination Committee and a Member of the Remuneration and Corporate Responsibility Committees.
2. Kirsty Bashforth is Chair of the Corporate Responsibility Committee and a Member of the Remuneration and Group Risk Committees.
3. Eric Born is a Member of the Audit and Corporate Responsibility Committees.
4.
5. Rachel Lomax is Chair of the Group Risk Committee and a Member of Audit and Nomination Committees.
6. Lynne Peacock is Chair of the Remuneration Committee and a Member of the Audit and Nomination Committees.
7. John Rishton is the Senior Independent Director, Chair of the Audit Committee and a Member of the Nomination, Remuneration and Group Risk Committees.
8. Taxable benefits in 2018 and 2019 relate to reimbursed taxable travel and subsistence business expenses.
Ian El-Mokadem is a Member of the Group Risk and Corporate Responsibility Committees.
Pensions (audited information)
As at 31 December 2019, 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 and to past Directors
(audited information)
No payments for loss of office or to past Directors were made in
the year.
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Serco Group plc
Performance graph and table
This graph shows the value as at 31 December 2019, of a £100
investment in Serco on 31 December 2009 compared with £100
invested in the FTSE 250 index on the same date. It has been
assumed that all dividends paid have been reinvested.
Serco performance graph
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.
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350
300
250
200
150
100
50
0
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Dec 2019
Serco
FTSE 250 Index
CEO’s pay in last ten financial years
Year ended 31 December
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Christopher
Hyman
Ed
Casey
Group CEO
Christopher
Hyman
Christopher
Hyman
Christopher
Hyman
Ed
Casey
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
CEO single figure
remuneration (£000)
Annual bonus outcome
(as % of maximum
opportunity)
LTI vesting outcome
(as % of maximum
opportunity)
2,647
2,826
2,582
91%
81%
72%
893
295
N/A
74%
1,605
748
71%
2,255
2,217
3,805
5,176
5,701
0%
87%
82%
75%
77%
94%
169%
80%
64%
0%
0%
100%
24%
91%
73%
71%
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Remuneration Report continued
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 22,000 of the circa 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%
1.55% 1
Benefits 2
Bonus 3
14%
18%
22%
5%
Notes:
1. This represents the average pay increase for all UK employees that was applied in the 2019 annual pay review cycle.
2. The nature of benefits provided to the CEO and to employees in 2019 compared to 2018 remains the same.
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 2019 compared to the 2018 bonuses paid in April 2019. The difference in the increase to the CEO and employee
bonuses is related to the different performance outcomes at Group, Divisional and Business Unit levels compared to 2018. The CEO’s 2019 bonus over
100% of salary is subject to compulsory deferral for three years into shares.
CEO Pay Ratio
The table below shows how pay for the CEO compares to our UK colleagues at the 25th, median and 75th percentiles.
Year 2019
Salary 1
Total pay and benefits 2
Pay Ratio (Option B)
25th percentile
Median pay
75th percentile
£24,859
£26,066
1:219
£27,026
£30,072
1:190
£32,429
£34,420
1:166
Notes:
1.
2.
Includes salary enhancements such as shift allowances, unsociable hours payments and overtime.
Includes the value of employer pension contributions made to a defined contribution pension arrangement. Each of these representative colleagues
participated in a salary sacrifice pension arrangement.
The Committee believes that the median ratio is consistent with
the Company’s pay, reward and progression policies for our UK
colleagues. As a business Serco employs a very wide range of
people with different skills, experiences and capabilities, and
our reward aims to reflect these differences and be responsive
to the needs of our employees. We apply the same reward
principles for all our colleagues, in that reward should be
competitive and aligned to the sectors and markets from which
we draw our talent. Our remuneration philosophy throughout
the organisation is to compensate employees fairly for their
contribution to the business while ensuring that we are
appropriately managing the cost of our workforce which, as a
people business, is our biggest operating cost.
The remuneration of our CEO includes a significant weighting
towards variable pay to ensure that he is appropriately
incentivised to deliver against our strategic goals. In particular,
the 2019 annual bonus and LTI values represent a significant
portion of the CEO’s 2019 single figure, recognising the
contribution he has made to the transformation of Serco. Of our
c.22,000 colleagues in the UK, a large number (c.16,000) are
frontline operational or administrative staff who are critical to
the delivery of the commitments we make under our contracts
every day. In line with market practice for such roles, the majority
of the workforce are therefore in receipt of fixed pay only
(including pension contributions). Given our workforce profile, all
three of our CEO pay ratio reference points compare our CEO’s
pay with front-line operational colleagues. As such, our CEO pay
ratio will fluctuate year on year primarily as a result of variable
pay outcomes which are used to incentivise our executives and
most senior leaders to deliver results for our customers,
colleagues and shareholders.
We have used our 2019 Gender Pay data to identify employee
representatives at each pay quartile of our UK employee
population. Employees were ranked by hourly pay and those
full-time colleagues at the quartile points fulfilling common roles
within the UK employee population were selected as the
representatives for comparison. Given our diverse workforce
and large number of UK employees across many contracts and
payrolls, this is considered to be the most appropriate method
of identifying employees who are representative of our
workforce. The single figures for each representative employee
(all of whom were full-time) were calculated in respect of the
financial year to 31 December 2019. The single figures have been
calculated taking into consideration regular salary and
allowances (e.g. shift allowances), employer pension
contributions, taxable benefits and bonuses (where relevant)
following the same approach taken in determining the CEO’s
single figure. The pay and benefits figures for the employee
representatives do not include any amounts in respect of
long-term incentives as these are only available to the most
senior members of the Group.
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.
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Serco Group plc Dividend per share
Overall expenditure on wages and salaries
2019 vs 2018
0%
8.6%
2019
Nil
2018
Nil
£1,562.1m
£1,438.7m
Dividend per share, and overall expenditure on wages and salaries have the same meaning as in the notes to the Company
Financial Statements.
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Awards made in 2019
Equity settled bonus plan (ESBP) (audited information)
In line with the approved Remuneration Policy, in connection
with the compulsory deferral of 2018 bonus in excess of 100% of
salary the Executive Directors were granted the following ESBP
Directors
Rupert Soames
Angus Cockburn
Awards in the form of Conditional Share Awards. ESBP Awards
granted in 2019 vest on the third anniversary of grant.
Face value
(£) 1
Grant date
296,863
26 April 2019
85,900
26 April 2019
Market price
at award
(£) 2
1.2420
1.2420
Number of
shares 3
239,020
69,162
Notes:
1. Calculated as the value of the Executive Directors’ 2018 bonus in excess of 100% of salary.
2. Closing share price on 25 April 2019 (being the last trading day prior to the grant).
3. Calculated using the closing share price on the trading day immediately prior to the grant date.
Pre-vesting malus and post-vesting clawback are applicable to these awards.
Long term incentive plan (LTIP) (audited information)
The former 2009 Performance Share Plan rules expired in 2019.
Following approval of new plan rules at the 2019 AGM,
Performance Share Plan awards were granted under the Serco
Group plc 2019 Long-Term Incentive Plan rules in line with the
approved Remuneration Policy. In 2019 the CEO received
awards equivalent to 200% of salary, and the CFO received
awards equivalent to 175% of salary. All awards were in the form
of Conditional Share Awards.
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 2021.
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 19.69p (threshold, 25% vesting) to 23.89p (maximum,
100% vesting), measured as an aggregate over the three-year performance
period.1
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 15.2% (threshold, 25% vesting) to
18.6% (maximum, 100% vesting), measured as an average over the three-year
performance period.1
Book-to-bill ratio of 100% (target, 50% vesting) to 105% (maximum, 100% vesting),
measured as an average over the three-year performance period.
Employee engagement score of 67 (target, 50% vesting) to 70 (maximum, 100%
vesting), measured via the Serco Employee Engagement Survey in the final year of
the performance period.
Note:
1. These are the adjusted EPS and ROIC targets. As set out in the Chair’s Statement at the beginning of this report, following the successful completion of the
NSBU acquisition, which was a significant acquisition by the Company, the Committee approved the adjustment to the EPS and ROIC performance targets
originally set. This ensured that the targets continued to accurately reflect the performance of the Group, and that they maintain the performance
“difficulty” required for vesting as originally intended. The original target ranges were: for EPS, 19.0p (threshold) to 23.2p (max); and for ROIC, 15.6%
(threshold) to 19.0% (max).
Annual Report and Accounts 2019
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Remuneration Report continued
The structure for vesting of the EPS, TSR and ROIC conditions is
straight-line vesting between threshold and maximum, and no
shares vest where performance is below threshold. The
Committee views the Order Book and Employee Engagement
targets to be strategically critical to the longer-term success of
the Company and that there should be no vesting below target
performance. Threshold performance therefore delivers a 0%
vesting outcome. The vesting level for on-target performance is
50%, with straight-line vesting between target and maximum.
This is a more stringent approach than required under the
approved Remuneration Policy.
Directors
(% salary)
(£)
Grant date
Basis of award
Face value
Rupert Soames
200% 1,700,000
6 June 2019
Angus Cockburn
175%
892,500
6 June 2019
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 LTIP award is subject to a post-vesting
holding requirement that takes the total term of the award (i.e.
performance period plus holding period) to a minimum of five
years. Pre-vesting malus and post-vesting clawback is also
applicable to these awards.
Market price
at award
(p) 1
129.50
129.50
Number of
shares 2
1,312,741
689,189
Percentage
vesting at
threshold
performance 3
Performance period
end date
21.25% 31 December 2021
21.25% 31 December 2021
Notes:
1. Closing share price on 5 June 2019 (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.
3. 85% of the awards that are subject to financial performance conditions vest at 25% for threshold performance. 15% of the awards that are subject to
strategic performance conditions vest at 0% for threshold performance.
Voting outcomes
At the previous AGMs, votes on remuneration matters were cast as follows:
2018 Annual Report on Remuneration
To adopt the rules of the 2019 Long-Term Incentive Plan
2017 Remuneration Policy
2017 Annual Report on Remuneration
Year of
AGM
2019
2019
2018
2018
For
%
88.26%
92.96%
88.51%
86.95%
Against
%
11.74%
7.04%
11.49%
13.05%
Number
withheld 1
19,584
42,511
61,479
51,945
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.
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.
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 £1.6190 per share at 31 December
2019 (being the last trading day of the financial year).
Rupert Soames was appointed as a Non-Executive Director of
DS Smith plc on 1 March 2019, and as Senior Independent
Director on 3 September 2019, in respect of which the total fee
payable is £70,500 per annum (£60,500 per annum as a
Non-Executive Director and £10,000 per annum as Senior
Independent Director). Angus Cockburn was Senior
Independent Director and Chair of the Audit Committee of
Ashtead Group plc throughout the year in respect of which the
total fee payable is £90,000 per annum (£60,000 per annum as a
Non-Executive Director, £15,000 per annum as Senior
Independent 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 2019.
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Shares
Share options6
Number of
shares owned
outright
(including
connected
persons) at
31 December
2019 2
Share
ownership
requirements
(% of salary) 1
Name
Value invested3
(£)
Subject to
performance
conditions 4
Not subject to
performance
conditions 5
Subject to
performance
conditions 7
Exercised
during the
year 8
Total share
interests at
31 December
2019 2
Rupert Soames
Angus Cockburn
200%
150%
3,617,163
4,727,762
2,675,085
239,020
3,257,905
1,410,028
9,789,173
1,408,933
1,709,299
1,130,659
69,162
1,676,863
725,749
4,285,617
Notes:
1. The CEO, Rupert Soames, and CFO, Angus Cockburn, have both exceeded their shareholding guidelines as well as their contractual investment
2.
commitments of investing 200% and 150% of salary, respectively.
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period between 1 January 2020 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 2019 by the Executive Director and/or their
4.
connected persons.
Includes awards made to Rupert Soames and Angus Cockburn under the Long-Term Incentive Plan, and previously made under the Deferred Bonus Plan
which have not yet vested. All awards are in the form of conditional share awards.
5. These are awards made under the Equity-Settled Bonus Plan in connection with the compulsory deferral of bonus into shares. Awards are in the form of
conditional share awards.
6. All options are in the form of nominal cost options subject to a 2 pence per share exercise price. There are no interests in the form of share options that are
7.
not subject to performance conditions, nor are there any share options that are vested but unexercised.
Includes awards previously made under the Performance Share Plan which have not yet vested. These are all nominal cost options with a 2 pence per share
exercise price.
8. Rupert Soames and Angus Cockburn exercised vested options in respect of their 2016 PSP awards that were subject to EPS, TSR and ROIC performance
conditions.
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
Kirsty Bashforth
Eric Born
Ian El-Mokadem
Rachel Lomax
Lynne Peacock
John Rishton
Number of shares owned outright
(including connected persons)
at 31 December 20191,2
200,000
10,000
30,000
50,000
40,000
15,000
43,086
Notes:
1.
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period between 1 January 2020 and the date of
this report.
2. 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
2019, 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 3,527,740 and 4,805,612 ordinary shares at 1
January 2019 and 31 December 2019 respectively.
Annual Report and Accounts 2019
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Remuneration Report continued
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.
How the element supports
our strategic objectives
Operation
Opportunity
Performance framework
Review takes account of
individual performance and
contribution to the Company
during the year.
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.
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.
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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.
How the element supports
our strategic objectives
Operation
Benefits
To provide a competitive
level of benefits.
A range of benefits may be
provided to Executive Directors.
These include, but are not limited
to, company car or car allowance,
private medical insurance,
permanent healthcare insurance,
life cover, annual allowance for
independent financial advice,
and voluntary health checks every
two years.
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.
Annual Report and Accounts 2019
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Remuneration Report continued
How the element supports
our strategic objectives
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.
Annual bonus
To 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.
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.
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our strategic objectives
Operation
Opportunity
Performance framework
Performance Share
Plan (PSP)
Recognises achievement
against the longer-term
objectives linked to the
Group’s strategy and
aligns incentives with
shareholder value
creation.
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.
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Remuneration Report continued
How the element supports
our strategic objectives
Operation
Pension1
Opportunity
Performance framework
To provide pension-
related benefits to
encourage executives to
build savings for
retirement.
Executive Directors may participate
in the Group defined contribution
pension plan (or overseas Serco
pension plan as appropriate).
None
Employer pension contributions
(or the equivalent), and/or
combined with a cash
supplement, of up to 30% of
base salary.
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.
Shareholding
guidelines
To support long-term
commitment to the
Company and the
alignment of employee
interests with those of
shareholders.
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.
Note:
1.
Note that although the Policy with regards to the Pension opportunity remains the same, the implementation of the approved Policy is such that the
opportunity for new Executive Directors will be aligned to that available to the UK workforce, and the opportunity for the incumbent Executive Directors
will be reduced from 30% to 20% of salary with effect from 1 April 2020, and further reduced from 1 January 2023 to broadly align with the workforce level.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
25 February 2020
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Annual Report and Accounts
The Directors present the Annual Report and Accounts of
the Group for the year ended 31 December 2019. Comparative
figures used in this report are for the year ended 31 December
2018 unless otherwise stated. The Corporate Governance
Report, set out on pages 101 to 123, 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 22 to 41
report on the activities during the year and likely future
developments. The information in these reports, which is
required to fulfil the requirements of the Business Review,
is incorporated in this Directors’ Report by reference.
Articles of Association
The rules relating to the appointment and replacement of
Directors are contained in the Company’s Articles of
Association. Changes to the Articles of Association must be
approved by the shareholders in accordance with the legislation
in force from time to time.
Dividends
The Directors recommend that a final dividend of 1.0p be paid
in respect of the year ended 31 December 2019 (2018: nil). No
interim dividend was paid during the year (2018: nil).
Subject to approval by shareholders at the Annual General
Meeting, the final dividend will be paid on 5 June 2020 to
shareholders on the register at the close of business on
15 May 2020.
Directors
Details of the current members of the Board, all of whom served
throughout the year, are set out on pages 102 and 103.
In accordance with the UK Corporate Governance Code,
all 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.
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.
Details of the Directors’ interests in the ordinary shares and
options over the ordinary shares of the Company as at 31
December 2019 are set out in the Remuneration Report on
pages 124 to 148.
The powers of the Directors to issue or buy back shares are
restricted to those approved at the Company’s Annual General
Meeting (“AGM”).
Between 1 January 2020 and the date of this report there were
no changes in the Directors’ interests in ordinary shares and
options over ordinary shares.
At the Annual General Meeting in May 2019, 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 2020 AGM, at which a resolution
will be proposed for its renewal, or, if earlier, 30 June 2020.
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 2019, the Company was
granted authority by shareholders to purchase up to 111,216,423
ordinary shares (10% of the Company’s issued ordinary share
capital as at 29 March 2019). This authority will expire at the
conclusion of the 2020 AGM, at which a resolution will be
proposed for its renewal, or, if earlier, 30 June 2020.
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 this 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, Iraq, Italy, Luxembourg, Netherlands, Qatar, Sharjah
and Singapore.
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, including 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:
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Directors’ Report continued
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. The first option was exercised by
the client in late 2019, so the current term will run until
December 2021. 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.
• Subcontract relating to the provision of ADF Health
Services by Bupa Health Services Pty (Bupa) to the
Commonwealth of Australia, Department of Defence
(NGHS Contract): On 4 February 2019 Serco Australia Pty
Limited entered into a Subcontract with Bupa for the
provision of national garrison health services to the
Commonwealth of Australia, Department of Defence. The
contract had a services commencement date of 1 July 2019,
with an initial 6-year term. The NGHS Contract includes a
change of control provision that provides that a change of
control of the ultimate holding company, Serco Group plc,
requires Bupa’s prior written consent. If the change is as a
result of market transactions, then Bupa is to be notified as
soon as possible and consent sought after the event. On
request, details of the change and its impact on Serco
Australia Pty Limited’s obligations under the NGHS Contract
are to be provided to Bupa. Bupa may provide consent to
the change subject to conditions. If Bupa does not consent
to the change of control, Bupa may terminate the NGHS
Contract for default.
• 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 (SSA) between the US
Government, Serco Inc. and Serco Group plc. The effective
date of the SSA is 7 October 2019. 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).
• 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.
• 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 Serco Group plc or another wholly owned
subsidiary of Serco Group plc 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.
• 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 is 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 was selected,
there are currently approximately 20,700 asylum seekers
living in more than 5,500 properties. The AASC Contract
became operational on 1 September 2019. The contract is for
a 10 year term. 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.
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Material contracts continued
• Agreement relating to the provision of Prisoner Escort
and Custodial Services (Generation 4) (“PECS IV”): On 30
October 2019 Serco Limited entered into a ten year contract
with the Secretary of State for Justice to provide prisoner
escort services to the South of England. Serco will be
responsible for provision of prisoner escort and custody
services, including the escort and custody of young people
in the criminal justice system. The PECS IV Contract
becomes operational on 28 August 2020. In the event of a
change of control or ownership of Serco, which the Authority
reasonably believes will negatively affect either Serco’s
ability to perform the services or the Authority’s reputation,
the contract may be terminated by the Authority.
