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Annual Report
and Accounts
2020
Contents
Strategic Report
01-80
Highlights
At a Glance
Chairman’s Statement
03
04
06
09 Our Market
14 Our Business Model
15
27
32 Our performance framework and
Chief Executive’s Review
Divisional Reviews
strategic priorities
Strategy Implementation
Key Performance Indicators
Covid-19 - Our Response
ESG Impact and Integrity - Corporate
Responsibility at Serco
Section 172 (1) Statement
Finance Review
Risk Management
Principal Risks and Uncertainties
Viability Statement
34
35
38
40
50
56
70
72
79
Corporate Governance
81-140
82
Board of Directors
86
Chairman’s Governance Overview
Board and Governance
89
91 Group Risk Committee Report
94
Audit Committee Report
99 Nomination Committee Report
101 Corporate Responsibility Committee Report
103 Compliance with the UK Corporate
Governance Code
105 Remuneration Report
134 Directors’ Report
Financial Statements
141-222
Independent Auditor’s Report
142
153 Consolidated Income Statement
154 Consolidated Statement of Comprehensive
Income
155 Consolidated Statement of Changes in Equity
156 Consolidated Balance Sheet
157 Consolidated Cash Flow Statement
158 Notes to the Consolidated Financial Statements
211 Company Balance Sheet
212 Company Statement of Changes in Equity
213 Notes to the Company Financial Statements
217 Appendix: List of subsidiaries and related
undertakings
220 Appendix: Supplementary information
221 Shareholder information
222 Useful Contacts
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
55,000+
EMPLOYEES
For more and the latest information
please visit our website at:
www.serco.com
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Highlights
Revenue
£3.9bn
2019: £3.2bn
Order Book
£13.5bn
2019: £14.1bn
Underlying Trading Profit
Reported Operating Profit
£163m
2019: £120m
£180m
2019: £103m
Underlying EPS, diluted
Reported EPS, diluted
8.4p
2019: 6.2p
Underlying ROIC
19.1%
2019: 15.4%
10.7p
2019: 4.2p
Free Cash Flow
£135m
2019: £62m
Employee Engagement
Major Incident Frequency
73 points
2019: 71 points
0.41 per
1m hours
2019: 0.39 per 1m hours
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P.35-37
See KPIs on
pages 35-37
for definitions
P.9-14
See pages 9-14 for
more information
on our market and
business model
Annual Report and Accounts 2020
Serco Group plc
03
At a Glance
What we do
Serco delivers services to governments and other institutions who serve the public
or protect vital national interests.
Serco’s roots go back to 1929, and in 1988 the Group was listed on the London Stock Exchange. Now,
Serco is a FTSE 250 company managing over 500 contracts worldwide and employing around 55,000
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 2020 of £3,885m or, including our
share of joint ventures and associates to reflect our total scale in each sector, of £4,250m.
Defence
Justice &
Immigration
Transport
Health
Citizen Services
£1,353m
£722m
£506m
Key services
£375m
£1,294m
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
Road traffic
management
Air traffic control
Integrated facilities
management
Non-clinical support
services
Contact centres and
case management
Middle, back office
and IT services
Patient administration
and contact
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
04
Serco Group plc
Annual Report and Accounts 2020
Where we operate
Serco’s operations are across four geographic regions:
Americas
£1,064m
UK & Europe
£2,143m
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Asia Pacific
£719m
Middle East
£324m
Revenue in 2020 (including share of joint ventures and associates).
Our business mix
Serco’s revenue by sector and geographic division:
Revenue by Sector
Revenue by Division
30%
17%
8%
50%
25%
9%
32%
12%
17%
Total revenue £4,250m
Total revenue £4,250m
Defence
Transport
Justice & Immigration
Health
Citizen Services
UK & Europe
Middle East
Americas
Asia Pacific
P.14
See page
14 for more
information on
our business model
Revenue in 2020 (including share of joint ventures and associates).
Annual Report and Accounts 2020
Serco Group plc
05
Financial StatementsCorporate Governance
Chairman’s Statement
Sir Roy Gardner
Chairman
Highlights of 2020
• Revenue grew by 20% to
£3.9bn, of which 16% was
organic.
• Underlying Trading Profit of
£163m, an increase of 36%.
• Free cash flow of £135m,
reducing covenant net
debt:EBITDA from 1.3x to 0.5x.
• Business coped admirably
with challenges of Covid-19.
• 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.
• Positive outlook for 2021 and
beyond.
• The health of our balance sheet
and the positive outlook give us
the confidence to resume
paying dividends to our
shareholders for the first time
since 2014.
“This will be my last
statement as Chairman of
Serco and perhaps the one
that gives me most pride
to deliver.”
“The year brought tremendous operational challenges for Serco due
to Covid-19 but the business handled them admirably, thanks to the
dedication of our people to delivering public services as well as the
strength and agility of our business model. The steps taken since 2014
to transform the business helped make this possible with the
investment we made in our systems in recent years meaning we were
able to respond rapidly at scale when our government customers
requested help in dealing with the challenges brought by Covid-19.
I believe these successes in delivering critical public services during
extraordinary times mean the company should face the future with
great confidence.”
Financial performance and strategy
A three-stage strategic plan was set out in 2015; Stabilise, Transform, Grow. We moved into
the growth phase during 2018, built on this in 2019 and, despite the challenges of Covid-19,
2020 was a year of substantial further progress. The year saw strong growth in revenue,
Underlying Trading Profit and earnings per share, a substantial reduction in net debt and
the successful refinancing of our debt.
Revenue grew by 20% to £3.9bn, with organic growth of 16%. Combined with an increase in
margin from 3.7% to 4.2%, this led to Underlying Trading Profit increasing 36% to £163m
and underlying earnings per share increasing by 37% to 8.43p. We delivered an excellent
cash performance in the period, which reduced our covenant net debt from £215m to £58m
and leverage from 1.3x EBITDA to 0.5x, below the lower end of our preferred 1x-2x range.
The strength of Serco’s balance sheet and the resilience of our earnings meant we were
able to successfully issue $200m (£156m) of US Private Placement loan notes, with an
average maturity of nearly eight years. It was the first time Serco has been able to access
the US Private Placement market in more than seven years. Low leverage and debt with
such long maturities provide a very strong base for the ongoing execution of our strategy.
Our pension schemes remain in a strong funding position with a balance sheet accounting
surplus, we continue to pay our supply chain promptly and do not utilise working capital
facilities to do so.
Operationally, it was pleasing to see our government customers turn to Serco as a trusted
and capable partner to help in their efforts to respond to the great challenges of Covid-19.
Our agile business model meant we were able to simultaneously supply this rapid increase
in demand for services and cope with abrupt reduction in volumes in other parts of our
business, such as Leisure and Transport. I am delighted that in the midst of this pandemic,
when the majority of our people are working in highly challenging environments on the
front line, our employee engagement scores, which have risen steadily since 2013, climbed
further from 71 points in 2019 to 73 points in 2020.
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Serco Group plc
Annual Report and Accounts 2020
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Order intake reduced from £5.4bn in 2019 to £3.1bn, causing our
order book to dip from an all-time high of £14.1bn to £13.5bn. We
had anticipated a significant reduction in order intake due to the
natural lumpy nature of contract awards and this was amplified as
the disruption of Covid-19 caused some decisions to be pushed
back. Our win rates on the new business that was awarded as well
as securing rebids and extensions on existing work remained high,
at around 35% and more than 90% in our wholly-owned operations,
respectively.
The strength of the business in 2020 demonstrated the value of
several core pillars of our strategy. Our tight focus on government
customers but with geographic and segmental diversification
served us well. It provided us with opportunities that more than
outweighed the negatively impacted parts of the group and all with
a counterpart with excellent credit risk. Another element of our
strategy is acquisitions. We announced the acquisition of one
business in the year, that of Facilities First Australia for A$78m
(£44m). FFA is a specialist provider of cleaning, facility maintenance
and management services to government. Its 2,500 employees and
experienced management team bring to Serco new skills and reach
in government facilities management, which is expected to see a
significant amount of bidding opportunities in the coming years.
Following the year end, we announced the proposed acquisition of
Whitney, Bradley & Brown Inc for US$295m (£215m). The acquisition
will increase the scale, breadth and capability of Serco’s North
American defence business and will give Serco a strong platform
from which to address all major segments of the US defence
services market. We continue to see a focused M&A program,
funding selective acquisitions that meet our investment criteria, as a
key part of sustainable value creation.
Our Board, governance and evolving
corporate responsibilities
There were several changes to the Board in the period as we
continue to bring in Non-Executive Directors with a mix of
backgrounds and experience to ensure a balanced, dynamic and
effective Board. Dame Sue Owen DCB, who has held senior
positions in several government departments, joined the Board
as a Non-Executive Director in August 2020. In the same month,
Rachel Lomax stepped down as a Non-Executive Director. I would
like to thank Rachel for the extensive contribution she made to
the Company since joining in early 2014. Rachel’s responsibilities
as Chair of the Group Risk Committee were taken on by
Ian El-Mokadem. In May, I decided I would not seek another
term as Chairman and asked the Board to start the process to
find a successor. After a detailed succession planning process
that included external candidates, John Rishton, our Senior
Independent Director and a member of the Board since September
2016, was selected as my successor. John, a highly experienced
executive, will take over when I stand down at the Annual General
Meeting in April 2021. At the start of 2021, we announced
Tim Lodge would be joining the Board in February, and will replace
John Rishton as chair of the Audit Committee in April. Tim has a
wealth of financial experience and a strong track record in driving
commercial performance, as well as delivering strategic change and
restructuring to support longer term investment and growth; he will
be a very welcome addition to the Board. These continued
developments are designed to drive effectiveness and support
our clear belief that strong governance is a vital component in
the long-term success of Serco.
In our Corporate Governance Report on pages 86 to 104, you will
read that we have fully complied with the provisions of the UK
Corporate Governance Code during 2020. The s172 statement we
make on pages 50 to 55 shows how the Board has engaged with our
stakeholders and approached the decisions we have made during
the year. Covid-19 has certainly made that more challenging but this
year the Board has met virtually far more than in previous years,
which has allowed it to hear from and engage with stakeholders as
well as ensuring it is keep up to date with how the Company has
reacted during this challenging time. We had regular calls on the
pandemic and the Board were involved in evaluating existing
contracts, new bids, meeting senior management responsible for
operational delivery and business development. Although Covid-19
meant site visits and involvement in management training, meetings
and events were curtailed during 2020, we sought to preserve these
important parts of the role to the extent this was possible;
Non-Executive Directors undertook the key elements of Serco’s
internal training and attended divisional management meetings as
well as contract visits by video conference. We reviewed 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 draw
your attention to our commitments to diversity.
Recognising how vitally important workforce engagement is to
operational and cultural continuity, especially during periods of
sustained crisis, we have focused on maintaining momentum and
establishing a healthy rhythm in our Employee Voice approach,
Colleague ConneXions, which was launched the previous year.
Detail of our work in this area is given on page 137.
You will see how important the Environmental, Social and
Governance (ESG) factors are as set out in the Corporate
Responsibility framework on pages 40 to 49. We have enhanced this
framework which is well embedded in the Company and, structured
around our Values and Purpose, our four core stakeholders –
owners, customers, employees and the wider world – and areas of
interest to these stakeholders and aligned these to the ESG factors
to ensure that we deliver an integrated framework. We take all of
these matters extremely seriously and it is a Board focus. Our
summary of Corporate Responsibility contained within this Annual
Report and Accounts, and our full Corporate Responsibility Report
which can be accessed on www.serco.com, set out in detail Serco’s
aims and actions to be a sustainable business that makes a positive
difference to society.
Change of Chief Financial Officer
Angus Cockburn informed me in December of his wish to retire
from full-time executive life. Angus has had an exceptional career
and his work at Serco ensured the business survived then provided
the base for it to deliver the high growth seen in the last three years.
I’m sorry to see Angus depart and would like to thank him for the
outstanding contribution he has made to the Group. At the same
time, I am delighted Nigel Crossley will be his successor. Nigel
joined Serco in 2014 and has been an incredibly important and
high-performing part of the team during our transformation.
Annual Report and Accounts 2020
Serco Group plc
07
Financial StatementsCorporate Governance
Chairman’s Statement continued
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 2020 has seen excellent
growth in revenues and profits, strong cash generation, a very
successful refinancing of our debt, the announcement of a bolt on
acquisition, 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 2021.
I would like to thank all colleagues in the business for their
exemplary efforts during this difficult time, 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
24 February 2021
Looking ahead
In the short term, we expect the growth seen in recent years to
continue, albeit at a more normal level. In 2021, we expect revenue
to grow by 7% to around £4.2bn and Underlying Trading Profit to
increase to around £175m, before the proposed acquisition of WBB.
Free Cash Flow should reduce year-on-year, as 2020 benefited from
some one-off factors, but cash conversion will remain high, and we
expect financial leverage to be in the middle of in our target 1x-2x
net debt:EBITDA range, even after the acquisition of FFA, the
proposed acquisition of WBB, the share buyback, and a resumption
of dividend payments to our shareholders.
The medium and long term outlook is harder to predict than a year
ago as the lasting impact of Covid-19 is still uncertain. But we have
already started the task of considering the changes and
opportunities that may arise and intend to present our conclusions
in the second half of 2021. Our initial view is that Covid-19 will put
even more pressure on governments to provide more and better
services for less, and this is positive for our market. There is likely to
be an impact on the mix of demand for services provided by the
private sector to governments and our business model, which is
designed to be agile, is well-suited to this. We therefore see no
reason to change our view that in the long term Serco should be
able to grow its revenues by, on average, around 5% a year, and
deliver trading margins of 5%.
Shareholder returns
This time last year we recommended paying a dividend for the first
time in six years, a moment that illustrated the transformation in the
company’s financial health. Like many companies, we withdrew this
proposal in the relatively early stages of Covid-19, when the
potential impact of the pandemic was difficult to predict. We see
the dividend decision this year as being one that, in addition to our
shareholders, should consider our stakeholders more generally.
Prior to making a decision on dividend we have refunded furlough
money received from the UK government, repaid early tax deferrals
where there is a mechanism to do so, and paid a bonus to 50,000 of
our front-line workers. After this, and with the combination of a
strong balance sheet and promising outlook for the business, the
Board believes it is appropriate to resume dividends again. We see
a suitable level to begin with as dividend cover of four times
underlying EPS, equivalent to a payout ratio of approximately 25%.
Our policy is to weight dividend payments roughly one-third :
two-thirds between interim and final payments.
The Board is therefore recommending a final dividend in respect of
the 2020 financial year of 1.4p. In addition, we are part way through
the process of buying £40m of shares and we intend to cancel half
of these. The £20m is roughly the same as the value of the 2019 final
and 2020 interim dividends, had they been paid.
The Board views the 25% payout ratio as a prudent starting point.
We are of the view it will enable us to balance dividends, potential
other uses of capital to generate incremental value and the desire
to maintain a strong balance sheet. The combination of these
should enhance Serco’s ability to deliver sustainable value for all of
the Group’s stakeholders.
08
Serco Group plc
Annual Report and Accounts 2020
Our Market
Our core sectors
Defence
Justice &
Immigration
Transport
Health
Citizen
Services
Our markets
United
Kingdom
Continental
Europe
North
America
Asia
Pacific
Middle
East
In a year when our market – and every market – has
been impacted by Covid-19, and no one can be sure
exactly how and when things will settle, we nonetheless
believe that fundamental drivers will continue to
increase demand for our services across the world.
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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, whilst in the UK the National Health Service is the single largest employer.
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 efficiently. 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 is carried out by private companies.
Some services which governments need in order to deliver public policy are similar or
identical to those required in the private sector, and suppliers can happily operate in both
markets. Running payroll, providing telecoms networks and IT centres is not vastly different
in the public and private sectors. But some government services – such as running prisons or
providing air traffic control – are unique to government and have no private sector
equivalent. Many government services are bought only by government, and providing them
is a specialist business, quite different from anything found in the private sector. However,
many of them can be run efficiently on behalf of government by private companies using
techniques, management, technology and processes developed in the private sector.
Annual Report and Accounts 2020
Serco Group plc
09
Financial StatementsCorporate Governance
Our Market continued
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 people, or most important services, 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.
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.
The Covid-19 pandemic has seen a further chapter in the sector’s
history open, with the private sector being used as a reserve force
to deliver brand new services required by governments in short
order at a time of national emergency. While this has been
politicised by some, and used to create controversy in the UK in
particular, nonetheless the private sector has proved itself an
invaluable partner to governments throughout the crisis – be it
through developing vaccines, lending hospital beds, providing
massive Covid-19 testing and diagnostic capability, setting up
emergency hospitals and more – and all at record speed.
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“The challenge facing governments worldwide
can, like our strategy, be simply expressed:
to deliver more, and better, for less.”
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Finally, although in their own country a national government can
wield the power of a monopoly purchaser, every country has a
government (or multiple governments if you consider state and
local bodies too), 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.”
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.
The third reason why the market for government services is
attractive is because of its enduring nature compared to other
markets. All around us – both due to Covid-19 but moreover long
before it - 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 were not being fundamentally challenged by technology and
now even more so. 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
– which we are of course responding to where appropriate, for
example in our Citizen Services business’ deployment of digital
channels and through ExperienceLab (our customer experience and
service design agency) - we also 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.
Annual Report and Accounts 2020
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Financial StatementsCorporate Governance
Our Market continued
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 interdepartmental 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.
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? The
boundaries are also forever moving as governments take decisions
to outsource new services or insource old ones, and as Serco
stretches its addressable market into new areas through
acquisitions and building new capabilities.
Over the years, and most recently in 2018, we have done a lot of
work to try and size the market in the sectors and geographies we
currently operate in, which are clearly a subset of the global market.
This is a significant exercise given the diversity of our markets and
footprint, but we will soon look to refresh it again, particularly
following the market changes – both shorter and longer term -
brought by Covid-19. For now, our best guess is that the total annual
value of government services in our target segments and
geographies which could be provided by the private sector is
around £300bn, of which around £100bn is delivered by private
companies. Rather than concentrate on the absolute number, some
key conclusions from our work are:
• the market for private sector delivery of government services
is very large;
• the supply-side is fragmented; as a leading international
supplier, our market share within our existing footprint, at
around 3%, is small, although it is larger in some specific
segments within certain sectors; and
• there is significant opportunity for growth, given that around
two-thirds of the services that could be provided by the
private sector are currently self-delivered by government.
In terms of market growth, in 2018 we carried out further work to
assess the rate of growth in our specific sectors and geographies.
When we 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. At that point,
we could not have predicted Covid-19, nor the huge changes and
challenges this would bring to our customers and to public services.
The immediate impact of Covid-19 on our markets has of course
been a very mixed picture: some market segments have suffered
dramatic downturns in demand (rail, leisure, air traffic control);
others have seen a major upsurge, particularly with regards to new
services to help address challenges created by the pandemic
(contact centres for citizen enquiries, hospitals, testing and tracing
services).
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The longer-term impact on market growth rates is much harder to
predict. It will take several years for governments’ expenditure
patterns to settle down following Covid-19; the immediate
aftermath will probably focus on continued need for surveillance of
the virus, and we also anticipate significant expenditure on
programmes which help people get back to work. Overall, while it is
true that in some areas arguments about the importance of national
self-sufficiency might make some governments consider doing
more in-house, we don’t think that this will happen meaningfully,
because as above, the private sector has responded extremely well
to governments’ emergency requirements. This will, hopefully,
remind governments of the value of resilient, robust supply chains
which can support them in both ordinary and extraordinary times.
Nor do we anticipate a lot of change from Covid-19 in our basic
business model of offering public services delivered by people
supported by good systems and processes. On the contrary, we
know that governments will be massively more indebted than they
were before the crisis, and that citizens will be more in need, as well
as more demanding, of public services critical to rebuilding society
and quality of life - be that services to deal with unemployment,
training and skills gaps, social care reform, acute healthcare
capacity, building national resilience, sustainable transport growth
and more. We think that the ‘Four Forces’, which we have previously
described as driving demand for our services, will have been
amplified by the crisis: increasing and changing demand for public
services; heightened expectations around the quality and resilience
of public services; increased fiscal deficits; the dire political
consequences of increasing taxes. These will continue to drive
governments to want to deliver more public services, of higher
quality, for less money. We believe that this imperative to provide
more, and better, for less will become even more urgent in the years
ahead, and to deliver those objectives governments will need the
skills, resources, innovation and nimbleness of the private sector.
On top of this of course, we will need to factor in the regional
impacts of a new administration in the United States which we feel
might lead to increased spending in the Federal & Civilian space,
possible new opportunities emerging as the UK adjusts to Brexit, as
well as a Scottish election in 2021, an Australian Federal election by
2022, Canada in 2023, and the UK by the end of 2024 – to name just
a few.
Regardless of the complications in making accurate predictions of
market growth rates, we should remember that in revenue terms
Serco has grown revenues by 10% compound over the last three
years; this is a combination of organic growth and acquisitions, and
it is clear that the market has not grown at this rate, so it is logical to
assume that we have been growing market share. With a market
which is so large and diverse, and whose boundaries are so hard to
define, it probably a fool’s errand to try to pin down growth rates to
within a percentage point or two. What is important is that whether
market growth is 3% or 5%, our long term target of 5% revenue
growth at 5% margins is, we believe, achievable.
Annual Report and Accounts 2020
Serco Group plc
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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’.
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Our drivers:
Values…
Trust
Care
Innovation
Pride
Purpose…
A trusted partner of
governments, delivering
superb public services, that
transform outcomes and
make a positive difference
for our fellow citizens
The ‘Four Forces’:
long-term structural
growth drivers…
Growing costs: healthcare,
ageing population and
infrastructure
Need to balance public
income and expenditure,
and reduce debt
Rising expectations
of service quality
Voters unwilling to tolerate
higher taxation
What we do:
How we add value:
c i f i c
a
A sia P
Citizen Ser v i c e s
h
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H
Superb
public
services
Transport
A
m
eric
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u stice &
I m m igratio
J
Efficiency & commercial
nous
Public service ethos
Transferable global
experience
Full service integration
UK & E u r o
e
p
Expert & empowered
people
Longer-term deliverables…
Trusted partnership
Revenue growth
5%+
Trading margin
5%+
Employee engagement
70 points or above
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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Chief Executive’s Review
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“Our priority in this crisis
has been to support the
delivery of essential public
services and, within that
context, do all we can to
protect our employees from
harm and our shareholders
from loss.”
Rupert Soames
Group Chief Executive
In the coming months, every company’s trading statement will pay glowing tributes to employees, and
thank them for their resilience and courage. I have struggled to think of words that are not trite or clichés
and will not be repeated by a thousand other CEOs, so I will use instead the words of a colleague, whose
job is escorting prisoners, who wrote to me in January:
“Working as a Custody Officer is both challenging and rewarding, yes, the current situation with the virus has certainly changed the
way in which we work and has made day to day life more challenging for everyone within Serco but also for the entire world. My
husband has cancer and also a disease which has caused him to have no immune system. People have asked me why I would continue
to work knowing that every day when I go home to him, I am putting his health at risk. The answer to this question is this: if everyone
took that attitude then businesses would suffer more than they are already, people like myself and my colleagues are what keep the
contract running, and without my work to focus on I am sure I would have gone crazy by now. Both my husband and I know that life
throws us curve balls now and again and we have to get on and make the best of it and most importantly never give in! My husband
and I acknowledge how precious life is, we are as careful as we possibly can be in protecting ourselves and others and acknowledge
that life has to go on.
Serco has looked after its employees very well throughout this terrible time. I am grateful to be able to work every day in a job that I
love doing.”
Around 90% of our 55,000 colleagues cannot work from home, because they work in places such as prisons, hospitals, ships, or trains. They
have turned up each day to enable us to deliver our promise of supporting the delivery of public services; many have suffered loss, either
of colleagues, friends or family, and still turned up for work. My respect and gratitude for them is unbound, and I want to extend our
condolences to the families of those colleagues who have died from Covid-19 over the last year.
Summary table of financial results.
Year ended 31 December
Revenue(1)
Underlying Trading Profit (UTP)(2)
Reported Operating Profit (i.e. after exceptional items)(2)
Underlying Earnings Per Share (EPS), diluted(3)
Reported EPS (i.e. after exceptional items), diluted
Dividend Per Share (recommended)
Free Cash Flow(4)
Adjusted Net Debt(5)
Reported Net Debt(6)
2020
Change at
reported currency
Change at
constant currency
2019
+20%
+37%
£3,884.8m
£3,248.4m
£163.1m
£179.2m
8.43p
10.67p
1.4p
£134.9m
£57.8m
£460.4m
£120.2m
£102.5m
6.16p
4.21p
£62.0m
£214.5m
£584.4m
+20%
+36%
+75%
+37%
+153%
+118%
-73%
-21%
Annual Report and Accounts 2020
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Financial StatementsCorporate Governance
Chief Executive’s Review continued
Very strong year across global business; guidance increased for 2021.
Highlights
• Revenue: grew by 20% to £3.9bn,
with organic growth
of 16%, a 5% uplift from our US
acquisition in August 2019
of NSBU and -1% from currency.
• Underlying Trading Profit:
increased by 36% to £163m, with
NSBU adding 8%; net impact of
Covid-19 around £2m, or ~1% of
UTP. Margin increased from 3.7%
to 4.2%. Around three-quarters
of our profit(7) is now from outside
the UK.
• Reported Operating Profit:
increased by 75%, or £77m, to
£179m, as a result of the 36%
increase in underlying profit and
an exceptional gain on disposal.
• Earnings per Share increased by
37% on an underlying basis(4) and
153% on a reported basis.
• Free Cash Flow(5): more than
doubled, to £135m.
• Adjusted Net Debt(6): reduced
by £157m to £58m. Covenant
leverage stands at 0.5x EBITDA.
• Order Intake and Pipeline:
some customer decisions slipped
from Q4 2020 to Q1 2021,
leading to order intake of £3.1bn
(80% book-to-bill) and significant
year-on-year increase in year-end
qualified pipeline of new business
to £6.4bn (2020: £4.9bn).
• Government support &
employee recognition: the
Group has repaid all UK
government employment and
liquidity support, including £2m
of furlough payments, and has
made ex-gratia payments
totalling £5m to around 50,000
front-line staff.
• Dividends: the Board
recommends restarting
dividends, last paid to Serco
shareholders in 2014, with a
payment of 1.4p in respect of the
2020 financial year.
• Acquisitions: in January 2021 we
acquired Facilities First Australia
(FFA), a leading Australian
facilities management company
for A$78m. In February 2021 we
announced the acquisition,
subject to regulatory approval, of
Whitney, Bradley & Brown Inc
(WBB), a leading provider of
technical and engineering
services to the US military for a
consideration of $295m.
• Outlook for 2021(8): having
delivered compound annual
growth in profits of 33% over the
last three years, we expect
revenues and trading profit to
continue to grow in 2021, albeit at
a slower rate than seen in recent
years. Reflecting a strong start to
the year, we have increased our
profit guidance for 2021 by 6%,
which equates to year-on-year
growth at constant currency of
10%. This excludes the effect of
the acquisition of WBB, Inc.
Guidance will be updated for this
following completion.
Turning to our financial performance in 2020, growing Revenues
by 20% (2019: +15%) and Underlying Trading Profit by 36%
(2019: +29%), is all the more impressive as it follows strong growth
in 2019 and underlines the momentum behind Serco’s return to
robust financial health. This performance is particularly gratifying
given the disruption caused to some parts of our business by
Covid-19; despite approaching £400m of Covid-19 related revenues,
the net impact of Covid-19 was around 1% of Underlying Trading
Profit, and the balance of the 35% increase in profits came from the
normal operations of the business.
Our free cash flow, now released from the drag of recent years of
Onerous Contract Provisions, was very strong at £135m, which,
combined with strong growth in EBITDA brings our covenant
leverage ratio down to 0.5x, which puts us in a very strong financial
position. This has enabled us to finance the recently announced
acquisition of WBB from our existing debt facilities and still be
around the middle of our target leverage
range of 1-2 times net debt: EBITDA.
It is pleasing finally to be able to re-start paying dividends, last paid
in 2014. The Board has thought carefully about this, particularly in
the light of the current circumstances; in April 2020, we justified
withdrawing the proposed Final Dividend in respect of 2019 saying:
“At a time when the UK and other governments are helping Serco
with its liquidity, it seems inappropriate to use that cash for
anything other than its intended purpose of protecting the financial
strength and resilience of our business”. Subsequently, and for the
same reason, we did not propose a dividend at the half year in
August 2020. Four things have changed for us since the earlier
decision-points in April and August. First, any concerns we had
about liquidity have proved groundless; we have successfully
re-entered the long term private placement debt market (and at
lower cost); we have been strongly cash-positive in 2020; leverage is
below our target range at year end, and even after the WBB
acquisition would sit comfortably within our target range. Secondly,
we have refunded all employment and liquidity support paid to
Serco by governments, with the exception of £12m in the USA, for
which there is no mechanism for early repayment, so will be repaid
as scheduled in 2021 and 2022. Thirdly, whilst the profits arising
from our work on Covid-19 are ephemeral, they do not represent a
material proportion of our profits in the year (net, around 1% of
Underlying Trading Profit). Finally, we have sought to recognise the
intense pressure and extra work that Covid-19 has brought to our
staff by making ex-gratia payments totalling £5m to 50,000 of our
front line colleagues. In the light of these four considerations, the
Board feels it appropriate to recommend the payment of a final
dividend in respect of 2020 of 1.4p per share, representing a 25%
payout ratio assuming a notional 1/3rd / 2/3rd split between interim
and full year dividends.
Looking ahead to 2021, guidance set out below is improved from
that which we gave in December. It does not reflect the acquisition
of WBB, announced on 16 February, which is subject to regulatory
approval; guidance will be updated immediately after completion,
which is expected to be during the course of Q2. After the dramatic
growth of the last three years – with 33% compound annual growth
in Underlying Trading Profit – we see 2021 as being a year of more
normal rates of growth in revenues and profits; we will have some
“drags” on our profitability, notably only having six months of the
AWE contract, and we expect revenues related to Covid-19 services
to be much stronger in the first half than in the second. However,
we have had a strong start to the year, and we are therefore
increasing our profit guidance for 2021, with the revised guidance
equating to 10% constant currency growth in the year.
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Guidance for 2021 excluding the effect of the WBB acquisition, but including Facilities First Australia
Revenue
Organic sales growth
Underlying Trading Profit
Net finance costs
Underlying effective tax rate
Free Cash Flow
Adjusted Net Debt
2020
Actual
£3.9bn
16%
£163m
£26m
23%
£135m
£58m
2021
Initial guidance
New guidance
~£4.1bn
~2%
~£165m
~£27m
~25%
~£75m
~£100m
~£4.2bn
~4%
~£175m
~£27m
~25%
~£75m
~£100m
Notes to guidance: The guidance uses an average GBP:USD exchange rate of 1.37 in 2021 and GBP:AUD of 1.79. If the WBB acquisition completes in Q2, we would
expect our Net Debt : EBITDA to be around 1.6x at the half year and reduce thereafter.
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 2020 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
OCP charges and releases
Other Contract & Balance Sheet Review adjustments and one-time items
Trading Profit
Amortisation of intangibles arising on acquisition
Operating Profit before exceptional items
Operating exceptional items
Reported Operating Profit
2020
£m
163.1
5.8
6.8
175.7
(9.0)
166.7
12.5
179.2
2019
£m
120.2
0.8
12.4
133.4
(7.5)
125.9
(23.4)
102.5
(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.
(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.
(6) Reported Net Debt includes all lease liabilities, including those newly recognised under IFRS16. A reconciliation of Adjusted Net Debt to
Reported Net Debt is as follows:
(7) Refers to non-UK Underlying Trading Profit as a proportion of group Underlying Trading Profit before corporate costs. Our Underlying
Trading Profit before corporate costs in 2020 was £204.3m.
As at 31 December
Adjusted Net Debt
Include: all lease liabilities accounted for in accordance with IFRS16
Reported Net Debt
2020
£m
57.8
402.6
460.4
2019
£m
214.5
369.9
584.4
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Chief Executive’s Review continued
Notes to financial results summary table and highlights:
continued
(8) Our outlook for 2021 is based upon currency rates as at 31
January 2021. The rates used, along with their estimated impact
on revenue and UTP are as follows:
Year ended 31 December
2021 outlook
2020 actual
2019 actual
Average FX rates:
US Dollar
Australian Dollar
Euro
Year-on-year impact:
Revenue
UTP
1.37
1.79
1.13
1.29
1.88
1.13
1.28
1.83
1.14
~(£40m)
~(£4m)
(£24m)
(£1m)
+£42m
+£4m
Reconciliations and further detail of financial performance are
included in the Finance Review on page 38. This includes full
definitions and explanations of the purpose and usefulness of each
non-IFRS Alternative Performance Measure (APM) used by the
Group. The condensed Consolidated Financial Statements and
accompanying notes are on page 76.
Summary of financial performance
Revenue and Trading Profit
Reported Revenue increased 20% to £3,885m (2019: £3,248m); in
accordance with IFRS this measure excludes Serco’s share of
revenue from joint ventures and associates of £364m (2019: £395m).