Financing facilities
• Revolving credit facility: the Company has a £250,000,000
revolving credit facility dated 3 December 2018 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 $281,339,457 at 31
December 2019, and their maturity is 14 May 2020 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.
• Term loan facility: the Company has £45,000,000 term loan
dated 23 May 2019. 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.
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 14 May 2020 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 208 to 214.
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
in taking their views on board. Effective leadership and line
management are our principle means of engagement and
employee feedback is invited through Viewpoint, our
employee engagement survey; Speak Up, our global ethics
helpline and investigation process; Yammer, our internal social
media platform; and Colleague ConneXions, our approach to
amplifying employee voice and strengthening dialogue
between the Board and employees.
Annual Report and Accounts 2019
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Directors’ Report continued
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.
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 Thursday 14 May 2020.
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 2019, 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; particularly in 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,
£213 million of US private placement notes and a £45m term
loan. As at 31 December 2019, the Group had £508m of
committed credit facilities and committed headroom of
£286 million.
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 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 and working capital requirements.
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 2021. The Directors have
also reviewed the principal risks considered on pages 62 to 73
and taken account of the results of sensitivity testing.
Participation by staff in the success of the Group is encouraged
by the availability of long-term incentive arrangements for
senior management, which effectively aligns their interests with
those of shareholders by requiring that Company-level financial
performance criteria are achieved as a condition of vesting.
Corporate responsibility
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 76 to 95.
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 2006 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 2019
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.
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Interests in voting rights
At 31 December 2019, the Company had been notified under Rule 5 of the Disclosure Guidance and Transparency Rules of the
Financial Conduct Authority (‘Rule 5’) of the following interests in voting rights over the issued share capital of the Company:
Notifying person
BlackRock Inc
FIL Limited
RWC Asset Management LLP
Marathon Asset Management LLP
Majedie Asset Management Limited
Number of shares at date of
notification
% held at date
of notification
91,121,219
923,226
35,553,935
127,598,380
73,169,712
156,204
73,325,916
61,187,686
58,353,594
55,965,452
7.45
0.07
2.90
10.42
6.66
0.01
6.67
5.00
5.31
5.09
Nature of holding
Indirect
Securities Lending
Contract for difference
Total
Indirect
Stock Loan
Total
Indirect
Indirect
Direct
Notes:
1. The above interests may have changed since the date of notification to an interest not requiring further notification under Rule 5.
2. On 6 February 2020, BlackRock Inc. notified the Company that its interest in voting rights had increased to 11.20%.
Index of Directors’ Report disclosures
The information required to be disclosed in the Directors’ Report can be found in this Annual Report on the pages listed below.
Pursuant to Listing Rule 9.8.4C, the information required to be disclosed in the Annual Report under Listing Rule 9.8.4R is marked
with an asterisk (*).
Amendment of the Articles
Appointment and replacement of Directors
Board of Directors
Change of control
Community
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
Page 149
Page 149
Pages 102 and 103
Pages 149 to 151
Pages 83 and 100
Pages 76 to 95
Page 149
Page 108
Page 154
Page 165
Page 81 and 119
Pages 8, 27, 53 and 149
Pages 81, 104 and 151
Page 151
Pages 208 to 214
Pages 12 to 21
Pages 152 and 172
Page 94
Independent Auditors’ Report
Long-term incentive plans*
Political donations
Powers for the Company to issue or
Pages 156 to 166
Pages 137 to 142
Page 152
Page 149
buy back its shares
Page 122
Powers of the Directors
Page 149
Restrictions on transfer of securities
Rights attaching to shares
Page 149
Risk management and internal control Pages 60 to 73 and 111
Share capital
Page 149
Pages 149 to 151
Significant agreements
Pages 226 and 227
Significant related party agreements*
Significant shareholders
Page 153
Pages 122 and 123
Statement of corporate governance
Pages 3 to 100
Strategic Report
Pages 74 and 75
Viability Statement
Page 149
Voting rights
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
25 February 2020
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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 comply with that law and those regulations.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website. Legislation in the UK governing the
preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Responsibility statement of the Directors in respect
of the Annual Report and Accounts
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company and the undertakings included in the
consolidation taken as a whole; and
• the Strategic Report includes a fair review of the
development and performance of the business and the
position of the Company and the undertakings included
in the consolidation taken as a whole, together with a
description of the principal risks and uncertainties that
they face.
We consider the Annual Report and Accounts, taken as a whole,
is fair, balanced and understandable and provides the
information necessary for shareholders to assess the Group’s
position and performance, business model and strategy.
By order of the Board:
Rupert Soames
Group Chief Executive
25 February 2020
Angus Cockburn
Group Chief Financial Officer
25 February 2020
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 standards 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 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.
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Serco Group plc
Contents
Independent Auditor’s Report
156
167 Consolidated Income Statement
Consolidated Statement of
168
Comprehensive Income
Consolidated Statement of Changes
in Equity
169
170 Consolidated Balance Sheet
171
172
Consolidated Cash Flow Statement
Notes to the Consolidated
Financial Statements
Company Statement of Changes in Equity
Notes to the Company Financial Statements
228 Company Balance Sheet
229
230
234 Appendix: List of Subsidiaries
237
238 Shareholder Information
239 Useful Contacts
Appendix: Supplementary Information
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155
Serco Group plc
Independent Auditor’s Report
to the members of Serco Group plc
Our opinion is unmodified
Basis for opinion
Key audit matters including
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 2019 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 2019 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 four financial years ended 31 December 2019.
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 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.
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The impact of uncertainties due to Britain exiting the European Union on our audit
Assessment of risk vs. prior year: Unchanged Refer to page 62 (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 its effects are subject to
unprecedented levels of uncertainty of
consequences, 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, Valuation of acquired intangibles, we found the
resulting estimates and related disclosures of the carrying value of
goodwill and disclosures in relation to going concern to be balanced (2018:
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.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Independent Auditor’s Report continued
to the members of Serco Group plc
Revenue and margin recognition
Revenue £3,248.4m (2018: £2,836.8m), operating profit £102.5m (2018: £80.5m) and Onerous Contract Provisions of £16.5m
(2018: £82.1m)
Assessment of risk vs. prior year: Unchanged
Refer to page 114 (Audit Committee Report), pages 174 to 175 and 181 (accounting policy), pages 182 to 185 (key judgements),
pages 203 to 204 (contract assets, trade and other receivables note in the financial statements) and pages 207 to 208 (provisions
note in the financial statements)
The risk
Our response
Accounting application
Revenue is the most material account in the
financial statements and is considered to be a
main driver of results, and as such had the
greatest effect on our allocation of resources in
planning and completing the audit.
In addition, the contractual arrangements that
underpin the measurement and recognition of
revenue by the Group can be complex, with
judgements involved in the assessment of current
and estimation of future financial performance of
those contracts.
Our key areas of focus have been:
•
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 the stage of completion by
reference to the estimate of cost to complete,
where the input method of accounting is used
to determine percentage completion;
• Consideration of the Group’s performance
against contractual obligations and the impact
on revenue (including variable 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, are reliant on the estimation
of future profitability of the contract.
Subjective estimate
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.
The effect of these matters is that, as part of
our risk assessment, we determined that the
assessment of 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.
Our audit 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 application: We inspected customer contracts to assess
the method of revenue recognition to determine that it is in accordance
with IFRS 15, including the appropriate recognition of revenue as the
performance obligation is satisfied on service contracts.
• Accounting analysis: We inspected and challenged accounting papers
prepared by the Group to understand the support and assess the
position provided in respect of key contract judgements and onerous
contract provisions.
• Tests of details: We inspected customer contracts for the sample which
we selected for testing and where applicable, obtained evidence of
correspondence with customers and third parties, in instances where
contractual variations and claims have arisen, to inform our assessment of
the revenue (including variable revenue) and costs recorded up to the
balance sheet date.
• Test of details: We assessed a sample of unbilled revenue against
documents such as post year end invoices or purchase orders, or customer
agreements for the work performed.
• Site visits and enquiry: We met with contract management and Business
Unit management teams responsible for the contracts we selected for
testing as well as attending a sample of monthly Divisional and Business
Unit Performance Reviews used to assess business performance in order to
inform our assessment of operational and financial performance of the
contracts. We also visited a number of key contract locations to observe
the contract operations and meet with contract delivery teams to further
assess the operational performance. For onerous and potentially onerous
contracts identified through application of quantitative or qualitative
selection criteria, our procedures also included:
• Benchmarking assumptions: We compared contract level forecast
revenues and costs to the Group’s annual budgets and longer-term
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 assessing against business plans.
• Our sector experience: We assessed the contractual terms and
conditions to identify the key obligations of the contract and compare
these with common industry risk factors to inform our challenge of
completeness of forecast costs and cost accruals recorded at the balance
sheet date. For a specific contract we used our own major project
specialists to assess the reasonableness of the contract projections.
• Historical comparisons: We compared the contract forecasts to historic
and in year performance to assess the historical accuracy of the forecasts.
• Test of details: for contracts assessed as potentially onerous, we
compared the allocation of central costs to the group’s policy and
challenged the underlying assumptions using our understanding of the
contract operations.
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The risk
Our response
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 the
estimation of onerous contracts.
Our findings
We found no material errors in the group’s application of its revenue
accounting policy (2018: no material errors). We found the resulting estimate
of onerous contract provision to be balanced (2018: balanced).
Annual Report and Accounts 2019
159
Financial StatementsCorporate GovernanceSerco Group plc
Independent Auditor’s Report continued
to the members of Serco Group plc
Recoverability of group goodwill and of parent’s investment in subsidiaries
Group: £671.2m (2018: £579.6m); parent Company: £2,029.5m (2018: £2,021.7m)
Assessment of risk vs. prior year: reduced
Refer to page 116 (Audit Committee Report), page 177 (accounting policy), page 183 (key judgements) and pages 199 to 200
(Goodwill note in the financial statements)
The risk
Our response
Our procedures included:
• 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 certain of the key inputs to these assumptions to
external data (such as bond yields and gearing). We challenged forecast
assumptions around new contract wins or extensions, contract attrition as well as
cost reductions on existing contracts.
• Historical comparisons: We compared current year actual cash flows to historic
forecasts to assess the historical accuracy of the forecasts in the impairment
model and we have also compared 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:
AsPac and Middle East, we challenged the projected win probabilities (including
contract extensions) on key contracts within the pipeline and sensitised the five
year cash flow forecasts by reducing new wins and extensions 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.
• Assessing transparency: We also assessed whether the Group’s disclosures
about the sensitivity of outcomes reflected the risks inherent in the valuation
of goodwill.
Our findings:
We found the Group’s assessment that there is no impairment of the carrying
amount of Group’s goodwill and of parent’s investment in subsidiaries to be
balanced (2018: balanced) and the related sensitivity disclosures to be proportionate
(2018: 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
uncertainty regarding forecast contract
extensions and new contract wins.
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. We considered the risk of
recoverability of the goodwill to have
reduced due to the re-organisation of cash
generating units (CGUs) in the last year and
consequently the higher levels of headroom
of the value in use of the business compared
to the carrying amounts.
The CGUs which were most sensitive to a
deterioration in the division’s cash flow
projections or an increase in discount rate
were the AsPac CGU and Middle East CGU.
As at year end 31 December 2019, the AsPac
CGU has headroom of £169m and Middle
East has headroom of £77m.
The effect of these matters is that, as part of
our risk assessment, we determined that the
value in use of goodwill and value in use of
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.
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Serco Group plc Classification of Exceptional Items £23.4m (2018: £31.9m)
Assessment of risk vs. prior year: unchanged
Refer to page 115 (Audit Committee Report), page 184 (key judgements) and pages 193 to 194 (Exceptional items note in the
financial statements)
The risk
Our response
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Presentation appropriateness
Significant judgement is involved in
determining the classification of costs and
income as exceptional items in the
financial statements, We consider this area
to be particularly susceptible to the
generic risk of management bias.
Our procedures included:
• Assessing principle: We assessed the Group’s accounting policies and
principles for recognised elements of costs and income as exceptional.
• Assessing application: We assessed the classification of items selected by the
Group as exceptional against the Group policy. We inspected accounting papers
prepared by the Group to understand the key factors considered and
judgements made. We also evaluated whether other material items should be
classified as exceptional items in line with the Group’s policy.
• Consistency of 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 presentation of profit or loss items as exceptional under the
Group’s accounting policy, there is room for judgement. We found that the Group’s
judgement was balanced (2018: balanced).
Valuation of acquired intangibles (£52.6 million)
A new key audit matter identified in 2020. Refer to page 113 (Audit Committee Report), page 176 (accounting policy) and pages
190 to 191 (financial disclosures)
The risk
Our response
Forecast-based valuation
The Group has recognised significant
customer relationship intangible assets as
part of the NSBU acquisition. There is
inherent uncertainty involved in
forecasting the cash flows of the acquired
businesses and discounting them to the
present day, which determines the fair
value of the intangibles at the
acquisition date.
The effect of these matters is that, as part
of our risk assessment, we determined that
the fair value of the acquired intangibles
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.
Our procedures included:
• Test of details: For the businesses acquired in the year (NSBU’s US and
Canadian businesses), we compared the forecast revenue and profit margins,
used as the basis for the calculation of the fair value of the acquired intangibles at
the acquisition date, with the forecasts included in the due diligence reports
obtained prior to the acquisition, current year performance of the business and
current forecasts.
• Our sector experience: We compared the identified intangible assets with our
expectation of the categories of assets we would expect based on similar
acquisitions in the industry.
• Assessing valuer’s credentials: We assessed the competence and objectivity of
the external experts who prepared the due diligence reports used to support the
valuation methodology and assumptions used within the forecasts.
• Our valuation expertise: We used our internal specialists to assess the
reasonableness of valuation methodologies used and to benchmark key
assumptions used in setting the discount rate to market data. We also compared
the discount rate set by the Group with our own expectations of an appropriate
discount rate.
• Sensitivity analysis: We calculated the impact of increasing and decreasing
certain key assumptions on the valuation of the acquired intangible assets.
Our findings:
As a result of our work we found the valuation of the acquired intangible assets to
be balanced.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
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 (2018:
£5 million), determined with reference to a benchmark of group profit before tax,
normalised to exclude this year’s exceptional items as disclosed in note 10, of £104.5
million (2018: £98.5 million). This materiality represents 4.8% of the benchmark (2018:
5.1%). The group team performed procedures on the items excluded from
normalised group profit before tax.
Materiality for the parent company financial statements as a whole was set at £4.5
million (2018: £4.5 million), determined with reference to a benchmark of company
total assets of £2,263.6 million (2018: £2,449.9 million), of which it represents 0.2%
(2018: 0.2%).
We agreed to report to the Audit Committee any corrected or uncorrected
identified misstatements exceeding £0.25 million (2018: £0.25 million), in addition to
other identified misstatements that warranted reporting on qualitative grounds.
Scope of our audit
Of the Group’s 6 (2018: 6) reporting components, we subjected 6 (2018: 6) to full
scope audits for Group purposes.
These 6 (2018: 6) components represent approximately 100% (2018: 100%) of the
Group’s Revenue, 100% (2018: 100%) of Group profit before tax and 98.4% (2018:
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 £3.5 million (2018: £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 (2018: 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 (2018: all) component
locations to assess the audit risk and strategy and also performed reviews over each
of the component audit files 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 by us, principally the testing of
transaction processing controls. Additional procedures are performed at certain
reporting components to address specific audit risks not addressed by the work
performed centrally over the shared service centre.
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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, including the cover that would be provided
under the Group’s insurance policies. 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 152 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.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
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 emerging and 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 emerging and 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.
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 provisions of the UK Corporate Governance Code specified by the Listing Rules for
our review.
We have nothing to report in these respects.
164
Annual Report and Accounts 2019
Serco Group plc The risk
Our response
We have nothing
to report in
respect of the
matters on which
we are required to
report by
exception
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.
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Respective
responsibilities
We have nothing to report in these respects.
Directors’ responsibilities
As explained more fully in their statement set out on page 154, 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.
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.
Annual Report and Accounts 2019
165
Financial StatementsCorporate GovernanceSerco Group plc
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
Auditor’s responsibilities continued
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, data protection laws 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. Through these
procedures, we became aware of actual or suspected non-compliance and considered the
effect as part of our procedures on the related financial statement items. The identified
actual or suspected non-compliance was not sufficiently significant to our audit to result in
our response being identified as a key audit matter.
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
25 February 2020
166
Annual Report and Accounts 2019
Serco Group plc Consolidated Income Statement
For the year ended 31 December
Revenue
Cost of sales
Gross profit
Administrative expenses
Other general and administrative expenses
Exceptional loss on disposal of subsidiaries and operations
Other exceptional operating items
Other expenses – amortisation and impairment of intangibles arising on acquisition
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
Profit before tax
Profit before tax and exceptional items
Tax on profit before exceptional items
Exceptional tax
Tax charge
Profit for the year
Attributable to:
Equity owners of the Company
Non controlling interests
Earnings per share (EPS)
Basic EPS
Diluted EPS
The accompanying notes form an integral part of the financial statements.
Note
9
2019
£m
3,248.4
(2,928.3)
320.1
2018
£m
2,836.8
(2,546.6)
290.2
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o
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8
10
19
6
13
14
10
15
15
17
17
(214.2)
–
(23.4)
(7.5)
(245.1)
27.5
102.5
125.9
2.7
(24.5)
–
(21.8)
80.7
104.1
(27.4)
(2.7)
(30.1)
50.6
50.4
0.2
4.31p
4.21p
(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
98.5
(8.8)
2.1
(6.7)
67.4
67.4
–
6.16p
5.99p
Annual Report and Accounts 2019
167
Financial StatementsCorporate GovernanceSerco Group plc
Consolidated Statement of
Comprehensive Income
For the year ended 31 December
Profit 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 gain/(loss) on reimbursable rights*
Tax relating to items not reclassified*
Share of other comprehensive income in joint ventures and associates
Items that may be reclassified subsequently to profit or loss:
Net exchange loss on translation of foreign operations**
Fair value (loss)/gain on cash flow hedges during the year**
Total other comprehensive (loss)/income for the year
Total comprehensive income for the year
Attributable to:
Equity owners of the Company
Non controlling interest
* Recorded in retirement benefit obligations reserve in the Consolidated Statement of Changes in Equity.
** Recorded in hedging and translation reserve in the Consolidated Statement of Changes in Equity.
The accompanying notes form an integral part of the financial statements.
Note
31
31
15
6
2019
£m
50.6
(20.3)
3.2
2.7
1.3
(33.3)
(0.1)
(46.5)
4.1
4.0
0.1
2018
£m
67.4
52.1
(0.2)
(9.2)
2.0
(5.3)
0.6
40.0
107.4
107.3
0.1
168
Annual Report and Accounts 2019
Serco Group plc
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
At 1 January 2018
22.0
327.9
0.1
41.8
(180.1)
88.3
(46.1)
10.1
264.0
Non
controlling
interest
£m
1.3
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Total
comprehensive
income for the
year
Shares transferred
to option holders
on exercise of
share options
Expense in relation
to share based
payments
–
–
–
–
–
–
–
69.3
42.7
–
–
(4.7)
107.3
0.1
–
–
–
–
–
–
(28.0)
27.4
14.7
–
–
–
(0.6)
14.7
–
–
At 1 January 2019
22.0
327.9
0.1
111.1
(137.4)
75.0
(18.7)
5.4
385.4
1.4
Opening balance
adjustment
– IFRS16 (note 2)
Total
comprehensive
income for the
year
Issue of share
capital
Shares transferred
to option holders
on exercise of
share options
Expense in relation
to share based
payments
At 31 December
–
–
–
–
2.5
135.0
–
–
–
–
–
–
–
–
–
–
–
–
3.0
–
51.8
(14.4)
–
–
3.0
–
–
(33.4)
4.0
0.1
–
–
–
–
(0.3)
–
(14.4)
14.6
–
11.6
–
–
–
–
137.2
0.2
11.6
–
–
–
2019
24.5
462.9
0.1
165.9
(151.8)
72.2
(4.4)
(28.0)
541.4
1.5
The accompanying notes form an integral part of the financial statements.
Annual Report and Accounts 2019
169
Financial StatementsCorporate GovernanceSerco Group plc
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
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
Lease obligations
Loans
Non current liabilities
Contract liabilities
Trade and other payables
Deferred tax liabilities
Provisions
Lease obligations
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
The accompanying notes form an integral part of the financial statements.
At 31 December
2019
£m
At 31 December
2018
£m
Note
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
671.2
96.5
392.6
23.6
26.5
–
63.9
78.3
1,352.6
18.3
293.5
315.7
6.8
89.5
3.0
726.8
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
2,079.4
1,553.6
(66.8)
(489.0)
(1.9)
(18.7)
(58.4)
(84.6)
(56.1)
(775.5)
(58.2)
(14.5)
(26.7)
(103.4)
(285.3)
(248.9)
(24.0)
(761.0)
(1,536.5)
542.9
24.5
462.9
0.1
165.9
(151.8)
72.2
(4.4)
(28.0)
541.4
1.5
542.9
(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
The financial statements were approved by the Board of Directors on 25 February 2020 and signed on its behalf by:
Rupert Soames
Group Chief Executive Officer
Angus Cockburn
Group Chief Financial Officer
170
Annual Report and Accounts 2019
Serco Group plc
Consolidated Cash Flow Statement
For the year ended 31 December
Note
37
8
7
Net cash inflow from operating activities before exceptional items
Exceptional items
Net cash inflow from operating activities
Investing activities
Interest received
Increase/(decrease) in security deposits
Dividends received from joint ventures and associates
Proceeds from disposal of property, plant and equipment
Proceeds from disposal of intangible assets
Net cash inflow 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 (outflow)/inflow from investing activities
Financing activities
Interest paid
Capitalised finance costs paid
Advances/(repayment) of loans
Capital element of lease repayments
Cash movements on hedging instruments
Issue of share capital
Proceeds received from exercise of share options
Net cash inflow/(outflow) from financing activities
Net increase/(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
23
The accompanying notes form an integral part of the financial statements.
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2019
£m
152.1
(49.2)
102.9
0.4
0.2
25.4
1.0
–
–
(193.2)
–
–
(6.8)
(17.5)
(190.5)
(21.4)
(1.2)
72.3
(70.2)
(2.0)
138.7
0.2
116.4
28.8
62.5
(1.8)
89.5
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
Annual Report and Accounts 2019
171
Financial StatementsCorporate GovernanceSerco Group plc
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 167 to 227 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 2019, 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’; particularly in 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 as at 31 December 2019 comprised a £250m revolving credit facility, a three year term
acquisition facility of £45m and £213m of US private placement notes. As at 31 December 2019, the Group had £508m of
committed credit facilities and committed headroom of £286m. 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 2021.
172
Annual Report and Accounts 2019
Serco Group plc Adoption of new and revised standards
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 IFRS16
approach to lessor accounting remaining substantially unchanged from its predecessor, IAS17.
Under the applicable transition rules a lessee shall either apply IFRS16 with full retrospective effect or alternatively not restate
comparative information but recognise the cumulative effect of initially applying IFRS16 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.
The impact for the Group of adopting IFRS16 is as follows:
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Retained earnings at 31 December 2018
Lease liability recognised
Right of use asset recognised, net of impairments
Impact of IFRS16 on opening provisions
Impact of IFRS16 on other creditors
Deferred tax asset recognised
Adjustment to retained earnings due to the implementation of IFRS16
Impact of IFRS16 on interest in joint ventures at 1 January 2019
Retained earnings at 1 January 2019
As at 1 January
2019
£m
111.1
(129.1)
104.2
12.5
10.6
5.1
3.3
(0.3)
114.1
The impact of IFRS16 on the Group’s income statement is to increase finance costs and improve trading profit as lease costs are
replaced with a lower depreciation charge. The impact to 2019 is outlined in the Divisional Reviews on pages 35 to 41 and to key
metrics in the Finance Review on page 59.
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
recognised as at 31 December 2018 gives a liability of £187.2m. This differs from the lease liability recognised as a result of
transitioning to IFRS16 for the following reasons:
Minimum lease payments under non-cancellable operating leases recognised in accordance with IAS17
Leases as at 31 December 2018:
Within one year
Between one and five years
After five years
Finance leases
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
£m
73.2
95.1
22.1
190.4
14.8
187.2
(44.8)
(13.3)
143.9
The implementation of IFRS16 Leases has required the Group to make a number of judgements 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.
Annual Report and Accounts 2019
173
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
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.
(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.
(vi) Lease terminations. Where a lease is terminated before the end of the lease term the right of use asset is disposed of with the
carrying value being charged to the income statement whilst the lease liability is extinguished from the balance sheet
resulting in a credit to the income statement. The net charge or credit to the income statement is added to any cost of exiting
the lease to result in a profit or loss on lease termination.
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 had
an effective date of 1 January 2019 so is reflected in the Group’s financial statements for the period ended 31 December 2019.
Application of this interpretation did not 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 IFRS16 Leases, or the calculation of net realisable
value under IAS2 Inventories or value in use under IAS36 Impairment of Assets.
Revenue recognition
The nature of the goods and services that the Group has promised to transfer can be read about in more detail in the Strategic
Report of the Annual Report and Accounts, including the overview of the core sectors in which the Group operates and the key
services provided on page 4, details of our markets and business model on pages 12 to 16, and major developments in the latest
year are reviewed in the Chief Executive’s Review on pages 22 to 34 and the Divisional Reviews on pages 35 to 41.
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.
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Serco Group plc Under IFRS15, unless upfront fees received from customers including transition payments can be clearly attributed 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.
In general, the timing of satisfaction of performance obligations is consistent with when payment becomes due other than in
instances where up front win fees or transition payments are received, where in most instances these are deferred.
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.
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Any variable amounts will only be recognised where it is highly probable that a significant reversal will not occur. Variable revenues
include volume based revenue, KPI based revenue and profit share elements.
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.
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.
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.
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.
Annual Report and Accounts 2019
175
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Operating profit
Operating profit is not a measure defined by IFRS and the Group considers this to include the profits and losses from operations
prior to corporation tax, interest revenue and finance costs.
Foreign currencies
Transactions in currencies other than Sterling are recorded at the rates of exchange on the dates of the transactions. At each
balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates
prevailing on the balance sheet date. Gains and losses arising on retranslation are included in the net profit or loss for the period,
except for exchange differences arising on non-monetary assets and liabilities where the changes in fair value are recognised
directly in equity through the consolidated statement of comprehensive income (SOCI).
On consolidation, the assets and liabilities of the Group’s overseas operations are translated at exchange rates prevailing on the
balance sheet date. Income and expense items are translated at the average exchange rates for the period. Exchange differences
arising, if any, are recognised directly within equity in the Group’s hedging and translation reserve. Such translation differences are
recognised as income or expenses in the period in which the operation is disposed of. Goodwill and fair value adjustments arising
on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
Dividends
Dividend distributions are recognised as a liability in the year in which the dividends are approved by the company’s shareholders.
Interim dividends are recognised when they are paid; final dividends when authorised in general meetings by shareholders.
Dividend income is recognised on receipt.
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 acquisition and transition costs for successful acquisitions are material, they are disclosed as exceptional costs
within note 10.
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.
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Serco Group plc i
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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 CGU’s total future discounted cash flows.
The fair values associated with material business combinations are valued by external advisers and any amount of consideration
which is contingent in nature is evaluated at the end of each reporting period, based on internal forecasts.
Other intangible assets
Material intangible assets are grouped into classes of similar nature and use and separately disclosed. Other intangible assets are
amortised from the date of completion.
Customer relationships can arise on the acquisition of subsidiaries and represent the incremental value expected to be gained as a
result of existing contracts in the purchased business. These assets are amortised over the average length of the related contracts.
Licences comprise premiums paid for the acquisition of licences, while franchises represent costs incurred in obtaining franchise
rights arising on the acquisition of franchises. These are amortised on a straight-line basis over the life of the respective licence or
franchise.
Software and IT represent computer systems and processes used by the Group in order to generate future economic value
through normal business operations. The underlying assets are amortised over the period from which the Group expects to
benefit, which is typically between three to eight years.
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
Right of use assets
2.5%
The higher of 10% or the rate produced by the lease term
15% – 20%
10% – 50%
10%
20% – 33%
Equally over the lease term from inception or equally over the remainder of the lease term
from the date of a reassessment of the lease end date
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.
Annual Report and Accounts 2019
177
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Asset impairment
The Group reviews the carrying amounts of its tangible and intangible assets (including goodwill) at each reporting period,
together with any other assets under the scope of IAS36 Impairment of Assets, in order to assess whether there is any indication
that those assets have suffered an impairment loss. As the impairment of assets has been identified as both a key source of
estimation uncertainty and a critical accounting judgement, further details around the specific judgements and estimates can be
seen in note 3.
If any indication of impairment exists, the recoverable amount of the asset is estimated in order to determine if there is any
impairment loss. Goodwill is assessed for impairment annually, irrespective of whether there are any indicators of impairment.
Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable
amount of the CGU to which the asset belongs.
Recoverable amount is defined as the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated
future cash flows are discounted to their present value with reference to pre-tax discount rates that reflect the risks specific to the
asset for which the estimates of future cash flows have not been adjusted.
If the recoverable amount is estimated to be less than the carrying amount of the asset, the carrying amount is impaired to its
recoverable amount. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any
goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in the CGU on a pro-rata basis.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods
are assessed at each reporting date for indications that the loss which led to the impairment has decreased or no longer exists.
Where an impairment loss is subsequently reversed, 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.
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Serco Group plc 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.
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End of contract provisions
Where the Group has a legal or constructive obligation to compensate employees at the end of a contract term and these
employees cannot be relocated within the Group, a provision is recognised to reflect the expected outflow of economic benefits
at the end of the contract. The obligation is reassessed at each reporting date. The amount calculated assumes the tenure of the
employee base, expected employee turnover and salary.
Derivative financial instruments and hedging activities
The Group enters into a variety of derivative financial instruments to manage its 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 remeasured
to their fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately unless the
derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss
depends on the nature of the hedge relationship. The Group designates certain derivatives as either hedges of the fair value of
recognised assets or liabilities (fair value hedges) or hedges of highly probable forecast transactions or hedges of firm
commitments (cash flow hedges).
At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the
hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Both at the
inception of the hedge and on a periodic basis, the Group assesses whether the hedging instrument that is used in a hedging
relationship is highly effective in offsetting changes in fair values or cash flows of the hedged item.
A derivative is presented as a non current asset or a non current liability if the remaining maturity of the instrument is more than 12
months and it is not expected to be realised or settled within 12 months. Derivatives, which mature within 12 months, are
presented as current assets or current liabilities.
Details of the fair values of the derivative instruments used for hedging purposes and movements in the hedging and translation
reserve in equity are detailed in the SOCI and described in note 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 a hedge is no longer effective as a result of a change in risk management strategy, 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 realised in the profit or loss account.
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 a hedge is no longer effective as a result of a change in risk management strategy, 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.
Annual Report and Accounts 2019
179
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Tax
The tax expense represents the sum of current tax expense and deferred tax expense.
Current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income
statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted
or substantively enacted by the balance sheet date.
Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between the tax bases of
assets and liabilities and their carrying amounts for accounting purposes.
Deferred tax 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, it affects neither the
tax profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the
Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in
the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be utilised.
Deferred tax is measured at the tax rates that are expected to apply in the period when the liability is settled or the asset is
realised, based upon tax rates and legislation that have been enacted or substantively enacted at the balance sheet date.
Deferred tax is charged or credited in the income statement, except where it relates to items charged or credited directly to
equity, in which case the deferred tax is also recognised in equity.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax
liabilities and when they relate to income taxes levied by the same tax authority where the Group intends to settle its current tax
assets and liabilities on a net basis.
Share based payment
Where the fair value of share options or shares under award 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 or award has also been adjusted to
take account of market conditions applicable to the option or award.
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.
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Serco Group plc 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.
An expected credit loss is recorded where there is evidence that a counterparty is at risk of default due to their credit worthiness.
The Group’s customer base is predominantly Government or Government-backed and as a result the Group’s expected credit loss
at a given point in time across the entirety of the customer base is immaterial.
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.
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Leases
On entering into a lease, a lease liability is recorded equal to the value of future lease payments discounted at the appropriate
incremental borrowing rate and simultaneously a right of use asset is created representing the right conferred to control the
manner of use of the leased asset.
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 and
corresponding assets are depreciated on a straight-line basis over the lease term.
The lease term is measured as the non-cancellable period of a lease, together with both periods covered by an option to extend
the lease if it is reasonably certain that the option will be exercised and periods covered by an option to terminate the lease if it is
reasonably certain that the option will not be exercised. The lease term is reassessed if an event occurs which causes either the
non-cancellable period to change, or another event occurs which changes the assessment of the likelihood of exercising an option
included in the lease.
All changes to leases are accounted for on a prospective basis from the point at which the change is triggered.
Where, on inception, the term of a lease is less than 12 months or the value of the leased asset is less than £5,000, or both, rentals
payable under the lease are charged to the income statement on a straight-line basis over the term of the relevant lease.
Loans
Loans are stated at amortised cost using the effective interest-rate method. Accrued interest is recorded separately from the
associated borrowings within current liabilities.
Loans are described as non-recourse loans and classified as such only if no Group company other than the relevant borrower has
an obligation, under a guarantee or other arrangement, to repay the debt.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that
necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until
such time as the assets are substantially ready for their intended use or sale.
All other borrowing costs are recognised as an expense in the period in which they are incurred.
Provisions
Provisions are recognised when the Group has an obligation to make a cash outflow as a result of a past event. Provisions are
measured at the best estimate of the expenditure required to settle the obligation at the balance sheet date when settlement is
considered to be likely.
Onerous contract provisions (OCPs) arise when the unavoidable costs of meeting contractual obligations exceed the remuneration
expected to be received. Unavoidable costs include total contract costs together with a rational allocation of shared costs that can be
directly linked to fulfilling contractual obligations which have been systematically allocated to OCPs on the basis of key cost drivers
except where this is impracticable, where contract revenue is used as a proxy to activity. The provision is calculated as the lower of the
termination costs payable for an early exit and the best estimate of 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.
Annual Report and Accounts 2019
181
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Net investments in foreign operations
Exchange differences arising on monetary items that form part of the Group’s net investment in foreign operations are initially
recognised in equity and accumulated in the hedging and translation reserve and reclassified from equity to profit or loss on
disposal of the net investment. When monetary items no longer form part of a hedging relationship, the exchange differences that
arose during the time that the hedge was in place remain in the hedging translation reserve until such time as the net investment is
disposed of.
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 measurement 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 a material adjustment in respect of onerous contract provisions within the next financial year.
Major sources of uncertainty which could result in a material adjustment within the next financial year are:
• The ability of the company to maintain or improve operational performance to ensure costs or performance-related penalties
are in line with expected levels.
• Volume driven revenue and costs being within the expected ranges.
• The outcome of matters dependent on the behaviour of the customer, such as a decision to extend a contract where it has the
unilateral right to do so.
• The outcome of open claims made by or against a customer regarding contractual performance.
• The ability of suppliers to deliver their contractual obligations on time and on budget.
In the current year, an amount of £2.5m was charged to historic provisions, and releases of £9.6m have been made. One new OCP
was recognised during the year with the charge being £1.9m. 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.
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During the year, the Group’s existing OCPs have continued to be utilised with the closing balance being significantly lower than at
the prior year-end. The Group does not expect to enter into new OCPs, however given the nature of the Group’s operations, there
is an inherent risk that a contract can become onerous. The Group operates a large number of long-term contracts at different
phases of their contract life cycle. Within the Group’s portfolio, there are a small number of contracts where the balance of risks
and opportunities indicates that they might be onerous if transformation initiatives or contract changes are not successful. The
Group has concluded that these contracts do not require an onerous contract provision on an individual basis. Following the
individual contract reviews, the Group has also undertaken a top down assessment which assumes that, whilst the contracts may
not be onerous on an individual basis, as a portfolio there is a risk that at least some of the transformation programmes or
customer negotiations required to avoid a contract loss, will not be fully successful, and it is more likely than not that one or more
of these contracts will be onerous. Therefore, in considering the Group’s overall onerous contract provision, the Group has made a
best estimate of the provision required to take into consideration this portfolio risk. As a result, the risk of OCPs and the
monitoring of individual contracts for indicators remains a critical estimate for the Group. The amount recognised in the year is
£6.2m at the Trading Profit level within the Corporate costs segment, which after this charge is therefore £51.7m (2018: £40.1m).
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 2019.
Current tax
Liabilities for tax contingencies require management judgement and estimates in respect of tax audits and also tax exposures in
each of the jurisdictions in which we operate. Management is also required to make an estimate of the current tax liability together
with an assessment of the temporary differences that arise as a consequence of different accounting and tax treatments. Key
judgement areas include the correct allocation of profits and losses between the countries in which we operate and the pricing of
intercompany services. Where management conclude that a tax position is uncertain, a current tax liability is held for anticipated
taxes that are considered probable based on the current information available.
These liabilities can be built up over a long period of time but the ultimate resolution of tax exposures usually occurs at a point in
time, and given the inherent uncertainties in assessing the outcomes of these exposures, these estimates are prone to change in
future periods. It is not currently possible to estimate the timing of potential cash outflow, but on resolution, to the extent this
differs from the liability held, this will be reflected through the tax charge/(credit) which could be material for that period to the
extent that the outcomes differ from the current estimates. 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.
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.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
3. Critical accounting judgements and key sources of estimation uncertainty continued
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. There is a level of judgement required in determining which items are exceptional on a
consistent basis and require separate disclosure. Further details can be seen in note 10.
The segmental analysis of operations in note 4 includes the additional performance measure of Trading Profit on 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 management
consider material and outside of the normal operating practice of the Group 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 operations.