Net currency movements reduced revenue by £22m or 1%, whilst
the full-year effect of the acquisition of Naval Systems Business Unit
(NSBU), which completed at the start of August 2019, added £150m
or 5% to growth. At constant currency, the organic revenue growth
was therefore £508m or 16%, accelerating from 15% in the first half
of the year to 17% in the second half. The very strong revenue
growth rate was a consequence of Covid-19 related services, higher
demand for our immigration services, a full year contribution from
the AASC asylum accommodation and support contract in the UK
and the AHSC defence garrison healthcare services contract in
Australia, as well as the start of new work including Clarence
Correctional Centre, Gatwick Immigration & Removal Centres and
Prisoner Escorting. This resulted in particularly strong organic
growth in our UK&E and AsPac Divisions.
Underlying Trading Profit (UTP) increased by £43m or 36% to £163m
(2019: £120m); excluding the £1m adverse impact of currency, the
increase in UTP was £44m or 37%. Profits increased in all our
divisions, with our UK&E and Americas businesses seeing very
strong improvement. The Group’s Underlying Trading Profit margin
was 4.2%, an increase of 50 basis points.
In every year, Serco’s results are the aggregation of pluses and
minuses, as some contracts grow their profits and others reduce
them. This year, some of the pluses and the minuses were extreme.
Contracts that went backwards included our business in the UK
supporting Local Authority Leisure Centres, which were largely
closed down during the various lockdowns; our Health business
bore very significant additional costs as it worked to maintain
service in the face of Covid-19; our Merseyrail joint venture saw
passenger volumes at a fraction of normal levels; together, these
three parts of our UK operations saw their contribution reduce
year-on-year by around £35m; our contract to build an ice-breaker
for the Australian Government suffered losses as we had to tow the
ship from its shipyard in Romania, where there was a serious
Covid-19 outbreak, to Holland in order to complete construction;
many of our contracts bore additional costs as they worked to
deliver services in the face of Covid-19. And we also made the
decision to recognise the extraordinary efforts of colleagues by
making ex-gratia payments totalling £5m to 50,000 front-line staff.
A large positive was we had a number of new and re-bid contracts
contributing to profits. Our Asylum Seeker (AASC) contract in the
UK, which over the last five years lost around £15m-£20m on
average per year, swung into profit under the new 10-year contract
in 2020; there was strong demand for immigration services in
Australia, which included mobilising quarantine hotels in Western
Australia; our defence garrison healthcare services contract in
Australia, won in 2019, made a full-year contribution in 2020; in the
US, our contract with the Federal Emergency Management Agency
(FEMA) saw strong growth. And we benefitted from an entirely new
source of business – NHS Test & Trace where we have provided
more than 25% of testing sites and half the Tier 3 tracing capacity;
although these contracts are at lower margins than we would
normally accept for this type of work, they generated nearly £350m
of revenue, so made a material contribution and helped to reduce
the impact of losses in Transport, Health and Leisure. Together,
contributions from these new and growing contracts combined to
outweigh the losses and reduced profits of other parts of the
business that were negatively impacted by Covid-19. Importantly, of
the £43m increase in UTP, the net impact on profits directly
attributable to Covid-19, was £2m; the balance of £41m came from
underlying growth in the business and the acquisition
of NSBU.
Trading Profit was £176m (2019: £133m), £13m higher than UTP,
which reflects a net £6m credit in Contract & Balance Sheet Review
and one-time items (2019: net credit of £4m), and £7m of other one
off items (2019: £12m) relating to the release of provisions that are
no longer required. The utilisation of Onerous Contract Provisions
(OCPs) fell from £41m in 2019 (excluding IFRS16-related accelerated
utilisation) to just £2m in 2020. We have now very nearly completed
our task of managing the £447m of loss-making onerous contracts
identified in 2014; the closing balance of OCPs now stands at £15m,
compared to £17m at the start of the year and the initial charge
of £447m.
Reported operating profit and exceptional costs
Reported Operating Profit grew by £77m, or 75%, to £179m
(2019: £103m) and was higher than Trading Profit as £9m (2019: £8m)
of amortisation of intangibles arising on acquisition was more than
offset by exceptional operating income of £13m (2019: costs of
£23m), the largest portion of which related to our exit from the
Viapath pathology services joint venture. There were no exceptional
restructuring costs (2019: £13m).
Finance costs
Net finance costs were £26m (2019: £22m), with the increase driven
by having a full year of property leases related to the AASC
contract. The interest component of leases reported under Finance
costs, as required under IFRS16, was £10m (2019: £7m). Cash net
interest paid was £25m (2019: £22m).
Pensions
Serco’s pension schemes are in a strong funding position, resulting
in a balance sheet accounting surplus, before tax, of £80m (31
December 2019: £54m) on scheme gross assets of £1.6bn and gross
liabilities of £1.5bn. The opening net asset position led to a net
credit within net finance costs of £1m (2019: £2m). 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 £31m (2019: £24m),
representing an underlying effective rate of 23% (2019: 25%) based
upon Underlying Trading Profit less net finance costs, totalling
£137m (2019: £98m). The rate is higher than the UK statutory rate of
corporation tax as the tax rates in our international divisions tend to
be higher than the UK’s rate. This is partially offset by consolidating
our share of joint venture and associate earnings as, although
included in profit before tax, the income has already been taxed.
The rate is lower than in 2019 due to an increase in the proportion of
the Group’s profits arising in the UK and a reduction in the
proportion of our profits made by our joint ventures and associates.
We expect the rate to increase to closer to 25% in 2021, although
this is sensitive to the geographic mix of our profits.
Tax on non-underlying items was a net credit of £12m (2019: charge
of £3m). The £12m credit, related to the tax impact of amortisation
of intangibles arising on acquisition of £2m and £10m related to
non-underlying items. Tax on exceptional items was £0.4m (2019:
£3m). The total tax charge was £19m (2019: £30m) and net cash tax
paid was £36m (2019: £31m), which is higher than the current tax
charge due to the effect of future expected cash tax deductions for
which a current accounting credit is taken and due to timing
differences on some tax receipts and payments, notably the cash
from joint ventures and associates for losses transferred to them.
Reported result for the year
The reported result for 2020, as presented at the bottom of the
Group’s Consolidated Income Statement on page 39, is a profit of
£134m (2019: £51m). This comprises reported operating profit of
£179m (2019: £103m), reported profit before tax of £153m (2019:
£81m) and tax of £19m (2019: £30m).
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 37% to 8.43p (2019: 6.16p). The
improvement reflects the 36% increase in Underlying Trading Profit
and the lower tax rate, partially offset by the increase in net finance
costs and an increase in the weighted average number of shares in
issue. The weighted average number of shares increased by 58m, or
5%, to 1,229m (2019: 1,171m), with the vast majority of this, 45m, the
full-year effect of the May 2019 share placing. Diluted reported EPS,
which includes the impact of the other non-underlying items and
exceptional costs, increased by 153% to 10.67p (2019: 4.21p).
Cash flow and net debt
Free Cash Flow showed sharp improvement, increasing by £73m to
£135m (2019: £62m), representing cash conversion of 120%. The
improvement was a result both of the £43m increase in underlying
profits as well as improved debtors collection, with an almost
complete catch up on delays in processing billings on our FEMA
contract in the US and successful collection of some older
receivables in our Middle East business. We also benefited from
£12m of Covid-19 tax deferrals in the USA, for which there is no
mechanism to repay ahead of schedule. Despite organic revenue
growth of just over half a billion pounds, our working capital outflow
was just £5m as governments, most notably the UK Government,
made significant efforts to ensure that their suppliers were paid
promptly, and for our part we ensured our suppliers were equally
supported. Average working capital days for the year were broadly
unchanged, with creditor days reducing from 29 in 2019 to 23 in
2020; we are proud to say that 89% of UK supplier invoices were
paid in under 30 days (2019: 86%) and 97% were paid in under 60
days (2019: 96%).
The cash outflows related to loss-making contracts subject to OCPs
reduced, reflected in the lower rate of provision utilisation of £2m
(2019: £41m). The Group did not utilise any working capital financing
facilities in 2020 or the prior year, and has no such facilities in place.
Of other movements within Free Cash Flow to note, cash tax paid
increased due to some timing effects and capital expenditure was
higher, primarily a temporary consequence of the purchase of
vehicles for our new prisoner escorting contract.
Adjusted Net Debt at the end of the year fell by £157m to £58m
(2019: £215m). Our key measure of adjusted net debt excludes all
lease liabilities, which now total £403m (2019: £370m), including
those leases now recognised under IFRS16. The adjusted measure
of net debt aligns closely with the covenant on our financing
facilities; our net debt for covenant purposes was £102m (2019:
£235m). The £157m reduction in 2020 includes the free cash inflow
of £137m, proceeds from the sale of our stake in Viapath and £12m
of favourable currency moves. The closing Adjusted Net Debt of
£58m compares to a daily average of £209m (2019: £231m) and a
peak net debt of £356m (2019: £357m). The unusually large
difference between peak, average daily and period end net debt
was the result of two factors that occurred in the first half: first, in
response to Covid-19 and government requests we mobilised and
paid for a large amount of additional resources from March
onwards, and it took until June for the contractual paperwork and
the payments to catch up, so we carried an unusually high amount
of working capital for much of the first six months; second, there
were delays in processing billings on our FEMA contract in the US in
Q1, which saw improvement in Q2 and complete catch up in the
second half. Working capital normalised in the second half, with
peak and average Net Debt being £208m and £137m respectively,
much closer to period end than in the first half.
Reported Net Debt fell £124m to £460m (2019: £584m),
notwithstanding a £33m increase in leases to £403m (2019: £370m),
reflecting the continued expansion of our AASC contract.
At the closing balance sheet date, our leverage for debt covenant
purposes was 0.5x EBITDA (2019: 1.2x), being Covenant Net Debt of
£102m divided by EBITDA of £225m. This compares with the
covenant requirement to be less than 3.5x Net Debt:EBITDA. Our
target range is 1x-2x Covenant Net Debt to EBITDA.
At our pre-close update on 17 December we announced that we
intended to buy £40m of shares over the coming months, and these
shares would be either cancelled, held in Treasury and/or used to
satisfy the requirements of employee share schemes. As at 24
February 2021, 14.4m shares have been purchased at an average
price of £1.23p. As stated below, it is now our intention to cancel
£20m of the purchased shares, and apply the balance to employee
share schemes. The effect of this share buyback, along with
dividends and the anticipated purchase of WBB Inc, would result in
our leverage for debt covenant purposes rising to around 1.6x
EBITDA.
The Revenue and Trading Profit performances are discussed in
more detail in the Divisional Reviews. More detailed analysis of
earnings, cash flow, financing and related matters are described
further in the Finance Review.
Annual Report and Accounts 2020
Serco Group plc
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Financial StatementsCorporate Governance
Chief Executive’s Review continued
Dividend recommendation
In the 2019 Annual Report, the Board recommended the payment
of a final dividend with respect to 2019, the first time it had been
able to make such a recommendation since 2014. It was a milestone
in the recovery of the company. Covid-19 then intervened and in
April 2020, we withdrew the proposed Final Dividend in respect of
2019 saying: “At a time when the UK and other governments are
helping Serco with its liquidity, it seems inappropriate to use that
cash for anything other than its intended purpose of protecting the
financial strength and resilience of our business”.
The Board has considered carefully the timing of the re-instatement
of dividends, which, in the current circumstances is more than a
simple financial calculation, given the importance of acting
responsibly from a reputational perspective at this challenging
time. We have also been mindful of the views of some of the
institutions and agencies whose opinion shareholders may value, as
well as taking into account more broadly, to the extent that we can
discern them, views of other stakeholders. It would, perhaps, be the
easiest thing to defer payments of dividends again, given that the
pandemic is still very much with us. On the other hand, Serco as a
company has been saved by its shareholders and supported on its
return to growth, with £850m of additional equity injected into the
company since May 2014; the Board feels very strongly that
shareholders should see cash returns on their investment at the
earliest moment it is appropriate and prudent for them to do so.
Four things have changed for us since the earlier decision-points of
our initial Covid-19 trading update in April and our half year results
August. First, any concerns we had about liquidity have proved
groundless; we have successfully re-financed our long-term debt
(and at lower cost); we have been strongly cash-positive in 2020;
leverage, even after the WBB acquisition, will be in the middle of
our target range. Secondly, we have refunded all employment and
liquidity support paid to Serco by governments, with the exception
of £12m in the USA, for which there is no mechanism for early
repayment. Thirdly, whilst the profits arising from our work on
Covid-19 are ephemeral, they do not represent a disproportionate
proportion of our profits in the year (net, around 1% of Underlying
Trading Profit). Finally, we have sought to recognise the intense
pressure and extra work that Covid-19 has brought to our staff by
making an ex-gratia payment of £5m to 50,000 of our front-line
colleagues.
In the light of these four considerations, the Board feels it both
appropriate and prudent to recommend the payment of a final
dividend in respect of 2020 of 1.4p per share, which based on a
policy of paying 1/3rd / 2/3rd split between interim and full year
dividend, would represent 4x dividend cover, or a 25% payout ratio.
The dividend, if approved by shareholders at the AGM on 21 April
2021, would be paid on 4 June. We also intend to cancel £20m of
the £40m of shares whose purchase we announced at our pre-close
Trading Update in December; the £20m would be roughly
equivalent to the cash value of the 2019 final and 2020 interim
dividends foregone.
As we said in last year’s report, the Board regards the 25% payout
ratio as a prudent starting point for dividends, and will keep
dividend policy under regular consideration as we continue to
implement the growth stage of our strategy. Future dividend
decisions will take into account the Group’s underlying earnings,
ash 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
We won £3.1bn of work in 2020, which represented a book-to-bill
ratio (the relationship between orders received and revenue
recognised) of around 80% (2019: 170%). We noted in last year’s full
year results that 2019’s £5.4bn of order intake was an exceptional
performance, and that we expected order intake in 2020 to be
significantly lower; since 2017, our book-to-bill ratio has been
approximately 115%. The natural lumpy flow of contract awards that
led us to make this prediction was exaggerated in 2020 by the
disruption caused by Covid-19 and, as a result, several large
contract award decisions scheduled for Q4 were delayed to 2021; a
consequence of this is that our reported year-end pipeline at £6.4bn
was significantly larger than last year’s £4.9bn. Furthermore, whilst
the average duration of a new contract in Serco is about five years
– so a new or rebid contract win “books” at a multiple of this year’s
“billing” – more than half of the £636m increase in revenues in 2020
arose from Covid-19 related work where contracts are by their
nature “booked” into the order book as they are “billed”. In the
light of these factors, we are encouraged that our book-to-bill
remained as high as 80%.
Of the order intake, approximately 60% was represented by the
value of rebids and extensions of existing work and 40% comprised
new business. Our win rate by value for new work was around 35%,
above the average over the last five years of approximately 25%.
Conversely, the win rate by value for securing existing work was
around 70%, which is considerably lower than the 80-90% we
typically see. The lower rate was a result of the Viapath joint venture,
in which we had a 33% interest, not being selected as the preferred
bidder for pathology services in London. We subsequently sold
down our interest in the joint venture for a consideration of £11m. In
our wholly-owned operations, the win rate by value for existing work
was over 90%. The win rates by number of tenders were nearly 60%
for new bids and over 90% for rebids and extensions.
Regionally, just under 50% of order intake came from the UK&E,
slightly less than 30% from Asia Pacific, 20% from the Americas and
the remaining proportion from customers of our Middle East
business.
The largest award was our £450m contract to continue to operate
the Northern Isles Ferry Services. First announced in September
2019, the contract was not included in our order intake until a
procurement challenge from the unsuccessful bidder was resolved
early in 2020. In Australia, we signed a six-year A$730m (~£370m)
extension to our contract to deliver support services at Fiona
Stanley Hospital in Perth. Also in Australia, we successfully rebid our
contract to run Acacia Prison in Western Australia. The new contract
has an estimated value of A$445m (£250m) over the initial five-year
period and $A1.4bn (£790m) if two five-year extensions are
exercised. The UK business won an eight-year contract valued at
just over £200m to manage the Gatwick Immigration Removal
Centres. We agreed and mobilised a range of work related to
helping governments tackle Covid-19. This included contracts in the
UK to support the NHS Test & Trace programme, testing facilities in
the UK, temporary hospitals in the UK and the Middle East, and
quarantine hotels in Western Australia. In total, the contracted value
of the Covid-19 work was approaching £400m.
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Other notable contract awards included a nine-year £116m
environmental services contract with three councils in Norfolk, a
new £52m, five-year agreement for deployment of secure services
for the US Department of Defense, a new win worth £43m to
provide deep space surveillance support in the USA and a
14-month extension to our contract to provide contact centre
services for the Australian Tax Office, valued at £44m. We were
also awarded a new contract to deliver front line customer services
at Dubai Airport. However, as a result of the airport closing and
subsequent lower passenger volumes due to Covid-19, the contract
is yet to start, so we have not included it in our order intake in
the period.
Bids for new work that were unsuccessful in the period included
Wellingborough Prison in the UK, Air Traffic Controller training for
the Federal Aviation Administration in North America and support
services for Kowloon West Cluster Hospital Authority in Hong Kong.
Order book
As a result of the lower order intake, the Group’s order book
reduced from £14.1bn at the start of 2020 to £13.5bn at the year end.
The order book reflects any required changes in assumptions for
existing contracts, including currency movements. 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 £13.5bn would be £14.4bn if option periods on contracts 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. The
order book definition also excludes our share of expected revenue
from contractual arrangements of our joint ventures and associates.
This would add a further £0.8bn if included within our order book,
relating to the remaining period of the AWE operations and the
Merseyrail franchise.
There is £2.9bn of revenue already secured in the order book for
2021, equivalent to around 70% visibility of our £4.2bn 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 and rebids across the
rest of the Group.
Rebids
As we look ahead the customary three years through to the end of
2023, across the Group there are around 75 contracts in our order
book with annual revenue of over £5m where an extension or rebid
will be required. Collectively these represent current annual
revenue of around £1.9bn or 50% of the Group’s 2021 revenue
guidance. At the start of 2018 the three-year forward rebid value
was £1.4bn, at the start of 2019 it was £1.2bn and at the start of 2020
it was £1.5bn. The proportion of revenue that requires securing at
some point over the next three years is slightly higher than usual as
the contracts related to the Covid-19 response are shorter-term in
nature. Contracts that could potentially end at some point before
the end of 2021 have aggregate annual revenue of around £1.1bn,
which is higher than normal as it includes the Covid-19 work and our
operations for the Dubai Metro, a rebid we consider to have been
unsuccessful, and accounts for 3% of Group revenue and a minor
profit impact. In 2022, the aggregate annual revenue due for
extension or recompete 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
Serco’s measure of pipeline is probably more narrowly defined than
is common in our industry; it was 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 framework, or call-off contracts such as Indefinite Delivery /
Indefinite Quantity (IDIQ) contracts, which are common in the US,
we only take the individual task orders into account. It is therefore a
relatively small proportion of the total universe of opportunities as
many of these have annual revenues less than £10m, are likely to be
decided beyond the next 24 months, will be work from framework
contracts, or are rebids and extensions.
On this definition our pipeline stood at £6.4bn at the close of 2020,
significantly higher than the £4.2bn we reported at the start of the
year and £4.1bn at the half year. As well as the usual flow of wins and
losses, 2020 was particularly unusual with Covid-19 leading to
changing timings on work in the pipeline plus new work helping
governments respond to the pandemic. The increase in the pipeline
value reflects a combination of new opportunities and award
decisions that were expected in 2020, being delayed to 2021, as our
government customers’ timelines were disrupted by Covid-19. The
upwards shift in our pipeline can be seen as a natural consequence
of our order intake being lower due to delayed award decisions.
The pipeline at the end of 2020 consisted of around 30 bids that
have an ACV averaging approximately £35m and a contract length
averaging around seven years. The UK & Europe division represents
slightly more than half of the Group’s pipeline, the Americas division
around one-third, AsPac approximately 10% and the Middle East
Division the balance.
Although excluded from our primary pipeline definition above,
opportunities for new business that have an estimated ACV smaller
than £10m are a significant component of the pipeline and potential
growth. This is increasingly likely to be the case given the use of task
orders under framework contracts. The pipeline of new business
opportunities with an estimated ACV of less than £10m has
increased from £1.6bn at the beginning of the year to £1.7bn.
The pipeline including both large and smaller opportunities has
increased from £6.5bn to £8.1bn.
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. While the second half
of 2020 did produce an increase in the pipeline, and market
conditions may over time become more favourable, it is not
necessarily strongly predictive of future revenues.
Annual Report and Accounts 2020
Serco Group plc
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Financial StatementsCorporate Governance
Chief Executive’s Review continued
Operational progress, transformation, innovation and people
We have an ambition to be the best-managed business in our sector. Achieving this will require investment in people, processes and
systems. We regularly update on progress, and each are described below, but Covid-19 has been hugely disruptive and has tested our
systems, processes and people in unforeseen ways.
Our first trading statement on Covid-19, issued on 2 April, set out our operational priorities:
“Our priority in this crisis is to support the delivery of essential public services and, within that context, do all we can to protect our
employees from harm and our shareholders from loss. .... Our mettle is being tested as never before, and we are determined to rise to
the level of events.”
It turns out that many of the investments that we have made over the past five years have proven their worth during the crisis. In particular, I
would point to three themes which have served us well.
The first is a management structure based on our “loose-tight” model. This means that we delegate authority and responsibility for
day-to-day operational management to be as close to the customer as possible, but we maintain a tight control over risk management,
bidding and cost control, and we have a well-established reporting regime, where transparency and reporting bad news as soon as it
happens are the orders of the day. During the crisis, we maintained the regimen of monthly reporting, and the Investment Committee,
which is a standing committee of the most senior Group executives including the CEO, CFO, COO and Group General Counsel and which
oversees bids and investments, met no fewer than 85 times between the 1st April and 31st December 2020. Divisional Performance
Reviews, and Business Unit Performance Reviews, continued their monthly rhythm. Our cash performance was reported daily.
The second was cultural: over the past five years we have laid much emphasis on our values of Trust, Care, Innovation and Pride. These
played a significant part in sustaining the ability of the business to deliver under extreme and unprecedent pressure. The levels of Trust
built up across the management team allowed us to work seamlessly together across boundaries; the value of Care made it easy to
connect company and personal interest with the astonishing efforts that people had to make to look after prisoners, patients, travellers,
and hundreds of thousands of often frightened and confused citizens. Innovation and loose-tight management allowed us to invent new
services and business models almost overnight and to adapt our IT platforms to new ways of working. Pride meant that people understood
that the work we do delivering public services is incredibly important and that it is a privilege to be able to make a difference every day to
people’s lives. Pride and Trust also helped us maintain momentum and morale in the face of public criticism and comment about our work
in the early days of NHS Test & Trace in the UK. Needless to say, much of the criticism was wildly unfair and bore little relationship to the
facts, but it was still unsettling to our colleagues to see their hard work being called into question.
What evidence do we have of the impact of our culture and organisational philosophy? On the operational side, clearly we have the
evidence of what has been delivered: quarantine hotels in Australia mobilised in a matter of days; 10,500 call handlers mobilised in four
weeks for the UK Tracing programme, then reduced three months later to 5,000, then expanded two months later to approaching 10,000.
A network of test centres set up and operated which between May and December tested more than 5 million people. Critical ship repairs
performed under lock-down; train and metro services maintained transport services to move critical workers; multiple crews on rotating
isolation to help support Navy movements; prisons adapted to 23-hour-day lockdowns and no visitors; hospital staff delivering cleaning,
catering and portering with sickness absence rates of up to 25% in some contracts. Operationally, Serco has performed really well during
the crisis.
But we also have the evidence of our trusty Viewpoint survey, to which 29,782 responded this year, slightly more than last year. These
surveys have been running since 2011, and the “Engagement Score” they produce has pretty accurately reflected the fortunes of the
company and the state of morale in Serco. Given the huge disruption experienced by so many of our colleagues; the immense changes
they faced and adaptations they had to make in both their personal and working lives, I was braced for a sharp drop in response rates and
scores. To my immense surprise and pleasure, I was wrong and engagement scores increased over prior years’, and continue their upward
march. There can be no greater tribute to the leadership shown by managers at all levels in the company that this has happened, and of all
our operational and financial achievements in 2020, it is of this that I am the most proud. Of particular note is the clear correlation between
the scores of People Managers (+2 at 75) and the wider workforce (+2 at 73); clearly, the experience of the workforce as a whole, and their
managers, is aligned to a rare degree.
Leaders
Managers
All employees
2011
2012
2013
65
54
45
56
51
45
51
49
42
2014
38
n/a
42
2015
2016
2017
2018*
2019
2020
55
59
53
72
62
54
71
65
56
69
70
67
77
73
71
83
75
73
*
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.
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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 surprise, the
27,000 respondents made some 50,000 individual comments. In
2020, we did the same, and this year there were 64,500 comments,
of which we have picked a genuinely random sample – the good the
bad and the ugly – of 1,000 and published them for public view on
our website. 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.
One thing that has suffered badly is our management training.
Several years ago we designed and developed specific week long
management training programmes with our partners at the Saïd
Business School, Oxford; travel restrictions meant that we had to
abandon these programmes because we believed the week long
residential element was critical in being able to build networks
across the company. We will reinstate these courses as soon as
we can and catch up. On the other hand, we have been able to
hold our commitment to recruiting graduates, and doubled our
intake in 2020.
The third element that has stood us in good stead has been our
investment in IT systems; over the past few years we have been
migrating our key management and financial systems to the Cloud,
and upgrading them at the same time. By the end of the first
quarter of 2020 we had migrated the majority of our worldwide
users on to Cloud-based implementations of Office 365, with the
effect that, when the pandemic hit, we had an IT and support
infrastructure which was able to adapt readily to remote and home
working in a secure manner for most of our users. Just in time, as it
turns out. Despite all the distractions of the crisis, we have not
slackened off our rate of investment in new systems; we are in the
process of a major upgrade of our back office systems in North
America, which is almost complete at the time of writing, and we are
also developing a custom-built system for the one process which
we in Serco do on a truly industrial scale: recruit, manage, pay, train
and organise people. This will use our existing SAP back-end, but
put a much more efficient and intuitive front-end onto it. To give
some idea of the scale at which Serco operates on the HR front: in
2020, including contingent labour, we recruited about 21,500
people, and created around 10,000 net new jobs.
We said at the beginning of the crisis that it would test our mettle; it
has, and I am proud beyond words as to how well colleagues and
the organisation as a whole have performed. For a very large
business, we have shown surprising agility. For a business which
sometimes looks like a collection of small businesses, we have
demonstrated our ability to act with common purpose, and to
maintain rigorous standards of reporting and control in confusing
and difficult circumstances. For a business of any size we have
shown great resilience. Perhaps the most remarkable thing is that
whilst the management of some other companies, for example in
travel, or hospitality, have had to manage disaster and seen their
businesses going bust, and others for instance in on-line retailing
may have seen the triumph of their model and their businesses
boom, Serco has had to manage businesses booming and busting
under the same roof.
Perhaps the biggest lesson we have learnt over the last year is
encapsulated in the words of Rudyard Kipling:-
“If you can meet with Triumph and Disaster, and treat those two
impostors just the same”
Easy to say, hard to do.
The Serco Institute
From March to June 2020, during the first few months of Covid-19,
and acknowledging the world was rightly rather distracted with
different priorities and focus areas, the Institute purposefully
paused its work and instead lent its team to help fight the virus on
the frontline of London hospitals, as well as to assist the Serco
Foundation’s Coronavirus Community Support Fund scheme that
gave over £600k to local charities fighting the pandemic. However,
since restarting in the summer, the Institute has been publishing
once again and making a thoughtful contribution and impact on
public service thinking and our markets:
•
It has produced several volumes in its new “Policy People” series
- interviews with key figures from across the international public
sector landscape, who share their insight and reflections on their
policy experiences.
• Ahead of the Integrated Review in UK Defence, the Institute
published a substantial report produced in conjunction with
Kings College London’s Centre for Defence Studies on the
merits of the ‘Whole Force’ approach, including greater use of
the private sector, which was launched at a roundtable hosted by
the Institute with the Chief of Defence Personnel and the recent
UK Minister for the Armed Forces speaking, amongst others.
• At the time of writing, as the outputs of the Institute gain
traction and attention, we have seen the launch of the Serco
Institute Middle East with two reports to be published based on
polling residents of the UAE and KSA respectively for their views,
hopes, and fears on the future of public services in their
countries.
• Last but not least, the Institute has also published numerous
short-form articles reacting to day-to-day or more immediate
events, such as the realities of NHS Test and Trace operations,
Social Value models in the UK, vaccine policy, the likely impact of
the Biden administration, and more.
In terms of work soon to be published, the report the Institute
commissioned from the independent economic consultancy Capital
Economics on the value of outsourcing is complete and simply
awaiting publication. This has provided new and persuasive
evidence and data in an area where there has been no new research
in nearly ten years. Some of the key conclusions are as follows:
• “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.”
Also, soon to be published is a piece of substantial research on
‘Contestability’ policy and the use of the private sector in delivering
public services in Australia.
Annual Report and Accounts 2020
Serco Group plc
23
Financial StatementsCorporate Governance
Chief Executive’s Review continued
The Serco Institute continued
At a time when the role of the private sector in delivering public
services has been questioned in some countries – particularly on
the back of political controversies as to how well or not
governments have dealt with the pandemic - and at a time when
citizens’ expectations of public services continue to increase and
evolve, we feel the Serco Institute can continue to make an
important contribution to understanding what works, and why, in
policy delivery, and disseminating knowledge of innovations in
public services.
Acquisitions
We regard acquisitions as an important part of our toolkit, which if
deployed correctly, can add value and speed strategic progress;
but they should be in addition to, and designed to deliver, new
opportunities for organic growth. They require discipline and
process, and for M&A we follow our head office mantra of having a
few good people rather than a lot of mediocre ones. Much of our
work we do in-house although we also use advisers where
appropriate. We look at an awful lot of opportunities, and reject
most of them. Generally speaking, we regard acquisitions as higher
risk than organic growth, so any candidates have to meet our
stringent criteria of being both financially and strategically
compelling. We also recognise that acquisition opportunities come
in different shapes, sizes and sectors, and a small one can be
strategically important to a region, but not necessarily significant at
Group level. But large or small, all acquisitions are centrally
managed by Group and follow the same rigorous process.
Since 2014 we have undertaken five acquisitions:
•
In 2017, we acquired BTP systems, a US defence engineering
company, for $20m (£13m).
In 2018 we acquired parts of the Carillion Healthcare business,
for £18m.
In 2019 we undertook a major acquisition in North America in the
form of the Naval Systems Business Unit of Alion, a leading
provider of naval design, systems engineering and acquisition &
programme management, for a consideration of $225m (£186m).
In January 2021, we acquired FFA, a specialist provider of
cleaning, facilities maintenance and management services to
governments in Australia for A$78m (£44m) including working
capital adjustments.
•
•
•
• On 16 February 2021 we announced the acquisition, subject to
regulatory approvals, of WBB, a leading provider of advisory,
engineering, and technical services to the US military, for $295m
(£215m).
The FFA acquisition was attractive because our Australian business
wanted to extend its reach and capability in the government
facilities maintenance and management market, for which there are
numerous opportunities in the years ahead. FFA was a rare asset
because of its focus on, and strong track record with, government,
indeed it had originally been the management buyout of the New
South Wales in-house FM operation. The purchase price was 6.2x
trailing EBITDA, which we believed was a fair price for a business
with relatively low margins.
The WBB acquisition, which is subject to regulatory approval, would
be our largest to date. It is highly complementary to our existing
Serco business in North America: like Serco, WBB is a leading
provider to the US Department of Defense of Systems Engineering
and Technical Assistance (SETA) services focusing in the fields of
Acquisition and Programme Management, Systems Design and
Engineering, Through-Lifecycle Asset Management and Mission.
It would add very significantly to the scale, breadth and capability
of our North American defence business. In terms of scale, it adds
around 20% to Serco’s existing $0.9bn of North American defence
revenues, and about 1,000 skilled people, reinforcing our position
as a significant supplier in the US defence services market, with
credible positions in all arms of the Department of Defense.
In terms of breadth the acquisition of WBB adds new market
segments and reach within US defence. It will approximately double
Serco’s revenues across both the US Army and Air Force/Space
Force, giving us ~$100m businesses in each. It will give us
immediate access to markets that are difficult to enter organically
including Air Force programme offices, the Missile Defense Agency,
Space and Missile Defense Command, the Office of the Secretary
of Defense, security agencies and others. In terms of capability,
WBB brings significant new areas of capability to Serco’s global
defence business, including Advanced Data Analytics, Organisation
Design, Cyber, AI & Machine Learning, Natural Language
Processing, Wargaming, Modelling, and technologies related to
geo-location. Among its 1,000 employees, 80% of whom have
security clearances, it has around 200 “Subject Matter Experts”
many of whom are former senior US military officers who are
recognised experts in their fields.
We will continue to keep our eyes and ears open for new
opportunities, and focus in the meantime on delivering value
from those acquisitions we have already done.
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. We had planned to conduct an annual update in 2020,
but as soon as Covid-19 struck we told those people who would
normally do this work to focus on managing the business. We did,
however, set all our Divisions to thinking how life might be different
in a post-Covid-19 world.
It is our intention to give investors a Capital Markets Day in the
second half of 2021, at which point the fog on what a post-Covid-19
world might look like will have thinned, and we will be able to give a
more considered analysis. In the Our Market section of the Annual
Report we set out a lot of our thinking, but below are some of our
reflections on how Covid-19 may impact our market:-
• Covid-19 will probably amplify the underlying drivers of demand
in our market – which in 2014 we described as the “Four Forces”.