Investigation by the Serious Fraud Office
On 4 July 2019, Serco Geografix Ltd, a wholly owned subsidiary, received judicial approval of a Deferred Prosecution Agreement
(DPA) with the UK Serious Fraud Office (SFO). This ruling concludes the SFO's investigation into Serco companies announced in
November 2013. As part of the DPA, the Group has paid a fine of £19.2m during the year and also paid SFO investigation costs
of £3.7m. As at the end of 2019, this is no longer a critical accounting judgement.
Claim for losses in respect of the 2013 share price reduction
The Group has received a claim seeking damages for alleged losses following the reduction in Serco’s share price in 2013. The
merit, likely outcome and potential impact on the group of any such litigation that either has been or might potentially be brought
against the group is subject to a number of significant uncertainties and, therefore, it is not possible to assess the quantum of any
such litigation as at the date of this disclosure. Given the uncertainties associated with this claim, it has been disclosed as a
contingent liability in note 29.
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 2019 under IFRS8 Operating Segments are as
set out below.
Reportable segments
Operating segments
UK & Europe
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
Americas
Services for sectors including Citizen Services, Defence and Transport delivered to US federal and
civilian agencies, selected state and municipal governments and the Canadian Government
AsPac
Services for sectors including Citizen Services, Defence, Health, Justice & Immigration and
Transport in the Asia Pacific region including Australia, New Zealand and Hong Kong
Middle East
Corporate
Services for sectors including Defence, Health and Transport in the Middle East region
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 reports 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.
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Serco Group plc Information about major customers
The Group has four major governmental customers which each represent more than 5% of Group revenues. The customers’
revenues were £1,043.3m (2018: £1,113.1m) for the UK Government within the UK & Europe segment, £734.9m (2018: £522.8m)
for the US Government within the Americas segment, £597.5m (2018: £498.7m) for the Australian Government within the AsPac
segment and £255.5m (2018: £232.9m) for the Government of the United Arab Emirates within the Middle East segment.
The following is an analysis of the Group’s revenue, results, assets and liabilities by reportable segment:
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Year ended 31 December 2019
Revenue
Result
Trading profit/(loss) from operations*
Amortisation and impairment of intangibles arising
on acquisition
Operating profit/(loss) before exceptional items
Other exceptional operating items**
Operating profit/(loss)
Investment revenue
Finance costs
Profit before tax
Tax charge
Tax on exceptional items
Profit for the year from operations
UK&E
£m
Americas
£m
AsPac
£m
1,361.7
915.7
621.4
48.2
91.7
31.2
(1.2)
47.0
(24.8)
22.2
(6.2)
85.5
15.3
100.8
(0.1)
31.1
(3.0)
28.1
Middle
East
£m
349.6
13.9
–
13.9
–
13.9
Corporate
£m
Total
£m
–
3,248.4
(51.6)
133.4
–
(51.6)
(10.9)
(62.5)
(7.5)
125.9
(23.4)
102.5
2.7
(24.5)
80.7
(27.4)
(2.7)
50.6
* Trading profit/(loss) is defined as operating profit/(loss) before exceptional items and amortisation and impairment of intangible assets arising on
acquisition.
** Exceptional restructuring costs 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 2019
Supplementary information
Share of profits in joint ventures and associates, net of
interest and tax
Depreciation of property, plant and equipment
Impairment of property, plant and equipment
Total depreciation and impairment of property, plant
and equipment
Amortisation of intangible assets arising on acquisition
Amortisation of other intangible assets
Total amortisation and impairment of intangible assets
Segment assets
Interests in joint ventures and associates
Other segment assets***
Total segment assets
Unallocated assets
Consolidated total assets
Segment liabilities
Segment liabilities***/****
Unallocated liabilities
Consolidated total liabilities
UK&E
£m
Americas
£m
AsPac
£m
Middle
East
£m
Corporate
£m
Total
£m
27.3
(37.3)
(18.9)
–
(17.4)
–
(56.2)
(17.4)
(1.2)
(0.3)
(1.5)
22.4
645.4
667.8
(6.2)
(1.2)
(7.4)
–
756.3
756.3
0.2
(9.0)
–
(9.0)
(0.1)
(4.8)
(4.9)
–
(4.7)
–
(4.7)
–
(0.4)
(0.4)
0.8
227.3
228.1
0.4
132.0
132.4
–
(6.0)
–
(6.0)
–
(11.4)
(11.4)
–
131.6
131.6
(536.3)
(232.8)
(151.8)
(103.0)
(160.3)
27.5
(74.4)
(18.9)
(93.3)
(7.5)
(18.1)
(25.6)
23.6
1,892.6
1,916.2
163.2
2,079.4
(1,184.2)
(352.3)
(1,536.5)
*** 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.
**** Following the adoption of IFRS16 Leases all recognised lease liabilities are included within segment liabilities. Previously, finance lease liabilities were
considered to be unallocated liabilities.
Annual Report and Accounts 2019
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Notes to the Consolidated Financial
Statements continued
4. Segmental information continued
Year ended 31 December 2018
Revenue
Result
Trading profit/(loss) from operations*
Amortisation and impairment of intangibles arising
on acquisition
Operating profit/(loss) before exceptional items
Exceptional loss on disposal of subsidiaries and
operations
Other exceptional operating items**
Operating profit/(loss)
Investment revenue
Finance costs
Other gains
Profit before tax
Tax charge
Tax on exceptional items
Profit for the year from 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
–
(40.1)
–
(13.1)
(53.2)
(4.3)
112.4
(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 restructuring costs 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 property, plant and equipment
Impairment of property, plant and equipment
Total depreciation and impairment of property, plant
and equipment
Amortisation of intangible assets arising on acquisition
Amortisation of other intangible assets
Exceptional impairment of other intangible assets
Total amortisation and impairment of intangible assets
Segment assets
Interests in joint ventures and associates
Other segment assets***
Total segment assets
Unallocated assets
Consolidated total assets
Segment liabilities
Segment liabilities***
Unallocated liabilities
Consolidated total liabilities
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Corporate
£m
Total
£m
28.6
(11.4)
(0.7)
(12.1)
(0.5)
(0.4)
(0.1)
(1.0)
19.6
487.6
507.2
–
(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)
–
426.4
426.4
0.6
222.1
222.7
0.4
123.4
123.8
–
(1.6)
–
(1.6)
–
(11.5)
–
(11.5)
–
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.
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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
Principal joint ventures and associates
United Kingdom
United Kingdom
Serco Limited
Serco Australia Pty Limited
Serco Inc.
AWE Management Limited
Merseyrail Services Holding Company Limited
2019
100%
100%
100%
2019
24.5%
50%
2018
100%
100%
100%
2018
24.5%
50%
A full list of subsidiaries and related undertakings is included in the Appendix on pages 234 to 236 which form part of the financial
statements.
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 £17.6m (2018: £20.0m) and £7.8m (2018: £8.7m)
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 2019
Summarised financial information
Revenue
Operating profit
Net investment revenue
Income tax charge
Profit from operations
Other comprehensive income
Total comprehensive income
Non current assets
Current assets
Current liabilities
Non current liabilities
Net assets
Proportion of group ownership
Carrying amount of investment
AWEML
(100% of results)
£m
MSHCL
(100% of results)
£m
Group portion of
material joint
ventures and
associates*
£m
Group portion of
other joint venture
arrangements
and associates*
£m
1,065.4
177.9
350.0
95.4
0.8
(18.8)
77.4
–
77.4
510.0
186.8
(163.0)
(509.3)
24.5
24.5%
6.0
18.9
0.2
(3.8)
15.3
2.5
17.8
23.2
64.6
(48.4)
(12.7)
26.7
50.0%
13.4
32.7
0.3
(6.4)
26.6
1.3
27.9
136.6
78.1
(64.1)
(131.2)
19.4
–
19.4
44.6
1.1
–
(0.2)
0.9
–
0.9
2.4
18.7
(14.7)
(2.2)
4.2
–
4.2
Total
£m
394.6
33.8
0.3
(6.6)
27.5
1.3
28.8
139.0
96.8
(78.8)
(133.4)
23.6
–
23.6
* Total results of the entity multiplied by the respective proportion of Group ownership.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
6. Joint ventures and associates continued
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
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
101.3
(7.6)
(0.1)
–
0.8
39.9
(7.3)
(12.5)
(1.6)
0.2
44.8
(5.6)
(6.3)
(0.8)
0.3
7.4
(0.2)
(2.3)
(0.9)
–
Total
£m
52.2
(5.8)
(8.6)
(1.7)
0.3
* Total results of the entity multiplied by the respective proportion of Group ownership.
The Group’s share of liabilities within joint ventures is £212.2m. Of this, an amount of £124.8m relates to a defined benefit pension
obligation, against which Serco is fully indemnified, and a further £69.6m is trade and other payables which arise as part of the day
to day operations carried out by those entities. The Group has no material exposure to third party debt or other financing
arrangements within any of its joint ventures and associates.
The financial statements of MSHCL are for a period which is different from that of the Group, being for the 52-week period ended
4 January 2020 (2018: 52-week period ended 5 January 2019). 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.
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: 2019
Rate of salary increases (%)
Inflation assumption (CPI %)
Discount rate (%)
Post-retirement mortality:
Current male industrial pensioners at 65 (years)
Future male industrial pensioners at 65 (years)
Retirement benefit funding position (100% of results)
Present value of scheme liabilities
Fair value of scheme assets
Net amount recognised
Members’ share of deficit
Franchise adjustment*
Related asset, right to reimbursement
Net retirement benefit obligation
AWEML
MSHCL
2.1%
2.1%
2.1%
22.9
25.0
3.1%
2.2%
2.1%
N/A
N/A
£m
£m
(2,213.6)
1,716.6
(497.0)
–
–
497.0
(374.5)
218.5
(156.0)
62.4
93.6
–
–
–
* 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.
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Serco Group plc 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
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
£m
46.3
(3.6)
(2.3)
(2.0)
0.3
Group portion of
material joint
ventures and
associates*
£m
Group portion of
other joint venture
arrangements and
associates*
£m
Total
£m
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43.6
375.1
31 December 2018
Summarised financial information
Revenue
Operating profit before exceptional items
Exceptional items
Operating profit
Net investment revenue
Income tax (charge)/credit
Profit from operations
Profit from 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
1,024.7
160.8
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
* Total results of the entity multiplied by the respective proportion of Group ownership.
331.5
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
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
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
98.1
(9.7)
–
–
0.6
34.3
(2.0)
–
(2.0)
0.2
41.2
(3.4)
–
(1.0)
0.2
5.1
(0.2)
(2.3)
(1.0)
0.1
* Total results of the entity multiplied by the respective proportion of Group ownership.
In 2018, the cost associated with the Group’s share of MSHCL’s obligation in respect of the equalisation of guaranteed minimum
pension (GMP) payments was recorded as exceptional to ensure consistent treatment across all defined benefit pension schemes
the Group is liable for. There was no equivalent charge in 2019. More information is provided in note 10.
Annual Report and Accounts 2019
189
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
6. Joint ventures and associates continued
Key disclosures with respect of the defined benefit pension schemes of material joint ventures and associates:
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
MSHCL
2.2%
2.2%
3.0%
23.0
25.6
3.1%
2.2%
2.9%
N/A
N/A
AWEML
£m
(2,030.4)
1,512.8
(517.6)
–
–
517.6
–
MSHCL
(**restated)
£m
(290.3)
193.3
(97.0)
38.8
58.2
–
–
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
** An adjustment has been made to the relative amounts of the Members’ share of deficit and the Franchise adjustment for MSHCL as at 31 December 2018.
The amounts previously disclosed had been transposed meaning the Members’ share of deficit was incorrectly disclosed as £58.2m and the Franchise
adjustment was incorrectly disclosed as £38.8m.
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 1 August 2019, the Group acquired the Naval Systems Business Unit and a small number of related contracting entities
(collectively, “NSBU”), from Alion Science & Technology Corporation. Serco acquired the net assets of the business as well as the
Alion Canada and Alion IPS legal entities. The acquired business contributed £109.8m of revenue and £7.2m of operating profit
before exceptional items to the Group’s results during the year to 31 December 2019. As a result of the acquisition, Alion Canada,
now known as Serco Canada Marine, and Alion IPS are 100% owned indirect subsidiaries of Serco Group plc.
NSBU is a leading provider of naval design, systems engineering, as well as production and lifecycle support services to the US
Navy, US Army and Royal Canadian Navy. The combined business will be a top tier supplier of services to the US Navy and
increases our exposure to US Navy fleet expansion, which is one of the fastest-growing areas of public procurement. The US Navy
has announced plans to increase the fleet from 280 to 355 ships by 2034, and we see a long-term and growing demand for the
capabilities that the combination of Serco and NSBU will be able to provide.
The total annual revenue of NSBU in 2020 is expected to be around $370m (£285m) and the estimated operating profit before
exceptional items, including an appropriate allocation of charges for shared support services and fully allocated overheads, of
around $27m (£20m).
The total consideration payable in relation to the acquisition of NSBU was £186.3m.
190
Annual Report and Accounts 2019
Serco Group plc Goodwill
Acquisition related intangible assets
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Deferred tax asset
Trade and other payables
Deferred tax liability
Acquisition date fair value of consideration transferred
Satisfied by:
Cash
Deferred consideration – working capital adjustment
Total consideration
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NSBU
£m
115.3
52.6
3.6
46.6
0.4
0.9
(30.7)
(2.4)
186.3
184.3
2.0
186.3
The net cash outflow as a result of acquisitions made during the year was £197.9m made up of £184.3m consideration paid on the
acquisition of NSBU, costs related to the acquisition of NSBU of £4.7m, consideration related to historic acquisitions of £9.3m and
£0.4m of cash acquired.
Goodwill on the acquisition of NSBU represents the premium associated with taking over the operations which are considered to
enhance Serco’s ability to deliver in the growth areas of US Navy fleet expansion within our US Defence business. The acquisition is
considered to be accretive to the Group’s financial performance. Goodwill on the acquisition is deductible for tax purposes over
fifteen years. Future US tax deductions will be available for £76.0m of acquired goodwill. The acquisition related intangible
represents customer relationships which have been valued using our best estimate of forecast cash flows discounted to present
value.
Based on estimates made of the full year impact of the acquisition of NSBU, had the acquisition taken place on 1 January 2019,
Group revenue and operating profit before exceptional items for the period would have increased by approximately £153m and
£10m respectively, taking total Group revenue to £3,401m and total Group operating profit before exceptional items to £136m.
The total impact of acquisitions to the Group’s cash flow position in the period was as follows:
Net cash outflow on acquisition of NSBU
Deferred consideration paid in respect of historic acquisitions:
Clarence Correctional Centre
Anglia Support Partnership
Net cash outflow arising in the year on acquisitions
Exceptional acquisition related costs – NSBU
Net cash impact in the year on acquisitions
£m
183.9
8.0
1.3
193.2
4.7
197.9
Costs associated with the acquisition of NSBU which were not directly related to the issue of shares or arrangement of the
acquisition facility are shown as exceptional costs in the Consolidated Income Statement for the year. The total acquisition-related
costs recognised in exceptional items for the year ended 31 December 2019 was £4.7m.
8. Disposals
No disposals of businesses have been made during the year ended 31 December 2019.
Annual Report and Accounts 2019
191
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
9. Revenue from contracts with customers
Revenue
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 2019
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
215.9
311.9
143.5
259.9
430.5
1,361.7
3.3
19.0
1,339.4
1,361.7
575.5
–
99.7
–
240.5
915.7
–
–
915.7
915.7
89.5
279.6
19.7
94.8
137.8
621.4
28.1
–
215.3
30.2
76.0
909.0
591.5
478.2
384.9
884.8
349.6
3,248.4
(0.4)
2.6
619.2
–
–
349.6
2.9
21.6
3,223.9
621.4
349.6
3,248.4
Year ended 31 December 2018 (restated*)
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Total
£m
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
213.5
269.8
141.6
232.4
443.4
1,300.7
1.6
38.9
1,260.2
1,300.7
337.6
–
90.2
–
217.8
645.6
–
–
645.6
645.6
56.2
271.4
18.3
96.4
105.9
548.2
3.2
1.8
543.2
548.2
40.8
–
204.6
28.5
68.4
342.3
–
–
342.3
342.3
648.1
541.2
454.7
357.3
835.5
2,836.8
4.8
40.7
2,791.3
2,836.8
* The prior period balances have been restated to ensure consistent application of the sector definitions used for the current period. The change has no
impact to the income statement or the balance sheet of the Group
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 measurable and highly probable that a significant reversal will not occur.
Within 1 year (2020)
Between 2 – 5 years (2021 – 2024)
5 years and beyond (2025+)
1,149.4
3,507.8
4,648.5
9,305.7
592.9
173.1
–
766.0
559.6
1,097.6
1,571.7
3,228.9
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Total
£m
2,599.2
5,073.4
6,393.7
297.3
294.9
173.5
765.7
14,066.3
192
Annual Report and Accounts 2019
Serco Group plc i
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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.
For the year ended 31 December
Exceptional items arising
Exceptional loss on disposal of subsidiaries and operations
Other exceptional operating items
Restructuring costs
Increase in onerous lease provision
Costs associated with SFO investigation
Reversal of impairment of interest in joint venture and related loan balances
Reversal of impairment on loan balances
Cost of Guaranteed Minimum Pension equalisation
Release of/(increase in) other provisions and other items
Cost associated with the acquisition of NSBU
Other exceptional operating items
Exceptional operating items
Exceptional finance income
Exceptional tax
Total operating and financing exceptional items net of tax
Exceptional loss on disposals
There were no material disposals of operations in 2019 (2018: none).
2019
£m
–
(12.8)
–
(25.2)
–
–
–
19.3
(4.7)
(23.4)
(23.4)
–
(2.7)
(26.1)
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)
Other exceptional operating items
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 2019, a charge of £12.8m (2018: £32.3m) 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 pages 20 to 21. The transformation activities associated with this are complete and, as such, all exceptional restructuring
costs related to this programme have ended in 2019. Non-exceptional restructuring charges are incurred by the business as part of
normal operational activity, which in the year totalled £8.9m (2018: £6.3m) and were included within operating profit before
exceptional items.
There was an exceptional charge totalling £25.2m (2018: credit of £0.4m) associated with the SFO’s investigation and the
programme of Corporate Renewal. These costs have historically been treated as exceptional and consistent treatment is applied
in 2019. During the year, the Group paid £22.9m in penalties and legal costs associated with the SFO’s investigation. The final
judgement was provided on 4 July 2019. The credit in 2018 reflects the recovery of costs from the Group’s insurance providers.
The remaining £2.3m relates to legal costs incurred by the Group in respect of the investigation.
In 2018, an exceptional charge of £9.6m was recorded 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. There was no equivalent charge in 2019.
The decrease in other provisions and other items of £19.3m (2018: increase of £2.8m) predominantly relates to a commercial
dispute which was settled in 2019. The treatment of the reduction as exceptional is consistent with the recognition of the original
charge associated with the same legal matter in 2014.
The Group completed the acquisition of the Naval Systems Business Unit (NSBU) from Alion Science and Technology in 2019.
The acquisition achieved final regulatory approvals and completed in August 2019. The transaction and implementation costs
of £4.7m have been treated as exceptional costs in line with the Group’s accounting policy.
Annual Report and Accounts 2019
193
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
10. Exceptional items continued
An exceptional profit of £13.9m was recognised in 2018 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. No such transactions took place in 2019.
Exceptional finance costs
There were no exceptional finance costs in the year ended 31 December 2019. During 2018, 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 had 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 was outside the normal financing arrangements
of the Group and significant in size it was recorded as exceptional finance income.
Exceptional tax
Exceptional tax for the year was a charge of £2.7m (2018: £2.1m credit) which arises on exceptional items within operating profit.
This charge arises mainly in connection with the decrease in provisions in respect of commercial disputes and legal claims for
which a tax credit had been recorded when the provisions were originally recognised. This charge is offset by tax deductions in
respect of the global restructuring programme and in the US on acquisition costs.
No tax credit arises on the exceptional charge associated with the costs in connection with the SFO investigation.
11. Operating profit
Operating profit is stated after charging/(crediting):
Year ended 31 December
Research and development costs
(Profit)/loss on disposal of property, plant and equipment
Profit on early termination of leases
Loss on disposal of intangible assets
Depreciation and impairment of leased assets
Depreciation and impairment of owned property, plant and equipment
Amortisation and impairment of intangible assets – arising on acquisition
Amortisation, write down and impairment of intangible assets – other
Exceptional net loss on disposal of subsidiaries and operations (note 10)
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
2019
£m
0.6
(0.6)
(0.9)
0.4
75.6
17.7
7.5
18.1
–
1,573.6
2.9
1.1
(0.2)
5.5
(1.6)
2018
£m
0.6
0.5
–
1.5
6.8
13.4
4.3
18.7
0.5
1,453.4
(1.0)
0.4
0.2
152.2
(1.7)
* The lease payments recognised in operating profit during the year ended 31 December 2019 are those which have not been recorded in accordance with
IFRS16 Leases due to their status as either short-term or low value.
Depreciation and impairment on leased assets has increased during the year due to the application of IFRS16 Leases resulting in
additional right of use assets being recognised within property, plant and equipment.
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
2019
£m
1.6
0.3
1.9
0.2
–
0.2
2018
£m
1.0
0.2
1.2
0.1
0.1
0.2
194
Annual Report and Accounts 2019
Serco Group plc 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 116. No services were provided pursuant to contingent
fee arrangements.
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12. Staff costs
The average number of persons employed by the Group (including Executive Directors) was:
Year ended 31 December
UK & Europe
Americas
AsPac
Middle East
Unallocated
2019
Number
21,626
6,795
10,441
4,340
727
43,929
2018
Number
20,307
6,091
8,851
4,185
950
40,384
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)
Movement in discount on other debtors
14. Finance costs
Year ended 31 December
Interest payable on lease liabilities
Interest payable on other loans
Facility fees and other charges
Movement in discount on provisions
Foreign exchange on financing activities
2019
£m
1,384.2
103.0
74.8
1,562.0
11.6
1,573.6
2018
£m
1,251.7
95.3
91.7
1,438.7
14.7
1,453.4
2019
£m
0.5
2.1
0.1
2.7
2019
£m
6.9
13.9
1.7
1.2
23.7
0.8
24.5
2018
£m
2.3
0.8
1.2
4.3
2018
£m
0.6
13.8
3.1
0.5
18.0
0.2
18.2
Annual Report and Accounts 2019
195
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
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 charge/(credit)
Adjustments in respect of prior years
Before
exceptional
items
2019
£m
Exceptional
items
2019
£m
22.7
(0.2)
4.7
0.2
27.4
(1.1)
–
3.8
–
2.7
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)
Total
2019
£m
21.6
(0.2)
8.5
0.2
30.1
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
Before
exceptional
items
2019
£m
Exceptional
items
2019
£m
104.1
(23.4)
Tax calculated at a rate of 19.00% (2018: 19.00%)
Expenses not deductible for tax purposes*
UK unprovided deferred tax**
Other unprovided deferred tax
Effect of the use of unrecognised tax losses
Impact of changes in statutory tax rates on current
income tax
Overseas rate differences
Statutory tax benefits
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
19.7
0.9
3.5
3.0
–
(0.2)
5.9
(0.2)
(3.1)
–
3.0
(5.1)
27.4
(4.4)
4.4
2.1
–
–
–
0.6
–
–
–
–
–
2.7
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
Total
2019
£m
80.7
15.3
5.3
5.6
3.0
–
(0.2)
6.5
(0.2)
(3.1)
–
3.0
(5.1)
30.1
Exceptional
items
2018
£m
(24.4)
(4.6)
–
3.5
–
–
–
(0.7)
–
(0.4)
–
–
0.1
(2.1)
Total
2018
£m
22.2
(0.9)
(14.5)
(0.1)
6.7
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 credits for amounts which have been charged to the income statement in previous periods in connection with items such
as fixed assets. Additional tax credit 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 credit has
yet been taken, for items such as restructuring costs.
The income tax charge for the year is based on the UK statutory rate of corporation tax for the period of 19.00% (2018: 19.00%).
Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.
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
2019
£m
–
0.1
2.7
2.8
2018
£m
–
–
(9.2)
(9.2)
196
Annual Report and Accounts 2019
Serco Group plc 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:
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At 1 January – asset
IFRS16 restatement
Opening asset restated
Income statement charge/(credit)
Items recognised in equity and in other comprehensive income
Arising on acquisition
Exchange differences
At 31 December – asset
The movement in deferred tax assets and liabilities during the year was as follows:
Temporary
differences
on assets/
intangibles
£m
Share-based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
24.6
(5.1)
19.5
(13.7)
–
(13.7)
9.9
–
9.9
OCPs
£m
(7.4)
–
(7.4)
At 1 January 2019
IFRS16 restatement
Opening asset restated
Charged/(credited) to income
statement (note 15a)
4.1
(1.6)
(0.4)
5.4
Items recognised in equity and
in other comprehensive
income (note 15b)
Arising on acquisition
Exchange differences
–
2.4
(1.6)
–
(0.9)
0.6
At 31 December 2019
24.4
(15.6)
(2.7)
–
–
6.8
–
–
0.1
(1.9)
Derivative
financial
instruments
£m
–
–
–
–
(0.1)
–
0.1
–
2019
£m
(39.5)
(5.1)
(44.6)
8.7
(2.8)
1.5
–
(37.2)
Tax
losses
£m
(20.6)
–
(20.6)
Other
temporary
differences
£m
(32.3)
–
(32.3)
2018
£m
(39.3)
–
(39.3)
(14.7)
9.2
2.3
3.0
(39.5)
Total
£m
(39.5)
(5.1)
(44.6)
(0.4)
1.6
8.7
–
–
–
–
–
0.8
(2.8)
1.5
–
(21.0)
(29.9)
(37.2)
Of the amount credited to the income statement, £nil (2018: credit of £0.1m) has been taken to cost of sales in respect of the R&D
Expenditure credit.
The movement in deferred tax assets and liabilities during the previous year was as follows:
At 1 January 2018
(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
Temporary
differences
on assets/
intangibles
£m
Share-based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
25.8
(12.2)
(4.7)
(1.8)
–
2.3
1.2
24.6
–
–
0.3
(13.7)
2.5
(1.7)
9.2
–
(0.1)
9.9
Tax
losses
£m
(18.7)
Other
temporary
differences
£m
(28.8)
Total
£m
(39.3)
(1.9)
(5.4)
(14.7)
–
–
–
–
–
1.9
9.2
2.3
3.0
(20.6)
(32.3)
(39.5)
OCPs
£m
(7.9)
0.8
–
–
(0.3)
(7.4)
Annual Report and Accounts 2019
197
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
16. Deferred tax continued
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against
current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following is the analysis of the
deferred tax balances (after offset) for financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
2019
£m
26.7
(63.9)
(37.2)
2018
£m
21.4
(60.9)
(39.5)
As at the balance sheet date, the UK has a potential deferred tax asset of £180.8m (2018: £168.8m) available for offset against future
profits. A deferred tax asset has currently been recognised of £21.1m (2018: £20.3m). Recognition has been based on forecast
future taxable profits. No deferred tax asset has been recognised in respect of the remaining asset (net £159.7m) 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 2019 has been calculated reflecting the reduced rate.
Losses of £0.1m (2018: £0.2m) expire within five years, losses of £0.1m (2018: £0.1m) expire within 6–10 years, losses of £0.7m
(2018: £0.7m) expire within 20 years and losses of £1,063.9m (2018: £1,015.2m) may be carried forward indefinitely.
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
2019
Millions
1,171.4
27.6
1,199.0
2018
Millions
1,094.4
31.0
1,125.4
At 31 December 2019 no options over shares (2018: 145,238 shares) were excluded from the weighted average number of shares
used for calculating diluted earnings per share in accordance with IFRS2 Share Based Payment 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 items for the purpose of basic
EPS
Effect of dilutive potential ordinary shares
Excluding exceptional items, diluted
Earnings
2019
£m
50.4
–
50.4
50.4
23.4
2.7
76.5
–
76.5
Per share amount
2019
pence
4.31
(0.10)
4.21
4.31
2.00
0.23
6.54
(0.15)
6.39
Earnings
2018
£m
67.4
–
67.4
67.4
24.4
(2.1)
89.7
–
89.7
Per share amount
2018
pence
6.16
(0.17)
5.99
6.16
2.23
(0.19)
8.20
(0.23)
7.97
198
Annual Report and Accounts 2019
Serco Group plc 18. Goodwill
At 1 January 2018
Exchange differences
Acquisitions
At 1 January 2019
Exchange differences
Acquisitions
At 31 December 2019
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Accumulated
impairment losses
£m
Cost
£m
878.0
24.4
16.8
919.2
(31.5)
115.3
1,003.0
(326.7)
(12.9)
–
(339.6)
7.8
–
(331.8)
Carrying
amount
£m
551.3
11.5
16.8
579.6
(23.7)
115.3
671.2
Movements in the balance since the prior year end can be seen as follows:
UK & Europe
Americas
AsPac
Middle East
Goodwill
balance
1 January
2019
£m
184.3
278.9
105.9
10.5
579.6
Additions
2019
£m
Exchange
differences
2019
£m
Impairment
2019
£m
Goodwill
balance
31 December
2019
£m
Headroom on
impairment
analysis
2019
£m
Headroom on
impairment
analysis
2018
£m
–
115.3
–
–
115.3
(1.1)
(18.1)
(4.2)
(0.3)
(23.7)
–
–
–
–
–
183.2
376.1
101.7
10.2
671.2
799.2
420.3
162.7
63.3
593.6
159.4
307.8
57.9
1,445.5
1,118.7
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. The increase in headroom compared to 2018 is predominantly due to a reduction in discount rates in 2019
and additionally from higher forecast cashflows partially offset by an increase in underlying assets.
The key assumptions applied in the impairment review are set out below:
UK & Europe
Americas
AsPac
Middle East
Discount
rate
2019
%
Discount
rate
2018
%
9.4
10.4
9.7
11.9
10.0
10.6
10.0
11.8
Terminal
growth
rate
2019
%
Terminal
growth
rate
2018
%
1.7
2.2
2.3
1.8
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.
Annual Report and Accounts 2019
199
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
18. Goodwill continued
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’s five-year plan are based on internal data
regarding our current contracted position, the pipeline of opportunities and forecast growth for the relevant market.
Short-term profitability and cash conversion is based on our historic experiences and a level of judgement is applied to expected
changes in both. Where businesses have been poor performers in recent history, turnaround has only been assumed where a
detailed and achievable plan is in place and all forecasts include cash flows relating to contracts where onerous contract provisions
have been made.
Terminal growth rates
The calculations include a terminal value based on the projections for the fifth year of the short-term plan, with a growth rate
assumption applied which extrapolates the business into perpetuity. The terminal growth rates are based on long-term inflation
rates of the geographic market in which the CGUs operate and therefore do not exceed the average long-term growth rates
forecast for the individual markets. These are provided by external sources.
Sensitivity analysis
Sensitivity analysis has been performed for each key assumption, a 1% movement in discount rates and a 1% movement in terminal
growth rates are considered to be reasonably possible. No impairment results from these changes being made to the key
assumptions either individually or in combination.
In the CGU with the lowest and most sensitive headroom, a reduction in short term growth rates of approximately 50% would be
required to reduce the headroom to nil.
19. Other intangible assets
Acquisition related
Other
Customer
relationships
£m
Licences
and
franchises
£m
Internally
generated
development
expenditure
£m
Software
and IT
£m
Cost
At 1 January 2019
Arising on acquisition
Additions - internal development
Additions - external
Disposals
Reclassification from/(to) other intangible asset categories
Exchange differences
At 31 December 2019
Accumulated amortisation and impairment
At 1 January 2019
Amortisation charge – internal development
Amortisation charge – external
Disposals
Reclassification from/(to) other intangible asset categories
Exchange differences
At 31 December 2019
Net book value
At 31 December 2019
51.7
52.6
–
–
–
–
(5.2)
99.1
32.2
–
7.4
–
–
(1.2)
38.4
60.7
0.2
–
–
–
–
(0.2)
–
123.1
–
1.8
4.6
(4.7)
0.1
(1.3)
–
123.6
82.8
9.1
3.7
(4.3)
0.2
(1.1)
90.4
0.1
–
0.1
–
(0.2)
–
–
–
Total
£m
231.7
52.6
2.2
4.6
(4.7)
–
(6.8)
279.6
164.4
14.4
11.2
(4.3)
–
(2.6)
183.1
56.7
–
0.4
–
–
0.1
(0.3)
56.9
49.3
5.3
–
–
–
(0.3)
54.3
33.2
2.6
96.5
200
Annual Report and Accounts 2019
Serco Group plc i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
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
Acquisition related
Other
Customer
relationships
£m
Licences
and
franchises
£m
Internally
generated
development
expenditure
£m
Software
and IT
£m
Cost
At 1 January 2018
Arising on acquisition
Eliminated on disposal
Additions - internal development
Additions - external
Disposals
Reclassification from property, plant and equipment
Exchange differences
At 31 December 2018
Accumulated amortisation and impairment
At 1 January 2018
Brought forward reclassification
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
40.3
7.4
67.3
Included in Software and IT and other internally generated development expenditure is an amount of £nil (2018: £3.6m) in respect
of leased intangibles.
Customer relationships are amortised over the average length of contracts acquired. The Group is carrying £60.7m (2018: £19.5m)
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 £7.5m (2018: £4.3m).
The net book value of internally generated intangible assets as at 31 December 2019 was approximately £2.6m (2018: £7.4m) in
development expenditure and £20.7m (2018: £28.0m) in software and IT.
Annual Report and Accounts 2019
201
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
20. Property, plant and equipment
Freehold land
and buildings
Owned
£m
Freehold land
and buildings
Leased
£m
Short-
leasehold
assets
Owned
£m
Machinery,
motor
vehicles
Owned
£m
Machinery,
motor
vehicles
Leased
£m
Cost
At 1 January 2019
Opening adjustment – IFRS16 (note 2)
Arising on acquisition
Additions
Reclassification from/(to) PPE category
Disposals
Exchange differences
At 31 December 2019
Accumulated depreciation and impairment
At 1 January 2019
Opening adjustment – IFRS16 (note 2)
Charge for the year – impairment
Charge for the year – depreciation
Reclassification from/(to) PPE category
Disposals
Exchange differences
At 31 December 2019
Net book value
At 31 December 2019
4.3
–
–
0.1
0.2
–
–
4.6
2.7
–
–
0.1
0.2
–
–
3.0
1.6
0.3
171.0
–
264.5
(0.2)
(6.2)
(5.2)
424.2
0.2
93.0
–
40.8
(0.2)
(4.1)
(1.4)
128.3
30.3
–
2.3
3.3
0.5
(2.0)
(0.8)
33.6
19.5
–
0.1
3.3
–
(1.9)
(0.3)
20.7
96.1
–
1.3
14.1
27.7
(9.4)
(1.5)
77.6
41.2
–
39.8
(28.2)
(2.3)
(1.5)
128.3
126.6
64.2
–
2.3
11.9
27.2
(9.1)
(1.0)
95.5
57.2
15.0
16.5
18.3
(27.2)
(2.1)
(0.5)
77.2
The impairment charge for the year includes £16.5m of impairment charged against right of use assets arising in the year on newly
entered into leases on onerous contracts.
295.9
12.9
32.8
49.4
392.6
Freehold land
and buildings
Owned
£m
Freehold land
and buildings
Leased
£m
Short-
leasehold
assets
Owned
£m
Machinery,
motor
vehicles
Owned
£m
Machinery,
motor
vehicles
Leased
£m
Cost
At 1 January 2018
Arising on acquisition
Eliminated on disposal
Additions
Reclassification from/(to) PPE category
Reclassification to other intangible assets
Disposals
Exchange differences
At 31 December 2018
Accumulated depreciation and impairment
At 1 January 2018
Brought forward reclassification
Eliminated on disposal
Charge for the year – impairment
Charge for the year – depreciation
Reclassification from/(to) PPE category
Reclassification to other intangible assets
Disposals
Exchange differences
At 31 December 2018
Net book value
At 31 December 2018
4.3
–
–
–
–
–
–
–
4.3
2.5
–
–
–
0.2
–
–
–
–
2.7
1.6
0.3
–
–
–
–
–
–
–
0.3
0.2
–
–
–
–
–
–
–
–
0.2
0.1
30.3
0.1
–
6.5
–
–
(7.2)
0.6
30.3
23.8
–
–
–
2.6
–
–
(7.0)
0.1
19.5
100.6
0.1
(1.9)
19.9
7.3
(2.5)
(27.6)
0.2
96.1
71.1
0.3
(1.9)
0.7
9.9
7.5
(1.4)
(22.1)
0.1
64.2
85.8
–
–
3.6
(7.3)
(0.9)
(3.6)
–
77.6
62.4
–
–
–
6.8
(7.5)
(1.0)
(3.5)
–
57.2
10.8
31.9
20.4
64.8
Total
£m
208.6
212.2
3.6
321.8
–
(19.9)
(9.0)
717.3
143.8
108.0
18.9
74.4
–
(17.2)
(3.2)
324.7
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
202
Annual Report and Accounts 2019
Serco Group plc 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 costs
Capitalised mobilisation and phase in costs
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2019
£m
15.2
3.1
–
18.3
2019
£m
270.5
3.8
19.2
293.5
2018
£m
14.9
2.7
5.3
22.9
2018
£m
222.2
4.9
17.2
244.3
The Group’s balance sheet includes capitalised bid and phase in costs 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 from/(to) contract asset
Exchange differences
At 31 December
2019
£m
22.1
7.1
(6.7)
0.9
(0.4)
23.0
Total trade and other receivables held by the Group at 31 December 2019 amount to £342.2m (2018: £329.8m).