They are: relentlessly increasing demand for public services;
expectations of higher service quality; structural fiscal deficits;
electoral resistance to tax increases. These forces 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’). We believe that Covid-19 has
reconnected hundreds of millions of people worldwide with
government services and reminded them of the value of well
organised service delivery. This will make government more
confident in promoting services to citizens. But the fact is that
deficits and levels of government debt have increased to levels
not seen outside World War, and governments will be sharply
focused on delivering “More and Better for Less”. This is positive
for our market.
24
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Annual Report and Accounts 2020
• When faced by Covid-19, governments worldwide were
surprised by two things. First, how little resilience there was in
many critical self-provided government services, and second by
how well the private sector was able to respond to an existential
crisis. From developing vaccines in previously undreamt-of
timescales, to building vast new hospitals in weeks, to
manufacturing tens of thousands of ventilators, to standing up
test and tracing services on a scale never before seen,
governments asked the private sector to respond, and has, I
suggest, been pleasantly surprised at how broad and capable
the private sector has proved to be.
•
• We think that thoughtful governments will reflect that they need
to be more diligent about how they plan for crises, and putting
in place supply-chains and procurement processes that allow for
the swift mobilisation of the private sector.
In the UK in particular, many companies have avoided doing
business with government as they have seen the carnage that
has been wrought, some by government, some by self-harm, on
the sector over the past 10 years. During the crisis, companies
have seen that, particularly in crisis, government can be a good
customer to have; they pay on time, and in times of trouble,
demand increases. This may attract more entrants into the
market, which would be a good thing. One of the greatest
danger for companies like Serco, whose very existence depends
upon government being confident it can test value through
competition, is if there is no competition.
• Governments across the world were broadly able to maintain
momentum on tender evaluation during the first six months of
2020, but in the second half many of the larger tender
adjudications became delayed, and we suspect that it will take
some time for backlogs to be cleared. This trend is exacerbated
in the US where it is the habit of losers, particularly incumbent
losers, to launch protests against procurement decisions, and
Covid-19 is slowing up the process of dealing with these
protests.
• With hundreds of millions of people being made unemployed,
we believe that governments will invest in services to get people
back into work as soon as possible. This is an area in which we
have deep experience.
• We see demand for testing and contact tracing reducing during
the course of 2021 and eventually being taken over by Local
Authorities, with a reserve force from the private sector at the
ready to deploy in case of significant outbreaks.
• We believe the arrival of the Biden administration and its
response to higher debt due to Covid-19 is likely to slow the rate
of growth in US defence spending. However, the need to
respond to external military threats is supported across both
parties and we therefore think the change of government is
unlikely to have a dramatic impact on our US defence business.
Long term, we believe that the Covid-19 crisis will have an impact on
the mix of demand for services provided by the private sector to
governments, but we see no reason to change our view that in the
years ahead Serco should be able to grow its revenues by, on
average, around 5% a year, and deliver trading margins of 5%.
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Guidance for 2021
At our Closed Period trading update on 17 December 2020,
we provided our initial outlook for 2020 and remarked that we
anticipated a year of stable revenue, UTP and earnings for the
existing business, with a small uplift to reflect the acquisition of
FFA. We also noted that, in common with many other businesses,
we face a lot of uncertainty in 2021, and the outlook has a wider-
than-usual margin for error. Since that date, and having had a very
strong start to the year, we have revised upwards our view of
Underlying Trading Profit. We have also revised guidance to take
account of currency rates and to take into account the impact of the
resumption of dividend payments announced with our 2020 results.
With lower volumes expected from Covid-19-related work in the
second half, along with the exit from our activities at the Atomic
Weapons Establishment at the end of June 2021, we expect trading
to be stronger in the first half than in the second. This guidance
does not include the effect of the acquisition of WBB Inc, which is
still subject to regulatory approval; guidance will be updated
following completion, which we expect to achieve in Q2. In our
statement announcing the transaction, we stated that we expected
WBB to generate revenue in calendar 2021 of around $230m
(£168m), EBITDA of $29m (£21m) and UTP of $28m (£20m), before
exceptional transaction and integration costs; naturally, the
proportion of this that would accrue to Serco in 2021 would depend
on the timing of completion.
Revenue: Revenue in 2021 is expected to be around £4.2bn,
approximately 5% higher than the £3.9bn outturn for 2020.
This assumes 4% from the acquisition of FFA, organic growth of 4%
and a 1% adverse impact from currency. We will have an ongoing
positive contribution from several of the contracts that have
supported growth in the second half of 2020, including Prisoner
Escorting and Custody Services, Gatwick IRC and Clarence
Correctional Centre. Predicting the outcome for our Covid-19
related work is difficult due to the speed of change with the
pandemic and the potential for rapid changes in demand from
our government customers. Our current expectation is that the
level of work will be lower in 2021 but the range of potential
outcomes is wide.
Underlying Trading Profit: UTP is expected to be around £175m,
including approximately £6m from FFA and a currency headwind of
£4m, based on recent exchange rates. The year will benefit from the
annualisation of our new contracts from 2020 and we anticipate
some improvement in the parts of our business negatively impacted
by Covid-19 in 2020. These should offset the cessation of our
involvement in the Atomic Weapons Establishment at the end of
June 2021, higher insurance costs and a lower level of profit on our
Center for Medicare & Medicaid Services (CMS) contract as the
high volumes we saw in 2020 fall away; we also expect to see a
reduced contribution from our Anti-Terrorism / Force Protection
(ATFP) framework contract for US Naval Facilities due to the typical
phasing of work over the contract life.
Net finance costs and tax: Net finance costs are expected to be
around £27m. This is similar to 2020 as the lower level of debt is
temporarily offset by us paying interest on both our new US private
placement notes and the existing notes that will mature in May and
October 2021 as well as the acquisition of FFA. The underlying
effective tax rate is expected to continue at around 25%, although
this is sensitive to the geographic mix of our profit and any changes
to current corporate tax rates.
Annual Report and Accounts 2020
Serco Group plc
25
Financial StatementsCorporate Governance
Chief Executive’s Review continued
So, what does this say of the future? Naturally we will want to point
to the wisdom of our investment in management, systems,
processes, and the creation of an operating platform that is able to
work across different geographies and segments of the
government services marketplace. But we have been lucky, too.
Lucky to have had our balance sheet crisis before most of our peers,
and been able to learn the salutary lessons and disciplines that
brought with it; lucky that when Covid-19 struck, our balance sheet
was repaired and our operating platform was well invested; lucky
that when governments needed us, we had earned our right to be
“in the room”. And that combination of skill and luck has enabled us
to deliver 33% compound growth in profits over the last three years,
even in the teeth of a crisis as grave as Covid-19.
Maybe now, in 2021, we can think once again of the ambition we set
ourselves a year ago of being a more “normal” company. That we
can grow our margins to 5% and our revenues at 5%, quietly and
diligently serving governments, avoiding risk and losses, and
repeating to ourselves the mantra that “no deal is better than a bad
deal”. All the while paddling furiously below the surface trying to do
better than that; investing in our people and systems as well as
searching for value-enhancing acquisition such as NSBU, FFA and
WBB. And holding fast to our ambition to be thought of as the
best-managed business in our sector.
And we intend to stick with the strategy we developed in 2014:
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.
Rupert Soames
Group Chief Executive
Serco – and proud of it.
24 February 2021
Guidance for 2021 continued
Financial position: We expect Adjusted Net Debt to be to
approximately £100m. Strong cash generation will be balanced by
us repaying about half the of the £12m in US employment tax
deferrals in 2020, the acquisition of FFA and the £40m of our own
shares being purchased. Free Cash Flow is expected to reduce in
2021 due to the repayment of US tax deferrals, the purchase of
shares for employee share schemes and because 2020 benefitted
from catch up on delays in processing billings on our FEMA contract
in the US.
Our outlook for 2021 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 4.
Board
There have been numerous changes to the Board during the year,
which are described in the Chairman’s Statement. There are two in
particular I would like to comment on. The first is the departure of
Serco’s Chairman, Sir Roy Gardner who had the courage to join
Serco in 2015, at a time when few others would. He has been
immensely supportive of the executive and has been a font of wise
advice, for which I and my colleagues are enormously grateful. I
greatly look forward to working with new incoming Chairman, John
Rishton, who has been on the Serco Board since 2016. The second is
the departure of my longstanding colleague Angus Cockburn, who
is to step down from the Board at the AGM. Angus was instrumental
in persuading me to join Aggreko in 2003, and we have worked
together, with only a six-month break, since then. He is a prince
amongst men, and a giant amongst CFOs. Fortunately, in 2014 he
took the trouble to recruit and groom a brilliant successor, Nigel
Crossley, who will seamlessly take on Angus’s work.
Summary and concluding thoughts
In this section of my report last year, the preoccupation was how
we should adapt to being a “normal” company after four turbulent
years and how we should respond to the increased focus of
stakeholders on Environmental, Social and Governance
(ESG) issues.
On ESG, we have tried hard to respond in a thoughtful way to the
need for continuous improvement. We think that our reporting has
much improved, and although it will have negative consequences
for our profits, the loss of our contracts at AWE will allay the
concerns of those stakeholders who felt uncomfortable with us
being centrally involved with the production of nuclear weapons.
However, there will always be certain parts of our business which
will cause concern to some. Most notably the fact that we do on
governments’ behalf some of the hard things that citizens expects
their governments to do, like deport some people and hold others
in prison; all on behalf of democratically elected governments, but
unpalatable to some.
In terms of business operations, 2020 was a salutary example that,
in the words of Robert Burns, “the best laid schemes o’ mice an’
men gang aft a-gley.” Covid-19 upended the best-laid plans of
CEOs, let alone of mice. I am beyond proud of the way colleagues
managed their way through this crisis, and beyond pleased with the
way our “loose-tight” management structure, our reporting, our
processes and our IT systems were able to react with agility, pace
and precision to an existential, and completely unexpected, crisis
and deliver an outstanding financial outcome.
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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 2020
£m
Revenue
Change
Change at constant currency
Organic change at constant currency
UTP
Margin
Change
Contract & Balance Sheet Review
adjustments
Other one-time items
Trading Profit/(Loss)
Amortisation of intangibles arising on
acquisition
Operating profit/(loss)
before exceptionals
Year ended 31 December 2019
£m
Revenue
UTP
Margin
Contract & Balance Sheet Review
adjustments
Other one-time items
Trading Profit/(Loss)
Amortisation of intangibles arising on
acquisition
Operating profit/(loss)
before exceptionals
UK&E
Americas
AsPac
Middle East
Corporate costs
Total
1,777.4
+31%
+31%
+31%
57.0
3.2%
39bps
5.8
6.8
69.6
(2.0)
1,064.3
+16%
+17%
+1%
100.8
9.5%
51bps
–
–
718.9
+16%
+18%
+18%
32.6
4.5%
–50bps
–
–
324.2
(7%)
(7%)
(7%)
13.9
4.3%
31bps
–
–
–
(41.2)
(1.1%)
34bps
–
–
3,884.8
+19.6%
+20.3%
+16.2%
163.1
4.2%
50bps
5.8
6.8
100.8
32.6
13.9
(41.2)
175.7
(7.0)
–
–
–
(9.0)
67.6
93.8
32.6
13.9
(41.2)
166.7
UK&E
Americas
AsPac
Middle East
Corporate costs
Total
1,361.7
915.7
621.4
349.6
–
3,248.4
38.4
2.8%
0.3
9.6
48.3
(1.2)
82.1
9.0%
9.5
–
91.6
(6.2)
47.1
85.4
31.3
5.0%
–
–
31.3
(0.1)
31.2
13.9
4.0%
–
–
13.9
–
13.9
(45.5)
(1.4%)
(6.2)
–
(51.7)
–
120.2
3.7%
3.6
9.6
133.4
(7.5)
(51.7)
125.9
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 22-38. This includes full definitions and explanations of the purpose of each
non-IFRS Alternative Performance Measure (APM) used by the Group. The Consolidate Financial Statements and accompanying notes are
on pages 39-76. Included in note 2 to the Group’s Consolidated Financial Statements 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 2020
Serco Group plc
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Financial StatementsCorporate Governance
Divisional Reviews continued
UK & EUROPE
Sectors we
operate in:
• Defence
• Justice &
Immigration
• Transport
• Health
• Citizen Services
Revenue
Underlying Trading Profit (UTP)
£1,777m
2019: £1,362m
£57m
2019: £39m
Group revenue
46%
Group UTP (before Corporate costs)
28%
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
43% of the Group’s reported revenue, and those across the rest of
Europe approximately 3%.
The division had a very strong year, and the UK had the most to cope
with in terms of Covid-19, with some businesses going backwards
and others growing strongly. Revenue for 2020 was £1,777m (2019:
£1,362m), an increase of 31%. Reported revenue excludes that from
our joint venture and associate holdings which largely comprise the
operations of AWE and Merseyrail. At constant currency, the growth
in revenue was also 31%, or £415m. The high organic growth resulted
from a combination of additional work related to Covid-19, our
Asylum Accommodation and Support Services Contracts (AASC)
contracts, the start of our agreement to manage the Gatwick
Immigration Removal Centres and mobilisation of our new Prisoner
Escorting contract. Work supporting our customers’ response to
Covid-19 included the NHS Testing and Contact Tracing
programmes, and increased customer service work, including NHS
111. At the same time, Covid-19 caused an abrupt reduction in
demand in our Leisure business and on our contract to operate the
Northern Isles Ferries. The Caledonian Sleepers contract saw a
sharp reduction in passenger volumes and services as a result of
Government limitations on travel, but alongside these service
changes, Emergency Measures Arrangements were agreed with the
customer. The current EMA comes to an end in March 2021 and we
have commenced discussions with the customer about the future
trading arrangement, including the possibility of an extension or
new EMA.
Underlying Trading Profit (UTP) was £57m (2019: £38m), representing
a margin of 3.2% (2019: 2.8%) and growth of 48% at constant
currency. The increase in our profit was driven, in large part, by our
AASC contracts moving from losing money in 2019, as mobilisation
costs were incurred, to profitability, and by our additional Covid-19
work. There was a £2m non-recurring benefit to UTP as we exited
the Viapath pathology services joint venture. Trading Profit includes
the profit contribution (from which interest and tax have already
been deducted) of joint ventures and associates. If the £365m
(2019: £395m) proportional share of revenue from joint ventures
and associates was included and the £3m (2019: £6m) share of
interest and tax cost was excluded, the overall Divisional margin
would have been 2.8% (2019: 2.7%). The joint venture and associate
profit contribution was lower at £13m (2019: £27m), due to the
impact of Covid-19 on Merseyrail passenger numbers and lower
pricing on AWE.
Within UTP there was a reduced rate of OCP utilisation of £1m (2019:
£33m excluding IFRS16-related accelerated utilisation), as we draw
towards the end of our efforts over the last six years to reduce these
large loss-making contracts. Trading Profit of £70m (2019: £48m) was
above UTP due to a £6.8m credit, relating to a settlement in favour
of the Group included within other one-time items (2019: £9.6m net
credit) and a £5.8m credit in Contract & Balance Sheet Review
adjustments (2019: £0.3m net credit).
The UK & Europe Division’s order intake was £1.5bn, or 48% of that
for the whole Group. The largest award was our £450m contract to
continue to operate the Northern Isles Ferry Services. First
announced in September 2019, the contract was not included in our
order intake until a procurement challenge from the unsuccessful
bidder was resolved earlier this year. The second largest contract
award in the period was a new agreement to manage the Gatwick
Immigration Centres, valued at approximately £200m. We also
agreed various shorter-term contracts with the government to
provide services in response to Covid-19.
Of existing work where an extension or rebid will be required at some
point before the end of 2023, there are less than 30 contracts with
annual revenue of £5m or more within the division. In aggregate,
these represent around 40% of the current level of annual revenue for
the division. The largest is the NHS Test & Trace contract, which, due
to its nature, we don’t expect to continue, at least at its current level.
The larger contracts to rebid include, in 2021, our contract with the
Department for Work and Pensions and, in 2022, our Royal Navy fleet
support contract known as Future Provision of Marine Services
(FPMS) and our UK MOD Skynet satellite support operations.
The UK & Europe pipeline has increased materially in 2020 as a
result of new opportunities and awards that were expected in 2020
being delayed to 2021. Opportunities in the new bid pipeline
include several defence support opportunities, justice tenders
including the new build prison manage and operate contracts, and
environmental services work in Citizen Services. A significant
proportion of the UK pipeline relates to work for the Defence
Infrastructure Organisation (DIO). We are bidding this in a join
venture and, if successful, we would recognise only Serco’s share of
profit after interest and tax, not revenue.
The announcement in early November that the Ministry of Defence
intended to take back in-house the management of the Atomic
Weapons Establishment as from the end of June 2021, was clearly a
major disappointment as we have been involved with the
management of AWE for over 20 years. The contract contributed
£15m to UTP in 2020, and the financial consequences of losing the
contract will be split between 2021 and 2022.
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Annual Report and Accounts 2020
AMERICAS
Sectors we
operate in:
• Defence
• Transport
• Citizen Services
Revenue
Underlying Trading Profit (UTP)
£1,064m
2019: £646m
£101m
2019: £45.7m
Group revenue
27%
Group UTP (before Corporate costs)
49%
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Americas represented around £0.6bn ($0.8bn) or 19% of the Group’s
order intake. The largest award for new work was from the U.S.
Space Force to manage, operate and maintain the Ground-Based
Electro-Optical Deep Space Surveillance (GEODSS) system. The
contract has an eight-month base period and six one-year option
years with a total value of $57m. We also secured additional field
office support services work for the Pension Benefit Guaranty
Corporation, following our initial contract win in 2019.
Our rebid and extended win rate was in excess of 90% in the year.
This included the rebid of our contract to support the US Army’s
civilian readiness training and talent management efforts. We also
resecured places on the IDIQ frameworks for both ship and
shore-based C4ISR systems modernisation services over the next
ten years that replace the previous GIC frameworks.
Of existing work where an extension or rebid will be required at
some point before the end of 2023, there are around 25 contracts
with annual revenue of over £5m within the Americas division; in
aggregate, these represent around 60% of the current level of
annual revenue for the division. Those coming up for rebid or
extension in 2021 include our SEA 21 contract for managing
lifecycle maintenance of US Navy surface ships and our support
services at the 5 Wing Canadian Forces Base in Goose Bay; and in
2022, the Federal Aviation Administration’s (FAA) Contract Tower
(FCT) Program and resecuring a position on the successor
framework for CANES. In 2023, our CMS contract is scheduled to be
retendered. 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. Our Citizen Services business unit also had a number of
wins during the year, and building further the pipeline in this area
remains a target.
Our Americas Division accounts for 27% 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 2020 was £1,064m (2019: £916m), an increase of 16% in
reported currency. In US dollars, the main currency for operations of
the Division, revenue for the year was equivalent to approximately
US$1,369m (2019: US$1,172m). The Naval Systems Business Unit
(NSBU) acquisition, completed at the start of August 2019, drove
growth from acquisitions of 17%, while the strengthening of the
pound against the dollar decreased revenue by £8m or 1%.
Organically, revenue was stable as growth in the US Federal
Emergency Management Agency (FEMA) contract framework and
the US Pension Benefit Guaranty Corporation (PBGC) contract was
offset by the loss in 2019 of our contract to provide traffic
management services to the US state of Georgia Department of
Transportation (GDOT) and lower volumes on our Consolidated
Afloat Networks Enterprise Services (CANES) contract, which was
coming off strong demand and task order processing in 2019.
CANES had seen particularly strong demand and new task order
wins in 2019; it is a contract to assemble off-the-shelf components
for the US Navy and attracts with relatively low margins and by its
nature has volumes which vary by significant amounts from quarter
to quarter.
Underlying Trading Profit grew strongly to £101m (2019: £82m),
representing a margin of 9.5% (2019: 9.0%) and growth of £19m or
23%. Constant currency growth, after an adverse currency
movement of less than £1m, was 24%. Around half of the growth
came from the NSBU acquisition and half was organic. Despite
revenue being flat organically, profit improved as the additional
FEMA and PBGC work more than offset the reduced contribution
from CANES and GDOT, and due to a step up in profit on our
Anti-Terrorism / Force Protection (ATFP) framework contract for US
Naval Facilities. The ATFP contract has been successfully rebid in
2021 but the typical phasing of this work over the contract life
means, even if we successfully retain the contract, we anticipate a
lower level of revenue and profit at the beginning of the new
agreement. Following a strong 2019, profit was broadly flat on our
health insurance eligibility support contract for the Center for
Medicare & Medicaid Services (CMS). The temporary uplift in
volume related work experienced in 2019 continued into the first
half of 2020 before stepping down in the second half, as expected,
once the circumstances that led to the extra activity were resolved.
Within Underlying Trading Profit there was no OCP utilisation (2019:
£4m), as the Ontario Driver Examination Services (DES) contract is
no longer an onerous contract. There were no Contract & Balance
Sheet Review adjustments (2019: £9.5m net credit), so Trading Profit
was £101m (2019: £92m).
Annual Report and Accounts 2020
Serco Group plc
29
Financial StatementsCorporate Governance
Divisional Reviews continued
ASPAC
Sectors we
operate in:
• Defence
• Justice &
Immigration
• Transport
• Health
• Citizen Services
Revenue
£719m
2019: £621m
Group revenue
19%
Underlying Trading Profit (UTP)
£33m
2019: £31m
Group UTP (before Corporate costs)
16%
The contract has an estimated value of approximately $730m
(~£370m) over its six-year term, including indexation. We also
extended our contract to provide contact centre services to the
Australian Tax Office to April 2021 and to Services Australia to June
2021. Related to Covid-19, we agreed work with the government for
services, including to provide accommodation in mid-2020 for more
than 1,300 quarantined travellers in Western Australia and
additional contact centre work. Of existing work where an extension
or rebid will be required at some point before the end of 2023, there
are 10 contracts with annual revenue of over £5m within the AsPac
division. In aggregate, these represent just over half of the current
level of annual revenue for the division. This high proportion reflects
that the Australia onshore immigration services contract requires
further extension or rebid again at the end of 2021, with this
accounting for around 25% of divisional revenue. Others that will
require extending or rebidding include, in 2021, the Services
Australia framework contract, the Australian Tax Office framework
contract and the Fleet Marine Service Contract.
Our pipeline of new bid opportunities is currently weighted towards
the health segment. The largest is to provide health services as part
of the redevelopment and expansion project of the existing
Frankston Hospital in Victoria. Rebuilding the pipeline across the
Justice & Immigration, Defence, Citizen Services, Transport and
Health sectors remains a target, and we are expecting further
opportunities in the coming years.
The AsPac pipeline is in a rebuilding phase, with the growth team
looking to scope future opportunities over the short to medium
term. Our pipeline of new bid opportunities is currently weighted
towards health facilities management. We are expecting further
opportunities to join the pipeline in the Justice and Defence
segments. AsPac will be working with its newly acquired subsidiary,
FFA, to develop and execute a strong pipeline in the facilities
management and cleaning sectors.
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 2020 was £719m (2019: £621m), an increase of 16% in
reported currency. In Australian dollars, the main currency for
operations of the Division, revenue for the year was equivalent to
approximately A$1,343m (2019: A$1,137m). The weakening of local
currencies against sterling reduced revenue by £14m or 2%; the
organic change at constant currency was therefore growth of 18%,
or £112m. The largest contributor to this growth was the AHSC
defence garrison healthcare services contract in Australia, which
started operations on 1 July 2019. Other notable drivers of growth
were Clarence Correctional Centre, where operations commenced
in July, increased activity for our immigration business and
additional work with Services Australia (formerly the Department of
Human Services), where increased business resulted indirectly from
the impact of Covid-19.
Underlying Trading Profit was £33m (2019: £31m), representing a
margin of 4.5% (2019: 5.0%) and an increase of 4%. Excluding the
adverse currency movement of £0.4m, the increase at constant
currency was 6%. We saw good profit growth from the AHSC
contract, this being its first full year of operation, as well as the
additional work with Services Australia. The margin reduced by
around 50 basis points due to a drag from Clarence Correctional
Centre, which was break even, construction delays on Australia’s
new Antarctic research icebreaker vessel, as a result of Covid-19,
and additional overheads of around £3m, including £1m of front-line
worker bonuses.
There was OCP utilisation of £0.8m (2019: £3m) within Underlying
Trading Profit. There were no Contract & Balance Sheet Review
adjustments (2019: £nil), so trading profit was therefore £33m (2019:
£31m), the same as Underlying Trading Profit.
AsPac represented around £0.9bn or 29% of the Group’s order
intake. Having had significant success in winning in recent years,
it was a relatively quiet year for new work. We did however have a
very strong year on rebids and extensions, with our win rate by value
approaching 100%. Our contract to deliver prison services at Acacia
Prison for the Government of Western Australia was successfully
rebid. Serco has managed operations at the prison, which is
Western Australia’s largest prison and the second largest in
Australia, since 2006. The initial 5-year period has an estimated
value of A$445m or approximately £250m. The contract has
provision for two further 5-year extensions with potential value to
Serco over the full 15 years, including indexation, of approximately
A$1.4bn (£790m). We signed a variation and extension contract with
the government of Western Australia for the Fiona Stanley Hospital
in Perth. The new contract will see continued delivery of support
services at the hospital, albeit with a reduced number of
service lines.
30
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Annual Report and Accounts 2020
MIDDLE EAST
Sectors we
operate in:
• Defence
• Transport
• Health
• Citizen Services
Revenue
£324m
2019: £350m
Underlying Trading Profit (UTP)
£14m
2019: £14m
Group revenue
Group UTP (before Corporate costs)
8%
7%
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Operations in the Middle East Division include Transport, Defence,
Health and Citizen Services, with the region accounting for
approximately 8% of the Group’s reported revenue.
Revenue for 2020 was £324m (2019: £350m), a decrease of 7% in
reported currency. The weakening of local currency against sterling
decreased revenue by £3m or less than 1%; the organic change at
constant currency was also a decline of 7%. The Middle East
segment has faced the largest negative impact from Covid-19 as
there has been a sudden reduction in activity in parts of the
transport portfolio and, unlike in the UK, limited Covid-19 response
work to act as a counterbalance. There was growth in revenue from
expanded services to Mashroat in Saudi Arabia and the Dubai
Metro. These were outweighed by Covid-19 leading to reduced
revenue on various contracts including Baghdad Air Traffic Control,
health FM in Saudi Arabia and Dubai Airport facilities management.
There was also a drag from the Cleveland Clinic contract, which was
lost in 2019.
Underlying Trading Profit of £14m (2019: £14m) was stable year-on-
year, representing a margin of 4.3% (2019: 4.0%). Excluding the
adverse currency movement of £0.6m, the increase at constant
currency was 1%. Although the reduction in revenue on our air
traffic control work and health FM contracts in Saudi Arabia
negatively impacted profit, this was offset by improved profitability
on some of our work in Saudi Arabia. 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 was therefore
£14m (2019: £14m).
CORPORATE COSTS
Corporate costs relate to typical central function costs of running
the Group, including executive, governance and support functions
such as HR, finance and IT. Where appropriate, these costs are
stated after allocation of recharges to operating Divisions.
The costs of Group-wide programmes and initiatives are also
incurred centrally.
Corporate costs at the Underlying Trading Profit level reduced by
£4m to £41.2m (2019: £45.5m).
The Middle East represented £0.2bn, or 6%, of the Group’s order
intake, not helped by disruption from Covid-19. We were awarded
a new contract to deliver front line hospitality customer services at
Dubai Airport. However, as a result of the airport closing and
subsequent lower passenger volumes due to Covid-19, the contract
start was delayed. It began in January 2021 at a lower level than
originally anticipated. As a result, we have included it in our order
intake at a reduced amount. We did, however, secure a five-year
contract to continue running the monorail for Nakheel on the Palm
Jumeirah and successfully rebid our contract for the delivery of air
navigation services at Sharjah Airport.
Of existing work where an extension or rebid will be required at
some point before the end of 2023, there are around 10 contracts
with annual revenue of over £5m within the Middle East division.
In aggregate, these represent around 65% of the current level of
annual revenue for the division. The high proportion reflects that
the Dubai Metro contract is due for rebid in 2021, with this
accounting for around 30% of current divisional revenue. We
consider this rebid to have been unsuccessful. Further extensions or
rebids include the Dubai and Baghdad ANS contracts, the Middle
East Logistics and Base Support Services (MELABS) contract and
Saudi rail operations.
Corporate costs at a UTP level have reduced due to lower travel,
lower PSP costs as the issue of awards was delayed in the year, and
favourable estimates in provisions for disputes held centrally which
do not relate to specific contracts or operation.
Annual Report and Accounts 2020
Serco Group plc
31
Financial StatementsCorporate Governance
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.
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.
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
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Annual Report and Accounts 2020
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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. Never have we seen this more
evident than in 2020, when throughout the Covid-19 crisis Serco
colleagues stuck by their commitment to deliver to customers and
citizens despite the risks that doing so posed to themselves and to
their families. 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.
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 (8%), and again in
2020 (17%). Our underlying trading margin declined to a nadir of
2.3% in 2017 and has now had three years of improving, to 4.2%
in 2020.
Our view is that while organic revenue growth seen in 2020 cannot
continue at that same level (17%), and we see 2021 as a year of much
more modest growth, overall the ‘Four Forces’ we described some
years back will remain more relevant than ever post-Covid-19. We
believe the imperative for governments to provide more, and
better, for less will become even more urgent in the years ahead,
and to deliver those objectives governments will need the skills,
resources, innovation and nimbleness of the private sector. Our
view is that Serco is well-positioned to respond to this across our
different geographies and sectors, and that on average we will be
able to deliver revenue growth of around 5%.
When it comes to margin, we are inching ever closer to our 5%
target, and despite the competitiveness of some of our markets,
we can see plenty of opportunity in the years ahead to close the
remaining gap through an increasing focus - organically and
inorganically - on our higher margin segments, and through
deploying our operational excellence methodologies, technology,
data, and specialist workforce management techniques to increase
our operational productivity.
Annual Report and Accounts 2020
Serco Group plc
33
Financial StatementsCorporate Governance
Strategy implementation
In 2014 we identified three distinct phases in the implementation of our strategy;
Stabilise, Transform & Grow.
We are now well past the first two stages and established into the Growth phase – delivering 10%
compound growth in revenues and 33% compound growth in Underlying Trading Profit over the last
three years.
This has been achieved by winning new business; acquiring businesses; and improving efficiency.
Acquiring businesses
We have also made a number of
acquisitions, including:
Improving efficiency
Winning business
As a result of improving our win rates
and rebid rates in our sectors and
geographies, between 2017 and 2020
our order book increased from £10.7bn
to £13.5bn, helped by wins such as:
2017
• New Grafton Correctional Centre:
• BTP Systems, LLC, 2018: ~US$20m
~A$2.6bn
• University Hospital Southampton NHS
Foundation Trust: ~£125m
• US Army base modernisation services
and in particular IT support: ~US$140m
• Navy Fleet Readiness Centers:
~US$101m
2018
• Center for Medicare
& Medicaid Services (CMS): 10,000 employees to
work from home.
•
• 2020 LTIFR was below the target level, at 4.4.
• Successful redeployment of employees during Covid-19,
creation of 10,000 net new jobs.
• Demonstration of ongoing commitment to our people,
including new initiatives to support and improve
communications to all our colleagues during the Covid-19
crisis and continued site visits to support colleagues on the
front-line of the pandemic response, where appropriate and
safe to do so in-line with government guidance.
• Employee engagement score for 2020 of 73.
Profitable and sustainable
• Deliver against financial targets and city expectations whilst
maintaining the reputation of Serco in the investment
community.
• First company in sector to reinstate guidance after pandemic
hit. Maintained strong and transparent relationships with all
major investors.
The Committee considered Rupert’s performance against his stated objectives and deemed his overall performance in 2020 to be very
strong, awarding him a personal performance outcome of 80%. Rupert has continued to show highly effective and visible leadership
throughout 2020, and over the course of the year has delivered another strong year of performance in the face of the substantial
challenges brought on by Covid-19. This was achieved whilst maintaining the trust built up with our customers, based on the strong
foundations of good governance, and whilst ensuring the engagement and wellbeing of all colleagues at Serco, all of which is critical to
our longer term success.
122 Serco Group plc
Annual Report and Accounts 2020
Angus Cockburn – consideration of personal performance in the year
Target
Achievements in year
Winning good business
•
Improving Business Development performance to deliver a
reported pipeline with a target of £5,899m, new business wins
with a target of £1,699m and target total wins of £3,230m.
• Business development performance was on target (total wins
in 2020 amounted to £3.1bn).
• Reported pipeline for 2020 was significantly above target at
£6.4bn with total pipeline including both large and smaller
opportunities at £8.1bn.
Executing brilliantly
• Continue to drive and improve Serco Finance Transformation
across the Group.
• Maintain the reputation of Serco in the investment community.
• Support the achievement of a target LTIFR of 5.1.
• Strength of relationships with the investment community
maintained including the introduction of our new Head of
Investor Relations.
• Continued successful delivery of Finance Transformation
despite the challenges brought on by Covid-19.
• 2020 LTIFR was below the target level, at 4.4.
A place people are proud to work
• Supporting the achievement of a Group Engagement Score of
at least 68.
Profitable and sustainable
• Deliver against Financial Targets and City expectations.
• Demonstration of ongoing commitment to our people,
including new initiatives to support and improve
communications to all our colleagues during the Covid-19
crisis.
• Employee engagement score for 2020 of 73.
• Developed strong succession plans within the Finance
function, in particular the positioning and development of his
CFO successor enabling the appointment of an internal
successor who has been positively accepted by both internal
and external stakeholders.