Trade and other receivables: Non current
Other investments
Other receivables
Trade and other receivables: Current
Trade receivables
Prepayments
Amounts owed by joint ventures and associates
Security deposits
Other receivables
2019
£m
9.4
17.1
26.5
2019
£m
251.0
41.3
0.6
0.2
22.6
315.7
2018
£m
25.1
3.9
(5.5)
(1.2)
(0.2)
22.1
2018
£m
9.9
20.4
30.3
2018
£m
227.1
51.2
0.7
0.2
20.3
299.5
The Group cancelled its receivables financing facility during December 2019 (facility at 31 December 2018, all of which was unused:
£30.0m).
Annual Report and Accounts 2019
203
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
22. Contract assets, trade and other receivables continued
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 28 days
(2018: 29 days) and no interest was charged on overdue amounts in the current or prior reporting period.
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, £51.8m is due from agencies of the UK Government, the Group’s largest customer, £51.0m from the Australian Government,
£49.9m from the Government of the United Arab Emirates and £34.0m 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 2018, £88.7m
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.
The total amount of bad debt provision for the Group was £5.5m as at 31 December 2019 (2018: £2.8m). The Group does not have
any material impairments associated with expected credit losses. 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.
Ageing of trade receivables
Not due
Overdue by less than 30 days
Overdue by between 30 and 60 days
Overdue by more than 60 days
Allowance for doubtful debts
2019
£m
185.5
43.7
6.4
20.9
(5.5)
251.0
2018
£m
168.2
35.2
9.6
16.9
(2.8)
227.1
Of the total overdue trade receivable balance, 70% (2018: 87%) relates to the Group’s four major governmental customers (being
the governments of the UK, US, Australia and the United Arab Emirates).
Movements on the Group allowance for doubtful debts
At 1 January
Net charges and releases to income statement
Utilised
Exchange differences
At 31 December
2019
£m
2.8
2.9
(0.1)
(0.1)
5.5
Included in the current other receivables balance is a further £1.0m (2018: £5.6m) due from agencies of the UK Government.
23. Cash and cash equivalents
Customer advance payments*
Other cash and short-term deposits
Total cash and cash equivalents
Sterling
2019
£m
–
33.3
33.3
Other
currencies
2019
£m
0.2
56.0
56.2
Total
2019
£m
0.2
89.3
89.5
Sterling
2018
£m
–
38.7
38.7
Other
currencies
2018
£m
1.0
22.8
23.8
2018
£m
3.6
(1.0)
0.2
–
2.8
Total
2018
£m
1.0
61.5
62.5
* Customer advance payments totalling £0.2m (2018: £1.0m) are encumbered cash balances.
Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank
and other short-term highly liquid investments with a maturity of three months or less.
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Serco Group plc 24. Contract liabilities, trade and other payables
Contract liabilities: Current
Deferred income
Contract liabilities: Non current
Deferred income
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£m
66.8
2019
£m
58.2
2018
£m
74.3
2018
£m
86.6
The allocation of deferred income between current and non-current is presented on the basis that the current portion will unwind
in the following twelve months through revenue. There are no material items in the current portion of deferred income in 2018
which did not unwind during the year.
Total trade and other payables held by the Group at 31 December 2019 amount to £503.5m (2018: £443.0m).
Trade and other payables: Current
Trade payables
Other payables
Accruals
The average credit period taken for trade purchases is 36 days (2018: 30 days).
Trade and other payables: Non current
Other payables
25. Lease obligations
Amounts payable under 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
2019
£m
100.8
93.4
294.8
489.0
2019
£m
14.5
2018
£m
67.4
89.6
262.7
419.7
2018
£m
23.3
Minimum lease
payments
2019
£m
Minimum lease
payments
2018
£m
93.3
226.5
69.7
389.5
(19.6)
369.9
(84.6)
285.3
6.1
8.6
0.9
15.6
(0.8)
14.8
(5.7)
9.1
On 1 January 2019, the Group implemented IFRS16 Leases, replacing IAS17 Leases. In applying the modified retrospective
approach to transition, comparative financial information has not been restated. As a result, the amounts shown as being payable
under leases in the table above as at 31 December 2018 represent amounts payable on leases that were classified as finance leases
in accordance with IAS17.
The Directors estimate that the fair value of the Group’s lease obligations approximates their carrying amount. The Group uses
leases in the delivery of its contractual obligations and the services required to support the delivery of those contracts, including
administrative functions. There are no material future cash flows relating to leases in place as at 31 December 2019 that are not
reflected in the minimum lease payments disclosed above and the Group does not have any leases to which it is contracted but
which are not yet reflected in the minimum lease payments.
No lease liability is recognised in respect of leases which have a lease term of less than twelve months in duration at the point of
entering into the lease, or where the purchase price of the underlying right of use asset is less than £5,000.
Annual Report and Accounts 2019
205
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
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)
Amount due for settlement after one year
Total
2019
£m
56.1
93.9
155.0
–
305.0
(56.1)
248.9
Total
2018
£m
21.9
6.4
159.5
51.7
239.5
(21.9)
217.6
Included within amounts repayable within one year is £50.0m (2018: nil) related to the draw down on the revolving credit facility.
These amounts have individual maturity dates within one year, although the amounts are renewable under the terms of the facility
which will remain in place until December 2023. See note 23 for cash balances available.
Other loans
Carrying
amount
2019
£m
305.0
305.0
Fair value
2019
£m
304.9
304.9
Carrying
amount
2018
£m
239.5
239.5
Fair value
2018
£m
229.9
229.9
The fair values are based on cash flows discounted using a market rate appropriate to the loan. All loans are held at amortised
cost.
Analysis of net debt
The analysis below provides a reconciliation between the opening and closing positions in the balance sheet for liabilities arising
from financing activities together with movements in 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
Lease obligations
Liabilities arising from financing
activities
Cash and cash equivalents
Derivatives relating to Net Debt
Net Debt
At 1 January
2019
£m
Opening
adjustment
– IFRS16**
£m
(239.5)
(14.8)
(254.3)
62.5
3.8
(188.0)
–
(129.1)
(129.1)
–
–
(129.1)
Cash
flow
£m
(72.3)
70.2
(2.1)
28.4
–
26.3
–
–
–
0.4
–
0.4
Acquisitions*
£m
Exchange
differences
£m
Non cash
movements
£m
6.7
4.7
0.1
(300.9)
At 31
December
2019
£m
(305.0)
(369.9)
11.4
(1.8)
(2.8)
6.8
(300.8)
–
–
(674.9)
89.5
1.0
(300.8)
(584.4)
* Acquisitions represent the net cash/(debt) acquired on acquisition.
** The opening Net Debt balance has been adjusted to include lease liabilities recognised on the adoption of IFRS16 Leases.
Loans payable
Lease obligations
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)
Cash
flow
£m
33.3
8.7
42.0
(50.4)
(37.4)
–
(45.8)
Acquisitions*
£m
Exchange
differences
£m
Non cash
movements
£m
–
–
–
1.2
–
–
1.2
(12.9)
0.1
(12.8)
(0.4)
–
(9.0)
(22.2)
11.6
(3.4)
8.2
–
11.7
–
19.9
At 31
December
2018
£m
(239.5)
(14.8)
(254.3)
62.5
–
3.8
(188.0)
* Acquisitions represent the net cash/(debt) acquired on acquisition.
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27. Provisions
At 1 January 2019
Opening adjustment – IFRS16 (note 2)
Charged to income statement – exceptional
Charged to income statement – other
Released to income statement – exceptional
Released to income statement – other
Utilised during the year
Unwinding of discount
Exchange differences
At 31 December 2019
Analysed as:
Current
Non-current
Employee
related
£m
Property
£m
Contract
£m
59.5
–
0.4
18.2
(0.3)
(1.1)
(12.4)
–
(2.2)
62.1
8.7
53.4
62.1
12.4
0.8
–
2.1
–
(1.9)
(1.1)
1.1
(0.1)
13.3
6.7
6.6
13.3
82.1
(13.3)
–
10.6
–
(9.6)
(53.6)
0.2
0.1
16.5
15.9
0.6
16.5
Other
£m
85.4
–
–
12.9
(19.1)
(4.8)
(4.0)
–
(0.5)
69.9
27.1
42.8
69.9
Total
£m
239.4
(12.5)
0.4
43.8
(19.4)
(17.4)
(71.1)
1.3
(2.7)
161.8
58.4
103.4
161.8
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 2019, the release from OCPs is reflective of the Group’s ability to
forecast the final years of contracts which are nearing completion. Additional charges of £10.6m (2018: £3.4m) have been made in
respect of future losses on new and existing onerous contract provisions to reflect the updated forecasts as settlements are
agreed and contracts near completion. The additional charges represent certain operational issues and the associated risks which
arise as a result.
The Group operates a large number of long-term contracts at different phases of their contract life cycle. Within the Group’s
portfolio, there are a small number of contracts where the balance of risks and opportunities indicates that they might be onerous
if transformation initiatives or contract changes are not successful. The Group has concluded that these contracts do not require
an onerous contract provision on an individual basis. Following the individual contract reviews, the Group has also undertaken a
top down assessment which assumes that, whilst the contracts may not be onerous on an individual basis, as a portfolio there is a
risk that at least some of the transformation programmes or customer negotiations required to avoid a contract loss, will not be
fully successful, and it is more likely than not that one or more of these contracts will be onerous. Therefore, in considering the
Group’s overall onerous contract provision, the Group has made a best estimate of the provision required to take into
consideration this portfolio risk. As a result, the risk of OCPs and the monitoring of individual contracts for indicators remains a
critical estimate for the Group. The amount recognised in the year is £6.2m at the Trading Profit level within the Corporate costs
segment, which after this charge is therefore £51.7m (2018: £40.1m).
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 rewards fall due 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.
The majority of property provisions relate to leased properties and are associated with the requirement to return properties to
either their original condition, or to enact specific improvement activities in advance of exiting the lease. Dilapidations associated
with leased properties are held as a provision until such time as they fall due, with the longest running lease ending in April 2039.
Annual Report and Accounts 2019
207
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
27. Provisions continued
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 dependent on future events which could occur within the next 12 months or over a
longer period with the majority expected to be settled by 31 March 2023. The exceptional release has been recorded in respect of
a commercial dispute which was settled in 2019. The treatment as exceptional is consistent with the recognition of the original
charge associated with the same matter in 2014.
28. Capital and other commitments
Capital expenditure contracted but not provided
Property, plant and equipment
Intangible assets
2019
£m
21.0
0.8
2018
£m
0.8
0.9
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 (2018: £4.3m). The actual commitment outstanding at 31 December 2019 was £4.3m (2018: £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 2019 was
£257.5m (2018: £225.3m).
The Group has received a claim seeking damages for alleged losses following the reduction in Serco’s share price in 2013. The
merit, likely outcome and potential impact on the group of any such litigation that either has been or might potentially be brought
against the group is subject to a number of significant uncertainties and, therefore, it is not possible to reliably assess the quantum
of any such litigation as at the date of this disclosure.
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 2019 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.
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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
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
Forward foreign exchange contracts
Receivables
Other investments (note 22)
Financial liabilities – current
Derivatives designated as FVTPL
Forward foreign exchange contracts
Derivative instruments in designated hedge
accounting relationships
Forward foreign exchange contracts
Financial liabilities at amortised cost
Trade payables (note 24)
Loans (note 26)
Obligations under finance leases – in accordance
with IAS17 Leases (note 25)
Obligations under leases – in accordance with
IFRS16 Leases (note 25)
Financial liabilities – non current
Financial liabilities at amortised cost
Loans (note 26)
Obligations under finance leases – in accordance
with IAS17 Leases (note 25)
Obligations under leases – in accordance with
IFRS16 Leases (note 25)
Amortised
cost
2019
£m
89.5
–
–
–
251.0
0.2
0.6
–
9.4
–
–
(100.8)
(56.1)
–
(84.6)
(248.9)
–
(285.3)
Fair value
– Level 2
2019
£m
Level 2
2019
£m
Amortised
cost
2018
£m
Fair value
– Level 2
2018
£m
–
2.9
–
0.1
–
–
–
–
–
(1.8)
(0.1)
–
–
–
–
–
–
–
89.5
62.5
–
–
–
251.0
0.2
0.6
–
9.4
–
–
(100.8)
(56.1)
–
–
–
–
227.1
0.2
0.7
–
9.9
–
–
(67.4)
(21.9)
(5.7)
(84.6)
–
(248.8)
(217.6)
–
(285.3)
(9.1)
–
–
2.4
5.1
0.2
–
–
–
0.1
–
(3.7)
–
–
–
–
–
–
–
–
Level 2
2018
£m
62.5
–
–
–
227.1
0.2
0.7
–
9.9
–
–
(67.4)
(21.6)
(5.7)
–
(208.3)
(9.1)
–
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.
Annual Report and Accounts 2019
209
Financial StatementsCorporate GovernanceSerco Group plc
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 £1.1m (2018: net asset of £4.1m) comprising non-current
assets of £nil (2018: £0.1m), current assets of £3.0m (2018: £7.7m), current liabilities of £1.9m (2018: £3.7m) and non-current liabilities
of £nil (2018: £nil).
Currency swaps
Forward foreign exchange contracts
Currency swaps
Forward foreign exchange contracts
Movement in fair
value of
derivatives
designated in
hedge accounting
relationships
£m
Movement in fair
value of
derivatives not
designated in
hedge accounting
relationships
£m
(5.1)
–
(5.1)
–
2.1
2.1
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)
–
–
–
1 January 2019
£m
5.1
(1.0)
4.1
1 January 2018
£m
9.3
3.5
12.8
31 December
2019
£m
–
1.1
1.1
31 December
2018
£m
5.1
(1.0)
4.1
The fair value of financial liabilities recognised at fair value through profit and loss is £1.8m (2018: £3.7m) 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 tenure 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.
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
Term loan facility
Syndicated revolving credit facility
Currency
Sterling
Sterling
Currency
Sterling
Amount
2019
£m
250.0
45.0
Amount
2018
£m
250.0
Utilised
for bonding
facility
2019
£m
–
–
Utilised
for bonding
facility
2018
£m
Total
facility
available
2019
£m
200.0
–
Total
facility
available
2018
£m
–
250.0
Drawn
2019
£m
50.0
45.0
Drawn
2018
£m
–
210
Annual Report and Accounts 2019
Serco Group plc In May 2019, the Group entered into a new £45m term loan facility in order to fund the purchase of Naval Systems Business Unit.
The facility matures in August 2022.
In December 2018 the Group entered into a £250m revolving credit facility with a maturity date of December 2023.
In addition to the banking facilities, the Group has outstanding US private placements of £213.0m (2018: £242.2m) which will be
repaid as bullet repayments between 2020 and 2024.
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During 2019 the Group cancelled its £30.0m receivables financing facility (2018: £30.0m of which £nil was drawn at 31 December 2018).
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.
Following the adoption of IFRS16 Leases from 1 January 2019, liabilities associated with all leases are recognised within financial
liabilities. Leases which would have been previously classified as finance leases in accordance with IAS17 Leases had a total lease
liability at 31 December 2019 of £8.9m which is included in the lease liability below.
At 31 December 2019
Trade payables (note 24)
Obligations under 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 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.
On demand
or within one
year
£m
Between one
and two years
£m
Between two
and five years
£m
After
five years
£m
100.8
84.6
56.1
12.3
407.6
(398.2)
263.2
–
75.2
93.9
10.7
–
–
–
142.9
157.9
12.5
–
–
–
67.2
–
–
–
–
179.8
313.3
67.2
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
Total
£m
100.8
369.9
307.9
35.5
407.6
(398.2)
823.5
Total
£m
67.4
14.8
242.2
46.0
467.5
(471.8)
366.1
Gross cash flows in the table above relating to forward foreign exchange contracts total £398.2m (inflow) and £407.6m (outflow) on
demand or within one year and £nil (inflow) and £nil (outflow) between one and two years (2018: £448.6m (inflow) and £449.8m
(outflow) on demand or within one year and £nil (inflow) and £nil (outflow) between one and two years).
Annual Report and Accounts 2019
211
Financial StatementsCorporate GovernanceSerco Group plc
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 2019, 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 cross currency swaps matured in October 2019 when the corresponding private placement notes were repaid.
The profile of these cross-currency swaps held by the Group in the current and prior year is as follows:
Maturity
October 2019
2019 Receivable
2018 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
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
2019
£m
(3.3)
0.3
3.0
2018
£m
(8.8)
1.7
7.7
All derivatives designated as cash flow hedges are highly effective and as at 31 December 2019 a net fair value gain of £0.1m (2018:
£0.1m) has been deferred in the hedging reserve. During the course of the year to 31 December 2019, £nil (2018: £0.6m) of fair value
gains were transferred to the hedging reserve and £0.1m (2018: £0.1m) reclassified to the consolidated income statement.
The Group has previously designated a portion of the USD denominated private placement notes 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 were taken to reserves. Following the acquisition of Naval Systems Business Unit in 2019, the private placement notes
are not effective as a net investment hedge of the assets and liabilities of Serco North America (Holdings), Inc. As a result,
movements in the value of the private placement notes due to foreign exchange are reported in the income statement. The
Group’s strategy is to utilise natural offsets that exist within the Group to minimise the net movement in the income statement due
to foreign exchange. The value of loans used in the hedging relationship at 31 December 2018 was £194.3m.
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Serco Group plc
iv) Currency sensitivity
The Group’s currency exposures in respect of monetary items at 31 December 2019 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)
2019
£m
0.8
0.1
–
0.9
Equity gain/
(loss)
2019
£m
Pre-tax profits
gain/(loss)
2018
£m
Equity gain/
(loss)
2018
£m
–
–
(0.3)
(0.3)
–
0.1
–
0.1
(0.1)
–
(0.8)
(0.9)
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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
Financial liabilities
US Dollar loans
Other loans
Floating rate
2019
£m
Fixed rate
2019
£m
89.5
–
Weighted
average
interest rate
Floating rate
2019
%
–
2018
£m
62.5
Fixed rate
2018
£m
–
Weighted
average
Floating rate
2019
£m
Fixed rate
2019
£m
interest rate
2019
%
Floating rate
2018
£m
Fixed rate
2018
£m
Weighted
average
interest rate
2018
%
–
Weighted
average
interest rate
2018
%
–
95.0
95.0
213.0
–
213.0
5.3
2.1
4.3
–
–
–
242.2
–
242.2
5.2
–
5.2
Exposure to interest rate fluctuations is mitigated through the issuance of fixed rate debt and the use of interest rate derivatives.
Excluded from the above analysis is £369.9m (2018: £14.8m) of amounts payable under 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 excluding leases 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 2019 of
£0.1m (2018: decrease of £0.2m).
Annual Report and Accounts 2019
213
Financial StatementsCorporate GovernanceSerco Group plc
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 2019 (2018: 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 2019, 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 leases
Equity
Capital
2019
£m
(89.5)
307.9
369.9
542.9
1,131.2
2018
£m
(62.5)
242.2
14.8
386.8
581.3
As at 31 December 2018, the amounts recognised as obligations under leases represent the liability associated only with leases
previously classified as finance leases in accordance with IAS17 Leases.
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Annual Report and Accounts 2019
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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 2020 are £12.7m (2019: £4.9m).