• First company in sector to reinstate guidance after pandemic
hit. Maintained strong relationships with all major investors.
• Achieved strong financial performance for the year; reduction
in net debt from £215m to £58m and leverage of 0.5x EBITDA
which is below the lower end of our target range of 1-2x.
• Our strong balance sheet enabled Serco to access the US
Private Placement market for the first time in more than seven
years providing a very strong base for the ongoing execution
of our strategy.
• Provided strong leadership to the Growth Forum which has
become a key aspect of strategic growth planning at Serco.
The Committee considered Angus’s performance against his stated objectives and deemed his overall performance in 2020 to be very
strong, awarding him a personal performance outcome of 77.5%. Angus has continued to show highly effective and visible leadership
throughout 2020. Over the course of the year he has delivered another strong year of performance, maintained good levels of liquidity and
maintained a strong balance sheet despite the substantial challenges arising due to Covid-19. This was achieved whilst maintaining the
trust built up with our customers and the investment community, and ensuring the engagement and wellbeing of all colleagues at Serco,
all of which is critical to our longer term success.
Overall 2020 bonus outcome
Total bonus payable as % of maximum
Bonus opportunity as % of salary
Bonus amount achieved as % of salary
Bonus amount earned1
Rupert Soames
Angus Cockburn
80.0%
175%
140%
£1,190,000
79.3%
155%
123%
£642,133
Note:
1. Bonuses earned over 100% of salary are subject to mandatory deferral into Serco shares for three years.
Annual Report and Accounts 2020
Serco Group plc
123
Financial StatementsStrategic ReportCorporate Governance Remuneration Report continued
Long-term incentives
The total long-term incentives value included in the 2020 single total figure of remuneration includes the following Performance Share Plan
and legacy Deferred Bonus Plan Awards.
Performance share plan (PSP)
The 2020 single figure is comprised of the 2018 PSP awards granted on 25 June 2018, which are due to vest on 25 June 2021 subject to TSR,
EPS, ROIC, Order Book (measured as the book-to-bill ratio) and Employee Engagement performance in the period to 31 December 2020.
In determining the overall vesting for the 2018 PSP the Committee was mindful that the final year of the performance period was impacted
by Covid-19. Careful consideration was given to the overall performance of the Group over the performance period, and the extent to
which Covid-19 may have affected the performance assessed. The Committee is satisfied that the overall vesting outcome is an
appropriate reflection of the overall performance of the Group over the performance period, during which Management successfully
turned a corner in the transformation of Serco and transitioned to the growth phase of our corporate strategy. The performance and
formulaic vesting outcome for each tranche of the 2018 PSP is as follows:
Performance condition
and relative weighting
Threshold5 –
25% vesting
Relative TSR1 (28.33%)
Median ranking
Aggregate EPS2,3 (28.33%) 13.98p
Average pre-tax ROIC2,3
(28.33%)
Order Book4 (7.5%)
Employee Engagement
in 20204,5 (7.5%)
Overall vesting outcome
9.6%
N/A
N/A
Maximum – 100%
Upper quartile
ranking
16.98p
11.9%
105%
60%
Rank 45/172: Between median and upper quartile
97.8%
Performance measured
(% of maximum)
Vesting
22.78p
17.1%
115%
Engagement score of 73
100%
100%
100%
100%
99.4%
Notes
1. For the 2018 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 2020. The Company’s TSR (23.8%) ranked between median (at which TSR was -6.1%) and upper quartile (at which TSR was 25.5%) giving a vesting
outcome of 97.8%.
2. The 2018 EPS and ROIC performance targets are the adjusted targets following the NSBU acquisition (as set out in the 2019 Report) 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 2018
target ranges were: for EPS, 13.7p (threshold) to 16.7p (max); and for ROIC, 9.9% (threshold) to 12.2% (max).
3. The 2018 EPS and ROIC targets were set on a pre-IFRS 16 basis, therefore in assessing over the three year period, EPS and ROIC for 2019 and 2020 have been
included on a pre-IFRS 16 basis. This includes an adjustment to Trading Profit to remove the IFRS 16 benefit and an adjustment to Invested Capital to add back
finance leases following the change in definition in 2019 to present Invested Capital excluding right of use assets.
4. Only the financial performance targets vest (at 25%) for threshold performance, rising on a straight-line basis to 100% vesting at maximum performance. 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. The vesting level for on-target performance (being a book-to-bill ratio of 100%, or an Employee Engagement score of 56%)
is 50% of this element, rising on a straight-line basis to 100% for maximum performance.
5. Since the 2018 performance targets were set, the Company changed provider for its annual Viewpoint survey via which employee engagement is assessed each year
(from Aon to Glint). On transition an assessment was undertaken to convert the targets set (determined as a % engaged under the Aon tool) to an engagement score
per the Glint tool. In the year of transition, the Committee determined that the Glint engagement score of 67 was equivalent to 56% engaged based on the prior
methodology. The Committee is satisfied that the 2020 engagement score of 73 exceeds the maximum engagement required for full vesting of this element.
Executive Director
2018 PSP Tranche
No. of shares awarded
No. of shares vesting
Value of Vesting1
Value attributable to share
price appreciation2
Rupert Soames
Relative TSR
EPS
ROIC
Order Book
Employee
Engagement
Angus Cockburn
Relative TSR
EPS
ROIC
Order Book
Employee
Engagement
496,819
496,820
496,820
131,511
131,511
255,715
255,716
255,716
67,690
67,690
485,888
496,820
496,820
131,511
131,511
250,089
255,716
255,716
67,690
67,690
576,787
589,764
589,764
156,114
156,114
296,875
303,555
303,555
80,353
80,353
115,436
118,034
118,034
31,244
31,244
59,416
60,753
60,753
16,082
16,082
Notes:
1. As these awards are still to vest at the time of reporting, the share price used to determine the value of vesting for the 2020 single figure is the Q4 average closing
share price to 31 December 2020 (£1.2071).
2. The value included in the single figure reflects an increase in the share price from that at grant (£0.9695) to the estimate of the share price at vest (based on the 2020
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 on this basis.
124 Serco Group plc
Annual Report and Accounts 2020
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. This disclosure is for the final pay-out to any Executive Director under this element.
The performance period for the 2018 Deferred Bonus Plan (DBP) Matching Share Award (a conditional share award granted on 23 August
2018, wholly subject to EPS performance) ended on 31 December 2020. These awards are due to vest on 23 August 2021.
As set out in the 2019 Report, the 2018 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 13.98p rising on a straight-line basis to 100%
vesting for at or above maximum performance of an Adjusted EPS of 16.98p measured as an aggregate over the three-year performance
period. The original target range was set at 13.7p (threshold) to 16.7p (max). The Adjusted EPS for the period was measured as 22.78p. Having
considered the wider performance of the Company over the three-year period, the Committee is satisfied that the 2018 DBP Matching
Share Award should vest in full.
Executive Director
Rupert Soames
No. of shares
awarded
488,418
vesting
488,418
No. of shares
Share price
at vest
Value of vesting
£1.20711
£589,559
£111,307
Value attributable
to share price
appreciation2
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 2020.
2. The value included in the single figure reflects an increase in the share price from that at grant (£0.9792) to the estimate of the share price at vest (based on the 2020
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 on this basis.
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.
Fee bearing
Committee roles
held in the year
Board fee
(including Chairmanship fees)
(£)
Taxable benefits5
(£)
Total6
(£)
2020
2019
2020
2019
2020
2019
Sir Roy Gardner1
(Chairman)
R
250,000
250,000
Kirsty Bashforth
C R GR
Eric Born
Ian El-Mokadem2
Rachel Lomax3
Dame Sue Owen4
Lynne Peacock
John Rishton (SID)
Total
A C
C
A
A
A
A
GR
GR
GR
R
R GR
75,500
63,000
65,530
46,720
26,250
70,500
90,500
688,000
73,833
63,000
63,000
70,500
–
70,500
90,500
681,334
7,066
637
4,383
–
–
–
–
14,222
3,424
2,867
–
–
–
–
874
12,960
1,775
22,288
257,066
264,222
76,137
67,383
65,530
46,720
26,250
70,500
91,374
77,257
65,867
63,000
70,500
–
70,500
92,275
701,358
703,622
Notes:
A = Audit Committee, C = Corporate Responsibility Committee, R = Remuneration Committee, GR = Group Risk Committee. Red denotes Chair. No additional fees
were payable for other Board Committee roles in the year.
1. Sir Roy Gardner receives no additional fees for Committee membership.
2.
3. Rachel Lomax resigned from the Board on 30 August 2020.
4. Dame Sue Owen joined the Board on 3 August 2020.
5. Taxable benefits in 2019 and 2020 relate to reimbursed taxable travel and subsistence business expenses.
6. Non-Executive Directors do not receive any variable pay so “Total” is total fixed remuneration.
Ian El-Mokadem was appointed Chair of the Group Risk Committee from 31 August 2020 (Member prior to this date).
Annual Report and Accounts 2020
Serco Group plc
125
Financial StatementsStrategic ReportCorporate Governance Remuneration Report continued
Pensions (audited information)
As at 31 December 2020, there were no Executive Directors actively participating, 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.
Performance graph and table
This graph shows the value as at 31 December 2020, of a £100 investment in Serco on 31 December 2010 compared with £100 invested in
the FTSE 250 index on the same date. It has been assumed that all dividends paid have been reinvested. The TSR performance for the
long-term incentives applies over a different period and details of the Company’s performance versus the FTSE 250 relevant to the 2020
single figure can be found on page 124.
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.
300
250
200
150
100
50
0
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Dec 2019
Dec 2020
Serco
FTSE 250 Index
CEO’s pay in last ten financial years
Year ended 31 December
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Group CEO
Christopher
Hyman
Christopher
Hyman
Ed
Casey
Christopher
Hyman
CEO single figure
remuneration (£000)
2,826
2,581
81%
72%
Annual bonus outcome
(as % of maximum
opportunity)
LTI vesting outcome
(as % of maximum
opportunity)
Ed
Casey
Rupert
Soames
1,605
748
71%
0%
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
Rupert
Soames
2,255
2,217
3,681
5,176
5,201
4,943
87%
82%
75%
77%
94%
80%
893
295
N/A
74%
80%
64%
0%
0%
100%
24%
91%
73%
71%
99%
Percentage change in Directors’ remuneration
The table below shows the percentage change in remuneration for all Directors who served during 2020 compared to that for the average
UK employee. The UK employee sub-set of the Company’s global workforce has been chosen as the group which provides the most
appropriate comparator; there are no employees in the Group’s parent company. The UK employee population comprises some 21,000 of
the circa 55,000 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 Directors’ pay is set against the UK market (with the Executive Directors based in the UK) we have chosen
employees within the same country.
126 Serco Group plc
Annual Report and Accounts 2020
Executive Directors
Non-Executive Directors
UK
employees
Rupert
Soames
Angus
Cockburn
Sir Roy
Gardner
Kirsty
Bashforth
Eric
Born
Rachel
Lomax
Ian
El-Mokadem
Dame
Sue Owen
Lynne
Peacock
John
Rishton
Salary/fees1
Benefits2
Bonus3
1.9%
-3%
20%
0%
20%
-15%
2%
36%
-10%
0%
-50%
N/A
2%
-81%
N/A
0%
53%
N/A
-34%
0%
N/A
4%
0%
N/A
N/A
N/A
N/A
0%
0%
N/A
0%
-51%
N/A
1. The average salary change for UK employees represents the average pay increase applied in the 2020 annual pay review. Changes in NED fees reflect changes in
each individual’s role on the Board and its Committees, there were no changes to the underlying fees.
2. The nature of taxable benefits provided to all Directors and employees in 2020 compared to 2019 remains the same. The increase in the value of the Executive
Directors’ benefits is due to the 2019 and 2020 US tax advice benefits both arising in 2020.
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 2020 compared to the 2019 bonuses paid in April 2020. The Executive Directors’ 2020 bonuses over 100% of salary are subject to
compulsory deferral for three years into shares. NEDs do not receive bonus pay.
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
2020 (Option B)
2019 (Option B)
Percentile
25th
Median
75th
25th
Median
75th
Salary1
Total pay and benefits2
Pay Ratio
£24,964
£30,597
£32,486
£24,859
£27,026
£32,429
£26,611
£33,127
£34,709
£26,066
£30,072
£34,420
1:186
1:149
1:142
1:219
1:190
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.
As indicated in last year’s Report, the remuneration of Serco’s CEO
has a significant weighting towards variable pay to align his
remuneration with Company performance. In contrast, due to our
workforce profile, all three of our pay ratio reference points
represent front-line 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, these
colleagues are in receipt of fixed pay only (including pension
contributions). The reduction in the Pay Ratio from 2019 to 2020 is
therefore a primarily a result of the reduction in the CEO’s single
figure in 2020 compared to 2019, driven by a reduction in his variable
pay. In addition, with his agreement, the pension opportunity for the
CEO was significantly reduced (from 30% to 20% of salary) from 1
April 2020, adding to the reduction in his overall remuneration.
However, the remuneration for the reference points has increased
slightly on the prior year reflecting the commitment made by the
Company to ensure front-line colleagues continue to receive fair pay
for their contributions to the success of Serco and, particularly
during 2020 to protect their pay from any adverse impact due to the
Covid-19 pandemic.
Consistent with our approach in 2019, we have used our 2020
Gender Pay data to identify employee representatives at each
pay quartile of our UK employee population. Employees were
ranked by hourly pay and, where possible, 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 2020. 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. Significant salary enhancements, such as acting up
allowances, which were not received at the date the pay was
calculated for Gender Pay Gap purposes are disregarded from the
single figure calculation for the representative employees to avoid
over-inflating the representative pay at the quartile levels. 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.
The Gender Pay Gap hourly pay figures for representatives at each
quartile have increased by 2-4% on 2019. Overtime, which is not
counted for Gender Pay purposes, has a significant impact on the
salary figures for the representative employees and is the main
reason for the apparent salary increase at the median percentile.
Annual Report and Accounts 2020
Serco Group plc
127
Financial StatementsStrategic ReportCorporate Governance Remuneration Report continued
Relative importance of spend on pay
The table below details the percentage change in dividends and overall expenditure on pay compared with the previous financial year.
Serco considers overall expenditure on staff pay in the context of the general finances of the Company. This includes the determination of
the annual salary increase budget, the annual grant of shares and annual bonus for the business.
Dividend per share
Overall expenditure on wages and salaries
2020 vs 2019
0%
11.6%
2020
Nil
2019
Nil
£1,742.7m
£1,562.0m
Dividend per share, and overall expenditure on wages and salaries have the same meaning as in the notes to the Company Financial
Statements.
Awards made in 2020
Equity settled bonus plan (ESBP) (audited information)
In line with the approved Remuneration Policy, in connection with the compulsory deferral of 2019 bonus in excess of 100% of salary, the
Executive Directors were granted the following ESBP Awards in the form of Conditional Share Awards. ESBP Awards granted in 2020 vest
on the third anniversary of grant.
Directors
Rupert Soames
Angus Cockburn
Face value
(£)1
548,250
227,141
Market price at award
Grant date
(£)2
Number of shares3
28 April 2020
28 April 2020
1.2926
1.2926
424,145
175,724
Notes:
1. Calculated as the value of the Executive Directors’ 2019 bonus in excess of 100% of salary.
2. Average closing share price on the five trading days immediately prior to the date of grant.
3. Calculated using the average share price used to determine the number of shares awarded.
Pre-vesting malus and post-vesting clawback are applicable to these awards but no further performance conditions apply.
Long term incentive plan (LTIP) (audited information)
In line with the approved Policy, in 2020 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 on 6 April 2023, following 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 2022.
Performance measure
Weighting
of measure
Performance target
Aggregate EPS
28.33%
Relative TSR
28.33%
Statutory Earnings Per Share (EPS) before exceptional items (adjusted to reflect tax paid on a
cash basis) of 20.62p (threshold, 25% vesting) to 25.20p (maximum, 100% vesting), measured as
an aggregate over the three-year performance period.
Total Shareholder Return (TSR) of median (threshold, 25% vesting) to upper quartile (maximum,
100% vesting) when ranked relative to companies in the FTSE 250 (excluding investment trusts),
measured over the three-year performance period.
Average ROIC
28.33%
Pre-tax Return on Invested Capital (ROIC) of 16.4% (threshold, 25% vesting) to 20.0% (maximum,
100% vesting), measured as an average over the three-year performance period.
Order Book
7.50%
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 7.50%
Employee engagement score of 67 (target, 50% vesting) to 72 (maximum, 100% vesting),
measured via the Serco Employee Engagement Survey in the final year of the performance
period.
The structure for vesting of the EPS, TSR and ROIC conditions is straight-line vesting between threshold and target, and target 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 of these elements 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 Policy.
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.
128 Serco Group plc
Annual Report and Accounts 2020
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.
Directors
Rupert Soames
Angus Cockburn
Basis of
award
(% salary)
Face
value
(£)
Grant date
Market price
at award (£)1
Number
of shares2
Percentage
vesting at
threshold
performance3
Performance
period
end date
200% 1,700,000
6 October 2020
1.2814
1,326,673
21.25% 31 December 2022
175%
914,812
6 October 2020
1.2814
713,916
21.25% 31 December 2022
Notes:
1. Average closing share price on the five trading days immediately prior to the date of grant.
2. Calculated using the average share price used to determine the number of shares awarded.
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.
Implementation of Policy in 2021
Executive Directors
Salary increases for the year ending 31 December 2021
The Committee reviewed base salaries for the current Executive Directors and determined that no increase to salaries will apply from
1 April 2021 in light of the ongoing societal impact of Covid-19 and the relatively competitive levels of remuneration. The salary for the new
CFO has been set to apply from his appointment.
Pension
As summarised on page 110, and in line with our commitment to align the Executive Director pension opportunity with that of the wider
workforce, the two incumbent Executive Directors will have a pension opportunity in 2021 of 20% of salary and will be reduced to align to
the workforce by 2023. The new CFO will receive a pension opportunity aligned to the wider workforce (8% of salary) from the date of his
appointment.
Annual bonus and LTIP
Details of structure and opportunity under the 2021 annual bonus and LTIP for each Executive Director are set out on page 111. Further
details of the performance framework to apply in 2021 are provided below.
Details of the performance measures to apply to the 2021 annual bonus and long-term incentive awards
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
2021 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.
Recognising the importance of our ESG commitments to both the short and long term success of Serco, an ESG scorecard has been
incorporated into each incentive. The ESG scorecard components have been chosen taking into consideration our current maturity across
this space, our ability to set and measure performance that is relevant and meaningful to Serco, and the current strategic priorities as
articulated in our Corporate Responsibility and People Reports. As our ESG strategy continues to evolve, and the priorities for Serco
change, we would expect the scorecard components to also change. Therefore, these scorecards will be reviewed, and new measures
and/or targets proposed, each year as appropriate.
Determination of the amount payable under the 2021 bonus will also take into consideration the wider performance of the Group as well
as the affordability of the bonuses so determined. In determining the vesting of the 2021 LTIP awards, the Committee will also take into
consideration the wider performance of the Group; the final vesting will be adjusted where appropriate to ensure the outcomes are a fair
and reasonable reflection of the performance of the Group.
2021 Bonus performance measures
As set out in the Chair’s letter, the performance measures to apply to the 2021 annual bonus have been rebalanced to ensure a greater
focus on profit growth and cash, as well as to incorporate strategically aligned ESG measures to support our ambition of being the best
managed company in our sector. The 2021 performance measures will be aligned to core KPIs as follows:
Financial (70%)
Non-financial (30%)
Core KPIs
40%
30%
Trading Profit
Free Cash Flow
15%
15%
Personal objectives aligned to the delivery of the Group’s
corporate strategy
ESG scorecard aligned to being the “best managed company in
the sector”
Annual Report and Accounts 2020
Serco Group plc
129
Financial StatementsStrategic ReportCorporate Governance Remuneration Report continued
Components of the 2021 annual bonus ESG scorecard (15% weighting)
The 2021 annual bonus ESG scorecard will focus on three key areas:
• Maintain and continue to improve robust governance processes including ensuring an active and ongoing engagement with
stakeholders (to include shareholders, governments and customers, and colleagues) setting out the progress in achieving strategic
objectives including ESG strategy and approach, as well as operating/financial performance;
• Ensure a focus on health and safety within our operations through improvements in LTIFR; and
• Maintain a high level of colleague engagement as measured through our annual Group employee engagement score.
The specific targets for the 2021 annual bonus are deemed to be commercially sensitive. Full disclosure of the targets set will be made in
the 2021 Report following the end of the current financial year to the extent these are no longer considered commercially sensitive.
2021 LTIP performance measures
The table below provides details of the performance measures to apply to the 2021 LTIP awards. The financial targets are still being
finalised, taking into account our longer term business forecast and strategy, as well as analyst consensus following the announcement of
our 2020 financial results. Full details of all targets will be disclosed prior to the 2021 AGM.
Performance measure
Weighting
of measure Performance target
Financial performance
Relative TSR
25%
Total Shareholder Return (TSR) when ranked relative to companies in the FTSE
250 (excluding investment trusts), measured over the three-year performance
period.
Average ROIC
25%
Pre-tax Return on Invested Capital (ROIC) measured as an average over the
three-year performance period.
Aggregate EPS
25%
Non-financial strategic
performance
Order Book
10%
Statutory Earnings Per Share (EPS) before exceptional items (adjusted to reflect
tax paid on a cash basis) measured as an aggregate over the three-year
performance period.
Book-to-bill ratio of 100% (target, 50% vesting) to 105% (maximum, 100%
vesting), measured as the cumulative average over the three-year performance
period.
ESG scorecard
15%
The components of the 2021 LTIP ESG scorecard (set out below) have been
selected as being important to the long-term sustainability of Serco.
Components of the 2021 LTIP ESG scorecard (15% weighting)
The 2021 annual bonus ESG scorecard will focus on three key areas:
Performance measure
Performance target
Employee engagement
Average annual Group employee engagement score over the three-year performance
period at or above 69 for on target performance, and at or above 71 for maximum
performance.
Improvement in colleague diversity across
gender (focussing on leaders) and ethnicity
Gender diversity amongst our leaders to be measured as the percentage of women holding
senior global leadership roles in 2023; target performance of 33%, and maximum
performance at 35% or above.
Demonstrate significant progress on our approach and strategy for addressing ethnic
diversity challenges throughout our organisation, and particularly in management and
senior leadership roles. Commit to diversity charters where appropriate, such as the UK Race
at Work charter, and show progress against commitments made.
Improvement in our understanding,
management and disclosure of Serco’s
environmental risks
Demonstrate significant improvements in environmental performance and management of
environmental risks, through actions taken in line with our environmental strategy and
improvements in externally issued environment/climate change ratings.
In each case, the performance will be assessed over the three-year period ending 31 December 2022. The structure for vesting of the EPS,
TSR, ROIC and ESG conditions will be straight-line vesting between threshold and target, and target and maximum, and no shares will vest
where performance is below threshold. The Committee views the Order Book and ESG 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 will therefore deliver
a 0% vesting outcome. The vesting level for on-target performance will be 50%, with straight-line vesting between target and maximum.
This is a more stringent approach than that required under the Policy. In determining the final vesting of these awards, the Committee will
also give consideration to 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.
130 Serco Group plc
Annual Report and Accounts 2020
Non-Executive Directors
Following a review of Non-Executive Director fees, it was agreed that, with the exception of the Chairman, the fees should remain
unchanged. The Committee also considered and approved the fees for John Rishton in connection with his appointment as Chairman of
the Board, succeeding Sir Roy Gardner in this role with effect from the 2021 AGM. It was determined that on the appointment of John
Rishton, the Chairman’s fee would increase to £280,000 to incorporate a separate expense allowance that was made available to the
current Chairman. With the change in base fee John Rishton will not be eligible for a separate expense allowance although he may still
claim reimbursement for certain expenses incurred in line with the Policy. Tim Lodge, who was appointed as a Non-Executive Director and
member of the Audit, Group Risk and Remuneration Committees on 21 February 2021, will be remunerated in line with the fees applicable
to 2021. In line with the approved Non-Executive Directors’ Remuneration Policy, the fees to apply in 2021 will be as follows:
Base fee to
apply from
1 January 20211
£
Base fee
1 January 2020
£
Change
£
Element – Annual Board and Committee fees
Chairman1
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)
Notes:
1. Sir Roy Gardner’s fee as Chairman will remain £250,000 until he stands down from the Board at the 2021 AGM.
280,000
250,000
30,000
15,000
53,000
12,500
15,000
No change
53,000
No change
12,500
No change
5,000
5,000
No change
No additional fee is payable for the Chair or Membership of the Nomination Committee, or for responsibilities in connection with our
Employee Voice initiatives. The Chairman does not receive any additional fees for his Committee memberships nor do the Executive
Directors where they sit on Board Committees.
Voting outcomes
At the previous AGMs, votes on remuneration matters were cast as follows:
2019 Annual Report on Remuneration
2017 Remuneration Policy
Year of AGM
2020
2018
For
%
95.53%
88.51%
Against
% Number withheld1
4.47%
11.49%
89,992
61,479
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.
Rupert Soames served as Senior Independent Director and a Member of the Audit, Nomination and Remuneration Committees of DS
Smith Plc throughout the year in respect of which he receives a fee of £70,500 per annum (comprising a Director’s fee of £60,500 per
annum and an additional fee of £10,000 per annum for acting as Senior Independent Director). Angus Cockburn was Senior Independent
Director, Chair of the Audit Committee and a Member of the Nomination and Remuneration Committees of Ashtead Group plc
throughout the year in respect of which he receives a fee of £90,000 per annum (comprising a Director’s fee of £60,000 per annum and
additional fees of £15,000 per annum for each role in acting as Senior Independent Director and for chairing the Audit Committee). He was
also appointed as a Non-Executive Director of The Edrington Group Limited on 1 September 2020 in respect of which he receives a fee of
£65,000 per annum which he donates to the Robertson Trust, the charity which owns The Edrington Group Limited.
No other fee-paying external positions were held by the Executive Directors during the year ended 31 December 2020.
Annual Report and Accounts 2020
Serco Group plc
131
Financial StatementsStrategic ReportCorporate Governance Remuneration Report continued
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 £1.1950 per share at 31 December 2020 (being the last trading day of the financial year).
Executive Directors
Name
Rupert Soames
Angus Cockburn
Share Awards
Share options6
Share ownership
requirements
(% of salary)1
Number of
shares owned
outright at 31
December
20202
Value
invested3
(£)
Subject to
performance
conditions4
Not subject to
performance
conditions5
Subject to
performance
conditions7
Exercised
during the
year8
Total share
interests at 31
December
20202
200% 4,600,492
6,000,836
3,127,832
663,165
1,753,481
1,002,949
10,144,970
150%
1,901,118
2,346,454
1,403,105
244,886
902,527
516,224
4,451,636
Notes:
1. The CEO, Rupert Soames, and CFO, Angus Cockburn, have both exceeded their shareholding guidelines as well as their contractual investment commitments of
investing 200% and 150% of salary, respectively.
2.
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period between 1 January 2021 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 2020 by the Executive Director and/or their connected
4.
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 and have not yet vested.
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 not
7.
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 2017 PSP awards that were subject to EPS 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 Lomax1
Dame Sue Owen
Lynne Peacock
John Rishton
Number of shares owned outright
(including connected persons) at 31
December 20202,3
225,000
10,000
30,000
50,000
40,000
10,000
15,000
43,086
Notes:
1. Showing Rachel Lomax’s share interests as at 30 August 2020 when she resigned from the Board.
2.
Includes shares owned by connected persons. There were no changes in Directors’ interests in the period between 1 January 2021 and the date of this report.
3. 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.
132 Serco Group plc
Annual Report and Accounts 2020
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 2020,
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 4,805,612 and 7,036,349 ordinary shares at 1 January
2020 and 31 December 2020 respectively.
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
24 February 2021
Annual Report and Accounts 2020
Serco Group plc
133
Financial StatementsStrategic ReportCorporate Governance Directors’ Report
Annual Report and Accounts
The Directors present the Annual Report and Accounts of
the Group for the year ended 31 December 2020. Comparative
figures used in this report are for the year ended 31 December 2019
unless otherwise stated. The Corporate Governance Report, set out
on pages 81 to 104, 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 15 to 31 report on the
activities during the year and likely future developments. The
information in these reports, which is required to fulfil the
requirements of the Business Review, is incorporated in this
Directors’ Report by reference.
Articles of Association
The rules relating to the appointment and replacement of Directors
are contained in the Company’s Articles of Association. Changes to
the Articles of Association must be approved by the shareholders in
accordance with the legislation in force from time to time.
Share capital
The issued share capital of the Company, together with the details
of shares issued during the year, is shown in note 32 to the
Consolidated Financial Statements.
The powers of the Directors to issue or buy back shares are
restricted to those approved at the Company’s Annual General
Meeting (“AGM”).
At the Annual General Meeting in May 2020, 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
2021 Annual General Meeting, at which a resolution will be
proposed for its renewal, or, if earlier, 30 June 2021.
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 2020, the Company was
granted authority by shareholders to purchase up to 122,338,063
ordinary shares (10% of the Company’s issued ordinary share capital
as at 12 March 2020). This authority will expire at the conclusion of
the 2021 Annual General Meeting, at which a resolution will be
proposed for its renewal, or, if earlier, 30 June 2021.
As announced on 17 December 2020 the Company has commenced
a programme to purchase its own shares with a value of up to £40
million. Since the year end, up until 24 February 2021 (being the
latest practicable date before publication), the Company has
purchased a total of 14,412,280 shares with a nominal value of
£288,246 (representing 1.18% of the Company’s issued share capital
on 12 March 2020 at a total cost of £17,738,433.
These shares are currently held in treasury and, provided the
repurchase programme is successfully completed, it is intended
that shares valued at approximately £20 million, roughly equivalent
to the sum of the final dividend for 2019 (which was withdrawn) and
the interim dividend for 2020 (which it had been intended would be
declared), will be cancelled. The remainder, valued at approximately
£20 million, will be used to satisfy awards under existing employee
share schemes.
Dividends
Although the Directors had recommended that a dividend should
be paid in respect of the year ended 31 December 2019, subject to
approval by shareholders, that recommendation was subsequently
withdrawn given the uncertain conditions at the time.
The Directors recommend that a final dividend of 1.4p be paid in
respect of the year ended 31 December 2020 (2019: nil). No interim
dividend was paid during the year (2019: nil).
Subject to approval by shareholders at the Annual General Meeting
to be held on 21 April 2021, the final dividend will be paid on
4 June 2021 to shareholders on the register at the close of business
on 14 May 2021.
Directors
Details of the current members of the Board, all of whom served
throughout the year with the exception of Dame Sue Owen, who
was appointed on 3 August 2020, and Tim Lodge, who was
appointed on 21 February 2021, are set out on pages 82 to 85. In
addition, Nigel Crossley has been appointed as a Director with
effect from 21 April 2021.
Rachel Lomax resigned as a Director on 30 August 2020.
Dame Sue Owen and Tim Lodge, having been appointed as
Directors since the previous Annual General Meeting, will resign
and offer themselves for election at the Annual General Meeting
on 21 April 2020 in accordance with the Articles of Association.
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.
Details of the Directors’ interests in the ordinary shares and options
over the ordinary shares of the Company as at 31 December 2020
are set out in the Remuneration Report on pages 105 to 133.
Between 1 January 2021 and the date of this report there were no
changes in the Directors’ interests in ordinary shares and options
over ordinary shares.
134
Annual Report and Accounts 2020
Serco Group plc • 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 six-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.
• Anti-Terrorism/Force Protection (AT/FP) Ashore Program
Global Sustainment Contract: On 23 July 2015, Serco Inc. was
awarded a contract with the United States of America (acting
through the Naval Facilities Engineering Systems Command) to
provide sustainment services for electronic anti-terrorism and
force protection systems at U.S. Navy installations around the
world. The contract had an initial base term of one year, with four
(one year) options. 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.
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, Saudi Arabia, 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:
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.
Annual Report and Accounts 2020
135
Financial StatementsStrategic ReportCorporate GovernanceSerco Group plc Directors’ Report continued
Material contracts continued
• 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. On 2
November 2020, the AWE JV received notice from the
authorised representative of the Secretary of State for Defence
that the AWE Contract will terminate with effect from 30 June
2021. On termination of the AWE Contract, ownership of AWE
PLC, the entity which is wholly owned by the AWE JV and
manages and operates the Atomic Weapons Establishment on
its behalf, will transfer to the Ministry of Defence (“MoD”). Serco
is working with the other shareholders in the AWE JV and the
MoD on the implementation of a transition plan and
management of the AWE JV’s exit from the AWE Contract.
• 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 AASC regions, 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. Across the two regions for which
Serco was selected, there are currently approximately 23,600
asylum seekers living in more than 5,500 properties. The AASC
Contracts became operational on 1 September 2019. The
contracts are for a ten year term. In the event of a change of
control or ownership of Serco Limited or Serco Group plc, which
in the reasonable opinion of the Authority adversely affects
Serco’s ability to perform the services, the contracts may be
terminated by the Authority.
• 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 became operational on 28 August 2020. In the
event of a change of control or ownership of Serco Limited or
Serco Group plc, 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.