Among our non-contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The most recent
full actuarial valuation of this scheme was undertaken as at 5 April 2018 and resulted in an actuarially assessed deficit of £26.0m 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 2019 the estimated actuarial deficit of SPLAS was £27.0m (2018: £27.8m)
based on the actuarial assessment on the funding basis whereas the accounting valuation resulted in an asset of £78.3m
(2018: £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 2019, with 30.8% of pensionable salaries due to be paid from 1 November
2019, changing to 30.3% from 1 November 2020. The schedule of contributions also determined that additional shortfall
contributions were required – a total of £5.2m of these have already been made, with further amounts of £4m due in both March
2020 and March 2021 then £1.7m for the years 2022 to 2028.
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, 44% of the scheme’s assets are annuity policies, 32% 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 decreased from 2.86% p.a. to 2.05% p.a. during 2019 resulting in an increase 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. SPLAS previously transferred assets to a passive LDI portfolio managed by BlackRock, over the
course of late 2016 and early 2017. This ensures that the scheme remains protected against changes to interest rates and long
term inflation expectations, with the funding level therefore being relatively stable. The Buy and Maintain credit
implementation comprises four tranches, the final of which is expected to be completed by June 2020, market conditions
permitting.
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.
Annual Report and Accounts 2019
215
Financial StatementsCorporate GovernanceSerco Group plc
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 the unfunded scheme
amount to £0.4m (2018: £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
In June 2019, the company and the Trustees of SPLAS finalised the 2018 valuation. This led to a new schedule of contributions.
Following a 60-day consultation, most active SPLAS members agreed to a small increase in their own contributions, enabling a
reduction in employer contributions.
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
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
2019
£m
Non contract
specific
2019
£m
1.1
0.2
–
1.3
(0.4)
(0.1)
0.5
–
3.2
1.2
2.0
6.4
(37.5)
–
35.4
(2.1)
Total
2019
£m
4.3
1.4
2.0
7.7
(37.9)
(0.1)
35.9
(2.1)
216
Annual Report and Accounts 2019
Serco Group plc 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 (loss)/profit on reimbursable rights
Total pension loss recognised in the SOCI
Recognised in the income statement
Current service cost – employer
Past service cost
Administrative expenses and taxes
Recognised in arriving at operating profit
Interest income on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Finance income
Included within the SOCI
Actual return on scheme assets
Less: interest income on scheme assets
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurements
Change in members’ share
Actuarial (loss)/profit on reimbursable rights
Total pension gain recognised in the SOCI
Contract
specific
2019
£m
Non contract
specific
2019
£m
2.8
(0.5)
2.3
(0.7)
(4.8)
–
(3.2)
2.0
1.1
3.1
(0.1)
125.3
(37.6)
87.7
40.6
(143.8)
(1.6)
(17.1)
–
0.1
0.1
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Total
2019
£m
128.1
(38.1)
90.0
39.9
(148.6)
(1.6)
(20.3)
2.0
1.2
3.2
(17.0)
(17.1)
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)
Contract
specific
2018
£m
Non contract
specific
2018 (restated*)
£m
Total
2018
(restated*)
£m
(0.5)
(0.4)
(0.9)
–
1.7
–
0.8
(0.3)
(0.3)
0.5
40.7
(33.4)
7.3
(48.9)
74.0
18.9
51.3
0.1
0.1
51.4
40.2
(33.8)
6.4
(48.9)
75.7
18.9
52.1
(0.2)
(0.2)
51.9
* For the year ended 31 December 2018 a reassessment of the causes of changes in the liability associated with the SPLAS scheme identified that the
previously disclosed effect of experience adjustments contained a component that related to a change in demographic assumptions. There is no impact
on the closing liability associated with the SPLAS scheme and no impact on the Group's gross or net pension assets or obligations.
Annual Report and Accounts 2019
217
Financial StatementsCorporate GovernanceSerco Group plc
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:
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
Scheme assets at fair value
Equities
Bonds except LDIs
LDIs
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)
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)
1,408.5
(1,353.4)
1,429.2
(1,384.5)
Contract
specific
2019
£m
Non contract
specific
2019
£m
10.8
4.1
–
1.7
4.1
–
20.7
(31.1)
(10.4)
5.8
3.8
(0.8)
(0.8)
–
(0.8)
–
(0.8)
43.9
298.1
447.4
–
5.1
614.0
55.1
–
–
55.1
(23.2)
78.3
55.1
(9.2)
45.9
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
2019
£m
54.7
302.2
447.4
1.7
9.2
614.0
44.7
5.8
3.8
54.3
(24.0)
78.3
54.3
(9.2)
45.1
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)
(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
64.9
3.7
2.3
70.9
(14.9)
85.8
70.9
(9.9)
61.0
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
218
Annual Report and Accounts 2019
Serco Group plc 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.
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.
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Changes in the fair value of scheme liabilities
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 1 January 2019
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
At 31 December 2019
Changes in the fair value of scheme 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 1 January 2019
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 2019
Contract
specific
£m
Non contract
specific
£m
23.4
1.1
0.5
–
0.1
0.4
0.1
(0.1)
(1.7)
–
23.8
1.0
0.5
0.2
0.1
0.5
0.1
(0.6)
0.7
4.8
–
31.1
1,341.3
4.6
–
9.3
0.2
32.6
–
(80.7)
(74.0)
30.0
1,263.3
3.2
–
1.2
0.2
35.5
–
(54.9)
(40.6)
143.9
1.6
1,353.4
Contract
specific
£m
Non contract
specific
£m
17.4
0.4
0.1
–
0.5
0.2
(0.1)
(0.9)
17.6
0.4
0.1
(0.1)
0.6
0.3
(0.5)
2.3
20.7
1,367.6
33.3
–
(3.8)
10.2
0.3
(80.7)
7.4
1,334.3
37.6
–
(2.0)
5.5
0.3
(54.9)
87.7
1,408.5
Total
£m
1,364.7
5.7
0.5
9.3
0.3
33.0
0.1
(80.8)
(75.7)
30.0
1,287.1
4.2
0.5
1.4
0.3
36.0
0.1
(55.5)
(39.9)
148.7
1.6
1,384.5
Total
£m
1,385.0
33.7
0.1
(3.8)
10.7
0.5
(80.8)
6.5
1,351.9
38.0
0.1
(2.1)
6.1
0.6
(55.4)
90.0
1,429.2
Annual Report and Accounts 2019
219
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
31. Retirement benefit schemes continued
Changes in the franchise adjustment
At 1 January 2018
Interest on franchise adjustment
At 1 January 2019
Interest on franchise adjustment
Recognised in the SOCI
At 31 December 2019
Total
£m
3.6
0.1
3.7
0.1
2.0
5.8
v) Actuarial assumptions: SPLAS
The assumptions set out below are for SPLAS, which reflects 91% of total liabilities and 94% of total assets of the defined benefit
pension schemes in which the Group participates. The significant actuarial assumptions with regards to the determination of the
defined benefit obligation are set out below.
The Group has updated its approach to setting RPI and CPI inflation assumptions in light of the RPI reform proposals published on
the 4th September 2019 by the UK Chancellor and UK Statistics Authority.
The Group continued to set RPI inflation in line with the market break-even expectations less an inflation risk premium.
The inflation risk premium has been increased from 0.2% at 31 December 2018 to 0.4% at 31 December 2019, reflecting an
allowance for additional market distortions caused by the RPI reform proposals. For CPI, the Group reduced the assumed
difference between the RPI and CPI by 0.4% to an average of 0.6% per annum.
The estimated impact of the change in the methodology is approximately a £20m increase in the defined benefit obligation in
respect of the SPLAS scheme.
The average duration of the benefit obligation at the end of the reporting period is 16.8 years (2018: 16.1 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
2019
%
2018
%
2.70
2.20 (CPI) and 3.00 (RPI)
2.30 (CPI) and 3.30 (RPI)
2.20 (CPI) and 3.20 (RPI)
2.10
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
2019
years
21.6
24.1
23.8
26.2
2018
years
22.6
25.1
24.4
27.0
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 2019 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 2019 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
2019
£m
(108.5)
122.9
88.9
(83.3)
3.2
(3.1)
48.6
2018
£m
(102.8)
112.2
66.9
(64.7)
2.4
(2.3)
39.9
220
Annual Report and Accounts 2019
Serco Group plc i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Management acknowledges that the method used of presuming that all other assumptions remaining constant has inherent
limitation given that it is more likely for a combination of changes, but highlights the value of each individual risk and is therefore a
suitable basis for providing this analysis.
Assumptions in respect of the expected return on scheme assets are required when calculating the franchise adjustment for the
contract-specific plans. These assumptions are based on market expectations of returns over the life of the related obligation. Due
consideration has been given to current market conditions as at 31 December 2019 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% (2018: 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 £69.2m (2018: £73.6m) 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 (2018: 1,098,564,237) ordinary shares of 2p each at 1 January
Issued: 124,816,400 ordinary shares of 2p
1,223,380,637 (2018: 1,098,564,237) ordinary shares of 2p each at 31
2019
£m
22.0
2.5
Number
2019
millions
1,098.6
124.8
2018
£m
22.0
–
Number
2018
millions
1,098.6
–
December
24.5
1,223.4
22.0
1,098.6
In May 2019, the company completed a placement of 111,216,400 new ordinary shares of 2p each raising net proceeds of £138.7m
(2018: nil). Additionally, in March 2019, 13,600,000 shares were issued to the Employee Share Ownership Trust to satisfy awards
under the Group’s share award schemes.
The Company has one class of ordinary shares which carry no right to fixed income.
33. Share premium account
At 1 January
Arising on shares issued
At 31 December
2019
£m
327.9
135.0
462.9
2018
£m
327.9
–
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 awards schemes satisfied by own shares.
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 award schemes. At 31 December 2019, the
ESOT held 4,805,612 (2018: 3,527,740) shares equal to 0.4% of the current allotted share capital (2018: 0.3%). The market value of
shares held by the ESOT as at 31 December 2019 was £7.8m (2018: £3.4m).
Annual Report and Accounts 2019
221
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
34. Reserves continued
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.
Hedging
reserve
£m
Translation
reserve
£m
At 1 January 2018
Total comprehensive income for the year
At 1 January 2019
Total comprehensive income for the year
At 31 December 2019
(0.7)
0.6
(0.1)
(0.1)
(0.2)
35. Share based payment expense
The Group recognised the following expenses related to equity settled share based payment transactions:
Long Term Incentive Plan
Performance Share Plan
Deferred Bonus Plan
Equity Settled Bonus Plan
10.8
(5.3)
5.5
(33.3)
(27.8)
2019
£m
2.0
7.8
1.4
0.4
11.6
Total
£m
10.1
(4.7)
5.4
(33.4)
(28.0)
2018
£m
–
13.1
1.6
–
14.7
Long Term Incentive Plan (LTIP)
Under the LTIP, eligible employees have been granted conditional share awards. Awards vest after the performance period of two
to three years and are subject to the achievement of certain performance measures, with the exception of non-performance
awards. These non-performance awards are only subject to continued employment on vesting dates which vary from two to three
years after the grant dates.
On the performance related awards, the performance measures are Earnings per Share (EPS), Total Shareholder Return (TSR),
Return on Invested Capital (ROIC) and measures linked to Strategic Objectives.
Outstanding at 1 January
Granted during the year
Lapsed during the year
Outstanding at 31 December
Number of
shares under
award
2019
thousands
Weighted
average
exercise price
2019
£
Number of
shares under
award
2018
thousands
Weighted
average
exercise price
2018
£
–
11,832
(364)
11,468
nil
nil
nil
nil
–
–
–
–
nil
nil
nil
nil
The awards over shares outstanding at 31 December 2019 were all unvested and had a weighted average contractual life of 2.4
years (2018: nil years).
In the year, eight grants were made, of which six were non-performance. The remaining two 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% linked to Strategic Objectives based on improvements in order book and
employee engagement. The rewards subject to market-based performance conditions (such as the TSR condition for these
awards) were valued using the Monte Carlo Simulation model. For rewards subject only to non-market-based performance
conditions (such as the EPS and ROIC conditions) a Black-Scholes model has been used. A Black-Scholes model 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 awards granted under schemes where
there are changes in performance conditions by which the awards are measured, such as for the Absolute Share Price or TSR
based awards.
222
Annual Report and Accounts 2019
Serco Group plc The Monte Carlo and Black-Scholes models used the following inputs:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2019
£1.32
nil
31.7%
3 years
0.55%
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 awards granted under this scheme in the year is £1.25 (2018: nil).
Performance Share Plan (PSP)
Under the PSP, eligible employees have been granted options or conditional share awards with an exercise price of two or zero
pence. Awards vest after the performance period of two to five years and are subject to the achievement of certain performance
measures, with the exception of non-performance awards. These non-performance awards are only subject to continued
employment on vesting dates which vary from two to five 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 linked 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, then 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 or shares
under award
2019
thousands
Weighted
average
exercise price
2019
£
Number of
options or shares
under award
2018
thousands
Weighted
average
exercise price
2018
£
43,551
–
(10,906)
(4,160)
28,485
0.02
–
0.02
0.02
0.02
41,001
15,213
(4,445)
(8,218)
43,551
0.02
0.02
0.02
0.02
0.02
Of these awards, 4,373,694 (2018: 3,829,638) were exercisable at the end of the year. The awards outstanding at 31 December 2019
had a weighted average contractual life of 6.9 years (2018: 7.4 years).
The awards subject to market-based performance conditions (such as the TSR condition for these awards), were valued using the
Monte Carlo Simulation model. For awards subject only to non-market-based performance conditions (such as the EPS and ROIC
conditions) a Black-Scholes model has been used. A Black-Scholes model 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 awards granted under schemes where
there are changes in performance conditions by which the awards are measured, such as for the Absolute Share Price or TSR
based awards.
There were no new awards grated under the Performance Share Plan in the year.
Annual Report and Accounts 2019
223
Financial StatementsCorporate GovernanceSerco Group plc
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 participate in a voluntary bonus deferral, using up to 50% of their earned annual
bonus to purchase shares in the Group at market price. In connection with this, the Group will make a matching share award, up to
a maximum of two times the gross bonus deferred, which will vest provided they remain in employment for that period, the shares
are retained for that period and the performance measures have been met.
Outstanding at 1 January
Granted during the year
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
shares under
award
2019
thousands
Weighted
average
exercise price
2019
£
Number of
shares under
award
2018
thousands
Weighted
average
exercise price
2018
£
5,021
496
(2,137)
–
3,380
nil
nil
nil
nil
nil
4,894
956
(755)
(74)
5,021
nil
nil
nil
nil
nil
The awards over shares outstanding at 31 December 2019 and 2018 were all unvested and had a weighted average contractual life
of 1.0 years (2018: 1.2 years).
There were 496,536 new awards granted under the Deferred Bonus Plan in the year, subject to the same EPS performance
conditions as the LTIP. The awards were valued using a Black-Scholes model.
The Black-Scholes model used the following inputs:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
2019
£1.46
nil
30.5%
3 years
0.52%
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 awards granted under this scheme in the year is £1.46 (2018: £0.99).
Equity Settled Bonus Plan (ESBP)
Under the ESBP, eligible employees who are subject to a compulsory bonus deferral, are granted share awards equivalent in value
to the gross bonus deferred. The awards vest at the end of the deferral period and the awards are not subject to any performance
or service conditions.
Outstanding at 1 January
Granted during the year
Outstanding at 31 December
Number of shares
under award
2019
thousands
Weighted
average
exercise price
2019
£
Number of
shares under
award
2018
thousands
Weighted
average
exercise price
2018
£
–
308
308
nil
nil
nil
–
–
–
nil
nil
nil
The awards over shares outstanding at 31 December 2019 were all unvested and had a weighted average contractual life of 2.3
years (2018: nil).
There were 308,182 new awards granted under the Equity Settled Bonus Plan in the year. The awards were valued using a
Black-Scholes model.
224
Annual Report and Accounts 2019
Serco Group plc The Black-Scholes Model used the following inputs:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life
Risk free rate
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2019
£1.23
nil
32.1%
3 years
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 awards granted under this scheme in the year is £1.23 (2018: nil).
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
2019
thousands
Weighted
average exercise
price
2019
£
Number of
options
2018
thousands
Weighted
average
exercise price
2018
£
55
(55)
–
3.88
(3.88)
–
93
(38)
55
4.16
(0.28)
3.88
At the end of 2019, all remaining options had lapsed. In 2018, 54,545 options were exercisable at the end of the year, with a
weighted average exercise price of £3.88.
The options outstanding at 31 December 2018 had a weighted average contractual life of 0.37 years and an exercise price of £3.88.
In 2018 the weighted average share price at the date of exercise approximated to the weighted average share price during the
year, which was £0.95.
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.
Annual Report and Accounts 2019
225
Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Consolidated Financial
Statements continued
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
Transactions 2019
£m
Current
outstanding at 31
December 2019
£m
Non current
outstanding at 31
December 2019
£m
1.3
8.4
7.8
17.6
4.4
39.5
0.1
0.5
–
–
4.8
5.4
–
–
–
–
–
–
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.
Sale of goods and services
Joint ventures
Associates
Other
Dividends received – joint ventures
Dividends received – associates
Receivable from consortium for tax – joint ventures
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
–
–
–
–
–
–
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
2019
£m
8.9
5.3
14.2
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive
Committee (2019: 17 individuals, 2018: 17 individuals).
Aggregate Directors’ Remuneration
The total amounts for Directors’ remuneration in accordance with Schedule 5 to the Accounting Regulations were as follows:
Salaries, fees, bonuses and benefits in kind
Amounts receivable under long-term incentive schemes
Gains on exercise of share options
2019
£m
3.9
3.0
5.1
12.0
2018
£m
9.5
5.3
14.8
2018
£m
4.0
3.1
1.8
8.9
226
Annual Report and Accounts 2019
Serco Group plc 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 134 to 148.
37. Notes to the consolidated cash flow statement
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Year ended 31 December
Operating profit for the year
Adjustments for:
Share of profits in joint ventures and associates
Share based payment expense
Impairment of property, plant and equipment
Impairment of intangible assets
Depreciation of property, plant and equipment
Amortisation of intangible assets
Exceptional loss on disposal of subsidiaries
and operations
Reversal of impairment on loan balances
Profit on early termination of leases
(Profit)/loss on disposal of property, plant and
equipment
Loss on disposal of intangible assets
Exceptional Interest in JV
Decrease in provisions
Other non cash movements
Total non cash items
Operating cash inflow/(outflow) before movements
in working capital
Decrease/(increase) in inventories
(Increase)/decrease in receivables
Increase/(decrease) in payables
Movements in working capital
Cash generated by operations
Tax paid
Non cash R&D expenditure
Net cash inflow/(outflow) from operating activities
2019
Before
exceptional
items
£m
2019
Exceptional
items
£m
2018
Before
exceptional
items
£m
2018
Exceptional
items
£m
2019
Total
£m
125.9
(23.4)
102.5
112.4
(31.9)
(27.5)
11.6
18.9
–
74.4
25.6
–
–
(0.9)
(0.6)
0.4
–
(43.1)
(1.2)
57.6
183.5
4.4
(36.7)
32.2
(0.1)
183.4
(31.2)
(0.1)
152.1
–
–
–
–
–
–
–
–
–
–
–
–
(20.5)
–
(20.5)
(43.9)
–
–
(5.3)
(5.3)
(49.2)
–
–
(49.2)
(27.5)
11.6
18.9
–
74.4
25.6
–
–
(0.9)
(0.6)
0.4
–
(63.6)
(1.2)
37.1
139.6
4.4
(36.7)
26.9
(5.4)
134.2
(31.2)
(0.1)
102.9
(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)
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
Additions to property, plant and equipment during the year amounting to £304.3m (2018: £3.6m) were financed by new leases.
38. Post balance sheet events
Subsequent to the year-end, the Board has recommended the payment of a final dividend in respect of the year ended
31 December 2019 of 1.0p. The dividend remains subject to shareholder approval at the Annual General Meeting and therefore no
amounts have been recognised in respect of a dividend in these financial statements.
Following the balance sheet date the UK formally left the European Union, which happened as expected following the result of the
General Election in December 2019. The transition period is expected to end on 31 December 2020 and the current shape of the
economic and political partnership between the UK and EU is not known. Notwithstanding this, as outlined in the Chief Executive’s
review on page 32 the Group’s direct exposure to Brexit is small as Serco neither exports nor imports to any significant degree; our
business in continental Europe is conducted through long-established local subsidiaries; and we employ relatively few continental
European citizens in the UK.
Annual Report and Accounts 2019
227
Financial StatementsCorporate GovernanceSerco Group plc
Company Balance Sheet
At 31 December
Non current assets
Property, plant and equipment
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
Corporation tax asset
Cash at bank and in hand
Total assets
Creditors: amounts falling due within one year
Trade and other payables
Borrowings
Provisions
Corporation tax liability
Derivative financial instruments
Net current assets
Creditors: amounts falling due after more than one year
Trade and other payables
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
40
41
42
42
46
46
43
44
45
46
43
44
45
48
49
50
51
53
2019
£m
0.1
2,029.5
2,029.6
4.6
211.9
2.9
–
0.4
14.2
234.0
2018
£m
–
2,021.7
2,021.7
3.2
381.0
–
7.5
–
36.5
428.2
2,263.6
2,449.9
(67.2)
(56.1)
(9.0)
–
(1.8)
(134.1)
99.9
(0.1)
(248.9)
(782.9)
(41.1)
(1,073.0)
(1,207.1)
1,056.5
24.5
462.9
0.1
515.5
57.9
(4.4)
–
1,056.5
(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
The accompanying notes form an integral part of the financial statements.
The financial statements (registered number 02048608) were approved by the Board of Directors on 25 February 2020 and signed
on its behalf by:
Rupert Soames
Group Chief Executive Officer
Angus Cockburn
Group Chief Financial Officer
228
Annual Report and Accounts 2019
Serco Group plc
Company Statement of Changes in Equity
Share capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Profit and
loss account
£m
Share based
payment
reserve
£m
Own
shares
reserve
£m
Hedging and
translation
reserve
£m
Total
shareholders’
equity
£m
22.0
327.9
0.1
617.6
74.0
(46.1)
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
At 1 January 2019
Total comprehensive income
for the year
Issue of share capital
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
22.0
327.9
0.1
580.0
–
2.5
–
135.0
–
–
–
–
–
–
–
–
–
–
–
(64.5)
–
–
–
–
(37.6)
–
–
(28.0)
27.4
(0.6)
0.4
–
–
–
994.9
(37.2)
(0.6)
11.2
3.5
–
–
11.2
3.5
60.7
–
–
(18.7)
(0.2)
971.8
–
(0.3)
0.2
–
(64.3)
137.2
(14.4)
14.6
7.8
3.8
57.9
–
–
(4.4)
–
–
–
–
0.2
7.8
3.8
1,056.5
At 31 December 2019
24.5
462.9
0.1
515.5
The accompanying notes form an integral part of the financial statements.
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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 £64.5m
(2018: £37.6m), and loss in total comprehensive income for the year was a loss of £64.3m (2018: loss of £37.2m).
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. Property, plant and equipment
Leased motor vehicles of £0.1m have been included on the balance sheet following the adoption of IFRS16.
41. Investments held as fixed assets
Shares in subsidiary companies at cost
At 1 January 2018
Options over parent’s shares awarded to employees of subsidiaries
At 1 January 2019
Options over parent’s shares awarded to employees of subsidiaries
At 31 December 2019
The Company directly owns 100% of the ordinary share capital of the following subsidiaries:
Name
Serco Holdings Limited
42. Debtors
Amounts due within one year
Other debtors
Amounts due after more than one year
Amounts owed by subsidiary companies
£m
2,010.5
11.2
2,021.7
7.8
2,029.5
% ownership
100%
2019
£m
4.6
2019
£m
211.9
2018
£m
3.2
2018
£m
381.0
230
Annual Report and Accounts 2019
Serco Group plc 43. Trade and other payables
Amounts due within one year
Amounts owed to subsidiary companies
Trade creditors
Accruals and deferred income
Other creditors including taxation and social security
Amounts due after more than one year
Other creditors
44. 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
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£m
49.7
0.3
14.6
2.6
67.2
2019
£m
0.1
2019
£m
305.0
(56.1)
248.9
56.1
93.9
155.0
–
305.0
2018
£m
42.5
1.6
13.7
2.8
60.6
2018
£m
–
2018
£m
239.5
(21.9)
217.6
21.9
6.4
159.5
51.7
239.5
Included within amounts repayable within one year is £50.0m (2018: nil) related to the draw down on the revolving credit facility.
These amounts have individual maturity dates within one year, although the amounts are renewable under the terms of the facility
which will remain in place until December 2023.
45. Provisions
At 1 January 2019
Charged to income statement
At 31 December 2019
Analysed as:
Current
Non current
Contract
£m
–
6.2
6.2
6.2
–
6.2
Other
£m
43.9
–
43.9
2.8
41.1
43.9
Total
£m
43.9
6.2
50.1
9.0
41.1
50.1
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.
Annual Report and Accounts 2019
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Financial StatementsCorporate GovernanceSerco Group plc
Notes to the Company Financial
Statements continued
–
(3.7)
(3.7)
–
(3.7)
(3.7)
2018
£m
0.3
0.8
29.5
30.6
46. Derivative financial instruments
Currency swaps
Forward foreign exchange contracts
Analysed as:
Non current
Current
Assets
2019
£m
Liabilities
2019
£m
Assets
2018
£m
Liabilities
2018
£m
–
2.9
2.9
–
2.9
2.9
–
(1.8)
(1.8)
–
(1.8)
(1.8)
5.1
2.4
7.5
7.5
–
7.5
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.
47. 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
48. Called up share capital
2019
£m
0.3
0.9
31.8
33.0
Issued and fully paid
1,098,564,237 (2018: 1,098,564,237) ordinary shares of 2p each at 1 January
Issue: 124,816,400 ordinary shares of 2p
1,223,380,637 (2018: 1,098,564,237) ordinary shares of 2p each at 31 December
2019
£m
22.0
2.5
24.5
Number
2019
millions
1,098.6
124.8
1,223.4
2018
£m
22.0
–
22.0
Number
2018
millions
1,098.6
–
1,098.6
In May 2019, the company completed a placement of 111,216,400 new ordinary shares of 2p each raising net proceeds of £138.7m
(2018: nil). Additionally, in March 2019, 13,600,000 shares were issued to the Employee Share Ownership Trust to satisfy awards
under the Group’s share award schemes.
The Company has one class of ordinary shares which carry no right to fixed income.
49. Share premium account
At 1 January
Arising on shares issued
At 31 December
50. Profit and loss account
At 1 January
Loss for the year
At 31 December
2019
£m
327.9
135.0
462.9
2019
£m
580.0
(64.5)
515.5
2018
£m
327.9
–
327.9
2018
£m
617.6
(37.6)
580.0
232
Annual Report and Accounts 2019
Serco Group plc 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 £64.5m (2018: loss of £37.6m), and loss in total comprehensive income for the year
was a loss of £64.3m (2018: loss of £37.2m).
The Company plans to maintain sufficient funds and distributable reserves to allow payments of projected dividends to
shareholders. During 2015 Serco Group plc, as a statutory entity, created £519m of reserves from the Rights Issue which was
structured to ensure that these reserves were distributable. The majority of these reserves remain and are available to facilitate the
payment of distributions by Serco Group plc.
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51. 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
2019
£m
60.7
7.8
3.8
(14.4)
57.9
2018
£m
74.0
11.2
3.5
(28.0)
60.7
Details of the share based payment disclosures are set out in note 35 of the Group’s consolidated financial statements.
52. 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 award schemes. At 31 December 2019, the
ESOT held 4,805,612 (2018: 3,527,740) shares equal to 0.4% of the current allotted share capital (2018: 0.3%). The market value of
shares held by the ESOT as at 31 December 2019 was £7.8m (2018: £3.4m).
53. Hedging and translation reserve
At 1 January
Fair value gain on cash flow hedges during the period
At 31 December
2019
£m
(0.2)
0.2
–
2018
£m
(0.6)
0.4
(0.2)
54. 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 (2018: £4.3m). The actual commitment outstanding at 31 December 2019 was £4.3m (2018: £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
2019 was £239.8m (2018: £207.0m).
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 has received a claim seeking damages for alleged losses following the reduction in Serco’s share price in 2013. The
merit, likely outcome and potential impact on the group of any such litigation that either has been or might potentially be brought
against the group is subject to a number of significant uncertainties and, therefore, it is not possible to reliably assess the quantum
of any such litigation as at the date of this disclosure.
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.
55. 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.
Annual Report and Accounts 2019
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Appendix: List of Subsidiaries and
Related Undertakings
Serco Group
interest
Registered office address
Company name
Aeradio Technical Services WLL2/4
Aeradio Technical Services LLC
Alion-IPS Corporation
AWE Management Limited3
AWE Pension Trustees Limited
AWE plc
BAS-Serco Limited
Cardinal Insurance Company Limited
CCM Software Services Ltd2
COMPASS SNI Limited
Conflucent Innovations, LLC
Djurgardens Farjetrafik AB
DMS Maritime Pty Limited
Hong Kong Parking Limited
Innu Serco Inc
Innu Serco Limited Partnership
International Aeradio (Emirates) LLC – Abu
Dhabi
49%
49%
100%
24.5%
24.5%
24.5%
10%
100%
100%
100%
49%
50%
100%
40%
49%
49%
49%
International Aeradio (Emirates) LLC – Dubai
49%
JBI Properties Services Company LLC
Khadamat Facilities Management LLC
LOGTEC Inc.
Mahani Technical Services, LLC
Merseyrail Electrics 2002 Limited
Merseyrail Infraco Limited
49%
49%
100%
49%
50%
50%
Merseyrail Services Holding Company Limited3 50%
Northern Rail Holdings Limited
Northern Rail Limited
50%
50%
Priority Properties North West Limited
100%
Headquarters Building, Building # 1605, Road # 5141, Askar # 951,
PO Box 26803 Manama, Kingdom of Bahrain
Headquarters Building, PO Box 126, Doha, Qatar
12930 Worldgate Drive, Suite 600, Herndon VA 20170, United States
Room 20, Building F161.2 Atomic Weapons Establishment,
Aldermaston, Reading, RG7 4PR, United Kingdom
Room 20, Building F161.2 Atomic Weapons Establishment,
Aldermaston, Reading, RG7 4PR, United Kingdom
Room 20, Building F161.2 Atomic Weapons Establishment,
Aldermaston, Reading, RG7 4PR, United Kingdom
Clarendon House, 2 Church Street, Hamilton, HM11, Bermuda
Maison Trinity, Trinity Square, St Peter Port Guernsey
135 Hillside, Greystones, Co Wicklow 216410, Ireland
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, United Kingdom
5880 Innovation Drive, Dublin, OH 43016, United States
Svensksundsvagen 17, 111 49 Stockholm
Sweden
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
Room 2601, World Trade Centre, 280 Gloucester Road, Causeway
Bay, Hong Kong
P.O. Box 1012, Station C, Happy Valley – Goose Bay,
NL, A0P 1C0, Canada
P.O. Box 1012, Station C, Happy Valley – Goose Bay,
NL, A0P 1C0, Canada
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
12930 Worldgate Drive, Suite 600, Herndon VA 20170, United States
Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, Delaware 19801
Rail House, Lord Nelson Street, Liverpool, Merseyside, L1 1JF
Rail House, Lord Nelson Street, Liverpool, Merseyside, L1 1JF
Eversheds House, 70 Great Bridgewater Street, Manchester,
Lancashire, M1 5ES United Kingdom
Eversheds House, 70 Great Bridgewater Street, Manchester,
Lancashire, M1 5ES United Kingdom
Serco House 16 Bartley Wood, Business Park Bartley Way, Hook,
Hampshire, RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way,
Hook, Hampshire, United Kingdom
Serco (Jersey) Limited
Serco Australia Pty Limited3
Serco Belgium S.A
100%
100%
100%
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
234
Annual Report and Accounts 2019
Serco Group plc Serco Group
interest
Registered office address
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Company name
Serco Caledonian Sleepers Limited
Serco Canada Inc.
Serco Canada Marine Corporation
Serco Citizen Services Pty Ltd
Serco Consulting Bahrain WLL
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%
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 Pty Limited
Serco Holdings Limited1
Serco Inc.3
Serco Integrated Transport Private Limited2
Serco International Limited
Serco International S.à r.l
Serco Italia SpA
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
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Basement And Ground Floor Premises, 1-5 Union Street, Inverness,
IV1 1PP, Scotland, United Kingdom
330 Bay Street, Suite 400, Toronto, Canada M5H 2S8
12930 Worldgate Drive, Suite 600, Herndon VA 20170, United States
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
Diplomatic Area, Road 1702, Block 317, Building 125, Flat 407,
Manama, Kingdom of Bahrain
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, 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, RG27 9UY, 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, RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, 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
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, United Kingdom
12930 Worldgate Drive, Suite 600, Herndon VA 20170, United States
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, RG27 9UY, United Kingdom
17 Boulevard Royal, L-2449, Luxembourg
Viale della Tecnica 161, 00144, Rome, Italy
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, United Kingdom
Rue de Neudorf, 560A, L2200, Luxembourg
Kapteynstraat 1, 2201 BB Noordwijk ZH, Netherlands
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
Annual Report and Accounts 2019
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Appendix: List of Subsidiaries and
Related Undertakings continued
Company name
Serco North America (Holdings), Inc.
Serco North America Limited
Serco Paisa Limited
Serco PIK Limited
Serco Pension Trustee Limited
Serco Projects LLC
Serco Regional Services Limited
Serco Safety Services L.L.C.5
Serco Sarl
Serco SAS
Serco Saudi Arabia LLC
Serco Saudi Services L.L.C.
Serco Services GmbH
Serco Services Inc.
Serco Services Ireland Limited
Serco Singapore Pte Limited
Serco Switzerland SA
Serco Traffic Camera Services (VIC)
Pty Limited
Serco-IAL Limited
Viapath Services LLP
Viapath Analytics LLP
VIAPATH Group LLP
Vivo Defence Services Limited
Serco Group
interest
Registered office address
100%
100%
50%
100%
100%
49%
100%
49%
100%
100%
100%
60%
100%
100%
100%
100%
100%
100%
100%
33%
33%
33%
50%
1209 Orange Street, Wilmington, DE 19801, United States
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, 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, RG27 9UY, United Kingdom
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, 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, RG27 9UY, United Kingdom
Hala Business Center, Al Khor Building, Office 201, 202, Baniyas
Street, Al Buteen Area Deira, Dubai
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
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
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
62 Route de Frontenex Bis 86, 1208 Geneva, Switzerland
Level 24, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, United Kingdom
Francis House, 9 King's Head Yard, London, SE1 1NA, United
Kingdom
Francis House, 9 King's Head Yard, London, SE1 1NA, United
Kingdom
Francis House, 9 King’s Head Yard, London, SE1 1NA,
United Kingdom
Shared Services Centre Q3 Office, Quorum Business Park, Benton
Lane, Newcastle-Upon-Tyne, NE12 8EX, 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 2019.
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.
5 Formerly, Serco Hospitality Services L.L.C. Registered name changed to Serco Safety Services L.L.C. on 12th February 2020.
236
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Serco Group plc Appendix: Supplementary Information
Five-year record (unaudited)
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Adjusted Revenue
Less: Share of revenue of joint ventures and associates
3,643.0
(394.6)
3,211.9
(375.1)
3,307.3
(356.4)
2019
£m
2017
(restated**)
£m
2018
£m
2016
£m
3,529
(481)
Revenue
3,248.4
2,836.8
2,950.9
3,048
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*
Amortisation and impairment of intangibles arising on acquisition
Operating profit before exceptional items
Exceptional (loss)/profit 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
Profit/(loss) after tax
120.2
0.8
–
12.4
133.4
(7.5)
125.9
–
(23.4)
102.5
(21.8)
–
–
80.7
(30.1)
50.6
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
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)
82.1
14.2
0.5
3.5
100.3
(5.1)
95.2
0.1
(70.6)
24.7
(12.6)
(0.4)
–
11.7
(12.8)
(1.1)
2015
(restated*)
£m
4,252
(737)
3,515
95.9
20.9
11.7
9.0
137.5
(4.9)
132.6
2.8
(190.3)
(54.9)
(31.9)
(32.8)
–
(119.6)
(33.5)
(153.1)
Net Debt
(584.4)
(188.0)
(141.1)
(109.3)
(82.2)
Earnings per share before exceptional items**
Basic earnings/(loss) per share**
Dividend per share
Pence
6.54
4.31
–
Pence
8.20
6.16
–
Pence
1.50
(0.76)
–
Pence
Pence
6.12
(0.11)
–
6.55
(15.47)
–
* 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 2019
237
Financial StatementsCorporate GovernanceSerco Group plc
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.
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.
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.
Dividend
Proposed final dividend
The Directors have recommended payment of a final dividend
of 1.0p in respect of the year ended 31 December 2019, subject
to approval by shareholders at the Annual General Meeting.
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
Key dates
Annual General Meeting
Ex-dividend date
Record date
Payment date
14 May 2020
14 May 2020
15 May 2020
5 June 2020
Dividend payment
Shareholders are encouraged to receive dividends directly to
their bank or building society which saves paper, helping to
minimise our environmental impact and reducing the cost of
printing and delivery. Mandate forms are available at
www.shareview.co.uk
238
Annual Report and Accounts 2019
Serco Group plc 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
Notification of major interests in shares (TR1 Forms)
Email
cosec@serco.com
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 62 to 73. 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.
This report is printed on Revive 100 silk, a 100%
recycled paper made from post-consumer waste.
Revive is manufactured to certified environmental
management system ISO 14001. Our printer is
also ISO 14001 certified, Carbon Neutral &
Alcohol Free.
Annual Report and Accounts 2019
239
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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