• Skynet 5 Agreement relating to the Provision of Military
Satellite Communications: On 24 October 2003, Serco Limited
entered into a contract with Paradigm Secure Communications
Limited which was subsequently novated to Airbus Defence and
Space (ADS) for the provision of services in support of the PFI
contract between the Secretary of State for Defence and ADS
for the Skynet 5 programme which delivers secure global military
satellite infrastructure. Serco is responsible for provision of a
range of services in support of the Skynet 5 programme. The
current contract term will expire on 31 August 2022. In the event
of a change of control or ownership of Serco Limited without the
prior written consent of ADS and the Secretary of State for
Defence, the contract may be terminated by ADS.
• Covid-19 Track & Trace Contract: On 18 May 2020, Serco
Limited entered into a contract with the Secretary of State for
Health & Social Care (“the Authority”) for the provision of Track
& Trace Contact Centre Services as part of the UK Government’s
pandemic response. The current contract term will expire on 24
May 2021. In the event of a change of control of Serco Limited
which does not have the prior approval of the Authority, 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 four US
Private Placement Note Purchase Agreements (the ‘USPP
Agreements’) dated 9 May 2011, 20 October 2011, 13 May 2013
and 8 October 2020 respectively. The total amount of the notes
outstanding under the four USPP Agreements was $473,217,457
at 31 December 2020, and their maturity is between May 2021
and October 2032. 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.
136
Annual Report and Accounts 2020
Serco Group plc Annual General Meeting 2020
In compliance with the UK Government’s “Stay at Home Measures”
in place at the time, the 2020 Annual General Meeting took place as
a closed meeting, attended by Company Secretary and employee
shareholders to meet the quorum requirements, and was held at
Discovery House, 18 Bartley Way, Bartley Wood Business Park,
Hook, Hampshire RG27 9XA.
Annual General Meeting 2021
The 2021 Annual General Meeting of the Company will be held at
the Company’s offices at Enterprise House, 11 Bartley Wood
Business Park, Bartley Way, Hook, Hampshire RG27 9XB on
Wednesday 21 April 2021 at 2.00pm.
However, at the time of publication, it is anticipated that it will not
be possible for shareholders to attend owing to the restrictions
likely to be in place at the time. Accordingly, shareholders will be
advised of alternative arrangements once new legislation covering
annual general meetings is issued in place of that which expires on
31 March 2021.
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.
Financial risk policies
A summary of the Group’s treasury policies and objectives relating
to financial risk management, including exposure to associated
risks, is set out in note 30 on pages 193 to 198.
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.
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.
Human rights
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.
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.
Further information is contained in the People Report which is
available on the Company’s website
Corporate responsibility
We have been committed to delivering and communicating our
position and performance across Environmental, Social and
Governance (ESG) criteria for many years, recognising the relevance
to our profitability and sustainability of all that we do in those areas.
‘Corporate Responsibility’ (CR) is our chosen term for referring
collectively to our principal areas of ESG responsibility and
sustainability. We define and drive our ESG agenda through our CR
Framework. Each element in the framework is embedded in how we
manage our business, while Board oversight and scrutiny of CR is
embedded in our corporate governance through the Board’s
standing committee, the Corporate Responsibility Committee.
More information about our approach and ESG commitments,
including progress and performance, can be found in the Strategic
Report on pages 40 to 49.
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 Annual General Meeting in May 2020 regarding political
donations be renewed. Details will be included in the Notice of
Annual General Meeting.
Annual Report and Accounts 2020
137
Financial StatementsStrategic ReportCorporate GovernanceSerco Group plc Directors’ Report continued
Political donations continued
Within the US business there exists a Political Action Committee
(PAC), which is funded entirely by employees. The Serco PAC and its
contributions are administered in strict accordance with regulatory
requirements. Employee contributions are entirely voluntary and no
pressure is placed on employees to participate. Under US law, an
employee-funded PAC must bear the name of the employing
company.
Financial statements
At the date of this report, as far as each Director is aware, there is no
relevant audit information of which the Group’s Auditor is unaware.
Each Director has taken all the steps that he or she ought to have
taken as a Director in order to make himself or herself aware of any
relevant audit information and to establish that the Group’s Auditor
is aware of that information.
Auditor
The Audit Committee has considered the reappointment of KPMG
LLP as auditor and recommended it to the Board. The Board
recommends the reappointment of KPMG LLP to shareholders
at the Annual General Meeting to be held on Wednesday
21 April 2021.
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 2020, 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
£250 million revolving credit facility, £347 million of US private
placement notes and a £45 million term loan. As at 31 December
2020, the Group had £642 million of committed credit facilities and
committed headroom of £582 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 2022. The Directors have also
reviewed the principal risks considered on pages 70 to 78 and taken
account of the results of sensitivity testing.
Interests in voting rights
At 31 December 2020, 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 voting rights
attached to shares or held
through financial
instruments
% held at date
of notification
92,336,403
31,515,674
123,852,077
73,169,712
156,204
73,325,916
61,187,686
58,353,594
55,965,452
7.48
2.55
10.04
6.66
0.01
6.67
5.00
5.31
5.09
Nature of holding
Indirect
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. Since 31 December 2020:
(i) On 5 January 2021, BlackRock Inc notified the Company that its interest in voting rights had increased to 10.11% on 4 January 2021.
(ii) On 9 February 2021, JPMorgan Chase & Co. notified the Company that its interest in voting rights had increased to 5.00% on 5 February 2021.
(iii) On 18 February 2021, RWC Asset Management LLP notified the Company that its interest in voting rights had decreased to below 5.00% on 23 December 2020.
138
Annual Report and Accounts 2020
Serco Group plc
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
Independent Auditors’ Report
Long-term incentive plans*
Political donations
Powers for the Company to issue or buy back its shares
Powers of the Directors
Restrictions on transfer of securities
Rights attaching to shares
Risk management and internal control
Share capital
Significant agreements
Significant related party agreements*
Significant shareholders
Statement of corporate governance
Strategic Report
Viability Statement
Voting rights
Approved by the Board of Directors and signed on its behalf by:
David Eveleigh
Group General Counsel and Company Secretary
24 February 2021
Page 134
Page 134
Pages 82 to 85
Pages 135 to 137
Pages 45 to 55
Pages 40 to 49
Page 135
Page 90
Page 140
Page 151
Pages 87 to 100
Pages 8, 16, 64 and 134
Pages 44, 45, 86 and 137
Page 137
Pages 193 to 198
Pages 9 to 14
Pages 138 to 169
Page 48
Pages 142 to 152
Pages 105 to 133
Page 138
Page 134
Page 103
Page 134
Page 134
Pages 70 to 78 and 92 and 93
Page 134
Pages 135 to 137
Pages 207 and 208
Page 138
Pages 103 and 104
Pages 3 to 80
Pages 79 and 80
Page 134
Annual Report and Accounts 2020
139
Financial StatementsStrategic ReportCorporate GovernanceSerco Group plc Directors’ Report
Directors’ Responsibility Statement
The Directors are responsible for preparing the Annual Report and
the Group and Company financial statements in accordance with
applicable law and regulations.
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.
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 IFRS 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.
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
24 February 2021
Angus Cockburn
Group Chief Financial Officer
24 February 2021
140
Annual Report and Accounts 2020
Serco Group plc
Contents
Independent Auditor’s Report
142
153 Consolidated Income Statement
154 Consolidated Statement of Comprehensive
Income
155 Consolidated Statement of Changes in Equity
156 Consolidated Balance Sheet
157 Consolidated Cash Flow Statement
158 Notes to the Consolidated Financial Statements
211 Company Balance Sheet
212 Company Statement of Changes in Equity
213 Notes to the Company Financial Statements
217 Appendix: List of subsidiaries and related
undertakings
220 Appendix: Supplementary information
221 Shareholder information
222 Useful contacts
Annual Report and Accounts 2020
Serco Group plc
141
Financial StatementsStrategic ReportCorporate GovernanceFinancial StatementsContents Independent Auditor’s Report
to the members of Serco Group plc
1. Our opinion is unmodified
Basis for opinion
2. Key audit matters: our
assessment of risks of material
misstatement
We have audited the financial statements of Serco Group plc (“the Company”) for the year
ended 31 December 2020 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 note 2.
In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the
parent Company’s affairs as at 31 December 2020 and of the Group’s profit for the year
then ended;
• the Group financial statements have been properly prepared in accordance with
international accounting standards in conformity with the requirements of the
Companies Act 2006 and International Financial Reporting Standards adopted pursuant
to Regulation (EC) No. 1606/2002 as it applies in 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 first appointed as auditor by the directors on 27 May 2016. The period of total
uninterrupted engagement is for the five financial years ended 31 December 2020. 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 decreasing order of audit significance, in arriving at our
audit opinion above, together with our key audit procedures to address those matters and,
as required for public interest entities, our results from those procedures. These matters
were addressed, and our results are based on procedures undertaken, in the context of,
and solely for the purpose of, our audit of the financial statements as a whole, and in
forming our opinion thereon, and consequently are incidental to that opinion, and we do
not provide a separate opinion on these matters.
142 Serco Group plc
Annual Report and Accounts 2020
Revenue and margin recognition
Revenue £3,884.8m (2019: £3,248.4m), Operating Profit £179.2m (2019: £102.5m), Onerous Contract Provisions of £14.5m (2019: £16.5m) and
Contract Assets £296.1m (2019: £287.5m).
Assessment of risk vs. prior year: Unchanged
Refer to page 96 (Audit Committee Report), pages 159 to 161 and 166 (accounting policy), pages 166 to 169 (key judgements), pages 178 to
179 (Revenue from contracts with customers note in the financial statements), pages 188 to 189 (contract assets, trade and other
receivables note in the financial statements) and pages 192 to 193 (provisions note in the financial statements).
The risk
Our response
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Accounting application
The contractual arrangements that
underpin the measurement and
recognition of revenue by the group can
be complex, with significant judgement
involved in the assessment of current and
future financial performance. The key
judgements impacting the recognition of
revenue and resulting operating profit
include:
•
Interpretations of terms and conditions
in relation to the required service
obligations in accordance with
contractual arrangements;
• The allocation of revenue and costs to
performance obligations where
multiple deliverables exist;
• Assessment of stage of completion
and cost to complete, where
percentage completion accounting is
used;
• Consideration of the Group’s
performance against contractual
obligations and the impact on revenue
and costs of delivery;
• The recognition and recoverability
assessments of contract related assets,
including those recognised as direct
incremental costs prior to service
commencement.
Subjective estimate
Judgement is required to determine
whether a contract is onerous, based
upon the estimated future performance of
the contract. Where a contract is
determined to be loss-making, an onerous
contract provision is required, which
requires further judgement in assessing
the level of provision, based on estimated
income and 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 onerous contract provision 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 policy application
We inspected customer contracts to assess the method of revenue recognition to
determine that it was in accordance with the Group’s accounting policy and relevant
accounting standards, 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 explain the
positions taken in respect of key contract judgements including contract modifications
(such as those arising due to COVID-19). We also challenged whether it is highly probable
that the variable revenue recognised will not be reversed in future periods as required by
the application of the revenue constraint in accordance with the Group’s accounting policy
and relevant accounting standards.
Tests of details
To assess whether the revenue constraint was appropriately applied in accordance with the
Group’s accounting policy and relevant accounting standards;
• we vouched a sample of unbilled revenue to documents such as post year end invoices
or purchase orders, or customer agreements for the work performed;
• we inspected a sample of customer contracts to identify contractual KPI requirements
and assessed the contracts operational performance against those requirements; and
• we inspected a sample of customer contracts to identify contractual variations and
claims and where these arose, obtained evidence of correspondence with customers
and third parties.
Site visits
For contracts selected for testing;
• we attended a selection 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; and
• we performed virtual site visits and enquired with contract and Business Unit
management teams as to matters related to operational and financial performance in
order to assess whether indicators of an onerous contract exist.
For selected contract related assets, representing capitalised bid and phase in costs, our
procedures included:
Assessing application: We assessed whether contract related assets have been
recognised in accordance with the Group’s accounting policy and relevant accounting
standards.
Historical comparisons: We compared forecast contract cash flows and profits with
historical actuals and assessed whether the forecasts supported the carrying value of the
assets.
Independent reperformance: We compared the amortisation period with the duration of
the contract and checked that the amortisation had been calculated correctly.
Annual Report and Accounts 2020
Serco Group plc
143
Financial StatementsCorporate Governance
Independent Auditor’s Report
to the members of Serco Group plc continued
The risk
Our response
Accounting application continued
For onerous and potentially onerous contracts identified through application of quantitative
selection criteria, our procedures to address the subjective estimate risk 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, by comparing them to external evidence (for example
customer correspondence) 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 compared these with common industry risk factors to inform our challenge of
completeness of forecast costs.
Our major projects expertise
For a specific contract we used our own major project specialists to assess the
reasonableness of the cost estimates where there was material estimation uncertainty.
Historical comparisons
We compared the contract forecasts to historic and in year performance to assess the
historical accuracy of the forecasts.
Tests of details
For contracts we assessed as being potentially onerous, we compared the allocation of
central functional costs to the group’s policy and challenged the underlying assumptions
using our understanding of the contract operations.
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
(2019: no material errors). We found the resulting estimate of onerous contract provision to
be balanced (2019: balanced).
144 Serco Group plc
Annual Report and Accounts 2020
Recoverability of group goodwill and of parent’s investment in subsidiaries
Group: £669.6m (2019: £674.2m); parent Company: £2,032.7m (2019: £2,029.5m)
Assessment of risk vs. prior year: Unchanged
Refer to page 97 (Audit Committee Report), page 162 (accounting policy), page 167 to 168 (key judgements), pages 184 to 185 (Goodwill
note in the financial statements) and page 213 (investments held as fixed assets note in the parent Company financial statements).
The risk
Our response
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
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 estimation
uncertainty in valuing the recoverable
amounts of the Group’s cash
generating units. The estimated
recoverable amount of these
balances through value in use
calculations is subjective due to the
inherent uncertainty involved in
forecasting and discounting future
cash flows.
The 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 2020, the AsPac CGU
was estimated to have headroom of
£332.7m and Middle East has
headroom of £102.7m.
The effect of these matters is that, as
part of our risk assessment, we
determined that the value in use of
CGUs 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.
Our audit procedures included:
Benchmarking assumptions
With the assistance of our valuation specialists, we challenged the growth rate and discount rate
used in the value in use calculation by comparing the Group’s assumptions to external data. We
challenged the implied cumulative annual growth rate within the five year forecasts and
assessed this against past performance and the terminal growth rate. We challenged forecast
assumptions around new contract wins or extensions, contract attrition and profitability of
existing contracts.
Historical comparisons
We compared current year actual cash flows to historic forecasts to assess the historical accuracy
of the forecasts used in the impairment model.
Sensitivity analysis
We tested the sensitivity of impairment calculations to changes in key underlying assumptions,
which were the short term cash-flow projections, the discount rate and terminal growth rates.
We assessed the impact on headroom with the inclusion of an alpha factor in the discount rate in
order to reflect any country specific and forecasting risks we considered might be present in
each division. We challenged the projected win probabilities (including contract extensions) on
key contracts and sensitised the five year cash flow forecasts by reducing new wins and
extensions within the pipeline. We specifically considered the impact of COVID-19 on trading
and compared the forecasts against the company’s experience to date during the pandemic.
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 disclosure about the sensitivity of outcomes reflects the
risks inherent in the valuation of goodwill.
Substantive audit procedures over testing of recoverability of the investment in subsidiaries
included:
• Comparing the carrying amount of 100% of investments with the relevant subsidiaries’
financial statements or draft balance sheet to identify whether their net assets, being an
approximation of their minimum recoverable amount, are in excess of their carrying amount
and assessing whether those subsidiaries have historically been profit-making.
• Performing additional testing over discounted cashflows in relation to subsidiaries whereby a
net asset position in excess of their carrying amount is not identified.
Assessing the work performed by the subsidiary audit teams on all of those subsidiaries and
considering the results of that work, on those subsidiaries’ profits and net assets.
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 (2019: balanced) and the
related sensitivity disclosures to be proportionate (2019: proportionate).
We continue to perform procedures over the classification of exceptional items. However, due to
the significant reduction in value and quantum of exceptional items, we have not assessed this
as one of the most significant risks in our current year audit and, therefore, it is not separately
identified in our report this year. In 2019 we reported an event-driven Key Audit Matter in relation
to the acquisition accounting of the Group’s investment in the NSBU in the Americas division.
Annual Report and Accounts 2020
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3. 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 £6.2 million (2019: £5.0
million), determined with reference to a benchmark of group profit before tax. This materiality
represents 4.0%% of the benchmark (2019: 6.2%).
Materiality for the parent company financial statements as a whole was set at £5.4 million (2019:
£4.5 million), determined with reference to a benchmark of company total assets of £2,615.6
million (2019: £2,263.6 million), of which it represents 0.2% (2019: 0.2%).
In line with our audit methodology, our procedures on individual account balances and
disclosures were performed to a lower threshold, performance materiality, so as to reduce to an
acceptable level the risk that individually immaterial misstatements in individual account
balances add up to a material amount across the financial statements as a whole.
Performance materiality for the group was set at 65% (2019: 65%) of materiality for the financial
statements as a whole, which equates to £4.0 million (2019: £3.3 million). We applied this
percentage in our determination of performance materiality based on the high number of
judgements around the Group.
Performance materiality for the parent company was set at 75% (2019: 65%) of materiality for the
financial statements as a whole, which equates to £4.0 million (2019: £3.2 million). We applied this
percentage in our determination of performance materiality because we did not identify any
factors indicating an elevated level of risk.
We agreed to report to the Audit Committee any corrected or uncorrected identified
misstatements exceeding £0.31 million (2019: £0.25 million), in addition to other identified
misstatements that warranted reporting on qualitative grounds.
Scope of our audit
Of the Group’s 6 (2019: 6) reporting components, we subjected all to full scope audits for Group
purposes. These components represent approximately 100% (2019: 100%) of the Group’s
Revenue, 100% (2019: 100%) of Group profit before tax and 100% (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 £2.1 million to £3.7 million
(2019: £2.0 million to £3.5 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 (2019: 4 of the 6 components) was
performed by component auditors and the rest, as well as the audit of the parent company, was
performed by the Group team. Due to the limitations on international travel during 2020, the
Group team conducted site visits via video and telephone conference with all component
auditors to assess the audit risk and strategy (2019: all components visited physically). Further,
during these conferences, 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.
146 Serco Group plc
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4. Going concern
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The Directors have prepared the financial statements on the going concern basis as they do not
intend to liquidate the Group or the Company or to cease their operations, and as they have
concluded that the Group’s and the Company’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”).
We used our knowledge of the Group, its industry, and the general economic environment to
identify the inherent risks to its 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 and metrics relevant to debt covenants over this period
were:
– Significant deterioration of contractual performance impacting on profit margins across
the Group;
– Significant deterioration in the Group’s ability to win new contracts, and successfully retain
existing contracts which are being re-bid; and
– Significant deterioration of cash collection, leading to a build-up of working capital;
We also considered less predictable but realistic second order impacts, such as the impact of
the Covid-19 pandemic, and the possible impact of major contractual claims which could result
in a rapid reduction of available financial resources.
We considered whether these risks could plausibly affect the liquidity or covenant compliance in
the going concern period by assessing the degree of downside assumption that, individually
and collectively, could result in a liquidity issue, taking into account the Group’s current and
projected cash and facilities (a reverse stress test).
Our procedures also included:
• critically assessing assumptions in base case and downside scenarios relevant to liquidity and
covenant metrics, in particular in relation to profitability of existing contracts, and win rates
assumed for future pipeline, by comparing to the group’s approved budgets, growth and
economic forecasts and our knowledge of the entity and the sector in which it operates;
• comparing the future projections with the group’s past experience, in particular in respect of
win rates for new contracts and rebids, in order to assess whether the assumptions in the
going concern assessment were reasonable; and
• challenging whether the break-points in the Group’s reverse-stress test assessment were not
plausible to occur by comparing these scenarios with the Group’s previous experience,
including the experience to date during the Covid-19 pandemic assessing the working capital
assumptions by comparing the forecasts to actual recent experience and existing supplier/
customer arrangements.
We considered whether the going concern disclosure in note 2 to the financial statements gives
a full and accurate description of the Directors’ assessment of going concern , including the
identified risks and related sensitivities.
Our conclusions based on this work:
• we consider that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate;
• we have not identified, and concur with the directors’ assessment that there is not, a material
uncertainty related to events or conditions that, individually or collectively, may cast
significant doubt on the Group’s or Company’s ability to continue as a going concern for the
going concern period;
• we have nothing 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 the going concern period, and we found the going concern disclosure in note
2 to be acceptable; and
• the related statement under the Listing Rules set out on pages 158 to 159 is materially
consistent with the financial statements and our audit knowledge.
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 above conclusions are not a guarantee that the Group or the Company will
continue in operation.
Annual Report and Accounts 2020
Serco Group plc
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to the members of Serco Group plc continued
5. Fraud and breaches of laws
and regulations – ability to
detect
Identifying and responding to risks of material misstatement due to fraud
To identify risks of material misstatement due to fraud (“fraud risks”) we assessed events or
conditions that could indicate an incentive or pressure to commit fraud or provide an
opportunity to commit fraud. Our risk assessment procedures included:
• Enquiring of directors, the audit committee, internal audit, internal legal counsel and the
Group’s Ethics & Compliance function and inspection of policy documentation as to the
Group’s high-level policies and procedures to prevent and detect fraud, including the internal
audit function, and the Group’s channel for “whistleblowing”, as well as whether they have
knowledge of any actual, suspected or alleged fraud.
• Reading Board minutes (including minutes of board committees such as the audit committee
and risk committee).
• Considering remuneration incentive schemes and performance targets for directors and
management including the Revenue, Trading Profit and Free Cash Flow / Days Sales
Outstanding targets for management remuneration.
• Using analytical procedures to identify any usual or unexpected relationships.
• Using our own forensic subject matter experts to assist us in identifying fraud risks based on
discussions of the circumstances of the Group and Company.
We communicated identified fraud risks throughout the audit team and remained alert to any
indications of fraud throughout the audit. This included communication from the group to
component audit teams of relevant fraud risks identified at the Group level and request to
component audit teams to report to the Group audit team any instances of fraud that could give
rise to a material misstatement at group.
As required by auditing standards, and taking into account possible pressures to meet profit
targets our overall knowledge of the control environment, we perform procedures to address
the risk of management override of controls and the risk of fraudulent revenue recognition, in
particular:
• the risk that variable revenue is inappropriately recognised,
• the risk that Group and component management may be in a position to make inappropriate
accounting entries, and;
• the risk of bias in accounting estimates and judgements such as assessing whether long-term
contracts are onerous, determining whether provisions for disputes and litigation are
adequate and the assumptions and data used when testing for impairment of goodwill.
We did not identify any additional fraud risks.
We performed procedures including:
•
identifying journal entries and other adjustments to test for all components and at the Group
consolidation level based on risk criteria and comparing the identified entries to supporting
documentation. These included those posted by senior finance management, those posted
and approved by the same user and those posted to unexpected accounts.
• assessing significant accounting estimates for bias.
Identifying and responding to risks of material misstatement due to non-compliance with
laws and regulations
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 and
through discussion with the directors and other management (as required by auditing
standards), and from inspection of certain 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.
As the Group is regulated, our assessment of risks involved gaining an understanding of the
control environment including the entity’s procedures for complying with regulatory
requirements.
148 Serco Group plc
Annual Report and Accounts 2020
5. Fraud and breaches of laws
and regulations – ability to
detect continued
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 the Group level,
and a request for component auditors to report to the group team any instances of non-
compliance with laws and regulations that could give rise to a material misstatement at group.
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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 ,pensions legislation and taxation legislation and we assessed the extent of
compliance with these laws and regulations as part of our procedures on the related financial
statement items.
Secondly, the Group is subject to many other laws and regulations where the consequences of
non-compliance could have a material effect on amounts or disclosures in the financial
statements, for instance through the imposition of fines or litigation or the loss of the Group’s
license to operate. We identified the following areas as those most likely to have such an effect:
• health and safety, given the front-line nature of many of the Group’s operations,
• anti-bribery and corruption, recognising the Governmental nature of many of the group’s
customers,
• employment law, due to the significant number of employees the Group employs,
• Data protection laws, such as the General Data Protection Regulations in Europe due to the
number of employees and the services performed for customers in Europe
• national security laws; and
• single source procurement regulations in the UK, due to the contracting environment.
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. Therefore if a breach of operational regulations is
not disclosed to us or evident from relevant correspondence, an audit will not detect that
breach.
We assessed the disclosures in Principal Risks and Uncertainties on page 78 and the Audit
Committee Report on page 95 related to the Company’s obligations under the Deferred
Prosecution Agreement with the UK Serious Fraud Office compared to our knowledge based on
discussion with the Company’s legal advisors and our inspection of correspondence of the
Company with the Serious Fraud Office.
We discussed with the audit committee other matters related to actual or suspected breaches of
laws or regulations, for which disclosure is not necessary, and considered
any implications for our audit.
Context of the ability of the audit to detect fraud or breaches of law or regulation
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 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 fraud, as these
may involve collusion, forgery, intentional omissions, misrepresentations, or the override of
internal controls. Our audit procedures are designed to detect material misstatement.
We are not responsible for preventing non-compliance or fraud and cannot be expected
to detect non-compliance with all laws and regulations.
Annual Report and Accounts 2020
Serco Group plc
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to the members of Serco Group plc continued
6. 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
We are required to perform procedures to identify whether there is a material inconsistency
between the directors’ disclosures in respect of emerging and principal risks and the viability
statement, and the financial statements and our audit knowledge.
Based on those procedures, we have nothing material to add or draw attention to in relation to:
• the directors’ confirmation within the viability statement on pages 79 to 80 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 disclosures describing these risks and how emerging risks are identified,
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.
We are also required to review the viability statement, set out on pages 79 to 80 under the
Listing Rules. Based on the above procedures, we have concluded that the above disclosures are
materially consistent with the financial statements and our audit knowledge.
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.
150 Serco Group plc
Annual Report and Accounts 2020
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6. We have nothing to report
on the other information in
the Annual Report continued
Corporate governance disclosures
We are required to perform procedures to identify whether there is a material inconsistency
between the directors’ corporate governance disclosures and the financial statements and our
audit knowledge.
7. We have nothing to report
on the other matters on
which we are required to
report by exception
8. Respective responsibilities
Based on those procedures, we have concluded that each of the following is materially
consistent with the financial statements and our audit knowledge:
• 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;
• the section of the annual report describing the work of the Audit Committee, including the
significant issues that the audit committee considered in relation to the financial statements,
and how these issues were addressed; and
• the section of the annual report that describes the review of the effectiveness of the Group’s
risk management and internal control systems.
We are required to review the part of Corporate Governance Statement relating to the Group’s
compliance with the provisions of the UK Corporate Governance Code specified by the Listing
Rules for our review. We have nothing to report in this respect.
Under the Companies Act 2006, we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent Company, or returns
adequate for our audit have not been received from branches not visited by us; or
• the parent Company financial statements and the part of the Directors’ Remuneration Report
to be audited are not in agreement with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
We have nothing to report in these respects.
Directors’ responsibilities
As explained more fully in their statement set out on page 140, 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 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 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.
Annual Report and Accounts 2020
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Independent Auditor’s Report
to the members of Serco Group plc continued
9. The purpose of our audit
work and to whom we owe
our responsibilities
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 with 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
24 February 2021
152 Serco Group plc
Annual Report and Accounts 2020
Consolidated Income Statement
For the year ended 31 December
Revenue
Cost of sales
Gross profit
Administrative expenses
Exceptional profit on disposal of subsidiaries and operations
Other exceptional operating items
Other expenses - amortisation and impairment of intangibles arising on acquisition
Share of profits in joint ventures and associates, net of interest and tax
Operating profit
Operating profit before exceptional items
Investment revenue
Finance costs
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.
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Note
9
2020
£m
3,884.8
(3,501.8)
2019
£m
3,248.4
(2,928.3)
8
10
19
6
13
14
15
15
383.0
(220.0)
11.0
1.5
(9.0)
12.7
179.2
166.7
1.9
(27.8)
(25.9)
153.3
140.8
(18.9)
(0.4)
(19.3)
134.0
133.8
0.2
17
17
10.89p
10.67p
320.1
(214.2)
–
(23.4)
(7.5)
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
Annual Report and Accounts 2020
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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:
Share of other comprehensive income in joint ventures and associates
Remeasurements of post-employment benefit obligations*
Actuarial gain on reimbursable rights*
Income tax relating to these items*
Items that may be reclassified subsequently to profit or loss:
Net exchange gain/(loss) on translation of foreign operations**
Fair value loss on cash flow hedges during the year**
Total other comprehensive income/(expense) 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
6
31
31
15
2020
£m
134.0
2.7
18.2
3.9
(5.9)
7.9
(0.2)
26.6
160.6
160.4
0.2
2019
£m
50.6
1.3
(20.3)
3.2
2.7
(33.3)
(0.1)
(46.5)
4.1
4.0
0.1
154 Serco Group plc
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Consolidated Statement of Changes in Equity
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Share
capital
£m
Share
premium
account
£m
Capital
redemption
reserve
£m
Retained
earnings
£m
Retirement
benefit
obligations
reserve
£m
Share
based
payment
reserve
£m
Own
shares
reserve
£m
Hedging and
translation
reserve
£m
Total
shareholders’
equity
£m
Non
controlling
interest
£m
At 1 January 2019
22.0
327.9
0.1
111.1
(137.4)
75.0
(18.7)
5.4
385.4
Opening balance
adjustment – IFRS16
Total comprehensive
income for the year
Issue of share capital
Shares transferred to award
holders on exercise of
share awards
Expense in relation to share
based payments
–
–
–
–
2.5
135.0
–
–
–
–
–
–
–
–
–
3.0
–
51.8
(14.4)
–
–
–
–
–
–
–
–
–
–
–
(0.3)
(14.4)
14.6
11.6
–
–
(33.4)
–
–
–
3.0
4.0
137.2
0.2
11.6
1.4
–
0.1
–
–
–
At 1 January 2020
24.5
462.9
0.1
165.9
(151.8)
72.2
(4.4)
(28.0)
541.4
1.5
Total comprehensive
income for the year
–
–
Issue of share capital
0.2
0.2
Shares transferred to award
holders on exercise of
share awards
Expense in relation to share
based payments
–
–
–
–
–
–
–
–
136.5
16.2
–
–
–
–
–
–
–
–
(0.2)
(2.4)
2.5
11.2
–
–
7.7
160.4
0.2
–
–
–
0.2
0.1
11.2
–
–
–
At 31 December 2020
24.7
463.1
0.1
302.4
(135.6)
81.0
(2.1)
(20.3)
713.3
1.7
The accompanying notes form an integral part of the financial statements.
Annual Report and Accounts 2020
Serco Group plc
155
Financial StatementsCorporate Governance
Consolidated Balance Sheet
Non current assets
Goodwill
Other intangible assets
Property, plant and equipment
Interests in joint ventures and associates
Trade and other receivables
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
Derivative financial instruments
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
At 31 December
2020
£m
At 31 December
2019*
£m
Note
18
19
20
6
22
16
31
21
22
22
23
30
24
24
30
27
25
26
24
24
30
16
27
25
26
31
32
33
669.6
80.6
441.7
19.2
25.3
83.2
114.6
674.2
96.5
392.6
23.6
26.5
63.9
78.3
1,434.2
1,355.6
21.4
296.1
313.5
4.9
335.7
4.5
976.1
18.3
287.5
319.9
6.8
89.5
3.0
725.0
2,410.3
2,080.6
(42.3)
(533.9)
(9.3)
(21.6)
(62.1)
(109.3)
(89.7)
(868.2)
(47.5)
(9.4)
(0.1)
(26.9)
(115.9)
(293.3)
(299.1)
(34.9)
(827.1)
(66.8)
(490.2)
(1.9)
(18.7)
(58.4)
(84.6)
(56.1)
(776.7)
(58.2)
(14.5)
–
(26.7)
(103.4)
(285.3)
(248.9)
(24.0)
(761.0)
(1,695.3)
715.0
(1,537.7)
542.9
24.7
463.1
0.1
302.4
(135.6)
81.0
(2.1)
(20.3)
713.3
1.7
715.0
24.5
462.9
0.1
165.9
(151.8)
72.2
(4.4)
(28.0)
541.4
1.5
542.9
* During the year ended 31 December 2020, but within twelve months of the date of the acquisition, the Group finalised fair value measurements for a number of
contracts, which had previously been provisionally valued, associated with the acquisition of Naval Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting
in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value can be found in note 7.
The accompanying notes form an integral part of the financial statements.
The financial statements were approved by the Board of Directors on 24 February 2021 and signed on its behalf by:
Rupert Soames
Group Chief Executive Officer
Angus Cockburn
Group Chief Financial Officer
156 Serco Group plc
Annual Report and Accounts 2020
Consolidated Cash Flow Statement
For the year ended 31 December
Net cash inflow from operating activities before exceptional items
Exceptional items
Net cash inflow from operating activities
Investing activities
Interest received
Decrease in security deposits
Dividends received from joint ventures and associates
Exceptional distribution from joint ventures
Other dividends received
Proceeds from disposal of property, plant and equipment
Net cash inflow on disposal of subsidiaries and operations
Acquisition of subsidiaries, net of cash acquired
Proceeds from loans receivable
Purchase of other intangible assets
Purchase of property, plant and equipment
Net cash inflow/(outflow) from investing activities
Financing activities
Interest paid
Capitalised finance costs paid
Net advances/repayments 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 (outflow)/inflow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Net exchange gain/(loss)
Cash and cash equivalents at end of year
The accompanying notes form an integral part of the financial statements.
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Note
37
8
7
23
2020
£m
270.5
(2.0)
268.5
0.3
0.1
19.8
1.9
0.4
20.9
11.0
(4.9)
1.2
(8.3)
(41.8)
0.6
(24.9)
(0.9)
99.4
(100.8)
2.4
–
0.1
(24.7)
244.4
89.5
1.8
335.7
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
Annual Report and Accounts 2020
Serco Group plc
157
Financial StatementsCorporate Governance
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 and 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 141 to 222 have been prepared in accordance with international accounting standards
in conformity with the requirements of the Companies Act 2006 (“Adopted IFRS”) and are prepared in accordance with international
financial reporting standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies to the European Union.
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
In assessing the basis of preparation of the financial statements for the year ended 31 December 2020, 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 period of
assessment is considered to be at least 12 months from the date of approval of these financial statements.
At 31 December 2020, the Group’s principal debt facilities comprised a £250m revolving credit facility, an acquisition facility of £45m and
£347m of US private placement notes, giving £642m of committed credit facilities and committed headroom of £582m. As at December
2020, the Group’s leverage ratio is below its covenant of 3.5x and below the Group’s target range of 1x-2x at 0.45x.
The Directors have undertaken a rigorous assessment of going concern and liquidity taking into account key uncertainties and
sensitivities, including the potential impact of Covid-19 on the future performance of the Group. In making this assessment the Directors
have considered the Group’s existing debt levels, the committed funding and liquidity positions under its debt covenants, its ability to
generate cash from trading activities and its working capital requirements. The Directors have also identified a series of mitigating
actions that could be used to preserve cash in the business should the need arise.
The basis of the assessment is the Board-approved budget, which is prepared annually for the next two-year period and is based on a
bottom-up approach to all of the Group’s existing contracts, potential new contracts and administrative functions. In setting the Group’s
budgets for 2021 and 2022, consideration has been given to the known impacts of Covid-19, though most of the Group’s contracts
deliver critical services to Governments and the delivery requirements of these have not been materially impacted.
The Directors have considered various downside scenarios, including the anticipated impact of Covid-19 on the Group’s operations, and
have excluded the positive impacts on profitability experienced to date as a result of the virus. The key assumptions considered in these
downside scenarios include a range of lower passenger volumes on the Group’s train operating contracts, higher costs within the Health
portfolio and slower recovery in usage of leisure centres in the UK through to the end of 2021. In a more severe downside scenario, the
Directors have modelled the negative financial impact of Covid-19 as experienced during the year to 31 December 2020 through another
two three-month lockdowns during the assessment period. In these different downside scenarios, the Group continues to have sufficient
covenant and liquidity headroom.
158 Serco Group plc
Annual Report and Accounts 2020
Due to the limited impact of Covid-19 on the Group’s profitability, the Directors believe that appropriate sensitivities in assessing the
Group and Company’s ability to continue as a going concern are to model reductions in the Group’s win rates for new business and
rebids, and reductions in profit margins. Due to the diversity in the Group’s operations, the Directors believe that a reverse stress test of
these sensitivities to assess the headroom available under the Group’s debt covenants and available liquidity, provides meaningful
analysis of the Group’s ability to continue as a going concern. Based on the headroom available, the Directors are then able to assess
whether the reductions required to breach the Group’s financial covenants, or exhaust available liquidity, are plausible.
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This reverse stress test shows that, even after assuming that the US private placement loans of $152m due to mature before 30 June 2022
are repaid, and that no additional refinancing occurs, the Group can afford to be unsuccessful on 50% of its target new business and
rebid wins, combined with a profit margin 50 basis points below the Group’s forecast, and still retain sufficient liquidity to meet all
liabilities as they fall due and remain compliant with the Group’s financial covenants.
In respect of win rates, rebids have a more significant impact on the Group’s revenue than new business wins during the assessment
period, as contracts accounting for c.62% of total revenues are expected to be rebid in the next three years. The Group’s rebid win rate
excluding COMPASS SNI and Viapath, neither of which contributed to the Group’s profitability, has been in excess of 85% over the last
two years, therefore a reduction of 50% to the budgeted win rates and rebid rates is not considered plausible. The Group does not bid
for contracts at margins below its target range.
In respect to margin reduction, due to the diversified nature of the Group’s portfolio of long term contracts and the fact that the Group
has met or exceeded its full year guidance for the last five years, a reduction in margin of 50bps (c£20m) versus the Group’s budget is not
considered plausible within the assessment period combined with a 50% reduction in win rates for new business and rebids.
Consequently, the Directors are confident that the Group and Company will have sufficient funds to continue to meet its liabilities as they
fall due for at least 12 months from the date of approval of the financial statements and therefore have prepared the financial statements
on a going concern basis.
Adoption of new and revised standards
There have been no new accounting standards implemented by the Group during the year and no revisions to accounting standards have
had a material impact on the Group’s Financial Statements.
Amendments to IFRS16 Covid-19 Related Rent Concessions
On 28 May 2020, the IASB issued Covid-19 Related Rent Concessions - amendment to IFRS16 Leases. The amendments provide relief to
lessees from applying IFRS16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the
Covid-19 pandemic. As a practical expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a
lease modification. A lessee that makes this election accounts for any change in lease payments resulting from the Covid-19 related rent
concession the same way it would account for the change under IFRS16, if the change were not a lease modification.
Whilst the amendment applies to annual reporting periods beginning on or after 1 June 2020, earlier application is permitted. The impact
of applying the amendment to the Group’s Financial Statements was immaterial.
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, the calculation of net realisable value under IAS2 Inventories or value in use
under IAS36 Impairment of Assets.
Revenue recognition: Repeat service based contracts
The majority of the Group’s contracts are repeat service based contracts where value is transferred to the customer over time as the core
services are delivered and therefore in most cases revenue will be recognised on the output basis, with revenue linked to the deliverables
provided to the customer. Where any price step downs are required in a contract accounted for under the output basis and output is not
decreasing, revenue will require deferral from initial years to subsequent years in order for revenue to be recognised on a consistent basis.
There are certain contracts where a separate performance obligation has been identified for services where the pattern of delivery differs
to the core services and which are capable of being distinct. In these instances, where the transfer of control is most closely aligned to our
efforts in delivering the service, the input method is used to measure progress, and revenue is recognised in direct proportion to costs
incurred. Where deemed appropriate, the Group will utilise the practical expedient within IFRS15, allowing revenue to be recognised at
the amount which the Group has the right to invoice, where that amount corresponds directly with the value to the customer of the
Group’s performance completed to date.
Under IFRS15, unless upfront fees received from customers including transition payments can be clearly attributable to a distinct service
the customer is obtaining, then such payments do not constitute a separate performance obligation and instead are deferred and spread
over the life of the core services.
Annual Report and Accounts 2020
Serco Group plc
159
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
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.
Revenue recognition: Variable revenue
The Group has a number of contracts where at least an element of the revenue generated is variable in nature. Variability in revenue
recognised can arise from a number of factors, including usage related volumes, graduated performance against contractual performance
indicators, indexation linked pricing, profit sharing elements and customer decisions related to the provision of goods or services. Any
variable amounts will only be recognised where it is highly probable that a significant reversal will not occur.
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 recorded as a result are
recorded 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.
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.
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.
Government grants
The majority of the Group’s customers are governments. Any income that arises from a contractual agreement for the delivery of goods or
services, or a specific modification to such a contract, is treated as revenue. Income from governments is only considered to be a
government grant if it is not related to the supply of goods or services under a contractual arrangement.
Government grants are recognised where there is reasonable assurance that the grant will be received. Grants that compensate the Group
for expenses incurred are recognised in the income statement as a reduction to the corresponding expenses on a systematic basis in the
periods in which the expenses are recognised.
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.
160 Serco Group plc
Annual Report and Accounts 2020
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).
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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. On disposal of an operation, 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.
Annual Report and Accounts 2020
Serco Group plc
161
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
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 unit (CGU) or groups of CGUs which are expected to benefit from the acquisition.
On the disposal of a business which includes all or part of a CGU, any attributable goodwill is included in the determination of the profit or
loss on disposal. Where part of a CGU with goodwill is sold, the attributable amount is calculated based on the future discounted cash
flows leaving the Group as a proportion of the total CGU future discounted cash flows.
The fair values associated with material business combinations are valued by external advisers and any amount of consideration which is
contingent in nature is evaluated at the end of each reporting period, based on internal forecasts.
Other intangible assets
Material intangible assets are grouped into classes of similar nature and use and separately disclosed. Other intangible assets are
amortised from the date of completion.
Customer relationships can arise on the acquisition of subsidiaries and represent the incremental value expected to be gained as a result
of existing contracts in the purchased business. These assets are amortised over the average length of the related contracts.
Licences comprise premiums paid for the acquisition of licences, while franchises represent costs incurred in obtaining franchise rights
arising on the acquisition of franchises. These are amortised on a straight-line basis over the life of the respective licence or franchise.
Software and IT represent computer systems and processes used by the Group in order to generate future economic value through
normal business operations. The underlying assets are amortised over the period from which the Group expects to benefit, which is
typically between three to eight years.
Development expenditure is capitalised as an intangible asset only if the conditions below 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.
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.
162 Serco Group plc
Annual Report and Accounts 2020
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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 expenses in the income statement unless it is considered to be an exceptional item.
Retirement benefit costs
Payments to defined contribution pension schemes are charged as an expense as they fall due.
For defined benefit pension schemes, the cost of providing benefits is determined using the projected unit credit actuarial cost method,
with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses are recognised in full in the period in
which they occur. They are recognised outside the income statement and are presented in the statement of comprehensive income.
Both current and past service costs are the amounts recognised in the income statement, reflecting the expense associated with the
individuals. Current service cost represents the increase in the present value of the scheme liabilities expected to arise from employee
service in the current period. Past service cost is recognised immediately. Gains and losses on curtailments or settlements are recognised
in the income statement in the period in which the curtailment or settlement occurs.
The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as
reduced by the fair value of scheme assets. Any asset resulting from this calculation is limited to the present value of available refunds
(which is only recognised to the extent that the Group has an unconditional right to receive it) and reductions in future contributions to the
scheme. To the extent that an economic benefit is available as a reduction in future contributions and there is a minimum funding
requirement required of the Group, the economic benefit available as a reduction in contributions is calculated as the present value of the
estimated future service cost in each year, less the estimated minimum funding contributions required in respect of the future accrual and
benefits in that year.
Calculation of the amounts recognised in the Consolidated Financial Statements in respect of defined benefit pension schemes requires a
high level of judgement, as further explained in note 3.
Defined benefit obligations arising from contractual obligations
Where the Group takes on a contract and assumes the obligation to contribute variable amounts to the defined benefit pension scheme
throughout the period of the contract, the Group’s share of the scheme assets and liabilities is calculated by reducing the scheme assets
and liabilities with 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
in the Statement of Comprehensive Income (SOCI).
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
turnover and salary.
Derivative financial instruments and hedging activities
The Group may enter into a variety of derivative financial instruments to manage the exposure to interest rate, foreign exchange risk and
price risk, including currency swaps, foreign exchange forward contracts, interest rate swaps and commodity future contracts. Further
details of derivative financial instruments are given in note 30.
Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently re-measured to their
fair value at each balance sheet date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is
designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of
the hedge relationship. The Group designates certain derivatives as either hedges of the fair value of recognised assets or liabilities (fair
value hedges), hedges of highly probable forecast transactions or hedges of firm commitments (cash flow hedges).
Annual Report and Accounts 2020
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Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
At the inception of the hedge relationship, the Group documents the relationship between the hedging instrument and the hedged item,
along with its risk management objectives and its strategy for undertaking various hedge transactions. Both at the inception of the hedge
and on a periodic basis, the Group assesses whether the hedging instrument that is used in a hedging relationship is highly effective in
offsetting changes in fair values or cash flows of the hedged item.
A derivative is presented as a non current asset or a non current liability if the remaining maturity of the instrument is more than 12 months
and it is not expected to be realised or settled within 12 months. Derivatives, which mature within 12 months, are presented as current
assets or current liabilities.
Details of the fair values of the derivative instruments used for hedging purposes and movements in the hedging and translation reserve in
equity are detailed in the SOCI and described in note 30.
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss immediately,
together with any changes in the fair value of the hedged item that is attributable to the hedged risk. The change in the fair value of the
hedging instrument and the change in the hedged item attributable to the hedged risk are recognised in the line of the income statement
relating to the hedged item.
Hedge accounting is discontinued when 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 the Group de-designates the hedging relationship, the hedging instrument expires or is sold,
terminated, exercised, or no longer qualifies for hedge accounting. Any cumulative gain or loss deferred in equity at that time remains in
equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer
expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss.
Tax
The tax expense represents the sum of current tax expense and deferred tax expense.
Current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the income statement
because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never
taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by
the balance sheet date.
Deferred tax is provided, using the liability method, on temporary differences at the balance sheet date between the tax bases of assets
and liabilities and their carrying amounts for accounting purposes.
Deferred tax assets are generally recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax
losses, to the extent that it is probable that taxable profits will be available against which these items can be utilised.
Deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition of an
asset and liability in a transaction other than a business combination and, at the time of the transaction, 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
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.
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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.
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Inventories
Inventories are stated at the lower of cost and net realisable value and comprise service spares, supplies and consumables used in the
rendering of services to our customers. 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 and expected credit losses, to ensure that amounts recognised represent the recoverable amount.
Determining whether a trade receivable is impaired requires judgement to be applied based on the information available at each
reporting date. A provision for impairment arises where there is evidence that the Group will not be able to collect amounts due for
reasons other than customer default, which is achieved by creating an allowance for doubtful debts recognised in the income statement
within expenses. When a trade receivable is expected to be uncollectible for reasons other than credit-related losses, it is provided for
within the allowance. Subsequent recoveries of amounts previously provided for or written off are credited against expenses.
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.
An expected credit loss is recorded where there is evidence that a counterparty is at risk of default due to their credit worthiness. If the
loss was material, the amount would be presented separately in the Consolidated Income Statement, however 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 typically 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, which are subject to insignificant changes in value and have a maturity of three months or less from the date of
acquisition. This definition is also used for the Consolidated Cash Flow Statement.
Leases
The Group uses leases in the delivery of a number of contracts and in other centralised functions. Most notably, the Group uses
accommodation leases in the delivery of the Asylum Accommodation and Support Services contract, vehicle leases in the Prisoner
Escorting and Custodial Services contract and to deliver its UK vehicle fleet and support offices, amongst others. Where leases are utilised
in the delivery of contracts, the Group aims to limit the duration of any non-cancellable periods of leases to be no longer than the duration
of the underlying contract. For non-contract related leases, the Group has set policies on lease duration and purpose to ensure their
appropriate use.
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. The Group typically uses an appropriate incremental borrowing rate, based on the lease location and duration, as it typically
does not have access to the interest rate implicit in the lease.
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 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 twelve 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.
Annual Report and Accounts 2020
Serco Group plc
165
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
2. Significant accounting policies continued
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily
take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or sale.
All other borrowing costs are recognised as an expense in the period in which they are incurred.
Provisions
Provisions are recognised when the Group has an obligation to make a cash outflow as a result of a past event. Provisions are measured at
the best estimate of the expenditure required to settle the obligation at the balance sheet date when settlement is considered to be likely.
Onerous contract provisions (OCPs) arise when the unavoidable costs of meeting contractual obligations exceed the remuneration
expected to be received. Unavoidable costs include total contract costs together with a rational allocation of shared costs that can be
directly linked to fulfilling contractual obligations which have been systematically allocated to OCPs on the basis of key cost drivers except
where this is impracticable, where contract revenue is used as a proxy to activity. The provision is calculated as the lower of the termination
costs payable for an early exit and the 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.
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.
Dividends payable
Dividends are recorded in the Group’s Consolidated Financial Statements in the period in which they are declared, appropriately
authorised and no longer at the discretion of the Company.
Segmental information
Segmental information is based on internal reports about components of the Group that are regularly reviewed by the Group’s Chief
Operating Decision Maker (CODM) in order to allocate resources to the segments and to assess their performance. The CODM is
considered to be the Board of Directors as a body.
Segmental revenue is analysed on an external basis. Inter-segment revenue is not presented as it is not significant in the context of
revenue as a whole. Net finance costs are not presented for each operating segment as they are reviewed on a consolidated basis by
the CODM.
Specific corporate expenses are allocated to the corresponding segments. Segment assets comprise goodwill, other intangible assets,
property, plant and equipment including right of use assets, inventories, trade and other receivables (excluding corporation tax
recoverable) and any retirement benefit asset. Segment liabilities comprise trade and other payables, lease liabilities, provisions 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 Consolidated 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 material adjustment to the carrying amounts of onerous contract provisions within the next financial year for contracts which the
Directors have assessed do not require a provision as at 31 December 2020. The estimates made in relation to onerous contracts differ
according to whether an existing provision is measured or not.
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Major sources of uncertainty within existing onerous contract provisions 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 open claims made by or against a customer regarding contractual performance or contractual negotiations taking
place where there is expected to be a positive outcome from the Group’s perspective;
• The ability of suppliers to deliver their contractual obligations on time and on budget; and
• The longer term impact of Covid-19 on contract performance such as the performance and usage of leisure centres or passenger
volumes in the UK and the risk that this may be impacted by any future wave of the virus which requires a subsequent lock down period,
in the absence of any customer support.
In the current year, an amount of £0.1m was charged to historic provisions and releases of £5.9m have been made. One new OCP was
recognised during the year with the charge being £3.3m within Underlying Trading Profit. 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 such as the impact of Covid-19. 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.
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 Provisions, Contingent Liabilities &
Contingent Assets. 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. As at 31 December 2020, the
provision recognised in respect of this portfolio of contracts is £8.5m (2019: £6.2m).
The Group operates a large number of long-term contracts. Onerous contract provisions totalling £6.0m are estimated for individual
contracts, based on the specific characteristics of the contract including possible contract extensions or variations, estimates of
transaction price such as variable revenues and forecast costs to fulfil those contracts. As noted above, the Group also holds a balance of
£8.5m in respect of the portfolio risk associated with operating a large number of long-term contracts, giving a total onerous contract
provision of £14.5m (see note 27). Management has considered the nature of the estimate for onerous contract provisions and concluded
that it is reasonably possible that outcomes within the next financial year may be different from management’s assumptions and could, in
aggregate, require a material adjustment to the onerous contract provision. However, due to the estimation uncertainty across numerous
contracts each with different characteristics, it is not practical to provide a quantitative analysis of the aggregated judgements that are
applied, and management do not believe that disclosing a potential range of outcomes on a consolidated basis would provide meaningful
information to a reader of the accounts.
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. During the current year, the process for
setting future budgets and longer-term business planning, has required an assessment of the likely future impact of Covid-19 on the
Group’s operations and its future activities. As noted above, in relation to both going concern and onerous contract provisions, the
potential impact of Covid-19 in the future is uncertain. Management, as part of the budgeting process, have included an estimate of the
potential future impact, and as a result, no specific adjustment has been made in relation to the cash flows used in the assessment of the
value in use of assets.
Annual Report and Accounts 2020
Serco Group plc
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Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
3. Critical accounting judgements and key sources of estimation uncertainty continued
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 2020.
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 for
the Group 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 including the specific circumstances of each case and external advice,
where appropriate.
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 or 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 Group, 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.
Critical accounting judgements
Covid-19 related impacts
During the year ended 31 December 2020, the Group’s results have been impacted by Covid-19, and in a number of instances, the
recognition and measurement of amounts as at 31 December 2020 has required judgements to be made about the impact of Covid-19.
Management assessed each balance on the balance sheet for the impact of Covid-19 as at 31 December 2020, as well as a number of
other critical judgements which could also reasonably be considered to be impacted by the ongoing effects of Covid-19. Those items
for which Covid-19 was considered to be a critical element of the judgements made, are summarised below. In reviewing areas of the
financial statements that could be impacted by Covid-19, Management identified a number of areas subject to judgement, but where it
was considered unlikely that a material difference would result from the judgements made. These areas included:
• Compliance with banking covenants due to the headroom levels available under the current facilities;
• The impact of changes in cash flows on financing arrangements and hedging effectiveness due to the assumption that current
financing arrangements are sufficient and will continue unchanged for the duration of the arrangements;
• Dividends and capital management restrictions, owing to the limited impact of Covid-19 on the Group’s financial results and
considerations disclosed in the Chief Executive’s Review around the proposed dividend in relation to the year ended 31 December
2020;
• Alternative Performance Measures (APMs), as the impact of Covid-19 was considered too subjective to require a change to the Group’s
APMs, and the APMs continue to be appropriate to meet investors’ requirements and for further clarity and transparency of the Group’s
financial performance; and
• Post balance sheet events, owing to the fact that Covid-19 has been factored into other assumptions and judgements around forecast
performance into 2021, and in the absence of material events subsequent to 31 December 2020, no additional judgements were
required to be made.
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Going concern
As noted on page 158, the impact of Covid-19 on the ability of the Group to continue as a going concern has been considered by
Management. The critical judgements are focused on the economic recovery of certain sectors in which the Group operates, as well as
the potential impacts of future actions taken by governments globally. The judgements made represent severe but plausible scenarios
that could occur within the going concern assessment period. The conclusion drawn by Management based on these judgements is
that no material uncertainties exist in respect of the ability for the Group to continue as a going concern.
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Onerous contract provisions
The calculation of onerous contract provisions is a key source of estimation uncertainty. Within the calculation of onerous contract
provisions, judgements have been made by Management regarding the recovery of global economies from the impacts of Covid-19,
particularly in the sectors in which the Group operates. In particular, the short-term impacts of Covid-19 have been estimated specific to
each of the Group’s contracts and these impacts have been included in budgets used to identify any contracts which require an
onerous contract provision to be recognised. Judgements related to Covid-19 include the potential for further lock-downs, the length
of any such lock-downs and the scale and speed of future recoveries. Should this be incorrect then this could lead to onerous contract
provisions being recognised in future periods.
Impairment of assets
The impairment of assets is a key source of estimation uncertainty. In calculating the value in use of CGUs, Management are required to
form an estimate of the future cash flows which inherently includes a degree of estimation uncertainty. Moreover, when looking at
future cash flows as at 31 December 2020, Management has made judgements regarding the impact of Covid-19 over the same
timeframe as the cash flows used to calculate value in use. During this timeframe, Management has considered the impact of Covid-19
specific to each existing contract, as well as opportunities in the Group’s pipeline and this judgement is included in budgeted cash
flows. Should this be incorrect then this could lead to impairments being recognised in future periods.
Recoverability of trade receivables
At 31 December 2020, the Group’s trade receivables balance is recorded at the carrying value of trade receivables less an allowance for
bad or doubtful debts. Due to the global impact of the Covid-19 pandemic, Management has reassessed the judgement made in
previous periods that any expected credit losses associated with trade receivables is immaterial. Management remain confident that as
the Group’s customers are predominantly sovereign in nature, there remains limited risk to the recoverability of the trade receivables
balances at the end of the year as a result of expected credit losses. Should this be incorrect, a charge associated with irrecoverable
debts could be recognised in future periods.
Retirement benefit obligations
The net position on defined benefit pension schemes is a key source of estimation uncertainty. Covid-19 could have a material impact
on any number of judgements used in valuing the Group’s pension schemes as at 31 December 2020, including, but not necessarily
limited to, the discount rate used, future inflation rates and the mortality assumptions in place. To ensure appropriate judgements are
taken based on the most relevant information available, Management has continued to engage with third-party advisors in assessing
each of these judgements. The discount rate is derived from the return on corporate bond yields, and whilst this is largely observable,
any change in discount rates in the future could have a material impact on the carrying value of the defined benefit obligation. Similarly,
inflation rates and mortality assumptions impact the defined benefit obligation as they are used to model future salary increases and
the duration of pension payments. Whilst current assumptions use projected future inflation rates and the most up to date information
available on mortality, if these judgements change, the defined benefit obligation could also change materially in future periods.
Management also considered whether an allowance was required for assets held in pension schemes owing to the impact of Covid-19
on the carrying value of assets. In concluding that such an adjustment was not required, Management’s judgement focused on the fact
that a significant proportion of the assets are either quoted or have market observable prices and for those which are not directly
observable, sufficient assurance has been received from asset managers regarding the appropriateness of the carrying values of the
underlying assets.
Going concern
Whilst there are no material uncertainties over the ability of the Group to continue as a going concern, in preparing the going concern
assessment the Directors are required to make a number of judgements to reach such a conclusion. In particular, when forming an opinion
for the current year, the ongoing impact of Covid-19 and the impact on headroom in the Group’s financing facilities has been the most
critical area of judgement.
In order to model severe but plausible scenarios to stress test the potential impact of Covid-19 on the Group’s forecast, the Directors have
considered, amongst other scenarios, lower passenger volumes on the Group’s train operating contracts, higher costs within the Health
portfolio and slower recovery in usage of leisure centres in the UK through to the end of 2021, without mitigations that are outside of the
Group’s control. The Directors have also considered, for the plausible downside scenario, the absence of any repeat of contracts associated
with the UK Government’s response to the pandemic. The Directors have reviewed the impact on overseas operations and considered the
impact of a future wave in Australia which may impact the ability to deliver operations within contact centres, or drive higher absenteeism in
the delivery of its larger operations such as the Fiona Stanley Hospital or Department of Immigration and Border Protection contracts. In
the United States, the recent change in administration and escalation of Covid-19 cases has made an assessment of the impact of the
response to the pandemic difficult to estimate, as the response could take a different approach to that seen under the previous
administration. In an extreme case, the Directors have modelled the negative financial impact of Covid-19 as experienced during the year
to 31 December 2020, without the mitigations outlined above, through another two three-month lockdown periods during the assessment
period and allowed for the impact of a change in direction of the response in the United States. The scenario indicates that the Group has
sufficient liquidity to withstand a potential future wave of the virus if the impact is consistent with that experienced during the first wave.
Annual Report and Accounts 2020
Serco Group plc
169
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
3. Critical accounting judgements and key sources of estimation uncertainty continued
After considering these severe but plausible scenarios, the forecasts indicate sufficient capacity in the Group’s 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 its debt covenants and its ability to
generate cash from trading activities and working capital requirements, as well as a series of identified mitigating actions that could be
used to preserve cash in the business. In order to reverse stress test the headroom available on the Group’s debt covenants and liquidity
available, the Directors have considered the impact of reductions to expected win rates for new contracts and rebid contracts combined
with lower margins in the period of assessment and concluded that, given the headroom available, these do not present a material risk in
its ability to continue as a going concern.
In making the going concern assessment, the Directors have assumed that the US private placement loans of $152m due to mature before
30 June 2022 are repaid without any additional refinancing occurring.
Leases
The Group makes use of leases both in assisting with the operational delivery of contracts and within support functions. Operational
leases include, but are not limited to, accommodation for asylum seekers, vehicles used in the transport of service users and properties
used to deliver services or administrative functions. Within the Group’s support functions, the most prevalent leases are those associated
with properties and the company car fleet.
The majority of the Group’s operational leases are entered into either for the duration of the contract to which they relate, or with a
termination option included, allowing the Group the option to exit the lease if it so desires. As a result, the most significant judgement that
is made in relation to leases, is the derivation of the lease term at the outset of the lease. Extension and cancellation options included in
leases, where the Group has the unilateral option to exercise, are included when assessing the lease term only to the extent that it is more
likely than not they will be exercised. This assessment is revisited whenever the circumstances of a contract change, or more frequently if
Management become aware of a change in the probability of exercising such options.
Use of Alternative Performance Measures: Operating profit before exceptional items
IAS1 Presentation of Financial Statements 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 include 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 we consider material and outside of the
normal operating practice of the Company 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 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.
Claim for losses in respect of the 2013 share price reduction
Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the
reduction in Serco’s share price in 2013, the Group has continued to assess 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. Any outcome 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.
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 deferred taxes are disclosed in note 16.
170 Serco Group plc
Annual Report and Accounts 2020
4. Segmental information
The Group’s operating segments reflecting the information reported to the Board in 2020 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
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Americas
AsPac
Middle East
Corporate
delivered to UK Government, UK devolved authorities and other public sector customers in the UK and
Europe
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
Services for sectors including Citizen Services, Defence, Health, Justice & Immigration and Transport in
the Asia Pacific region including Australia, New Zealand and Hong Kong
Services for sectors including Citizen Services, 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 report directly to the CODM on a regular basis. As a result of this focus, the sectors in each region have similar economic
characteristics and are aggregated at the operating segment level in these financial statements.
The accounting policies of the reportable segments are the same as the Group’s accounting policies described in note 2.
Information about major customers
The Group has four major governmental customers which each represent more than 5% of Group revenues. The customers’ revenues were
£1,517.0m (2019: £1,043.3m) for the UK Government within the UK & Europe segment, £913.1m (2019: £734.9m) for the US Government
within the Americas segment, £703.8m (2019: £597.5m) for the Australian Government within the AsPac segment and £237.2m (2019:
£255.5m) for the Government of the United Arab Emirates within the Middle East segment.
Segmental information
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 including right of use assets, inventories, trade and other receivables (excluding corporation tax
recoverable) and any retirement benefit asset. Segment liabilities comprise trade and other payables, lease liabilities, provisions and
retirement benefit obligations.
The following is an analysis of the Group’s revenue, results, assets and liabilities by reportable segment:
Year ended 31 December 2020
Revenue
Result
Trading Profit/(Loss) from operations*
Amortisation and impairment of intangibles
arising on acquisition
Operating profit/(loss) before exceptional items
Exceptional profit on disposal of subsidiaries and operations
Other exceptional operating items**
Operating profit/(loss)
Investment revenue
Finance costs
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
1,777.4
1,064.3
718.9
324.2
–
3,884.8
69.6
100.8
32.6
(2.0)
(7.0)
67.6
11.0
1.0
79.6
93.8
–
1.4
95.2
–
32.6
–
(0.8)
31.8
13.9
–
13.9
–
–
13.9
(41.2)
175.7
–
(41.2)
–
(0.1)
(41.3)
(9.0)
166.7
11.0
1.5
179.2
1.9
(27.8)
153.3
(18.9)
(0.4)
134.0
* 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. Included within Other exceptional operating items are total acquisition related costs of £2.4m.
Annual Report and Accounts 2020
Serco Group plc
171
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
4. Segmental information continued
Year ended 31 December 2020
Supplementary information
Share of profits in joint ventures and associates,
net of interest and tax
Depreciation of plant, property and equipment
Impairment of plant, property and equipment
Total depreciation and impairment of plant,
property and equipment
Amortisation of intangible assets arising on acquisition
Amortisation of other intangible assets
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
12.7
(61.6)
(0.7)
–
(22.5)
–
(62.3)
(22.5)
(2.0)
(0.7)
(2.7)
18.7
750.9
769.6
(7.0)
(0.6)
(7.6)
–
675.3
675.3
–
(9.6)
–
(9.6)
–
(3.0)
(3.0)
0.1
274.4
274.5
–
(7.6)
–
(7.6)
–
(0.4)
(0.4)
0.4
87.9
88.3
–
(8.1)
–
(8.1)
–
(9.3)
(9.3)
–
174.3
174.3
(626.6)
(185.0)
(200.0)
(66.7)
(170.3)
12.7
(109.4)
(0.7)
(110.1)
(9.0)
(14.0)
(23.0)
19.2
1,962.8
1,982.0
428.3
2,410.3
(1,248.6)
(446.7)
(1,695.3)
*** 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.
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
1,361.7
915.7
AsPac
£m
621.4
Middle East
£m
Corporate
£m
Total
£m
349.6
–
3,248.4
48.2
(1.2)
47.0
(24.8)
22.2
91.7
(6.2)
85.5
15.3
100.8
31.2
(0.1)
31.1
(3.0)
28.1
13.9
–
13.9
–
13.9
(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.
172 Serco Group plc
Annual Report and Accounts 2020
Year ended 31 December 2019
Supplementary information
Share of profits in joint ventures and associates, net of
interest and tax
Depreciation of plant, property and equipment
Impairment of plant, property and equipment
Total depreciation and impairment of plant, property
and equipment
Amortisation of intangible assets arising on acquisition
Amortisation of other intangible assets
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
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Corporate
£m
Total
£m
27.3
(37.3)
(18.9)
(56.2)
(1.2)
(0.3)
(1.5)
22.4
645.4
667.8
–
(17.4)
–
(17.4)
(6.2)
(1.2)
(7.4)
–
757.5
757.5
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)
(234.0)
(151.8)
(103.0)
(160.3)
27.5
(74.4)
(18.9)
(93.3)
(7.5)
(18.1)
(25.6)
23.6
1,893.8
1,917.4
163.2
2,080.6
(1,185.4)
(352.3)
(1,537.7)
*** 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.
**** During the year ended 31 December 2020, but within twelve months of the date of the acquisition, the Group finalised fair value measurements for a number of
contracts, which had previously been provisionally valued, associated with the acquisition of Naval Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting
in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value can be found in note 7.
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
2020
100%
100%
100%
2020
24.5%
50%
2019
100%
100%
100%
2019
24.5%
50%
A full list of subsidiaries and related undertakings is included in the Appendix on pages 217 to 219 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 £15.5m (2019: £17.6m) and £1.5m (2019: £7.8m)
respectively were received from these companies in the year. The decrease in dividends received is mainly due to reduced profits from
joint ventures, most notably in respect of MSHCL, where passenger volumes in particular were negatively impacted by Covid–19.
On 31 May 2020, the Group disposed of its 33% interest in Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP (together
“Viapath”). As part of the transaction, the Group received an amount of £11.0m for its share in the net assets of the joint venture. At the
same time as disposing of the Group’s interest in Viapath, the Group recovered a loan into the joint venture of £1.2m and £2.9m of profit
share which was previously considered to be irrecoverable.
As announced on 2 November 2020, the Ministry of Defence notified the Group that it would be exercising its ability to terminate services
provided by the Group through AWEML on 30 June 2021. The terms of the exit are in the process of being negotiated and since the full
services under the contract have not been completed, judgement has been taken in relation to the milestone achievements which are to
be agreed and an estimate of the costs incurred in delivering services which cannot be recovered. The agreement in respect of both of
these items are to be finalised, however the final outcome is not expected to have a material impact on the Group’s Financial Statements.
Annual Report and Accounts 2020
Serco Group plc
173
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
6. Joint ventures and associates continued
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 2020
Summarised financial information
Revenue
Operating profit/(loss)
Net investment revenue/(finance cost)
Income tax (charge)/credit
Profit/(loss) from operations
Other comprehensive income
Total comprehensive income/(expense)
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
1,106.8
150.7
346.5
18.6
75.0
0.3
(14.0)
61.3
–
61.3
668.1
191.4
(169.2)
(665.9)
24.4
24.5%
6.0
(5.7)
(0.1)
1.5
(4.3)
5.3
1.0
19.1
43.2
(29.6)
(8.5)
24.2
50.0%
12.1
15.5
–
(2.7)
12.8
2.7
15.5
173.3
68.5
(56.3)
(167.4)
18.1
–
18.1
(0.1)
–
–
(0.1)
–
(0.1)
0.1
1.8
(0.8)
–
1.1
–
1.1
* Total results of the entity multiplied by the respective proportion of Group ownership.
Cash and cash equivalents
Current financial liabilities excluding trade and other
payables and provisions
Non current financial liabilities excluding trade and
other payables and provisions
Depreciation and amortisation
Interest income
Interest expense
AWEML
(100% of results)
£m
MSHCL
(100% of results)
£m
Group portion of
material joint
ventures and
associates*
£m
Group portion of
other joint
venture
arrangements and
associates*
£m
119.8
22.5
40.6
(0.6)
–
–
0.3
–
(5.5)
(7.7)
(6.1)
0.1
(0.2)
(2.9)
(3.8)
(3.1)
0.1
(0.1)
0.8
0.1
–
(0.4)
–
–
Total
£m
365.1
15.4
–
(2.7)
12.7
2.7
15.4
173.4
70.3
(57.1)
(167.4)
19.2
–
19.2
Total
£m
41.4
(2.8)
(3.8)
(3.5)
0.1
(0.1)
* Total results of the entity multiplied by the respective proportion of Group ownership.
The Group’s share of liabilities within joint ventures is £224.5m. Of this, an amount of £163.1m relates to a defined benefit pension
obligation, against which Serco is fully indemnified, and a further £49.7m is trade and other payables which arise as part of the day to day
operations carried out by those entities. Other than liabilities associated with leases, 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 9
January 2021 (2019: 52 week period ended 4 January 2020). 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.
174 Serco Group plc
Annual Report and Accounts 2020
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
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: 2020
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
1.9%
1.9%
1.5%
23.0
25.1
£m
(2,597.7)
1,931.8
(665.9)
–
–
665.9
–
MSHCL
2.8%
1.9%
2.4%
N/A
N/A
£m
(450.5)
233.8
(216.7)
86.7
130.0
–
–
* 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.
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
95.4
0.8
(18.8)
77.4
–
77.4
510.0
186.8
(163.0)
(509.3)
24.5
24.5%
6.0
177.9
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
350.0
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 2020
Serco Group plc
175
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
6. Joint ventures and associates continued
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
AWEML
(100% of results)
£m
MSHCL
(100% of results)
£m
101.3
(7.6)
(0.1)
–
0.8
39.9
(7.3)
(12.5)
(1.6)
0.2
Group portion of
material joint
ventures and
associates*
£m
Group portion of
other joint
venture
arrangements and
associates*
£m
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.
Key disclosures with respect of the defined benefit pension schemes of material joint ventures and associates:
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
£m
(2,213.6)
1,716.6
(497.0)
–
–
497.0
–
3.1%
2.2%
2.1%
N/A
N/A
£m
(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.
7. Acquisitions
The Group made no acquisitions during the period. On 17 December 2020, the Group announced it had reached an agreement to acquire
Facilities First Australia Holdings Pty Limited (“FFA") and the acquisition was completed on 4 January 2021 for consideration of A$52.6m,
subject to standard net working capital adjustments. Acquisition costs totalling £0.9m have been incurred during 2020 in respect of the
FFA acquisition and have been treated as exceptional in accordance with the Group’s accounting policies. Further details on this post year
end transaction are provided in note 38.
On 16 February 2021, the Group announced that it had agreed to acquire Whitney, Bradley & Brown, Inc (“WBB”), a leading provider of
advisory, engineering and technical services to the US Military, for $295m from an affiliate of H.I.G. Capital. The acquisition will increase the
scale, breadth and capability of Serco’s North American defence business and will give Serco a strong platform from which to address all
major segments of the US defence services market. The acquisition will be immediately accretive to earnings and will be funded through
existing debt facilities; it is expected to complete in the second quarter of 2021, subject to regulatory approvals. As the transaction is yet
to complete, the financial results and impact of the transaction have not been recognised in these Consolidated Financial Statements.
During the period the Group finalised the integration of Naval Systems Business Unit (“NSBU"), completed the analysis of balances
acquired as part of the transaction and made closing net working capital settlements with the vendor. Two main activities were undertaken
that resulted in adjustments to the fair value of acquired assets and liabilities. There were no material impacts to the post-acquisition
income statement. Firstly, the Group finalised its review of provisional working capital balances which resulted in fair value changes to both
receivables and payables. Secondly, one of the acquired fixed price contracts required a revision to the provisional estimate of the costs
required to complete the contract. The estimated cost of completion was increased as a result of a technical defect relating to machine
parts that had been in place at the acquisition date and which became known through initial testing that completed during the first six
months of 2020. As a result of these activities, the Group revised the fair values of the acquired assets and liabilities as at the transaction
date as follows:
176 Serco Group plc
Annual Report and Accounts 2020
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
Total consideration
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Fair value as
originally stated
£m
Fair value
adjustment*
£m
Revised
fair value
£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
3.0
–
–
(1.8)
–
–
(0.5)
–
0.7
–
0.7
0.7
118.3
52.6
3.6
44.8
0.4
0.9
(31.2)
(2.4)
187.0
184.3
2.7
187.0
* The fair value adjustments recorded represent items that were in existence at the acquisition date and therefore have no impact on profits or losses subsequent to
acquisition.
The total impact of acquisitions to the Group’s cash flow position during the current period was as follows:
Deferred consideration paid in respect of historic acquisition:
Carillion health contracts
NSBU
Anglia Support Partnership
Net cash outflow in relation to acquisitions
Exceptional acquisition related costs:
NSBU
Facilities First
Net cash outflow related to acquisition costs
Net cash impact in the period on acquisitions
£m
0.9
2.7
1.3
4.9
1.5
0.2
1.7
6.6
Costs associated with the acquisition of NSBU which were not directly related to the issue of shares or arrangement of the acquisition
facility and costs associated with the acquisition of FFA are shown as exceptional costs in the Group’s Consolidated Income Statement for
the year. The total acquisition related costs recognised in exceptional items for the year ended 31 December 2020 was £2.4m, of which, as
noted above, £1.7m were paid during the year.
8. Disposals
On 31 May 2020, the Group disposed of its 33% interest in Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP (together
“Viapath”). As part of the transaction, the Group received an amount of £11.0m for its share in the net assets of the joint venture. A
summary of the disposal is as follows:
Consideration
Less: Investment in joint venture disposed of
Profit on disposal
The net cash inflow arising on disposal and the impact on both Net Debt and Adjusted Net Debt is:
Consideration
Less: Costs associated with the disposal
Net cash flow on disposal
Viapath
£m
11.0
–
11.0
Viapath
£m
11.0
–
11.0
As well as consideration for its share of the net assets of Viapath, the Group also received £2.9m for the Group’s share of profits and £1.2m
for loans due from Viapath.
Annual Report and Accounts 2020
Serco Group plc
177
Financial StatementsCorporate Governance
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 2020
Key sectors
Defence
Justice & Immigration
Transport
Health
Citizen Services
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous
periods
Revenue recognised at a point in time
Products and services transferred over time
Year ended 31 December 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
196.6
393.7
143.6
245.9
797.6
725.2
–
84.7
–
254.4
1,777.4
1,064.3
133.3
328.1
7.7
101.4
148.4
718.9
27.0
–
194.2
10.0
93.0
1,082.1
721.8
430.2
357.3
1,293.4
324.2
3,884.8
1.1
14.2
1,762.1
–
–
1,064.3
1,777.4
1,064.3
(0.8)
0.8
718.9
718.9
–
–
324.2
0.3
15.0
3,869.5
324.2
3,884.8
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
(0.4)
2.6
619.2
621.4
28.1
–
215.3
30.2
76.0
349.6
–
–
349.6
349.6
909.0
591.5
478.2
384.9
884.8
3,248.4
2.9
21.6
3,223.9
3,248.4
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.
In assessing the future transaction price, the judgements of most relevance are the future term over which the transaction price is
calculated and the estimation of variable revenue to be included.
Where a contract with a customer includes, within the term of the committed contract, provisions for price-rebasing or a provision for
market testing, revenue beyond these is included to the extent that there are no indicators which suggest that the contract will not
continue past this point and it is highly probable that a significant reduction will not occur. Where there is a requirement for the Group, or a
customer, to enter into to a new contract, rather than continuing an existing contract, such an extension is not included for the purposes of
calculating future transaction price.
Additionally, the Group has a small subset of contracts that contain a termination for convenience clause, for example due to national
security considerations which are assumed by the Group not to be without cause. These contracts are considered to run for the full
intended term for the purpose of calculating the transaction price allocated to remaining performance obligations, other than instances
where the Group believes that termination will occur before the original contract end date.
Under the terms of certain contracts which the Group has with its customers, the Group’s compensation for providing those services is
based on volumes or other drivers of variable activity, such as additional activities awarded under existing contracts. These volumes are
not guaranteed, however based on historic volumes and the nature of the contracts in operation, such as the provision of asylum seeker
accommodation or passenger transport, Management are able to prepare a sufficiently reliable estimate of the minimum level of variable
178 Serco Group plc
Annual Report and Accounts 2020
revenue that is likely to be earned. As a result, variable revenue is included only to the level at which Management remain confident that a
significant reduction will not occur.
As part of the considerations around variable revenue, Management consider the impact that factors such as contractual performance,
anticipated demand and pricing (including indexation) may have on future revenue recognised. Management also considers whether there
are possible impacts from climate change and other environmental related risks, with certain sectors considered to be more at risk than
others, however no adjustment was identified in relation to existing contracts’ future revenue forecasts.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Within 1 year (2021)
Between 2 – 5 years (2022 – 2025)
5 years and beyond (2026+)
1,296.0
3,624.2
3,751.5
8,671.7
507.0
140.1
0.2
647.3
673.3
1,394.5
1,647.6
3,715.4
UK&E
£m
Americas
£m
AsPac
£m
Middle East
£m
Total
£m
2,699.4
5,298.4
5,544.4
223.1
139.6
145.1
507.8
13,542.2
10. Exceptional items
Exceptional items are items of financial performance that are outside normal operations and are material to the results of the Group either
by virtue of size or nature. As such, the items set out below require separate disclosure on the face of the income statement to assist in the
understanding of the underlying performance of the Group.
Other exceptional operating items
For the year ended 31 December
Exceptional items arising
Exceptional profit on disposal of subsidiaries and operations
Other exceptional operating items
Restructuring costs
Costs associated with UK Government review
Movement in other provisions and other items
Reversal of impairment in interest in joint venture and related loan balances
Costs associated with the acquisition of Naval Systems Business Unit
Costs associated with the acquisition of Facilities First Australia
Other exceptional operating items
Exceptional operating items
Exceptional tax
Total exceptional operating items net of tax
2020
£m
11.0
0.1
(1.3)
2.6
2.5
(1.5)
(0.9)
1.5
12.5
(0.4)
12.1
2019
£m
–
(12.8)
(25.2)
19.3
–
(4.7)
–
(23.4)
(23.4)
(2.7)
(26.1)
Exceptional items arising
As explained in note 8, the Group disposed of its interest in Viapath with effect from 31 May 2020. The Group had historically impaired its
investment in Viapath as it was not receiving any returns from this joint venture due to the level of investment being made back into the
business, therefore the carrying value of the Group’s investment in Viapath was nil. Following the announcement during the first half of
2020 that Viapath had been unsuccessful in the tender process to provide pathology services to five South East London hospitals as well as
associated GP surgeries, the Group exited the joint venture, selling its stake to the remaining two investors. In May 2020, the proceeds
received by the Group in exchange for its holding in the joint venture represents the profit on disposal of £11.0m.
At the same time as disposing of the Group’s interest in Viapath, certain historical balances were recovered which had previously been
impaired. Since the impairments associated with those balances were historically treated as exceptional items, the reversals of these
impairments have been treated consistently. The exceptional credit of £2.5m consists of the recovery of a loan from the Group into the
joint venture of £1.2m, the exceptional element of the recovery of profit share which was previously considered to be irrecoverable and the
reversal of impairment.
Other exceptional operating items
The Group recognised the final costs associated with the Strategy Review during 2019 and, on review, certain costs which had been
accrued but were not incurred were released back to exceptional operating items resulting in a credit to exceptional items of £0.1m during
2020 (2019: exceptional restructuring costs of £12.8m). Non-exceptional restructuring charges are incurred by the business as part of
normal operational activity, which in the year totalled £7.2m (2019: £8.9m) and were included within operating profit before exceptional
items.
There were exceptional costs totalling £1.3m (2019: £25.2m) associated with the UK Government reviews and the programme of Corporate
Renewal. These costs have historically been treated as exceptional and consistent treatment is applied in 2020. The 2019 costs included
£22.9m for the fine and associated costs which resulted from the SFO’s investigation into Serco companies.
Annual Report and Accounts 2020
Serco Group plc
179
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
10. Exceptional items continued
During 2019, the Group reached a legal settlement in relation to a commercial dispute which resulted in the release of a provision which
accounted for the majority of the £19.3m exceptional credit. The treatment of the release as exceptional was consistent with the
recognition of the charge associated with the same legal matter in 2014. During 2020, the Group reached an agreement with its insurer for
the reimbursement of £2.6m of legal fees associated with the matter and, consistent with the treatment of other associated amounts, this
has been treated as an exceptional credit.
The Group completed the acquisition of Naval Systems Business Unit (“NSBU”) from Alion Science and Technology in 2019. The
transaction and implementation costs incurred during 2020 of £1.5m (2019: £4.7m) have been treated as exceptional costs in line with the
Group’s accounting policy and the treatment of similar costs incurred during the year ended 31 December 2019. No further costs
associated with this acquisition are anticipated to be recognised as exceptional.
On 17 December 2020, the Group announced it has reached an agreement to acquire Facilities First Australia Holdings Pty Limited (“FFA”
or “Facilities First Australia”) and the acquisition was completed on 4 January 2021. Acquisition costs totalling £0.9m have been incurred
during 2020 in respect of the FFA acquisition and have been treated as exceptional in accordance with the Group’s accounting policies.
Exceptional tax
Exceptional tax for the year was a charge of £0.4m (2019: £2.7m charge) which arises on exceptional items within operating profit. This
charge arises mainly in connection the reimbursement of legal fees from our insurer. The charge is partially offset by tax deductions
related to the acquisition of Naval Systems Business Unit.
11. Operating profit
Operating profit is stated after charging/(crediting):
Year ended 31 December
Research and development costs
Profit on disposal of property, plant and equipment
Profit on early termination of leases
Loss on disposal of intangible assets
Depreciation and impairment of owned property, plant and equipment
Depreciation and impairment of leased property, plant and equipment
Amortisation and impairment of intangible assets – arising on acquisition
Amortisation, write down and impairment of intangible assets – other
Exceptional profit on disposal of subsidiaries and operations (note 8)
Staff costs (note 12)
Allowance for doubtful debts charged 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
2020
£m
1.8
(0.4)
(2.9)
0.6
16.2
93.9
9.0
14.0
11.0
1,753.9
1.9
0.3
(0.3)
5.6
(1.6)
2019
£m
0.6
(0.6)
(0.9)
0.4
17.7
75.6
7.5
18.1
–
1,573.6
2.9
1.1
(0.2)
5.5
(1.6)
* The lease payments recognised in operating profit are those which have not been recorded in accordance with IFRS16 Leases due to their status as either short-term
or low value.
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
Total non-audit fees
2020
£m
1.7
–
0.6
2.3
0.2
0.2
2019
£m
1.6
0.3
1.9
0.2
0.2
Fees payable to the Company’s Auditor for non-audit services to the Company are not required to be disclosed separately because the
Consolidated Financial Statements are required to disclose such fees on a consolidated basis.
Details of the Company’s policy on the use of auditors for non-audit services and how the auditor’s independence and objectivity was
safeguarded, are set out in the Audit Committee Report on page 94. No services were provided pursuant to contingent fee arrangements.
180 Serco Group plc
Annual Report and Accounts 2020
12. Staff costs
The average number of persons employed by the Company (including Executive Directors) was:
Year ended 31 December
UK & Europe
Americas
AsPac
Middle East
Unallocated
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2020
number
20,649
8,014
11,740
4,198
729
45,330
2019
number
21,626
6,795
10,441
4,340
727
43,929
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)
Other dividends received
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
15. Tax
15 (a) Income tax recognised in the income statement
Year ended 31 December
Current income tax
Current income tax charge/(credit)
Adjustments in respect of prior years
Deferred tax
Current year (credit)/charge
Adjustments in respect of prior years
2020
£m
1,547.3
111.0
84.4
1,742.7
11.2
1,753.9
2019
£m
1,384.2
103.0
74.8
1,562.0
11.6
1,573.6
2020
£m
0.2
1.2
0.4
0.1
1.9
2020
£m
9.5
15.3
2.1
0.2
27.1
0.7
27.8
Before
exceptional
items
2020
£m
Exceptional
items
2020
£m
41.8
(1.3)
(23.5)
1.9
18.9
0.4
–
–
–
0.4
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
Total
2020
£m
42.2
(1.3)
(23.5)
1.9
19.3
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
Total
2019
£m
21.6
(0.2)
8.5
0.2
30.1
Annual Report and Accounts 2020
Serco Group plc
181
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
15. Tax continued
The tax expense for the year can be reconciled to the profit in the Consolidated Income Statement as follows:
Year ended 31 December
Profit before tax
Tax calculated at a rate of 19.00% (2019: 19.00%)
Expenses not deductible for tax purposes*
UK unprovided deferred tax**
Other unprovided deferred tax
Effect of the use of unrecognised tax losses
Recognition of previously unrecognised UK 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
Before
exceptional
items
2020
£m
Exceptional
items
2020
£m
Before
exceptional
items
2019
£m
Total
2020
£m
Exceptional
items
2019
£m
140.8
12.5
153.3
104.1
(23.4)
26.7
6.5
(4.2)
2.5
(1.1)
(9.5)
–
7.2
–
(1.4)
0.6
(5.9)
(2.5)
18.9
2.4
(0.2)
(1.9)
–
–
–
–
0.1
–
–
–
–
–
0.4
29.1
6.3
(6.1)
2.5
(1.1)
(9.5)
–
7.3
–
(1.4)
0.6
(5.9)
(2.5)
19.3
19.7
0.9
4.4
3.0
–
(0.9)
(0.2)
5.9
(0.2)
(3.1)
–
3.0
(5.1)
27.4
(4.4)
4.4
2.1
–
–
–
–
0.6
–
–
–
–
–
2.7
Total
2019
£m
80.7
15.3
5.3
6.5
3.0
–
(0.9)
(0.2)
6.5
(0.2)
(3.1)
–
3.0
(5.1)
30.1
* 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.
*** Included within adjustments in respect of prior years is a charge of £4.9m being an immaterial adjustment in the current year related to the deferred tax impact of the
derecognition of balance sheet liabilities recognised in retained earnings on implementation of IFRS16 Leases in 2019.
The income tax charge for the year is based on the UK statutory rate of corporation tax for the period of 19.00% (2019: 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
Deferred tax
Relating to cash flow hedges
Taken to retirement benefit obligations reserve
2020
£m
–
(5.9)
(5.9)
16. Deferred tax
Deferred income taxes are calculated in full on temporary differences under the liability method using local substantively enacted
tax rates.
The movement in net deferred tax assets during the year was as follows:
At 1 January – asset
IFRS16 restatement
Opening asset restated
Income statement (credit)/charge*
Items recognised in equity and in other comprehensive income
Arising on acquisition
Exchange differences
At 31 December – asset
2020
£m
(37.2)
–
(37.2)
(21.6)
5.9
–
(3.4)
(56.3)
2019
£m
0.1
2.7
2.8
2019
£m
(39.5)
(5.1)
(44.6)
8.7
(2.8)
1.5
–
(37.2)
*
Included within the income statement (credit)/charge is a charge of £4.9m being an immaterial adjustment in the current year related to the deferred tax impact of
the derecognition of balance sheet liabilities recognised in retained earnings on implementation of IFRS16 Leases in 2019.
182 Serco Group plc
Annual Report and Accounts 2020
The movement in deferred tax assets and liabilities during the year was as follows:
At 1 January 2020
Charged/(credited) to income statement (note 15a)*
Items recognised in equity and in other
comprehensive income (note 15b)
Reclassification
Exchange differences
At 31 December 2020
Temporary
differences
on assets/
intangibles
£m
Share based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
24.4
2.8
–
–
(1.7)
(15.6)
(6.2)
–
(2.0)
(0.9)
6.8
–
5.9
2.0
0.1
Tax
losses
£m
(21.0)
(10.1)
–
–
–
Other
temporary
differences
£m
(29.9)
(9.4)
–
–
(1.0)
OCPs
£m
(1.9)
1.3
–
–
0.1
Total
£m
(37.2)
(21.6)
5.9
–
(3.4)
25.5
(24.7)
14.8
(0.5)
(31.1)
(40.3)
(56.3)
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*
Included within other temporary differences is a charge of £4.9m being an immaterial adjustment in the current year related to the deferred tax impact of the
derecognition of balance sheet liabilities recognised in retained earnings on implementation of IFRS16 Leases in 2019.
Other temporary differences include amounts such as provisions and accruals which, under certain tax laws, are only allowable when
expended.
The reclassification between categories in the year reflects payments in connection with employees which are considered more akin to
employee benefits than retirement benefit schemes.
The movement in deferred tax assets and liabilities during the previous year was as follows:
Temporary
differences
on assets/
intangibles
£m
Share based
payment and
employee
benefits
£m
Retirement
benefit
schemes
£m
Derivative
financial
instruments
£m
OCPs
£m
At 1 January 2019
IFRS16 restatement
Opening asset restated
Charged/(credited) to income statement
(note 15a)
Items recognised in equity and in other
comprehensive income (note 15b)
Arising on acquisition
Exchange differences
At 31 December 2019
24.6
(5.1)
19.5
4.1
–
2.4
(1.6)
24.4
(13.7)
–
(13.7)
(1.6)
–
(0.9)
0.6
(15.6)
9.9
–
9.9
(0.4)
(2.7)
–
–
6.8
(7.4)
–
(7.4)
5.4
–
–
0.1
(1.9)
–
–
–
–
(0.1)
–
0.1
–
Tax
losses
£m
(20.6)
–
(20.6)
(0.4)
–
–
–
Other
temporary
differences
£m
(32.3)
–
(32.3)
1.6
–
–
0.8
Total
£m
(39.5)
(5.1)
(44.6)
8.7
(2.8)
1.5
–
(21.0)
(29.9)
(37.2)
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax
liabilities and when the deferred income taxes relate to the same fiscal authority. The following is the analysis of the deferred tax balances
(after offset) for financial reporting purposes:
Deferred tax liabilities
Deferred tax assets
2020
£m
26.9
(83.2)
(56.3)
2019
£m
26.7
(63.9)
(37.2)
As at the balance sheet date, the UK has a potential deferred tax asset of £189.9m (2019: £180.8m) available for offset against future profits.
A deferred tax asset has currently been recognised of £30.6m (2019: £21.1m). Recognition has been based on forecast future taxable
profits. Due to the history of tax losses within the UK, no deferred tax asset has been recognised in respect of the remaining asset
(net £159.3m) due to the current absence of sufficient convincing evidence of further improvements in the UK profit forecast. Measures
enacted during 2016 cut the future tax rate from April 2020 from 19% to 17%. However, the March 2020 Budget announced that a rate of
19% would continue to apply with effect from 1 April 2020 and this change was substantially enacted on 17 March 2020. These measures
increase the Group’s future current tax charge accordingly. The deferred tax balance at 31 December 2020 has been calculated reflecting
the increased rate of 19%.
Losses of £0.1m (2019: £0.1m) expire within 5 years, losses of £0.5m (2019: £0.1m) expire within 6-10 years, losses of £0.7m (2019: £0.7m)
expire within 20 years and losses of £1,052.3m (2019: £1,063.9m) may be carried forward indefinitely.
Annual Report and Accounts 2020
Serco Group plc
183
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
17. Earnings per share
Basic and diluted earnings per ordinary share (EPS) have been calculated in accordance with IAS33 Earnings per Share.
The calculation of the basic and diluted EPS is based on the following data:
Number of shares
Weighted average number of ordinary shares for the purpose of basic EPS
Effect of dilutive potential ordinary shares: Shares under award
Weighted average number of ordinary shares for the purpose of diluted EPS
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
2020
£m
133.8
–
133.8
133.8
(12.5)
0.4
121.7
–
121.7
18. Goodwill
At 1 January 2019
Exchange differences
Acquisitions
Fair value adjustment*
At 31 December 2019*
Exchange differences
At 31 December 2020
2020
millions
1,229.1
25.2
1,254.3
Earnings
2019
£m
50.4
–
50.4
50.4
23.4
2.7
76.5
–
76.5
Accumulated
impairment losses
£m
(339.6)
7.8
–
–
(331.8)
7.0
(324.8)
Per share
amount
2020
pence
10.89
(0.22)
10.67
10.89
(1.02)
0.03
9.90
(0.20)
9.70
Cost
£m
919.2
(31.5)
115.3
3.0
1,006.0
(11.6)
994.4
2019
millions
1,171.4
27.6
1,199.0
Per share
amount
2019
pence
4.31
(0.10)
4.21
4.31
2.00
0.23
6.54
(0.15)
6.39
Carrying
amount
£m
579.6
(23.7)
115.3
3.0
674.2
(4.6)
669.6
Movements in the balance since the prior year end can be seen as follows:
UK & Europe
Americas
AsPac
Middle East
Goodwill
balance
1 January
2020*
£m
183.2
379.1
101.7
10.2
674.2
Exchange
differences
2020
£m
1.2
(12.4)
6.9
(0.3)
(4.6)
Goodwill
balance
31 December
2020
£m
Headroom on
impairment
analysis
2020
£m
Headroom on
impairment
analysis
2019*
£m
184.4
366.7
108.6
9.9
669.6
688.5
658.3
328.0
103.2
799.2
417.3
162.7
63.3
1,778.0
1,442.5
* During the year ended 31 December 2020, but within twelve months of the date of the acquisition, the Group finalised fair value measurements for a number of
contracts, which had previously been provisionally valued, associated with the acquisition of Naval Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting
in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value can be found in note 7.
184 Serco Group plc
Annual Report and Accounts 2020
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 2019 is predominantly due to higher forecast cashflows as the Group continues to forecast
growth across all divisions which in most instances outweighs the increase in discount rates. This is not the case in the UK & Europe CGU,
where rising discount rates have meant a reduction in headroom, whilst the impact of increased future cash flows in the AsPac CGU is
enhanced by a marginal reduction in discount rates.
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The key quantifiable assumptions applied in the impairment review are set out below:
UK & Europe
Americas
AsPac
Middle East
Discount
rate
2020
%
10.2
10.7
9.4
12.1
Discount
rate
2019
%
9.4
10.4
9.7
11.9
Terminal
growth
rates
2020
%
1.9
2.5
2.2
1.6
Terminal
growth
rates
2019
%
1.7
2.2
2.3
1.8
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.
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.
Short term growth rates
The annual impairment test is performed immediately prior to the year end, based initially on five-year cash flow forecasts approved by
senior Management. Short term revenue growth rates used in each CGU five-year plan are based on internal data regarding our current
contracted position, the pipeline of opportunities and forecast growth for the relevant market.
Short term profitability and cash conversion is based on our historic experiences and a level of judgement is applied to expected changes
in both. Where businesses have been poor performers in recent history, turnaround has only been assumed where a detailed and
achievable plan is in place and all forecasts include cash flows relating to contracts where onerous contract provisions have been made.
As explained in note 9, Management consider certain sectors in which the Group operates to be more exposed to environmental risks
than others. For example, changes in consumer attitudes to aviation or the use of private vehicles, may have an impact on the Group’s
Transport contracts. Currently, no adjustment to existing contracts is required, although Management will continue to monitor the
potential impact of environmental risks and will include these in future analysis as required.
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, as has a degree of estimation uncertainty in the cash flows associated with each CGU of up
to 10% in the final year of the plan. Performing a sensitivity analysis on short term growth rates is not a numerical exercise, as growth rates
are based on known opportunities and the likelihood of those opportunities being won and turned into resulting cash flows. In order to
model a sensitivity scenario for short term growth rates, Management have calculated the growth rates over the five years of cash flows,
restricted these to be equivalent to the long term growth rate, and assessed what change in discount rate would be required to have
resulted in the same reduction in value in use. In doing so, Management have identified increases in discount rates of between 1.0% and
3.5% across CGUs. No impairment results from these changes even when these increases in discount rates, which reflect a reduction in
short term growth rates, are combined with the additional 1% increase in discount rates and 1% reduction in terminal growth rates.
Annual Report and Accounts 2020
Serco Group plc
185
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
19. Other intangible assets
Acquisition related
Other
Customer
relationships
£m
Licences
and franchises
£m
Software and IT
£m
Internally
generated
development
expenditure
£m
Cost
At 1 January 2020
Additions – internal development
Additions – external
Disposals
Reclassification from property, plant and equipment
Exchange differences
At 31 December 2020
Accumulated amortisation and impairment
At 1 January 2020
Amortisation charge – internal development
Amortisation charge – external
Disposals
Reclassification from property, plant and equipment
Exchange differences
At 31 December 2020
Net book value
At 31 December 2020
99.1
–
–
(1.5)
–
(2.4)
95.2
38.4
–
9.0
(1.2)
–
(1.4)
44.8
50.4
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
123.6
0.9
7.4
(1.8)
0.4
1.4
131.9
90.4
2.2
9.9
(1.5)
0.2
1.0
102.2
56.9
–
–
–
–
–
56.9
54.3
1.9
–
–
–
0.2
56.4
29.7
0.5
80.6
Acquisition related
Other
Customer
relationships
£m
Licences
and franchises
£m
Software and IT
£m
Internally
generated
development
expenditure
£m
Cost
At 1 January 2019
Arising on acquisition
Additions – internal development
Additions – external
Disposals
Reclassification (to)/from 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 (to)/from 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)
–
–
0.1
–
0.1
–
(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
33.2
Total
£m
279.6
0.9
7.4
(3.3)
0.4
(1.0)
284.0
183.1
4.1
18.9
(2.7)
0.2
(0.2)
203.4
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
2.6
96.5
Customer relationships are amortised over the average length of contracts acquired. The Group is carrying £50.4m (2019: £60.7m) 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 £9.0m (2019: £7.5m).
The net book value of internally generated intangible assets as at 31 December 2020 was approximately £0.5m (2019: £2.6m) in
development expenditure and £19.6m (2019: £20.7m) in software and IT.
186 Serco Group plc
Annual Report and Accounts 2020
20. Property, plant and equipment
Cost
At 1 January 2020
Additions
Reclassification (to)/from PPE category
Reclassifications to other intangible assets
Disposals
Exchange differences
At 31 December 2020
Accumulated depreciation and impairment
At 1 January 2020
Charge for the year – impairment
Charge for the year – depreciation
Reclassification (to)/from PPE category
Reclassifications to other intangible assets
Disposals
Exchange differences
At 31 December 2020
Net book value
At 31 December 2020
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
4.6
0.2
(0.2)
–
(0.3)
–
4.3
3.0
–
0.2
(0.2)
–
(0.2)
–
2.8
424.2
134.2
0.2
–
(78.2)
(0.9)
479.5
128.3
0.2
73.7
0.2
–
(60.2)
(0.6)
141.6
33.6
4.7
–
–
(6.3)
(0.1)
31.9
20.7
–
3.1
–
–
(6.3)
–
17.5
128.3
36.9
2.5
(0.4)
(34.4)
0.5
133.4
95.5
0.3
12.6
0.5
(0.2)
(14.0)
0.4
95.1
126.6
24.9
(2.5)
–
(12.2)
(0.4)
136.4
77.2
0.2
19.8
(0.5)
–
(9.5)
(0.4)
1.5
337.9
14.4
38.3
49.6
441.7
86.8
343.8
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Total
£m
717.3
200.9
–
(0.4)
(131.4)
(0.9)
785.5
324.7
0.7
109.4
–
(0.2)
(90.2)
(0.6)
The impairment charge for the year includes £0.2m (2019: £16.5m) charged against right of use assets arising in the year on newly entered
into leases on onerous contracts.
The additions for leased freehold land and buildings include £1.3m for dilapidation provisions and £0.3m credit for non cash
lease incentives.
Cost
At 1 January 2019
Opening adjustment – IFRS16
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
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
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
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
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
295.9
12.9
32.8
49.4
392.6
Annual Report and Accounts 2020
Serco Group plc
187
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
21. Inventories
Service spares, supplies & consumables
2020
£m
21.4
21.4
2019
£m
18.3
18.3
The categorisation of inventory has been updated in the year in order to better present the nature of the inventory held by the Group.
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
2020
£m
278.0
2.8
15.3
296.1
2019*
£m
264.5
3.8
19.2
287.5
* During the year ended 31 December 2020, but within twelve months of the date of the acquisition, the Group finalised fair value measurements for a number of
contracts, which had previously been provisionally valued, associated with the acquisition of Naval Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting
in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value can be found in note 7.
The Group’s Consolidated 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.
An Expected Credit Loss (ECL) is recognised against contract assets only when it is considered to be material and there is evidence that
the credit worthiness of a counterparty may render balances irrecoverable.
Movements in the period were as follows:
Capitalised bid and phase in costs
At 1 January
Additions
Amortisation
Reclassified from contract asset
Exchange differences
At 31 December
Total trade and other receivables held by the Group at 31 December 2020 amount to £338.8m (2019*: £346.4m).
Trade and other receivables: Non current
Trade receivables
Other investments
Prepayments
Security deposits
Other receivables
2020
£m
23.0
1.3
(6.8)
–
0.6
18.1
2020
£m
3.1
9.4
1.7
0.5
10.6
25.3
2019
£m
22.1
7.1
(6.7)
0.9
(0.4)
23.0
2019
£m
7.3
8.9
0.3
0.5
9.5
26.5
188 Serco Group plc
Annual Report and Accounts 2020
Other non current receivables include long term employee compensation plans, advances and other non-trade receivables.
Trade and other receivables: Current
Trade receivables
Prepayments
Amounts owed by joint ventures and associates
Security deposits
Other receivables
2020
£m
244.3
45.5
0.2
0.2
23.3
313.5
2019*
£m
254.2
42.1
0.6
0.2
22.8
319.9
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* During the year ended 31 December 2020, but within twelve months of the date of the acquisition, the Group finalised fair value measurements for a number of
contracts, which had previously been provisionally valued, associated with the acquisition of Naval Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting
in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value can be found in note 7.
Other receivables include amounts due from third parties, advances paid to suppliers, employee benefit schemes and other non-trade
receivables.
The management of trade receivables is the responsibility of the operating segments, although they report to Group on a monthly basis
on debtor days, debtor ageing and significant outstanding debts. The average credit period taken by customers is 23 days (2019*: 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, £63.5m is
due from agencies of the UK Government, the Group’s largest customer, £57.1m from the Australian Government, £42.7m from the
Government of the United Arab Emirates and £27.8m from the US Government. There are no other customers who represent more than
5% of the total balance of trade receivables. Of the trade receivables balance at the end of 2019, £51.8m was due from agencies of the UK
Government. The maximum potential exposure to credit risk in relation to trade receivables at the reporting date is equal to their carrying
value. The Group does not hold any collateral as security.
The Group does not have any material impairments associated with expected credit losses due to the sovereign credit rating of most
customers. Further specific impairments to trade receivables are based on estimated irrecoverable amounts and provisions on
outstanding balances greater than a year old unless there is firm evidence that the balance is recoverable. The total amount of these
impairments for the Group was £7.0m as of 31 December 2020 (2019: £5.5m).
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
2020
£m
175.5
49.1
5.5
21.2
(7.0)
244.3
2019*
£m
188.7
43.7
6.4
20.9
(5.5)
254.2
* During the year ended 31 December 2020, but within twelve months of the date of the acquisition, the Group finalised fair value measurements for a number of
contracts, which had previously been provisionally valued, associated with the acquisition of Naval Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Combinations, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting
in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value can be found in note 7.
Of the total overdue trade receivable balance, 73% (2019: 70%) 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
2020
£m
5.5
1.9
(0.2)
(0.2)
7.0
2019
£m
2.8
2.9
(0.1)
(0.1)
5.5
Included in the current other receivables balance is a further £0.2m (2019: £1.0m) due from agencies of the UK Government.
Annual Report and Accounts 2020
Serco Group plc
189
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
23. Cash and cash equivalents
Customer advance payments*
Other cash and short-term deposits
Total cash and cash equivalents
Sterling
2020
£m
–
243.6
243.6
Other
currencies
2020
£m
0.1
92.0
92.1
Total
2020
£m
0.1
335.6
335.7
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
* Customer advance payments totalling £0.1m (2019: £0.2m) are encumbered cash balances.
Cash and cash equivalents (which are presented as a single class of assets on the face of the balance sheet) comprise cash at bank and
other short-term highly liquid investments with a maturity of three months or less.
24. Contract liabilities, trade and other payables
Contract liabilities: Current
Deferred income
Contract liabilities: Non current
Deferred income
2020
£m
42.3
2020
£m
47.5
2019
£m
66.8
2019
£m
58.2
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 were no material items in the current portion of deferred income in 2019 which did not
unwind during the year.
Total trade and other payables held by the Group at 31 December 2020 amount to £543.3m (2019: £504.7m).
Trade and other payables: Current
Trade payables
Other payables
Accruals
2020
£m
99.6
134.5
299.8
533.9
2019*
£m
100.8
94.6
294.8
490.2
* During the year ended 31 December 2020, but within twelve months of the date of the acquisition, the Group finalised fair value measurements for a number of
contracts, which had previously been provisionally valued, associated with the acquisition of Naval Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Contributions, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting
in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value can be found in note 7.
The average credit period taken for trade purchases is 25 days (2019 : 26 days).
The range of costs included in the calculation of the average credit period taken has been updated in 2020 to better reflect the nature of
the Group’s purchases. The average credit period for 2019 has been adjusted to ensure that the calculation is consistent with the method
used for the current year. Using the prior year calculation method, the average credit period in 2020 would be 32 days (2019: 36 days).
Trade and other payables: Non current
Other payables
2020
£m
9.4
2019
£m
14.5
25. Leases
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 2020 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. Additionally, the Group does not have any leases where payments are variable. As explained in note 3, the
Group has a significant number of leases which include either termination or extension options, or both. The amounts included in amounts
payable under leases below represents Management’s best estimate of the mix of options likely to be exercised in line with current
operational requirements.
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.
190 Serco Group plc
Annual Report and Accounts 2020
The Group has not materially benefitted from the amendment to IFRS16 issued during the year which allows rent concessions to be
recognised directly in the income statement.
Minimum lease
payments
2020
£m
Minimum lease
payments
2019
£m
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
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
The following amounts are included in the Group’s Consolidated Financial Statements in respect of its leases:
Additions to right of use assets (including transitional adjustments)
Depreciation charge on right of use assets (including transitional adjustments)
Impairment of right of use assets
Net disposals of right of use assets
Net reclassifications (from)/to right of use assets
Net exchange differences on right of use assets
Carrying amount of right of use assets
Current lease liabilities
Non current lease liabilities
Capital element of lease repayments
Interest expense on lease liabilities
Profit on early termination of leases
Expenses relating to short-term or low value leases
Note
20
20
20
20
20
20
20
25
25
14
11
11
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
115.3
228.9
90.5
434.7
(32.1)
402.6
(109.3)
293.3
2020
£m
159.1
(93.5)
(0.4)
(20.7)
(2.0)
(0.3)
387.5
109.3
293.3
(100.8)
(9.5)
2.9
(5.6)
Total
2020
£m
89.7
64.9
124.6
109.6
388.8
(89.7)
299.1
93.3
226.5
69.7
389.5
(19.6)
369.9
(84.6)
285.3
2019
£m
516.5
(167.1)
(16.5)
(2.3)
(1.0)
(4.8)
345.3
84.6
285.3
(70.2)
(6.9)
0.9
(5.5)
Total
2019
£m
56.1
93.9
155.0
–
305.0
(56.1)
248.9
Included within amounts repayable within one year is £nil (2019: £50.0m) related to the draw down on the revolving credit facility. See note
23 for cash balances available.
Loans
Carrying amount
2020
£m
Fair value
2020
£m
Carrying amount
2019
£m
388.8
388.8
397.8
397.8
305.0
305.0
Fair value
2019
£m
304.9
304.9
The fair values are based on cash flows discounted using a market rate appropriate to the loan. All loans are held at amortised cost.
Annual Report and Accounts 2020
Serco Group plc
191
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
26. Loans continued
Analysis of Net Debt
The analysis below provides a reconciliation between the opening and closing positions in the balance sheet for liabilities arising from
financing activities together with movements in derivatives relating to the items included in Net Debt. There were no changes in fair value
noted in either the current or prior year.
Exchange
differences
£m
Non cash
movements
£m
At 31 December
2020
£m
Loans payable
Lease obligations
Liabilities arising from financing activities
Cash and cash equivalents
Derivatives relating to Net Debt
Net Debt
Loans payable
Lease obligations
Liabilities arising from financing activities
Cash and cash equivalents
Derivatives relating to Net Debt
Net Debt
At 1 January 2020
£m
(305.0)
(369.9)
(674.9)
89.5
1.0
(584.4)
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
(99.4)
100.8
1.4
244.4
–
245.8
Cash
flow
£m
(72.3)
70.2
(2.1)
28.4
–
26.3
* Acquisitions represent the net cash/(debt) acquired on acquisition.
27. Provisions
15.6
0.9
16.5
1.8
(5.7)
12.6
–
(134.4)
(134.4)
–
–
(134.4)
Acquisitions*
£m
Exchange
differences
£m
Non cash
movements
£m
–
–
–
0.4
–
0.4
6.7
4.7
11.4
(1.8)
(2.8)
6.8
0.1
(300.9)
(300.8)
–
–
(300.8)
Employee
related
£m
Property
£m
Contract
£m
Other
£m
At 1 January 2020
Charged to income statement – exceptional
Charged to income statement – other
Released to income statement – exceptional
Released to income statement – other
Included in the valuation of right of use asset
Utilised during the year
Unwinding of discount
Exchange differences
At 31 December 2020
Analysed as:
Current
Non current
62.1
0.1
25.5
(0.2)
(0.7)
–
(5.8)
–
2.2
83.2
20.9
62.3
83.2
13.3
–
5.5
–
(3.1)
1.3
(1.7)
0.2
0.2
15.7
5.8
9.9
15.7
16.5
–
5.7
–
(5.9)
–
(1.8)
–
–
14.5
13.8
0.7
14.5
69.9
1.0
6.0
–
(6.2)
–
(6.2)
–
0.1
64.6
178.0
21.6
43.0
64.6
62.1
115.9
178.0
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 June 2039.
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. Individual provisions are only discounted where the impact is assessed to be
significant. Currently, no contract provisions are discounted. Discount rates are calculated based on the estimate risk-free rate of interest
for the region in which the provision is located and matched against the ageing profit of the provision.
192 Serco Group plc
Annual Report and Accounts 2020
(388.8)
(402.6)
(791.4)
335.7
(4.7)
(460.4)
At 31
December
2019
£m
(305.0)
(369.9)
(674.9)
89.5
1.0
(584.4)
Total
£m
161.8
1.1
42.7
(0.2)
(15.9)
1.3
(15.5)
0.2
2.5
Other provisions are held for indemnities given on disposed businesses, legal and other costs that the Company expects to incur over an
extended period, in respect of past events for which a provision has been recorded. 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 twelve months
or over a longer period with the majority expected to be settled by 31 December 2023.
i
S
t
r
a
t
e
g
c
R
e
p
o
r
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28. Capital and other commitments
Capital expenditure contracted but not provided
Property, plant and equipment
Intangible assets
2020
£m
6.6
3.4
2019
£m
21.0
0.8
29. Contingent liabilities
The Company has guaranteed overdrafts, leases, and bonding facilities of its joint ventures and associates up to a maximum value of
£3.8m (2019: £4.3m). The actual commitment outstanding at 31 December 2020 was £3.8m (2019: £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 2020 was £247.9m
(2019: £257.5m).
Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the
reduction in Serco’s share price in 2013, the Group has continued to assess 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. Any outcome 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.
The Group is in discussion with HMRC regarding the application of certain employer duties from April 2017. The Group has received strong
legal opinion that a court is likely to find in the Group’s favour and therefore no provision has been recorded on the balance sheet in
respect of the matter. Due to the range of subjective outcomes it is not possible to disclose any meaningful quantitative amount
associated with any liability where a cost to the Group of nil continues to be the most likely outcome.
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 2020 and the comparison fair values for loans
and 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.
Annual Report and Accounts 2020
Serco Group plc
193
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
30. Financial risk management continued
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*
Amortised
cost
2020
£m
Fair value
– Level 2
2020
£m
Amortised
cost
2019
£m
Fair value
– Level 2
2019
£m
2020
£m
Financial assets
Financial assets – current
Cash and bank balances
Derivatives designated as FVTPL
Forward foreign exchange contracts
Derivative instruments in designated hedge accounting
relationships
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
Receivables
Trade receivables (note 22)
Other investments (note 22)
Security deposits (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)
Lease obligations (note 25)
Financial liabilities – non current
Derivative instruments in designated hedge accounting
relationships
Forward foreign exchange contracts
Financial liabilities at amortised cost
Loans (note 26)
Lease obligations (note 25)
335.7
–
335.7
89.5
–
–
244.3
0.2
0.2
3.1
9.4
0.5
–
–
4.5
4.5
–
–
–
–
–
–
–
–
244.3
0.2
0.2
3.1
9.4
0.5
(9.2)
(9.2)
(0.1)
(0.1)
–
–
254.2
0.2
0.6
7.3
8.9
0.5
–
–
(99.6)
(89.7)
(109.3)
–
–
–
(99.6)
(91.2)
(109.3)
(100.8)
(56.1)
(84.6)
–
(0.1)
(0.1)
–
(299.1)
(293.3)
–
–
(306.6)
(293.3)
(248.9)
(285.3)
2019
£m
89.5
2.9
0.1
254.2
0.2
0.6
7.3
8.9
0.5
–
2.9
0.1
–
–
–
–
–
–
(1.8)
(1.8)
(0.1)
(0.1)
–
–
–
–
–
–
(100.8)
(56.1)
(84.6)
–
(248.8)
(285.3)
* During the year ended 31 December 2020, but within twelve months of the date of the acquisition, the Group finalised fair value measurements for a number of
contracts, which had previously been provisionally valued, associated with the acquisition of Naval Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Contributions, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting
in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value can be found in note 7.
The Directors estimate that the carrying amounts of cash, trade receivables and trade payables approximate to their fair value due to the
short-term maturity of these instruments.
The fair values of loans and 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.
194 Serco Group plc
Annual Report and Accounts 2020
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
ii) Fair value of derivative financial instruments
The fair value of derivative financial instruments results in a net liability of £4.9m (2019: net assets of £1.1m) comprising current assets of
£4.5m (2019: £3.0m), current liabilities of £9.3m (2019: £1.9m) and non current liabilities of £0.1m (2019: £nil).
Forward foreign exchange contracts
Cross 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
1 January 2020
£m
1.1
1.1
(0.2)
(0.2)
(5.8)
(5.8)
Movement in fair
value of
derivatives
designated in
hedge accounting
relationships
£m
Movement in fair
value of
derivatives not
designated in
hedge accounting
relationships
£m
(5.1)
–
(5.1)
–
2.1
2.1
1 January 2019
£m
5.1
(1.0)
4.1
31 December
2020
£m
(4.9)
(4.9)
31 December
2019
£m
–
1.1
1.1
The fair value of financial liabilities recognised at fair value through profit and loss is £9.2m (2019: £1.8m) 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
Term loan facility
Currency
Sterling
Sterling
Currency
Sterling
Sterling
Amount
2020
£m
250.0
45.0
Amount
2019
£m
250.0
45.0
Utilised
for bonding
facility
2020
£m
–
–
Utilised
for bonding
facility
2019
£m
–
–
Drawn
2020
£m
–
45.0
Drawn
2019
£m
50.0
45.0
Total
facility
available
2020
£m
250.0
–
Total
facility
available
2019
£m
200.0
–
In October 2020, the Group issued $200m (£155.9m) of new US private placement notes. In total, the Group has £346.7m (2019: £213.0m) of
US private placement loan notes which will be repaid as bullet repayments between 2021 and 2032.
Annual Report and Accounts 2020
Serco Group plc
195
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
30. Financial risk management continued
ii) Maturity of financial liabilities
The Group’s financial liabilities will be settled on both a net and a gross basis over the remaining period between the balance sheet date
and the contractual maturity date. The amounts disclosed below are the contractual undiscounted cash flows based on the earliest date
on which the Group can be required to pay.
At 31 December 2020
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 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.
On demand or
within one year
£m
Between one and
two years
£m
Between two and
five years
£m
After
five years
£m
99.6
109.3
90.9
15.2
1,007.8
(1,003.2)
–
79.2
65.8
10.8
–
–
–
131.1
125.1
21.8
–
–
–
83.0
109.9
16.1
–
–
319.6
155.8
278.0
209.0
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
–
–
179.8
313.3
–
67.2
–
–
–
–
67.2
Total
£m
99.6
402.6
391.7
63.9
1,007.8
(1,003.2)
962.4
Total
£m
100.8
369.9
307.9
35.5
407.6
(398.2)
823.5
Gross cash flows in the table above relating to forward foreign exchange contracts total £1,003.2m (inflow) and £1,007.8m (outflow) on
demand or within one year (2019: £398.2m (inflow) and £407.6m (outflow) on demand or within one year).
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 2020, there were no material unhedged non-functional currency monetary
assets or liabilities, firm commitments or highly probable forecast transactions.
ii) Translational
Where possible the Group will raise external funding to match the currency profile of its foreign operations, in order to mitigate translation
exposure. If matched funding is not possible, currency derivatives may be used to protect against movements in foreign exchange.
iii) Hedge accounting
For the purposes of hedge accounting, hedges are classified as either fair value hedges, cash flow hedges or hedges of net investments in
foreign operations. Details of the Group’s accounting policies in relation to derivatives qualifying for hedge accounting under IFRS9 can be
seen in note 2.
The Group holds 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
2020
£m
(6.0)
–
6.0
2019
£m
(3.3)
0.3
3.0
All derivatives designated as cash flow hedges are highly effective and as at 31 December 2020, a net fair value loss of £0.2m (2019: £0.1m
gain) has been deferred in the hedging reserve. During the year to 31 December 2020, £0.1m (2019: £nil) of fair value losses were
transferred to the hedging reserve and £0.1m (2019: £0.1m) reclassified to the Consolidated Income Statement.
196 Serco Group plc
Annual Report and Accounts 2020
iv) Currency sensitivity
The Group’s currency exposures in respect of monetary items at 31 December 2020 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)
2020
£m
(0.1)
–
–
(0.1)
Equity gain/
(loss)
2020
£m
Pre-tax profits
gain/(loss)
2019
£m
Equity gain/
(loss)
2019
£m
–
–
(0.6)
(0.6)
0.8
0.1
–
0.9
–
–
(0.3)
(0.3)
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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
Floating rate
2020
£m
335.7
Fixed rate
2020
£m
–
Weighted average
interest rate
2020
%
–
Floating rate
2019
£m
89.5
Fixed rate
2019
£m
–
Weighted average
interest rate
2019
%
–
Financial liabilities
US Dollar loans
Other loans
Floating rate
2020
£m
–
45.0
45.0
Fixed rate
2020
£m
Weighted average
interest rate
2020
%
Floating rate
2019
£m
Fixed rate
2019
£m
Weighted average
interest rate
2019
%
346.7
–
346.7
4.6
1.5
4.3
–
95.0
95.0
213.0
–
213.0
5.3
2.1
4.3
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 £402.6m (2019: £369.9m) 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 £2.9m increase in pre-tax profit for the year to 31 December 2020 (2019:
decrease of £0.1m).
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 2020 (2019: 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 2020, the Company has issued guarantees in respect of certain joint ventures and associates as per note 29.
Annual Report and Accounts 2020
Serco Group plc
197
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
30. Financial risk management continued
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
2020
£m
(335.7)
388.8
402.6
715.0
2019*
£m
(89.5)
305.0
369.9
542.9
1,170.7
1,128.3
* During the year ended 31 December 2020, but within twelve months of the date of the acquisition, the Group finalised fair value measurements for a number of
contracts, which had previously been provisionally valued, associated with the acquisition of Naval Systems Business Unit which was completed 1 August 2019. As a
result, in accordance with IFRS3 Business Contributions, goodwill has been revised and the fair value of acquired assets and liabilities have been adjusted, resulting
in an amendment to their carrying value as presented as at 31 December 2019. Further information on the fair value can be found in note 7.
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 2021 are £8.0m (2020: £12.7m).
Among our non-contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The most recent full
actuarial valuation of this scheme was undertaken as at 5 April 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 2020 the estimated actuarial deficit of SPLAS was £20.0m (2019: £27.0m) based on the actuarial
assessment on the funding basis whereas the accounting valuation resulted in an asset of £114.6m (2019: £78.3m). 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.
The scheme was comfortably on track to achieve full funding on the funding basis by March 2028 as planned in the 2018 valuation. As a
scheme well hedged for inflation risk, the impact of RPI reform is significant at a £65m increase to liabilities. This will be partially offset by
changes to mortality assumptions and the scheme will work with the Trustees during the 2021 valuation process to address the impact on
the funding level.
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 £9.2m of these have already been made, with further amounts of £4.0m due in 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, inflation assumptions, 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.
198 Serco Group plc
Annual Report and Accounts 2020
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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, 46% of the scheme’s assets are annuity policies, 27% are Liability Driven Investments (LDIs) and the remainder is split between
equities, bonds, pooled investment funds 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 2.05% p.a. to 1.39% p.a. during 2020 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 comprised of four tranches, the last of which completed during 2020.
• Interest risk. The present values 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 values 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.
• Inflation risk. The present values of the defined benefit schemes’ liabilities are calculated to include the effect of inflation on future
purchasing power based on estimations around inflation rates. An increase in expected future inflation rates will increase the schemes’
liabilities.
• Salary risk. The present values 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.
The defined benefit schemes are grouped together as follows:
• Contract specific. These are pre-funded defined benefit schemes. 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 Employee Benefits 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 £0.3m (2019: £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
The Group agreed with the Trustees of SPLAS a staggered schedule for the £4.0m deficit recovery payment which originally fell due in
March 2020 during the period when the impact of Covid-19 on the Group’s cash flows was being evaluated. Following that review, the
outstanding instalments were paid in June 2020. A further £4.0m due for payment in March 2021 will be paid in tranches from January 2021
to March 2021 as a gesture of goodwill for the Trustees agreeing to the delayed payments in 2020.
Annual Report and Accounts 2020
Serco Group plc
199
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
31. Retirement benefit schemes continued
iii) Values recognised in total comprehensive income in the year
The amounts recognised in the Consolidated Financial Statements for the year are analysed as follows:
Recognised in the income statement
Current service cost – employer
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 cost/(income)
Included within the SOCI
Actual return on scheme assets
Less: interest income on scheme assets
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurements
Change in franchise adjustment
Change in members’ share
Actuarial profit on reimbursable rights
Total pension (loss)/gain 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 after exceptionals
Interest income on scheme assets – employer
Interest on franchise adjustment
Interest cost on scheme liabilities – employer
Finance income
Included within the SOCI
Actual return on scheme assets
Less: interest income on scheme assets
Effect of changes in demographic assumptions
Effect of changes in financial assumptions
Effect of experience adjustments
Remeasurements
Change in franchise adjustment
Change in members’ share
Actuarial profit on reimbursable rights
Total pension loss recognised in the SOCI
Contract
specific
2020
£m
Non contract
specific
2020
£m
1.2
0.1
1.3
(0.2)
(0.1)
0.4
0.1
3.5
1.5
5.0
(29.1)
–
27.8
(1.3)
Contract
specific
2020
£m
Non contract
specific
2020
£m
0.1
(0.3)
(0.2)
0.4
(3.6)
(0.6)
(4.0)
2.5
1.3
3.8
(0.2)
216.7
(29.1)
187.6
–
(170.0)
4.6
22.2
–
0.1
0.1
22.3
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)
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
(17.0)
Total
2020
£m
4.7
1.6
6.3
(29.3)
(0.1)
28.2
(1.2)
Total
2020
£m
216.8
(29.4)
187.4
0.4
(173.6)
4.0
18.2
2.5
1.4
3.9
22.1
Total
2019
£m
4.3
1.4
2.0
7.7
(37.9)
(0.1)
35.9
(2.1)
Total
2019
£m
128.1
(38.1)
90.0
39.9
(148.6)
(1.6)
(20.3)
2.0
1.2
3.2
(17.1)
200 Serco Group plc
Annual Report and Accounts 2020
iv) Balance sheet values
The assets and liabilities of the schemes at 31 December are:
Scheme assets at fair value
Equities
Bonds except LDIs
Pooled investment funds
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
Annuity policies
Fair value of scheme assets
Present value of scheme liabilities
Net amount recognised
Franchise adjustment*
Members’ share of deficit
Net retirement benefit asset
Net pension liability
Net pension asset
Net retirement benefit asset
Deferred tax liabilities
Net retirement benefit asset (after tax)
Contract
specific
2020
£m
Non contract
specific
2020
£m
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Total
2020
£m
55.6
367.3
62.8
408.3
1.6
14.7
690.2
1,579.4
(1,497.8)
1,600.5
(1,534.8)
11.3
4.1
–
–
1.6
4.1
–
21.1
(37.0)
(15.9)
8.4
5.6
(1.9)
(1.9)
–
(1.9)
–
(1.9)
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)
44.3
363.2
62.8
408.3
–
10.6
690.2
81.6
–
–
81.6
(33.0)
114.6
81.6
(15.2)
66.4
43.9
298.1
447.4
–
5.1
614.0
65.7
8.4
5.6
79.7
(34.9)
114.6
79.7
(15.2)
64.5
Total
2019
£m
54.7
302.2
447.4
1.7
9.2
614.0
1,408.5
(1,353.4)
1,429.2
(1,384.5)
55.1
–
–
55.1
(23.2)
78.3
55.1
(9.2)
45.9
44.7
5.8
3.8
54.3
(24.0)
78.3
54.3
(9.2)
45.1
Contract
specific
2019
£m
Non contract
specific
2019
£m
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
* The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.
The SPLAS Trust Deed gives the Group an unconditional right to a refund of surplus assets, assuming the full settlement of plan liabilities
in the event of a plan wind-up. Pension assets are deemed to be recoverable and there are no adjustments in respect of minimum funding
requirements as economic benefits are available to the Group either in the form of future refunds or, for plans still open to benefit accrual,
in the form of possible reductions in future contributions.
As required by IAS19 Employee Benefits, the Group has considered the extent to which the pension plan assets should be classified in
accordance with the fair value hierarchy of IFRS13 Fair Value Measurement. 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.
Annual Report and Accounts 2020
Serco Group plc
201
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
31. Retirement benefit schemes continued
Changes in the fair value of scheme liabilities
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 1 January 2020
Current service cost – employer
Current service cost – employee
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 2020
Changes in the fair value of scheme assets
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 1 January 2020
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 2020
Changes in the franchise adjustment
At 1 January 2019
Interest on franchise adjustment
Recognised in the SOCI
At 1 January 2020
Interest on franchise adjustment
Recognised in the SOCI
At 31 December 2020
Contract
specific
£m
Non contract
specific
£m
23.8
1.0
0.5
0.2
0.1
0.5
0.1
(0.6)
0.7
4.8
–
31.1
1.2
0.7
–
0.4
0.2
(0.4)
(0.4)
3.6
0.6
37.0
1,263.3
3.2
–
1.2
0.2
35.5
–
(54.9)
(40.6)
143.9
1.6
1,353.4
3.5
–
0.1
27.8
–
(52.4)
–
170.0
(4.6)
1,497.8
Contract
specific
£m
Non contract
specific
£m
17.6
0.4
0.1
(0.1)
0.6
0.3
(0.5)
2.3
20.7
0.2
0.1
(0.1)
0.5
0.3
(0.4)
(0.2)
21.1
1,334.3
37.6
–
(2.0)
5.5
0.3
(54.9)
87.7
1,408.5
29.1
–
(1.5)
7.9
0.2
(52.4)
187.6
1,579.4
Total
£m
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
4.7
0.7
0.1
28.2
0.2
(52.8)
(0.4)
173.6
(4.0)
1,534.8
Total
£m
1,351.9
38.0
0.1
(2.1)
6.1
0.6
(55.4)
90.0
1,429.2
29.3
0.1
(1.6)
8.4
0.5
(52.8)
187.4
1,600.5
Total
£m
3.7
0.1
2.0
5.8
0.1
2.5
8.4
202 Serco Group plc
Annual Report and Accounts 2020
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
scheme in which the Group participates. The significant actuarial assumptions with regards to the determination of the defined benefit
obligation are set out below.
The 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 decreased from 0.4% at 31 December 2019 to 0.3% at 31 December 2020, reflecting a decrease in potential market
distortions caused by the RPI reform proposals. For CPI, the Group increased the assumed difference between the RPI and CPI by 0.3% to
an average of 0.9% per annum for pre-retirement scheme participants.
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The average duration of the benefit obligation at the end of the reporting period is 17.4 years (2019: 16.8 years).
Main assumptions
Rate of salary increases
Rate of increase in pensions in payment
Rate of increase in deferred pensions
Inflation assumption – pre-retirement
Inflation assumption – post-retirement
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
2020
%
2019
%
2.50
2.40 (CPI) and 2.75 (RPI)
2.20 (CPI) and 2.80 (RPI)
2.00 (CPI) and 2.90 (RPI)
2.40 (CPI) and 2.75 (RPI)
1.40
2.70
2.20 (CPI) and 3.00 (RPI)
2.30 (CPI) and 3.30 (RPI)
2.20 (CPI) and 3.20 (RPI)
2.20 (CPI) and 2.70 (RPI)
2.10
2020
years
21.6
24.2
23.9
26.3
2019
years
21.6
24.1
23.8
26.2
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 2020 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
2020 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
2020
£m
(125.3)
142.4
103.7
(96.6)
3.7
(3.5)
59.8
2019
£m
(108.5)
122.9
88.9
(83.3)
3.2
(3.1)
48.6
Management acknowledges that the method used of presuming that all other assumptions remaining constant has inherent limitation
given that it is more likely for a combination of changes but highlights the value of each individual risk and is therefore a suitable basis for
providing this analysis.
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 2020 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% (2019: 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.
Annual Report and Accounts 2020
Serco Group plc
203
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
31. Retirement benefit schemes continued
31 (b) Defined contribution schemes
The Group paid employer contributions of £79.3m (2019: £69.2m) 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
1,223,380,637 (2019: 1,098,564,237) ordinary shares of 2p each at 1 January
Issued: 10,000,000 (2019: 124,816,400) ordinary shares of 2p
1,233,380,637 (2019: 1,223,380,637) ordinary shares of 2p each at 31 December
2020
£m
24.5
0.2
24.7
Number
2020
millions
1,223.4
10.0
1,233.4
2019
£m
22.0
2.5
24.5
Number
2019
millions
1,098.6
124.8
1,223.4
In the year, 10,000,000 (2019: 13,600,000) shares were issued to the Employee Share Ownership Trust to satisfy awards under the Group’s
share plan schemes.
In May 2019, the Company completed a placement of 111,216,400 new ordinary shares of 2p, each raising net proceeds of £138.7m. There
were no such placements in 2020.
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
2020
£m
462.9
0.2
463.1
2019
£m
327.9
135.0
462.9
The movement on the account in the current year is the release of an accrual for costs associated with the 2019 share issue that will no
longer be incurred.
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 held by the Serco Group plc Employee Share Ownership Trust
(ESOT) to satisfy awards under the Group’s share plan schemes. At 31 December 2020, the ESOT held 7,036,349 (2019: 4,805,612) shares
equal to 0.6% of the current allotted share capital (2019: 0.4%). The market value of shares held by the ESOT as at 31 December 2020 was
£8.4m (2019: £7.8m).
34 (d) Hedging and translation reserve
The hedging and translation reserve represents foreign exchange differences arising on translation of the Group’s overseas operations
and movements relating to cash flow hedges.
At 1 January 2019
Total comprehensive income for the year
At 1 January 2020
Total comprehensive income for the year
At 31 December 2020
Hedging
reserve
£m
Translation
reserve
£m
(0.1)
(0.1)
(0.2)
(0.2)
(0.4)
5.5
(33.3)
(27.8)
7.9
(19.9)
Total
£m
5.4
(33.4)
(28.0)
7.7
(20.3)
204 Serco Group plc
Annual Report and Accounts 2020
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
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2020
£m
4.9
4.6
0.9
0.8
11.2
2019
£m
2.0
7.8
1.4
0.4
11.6
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 subject only 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
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of shares
under award
2020
thousands
Weighted
average
exercise price
2020
£
Number of
shares under
award
2019
thousands
Weighted
average
exercise price
2019
£
11,468
11,582
(11)
(890)
22,149
Nil
Nil
Nil
Nil
Nil
–
11,832
–
(364)
11,468
Nil
Nil
–
Nil
Nil
The awards over shares outstanding at 31 December 2020 were all unvested and had a weighted average contractual life of 1.9 years (2019:
2.4 years).
In the year, seven grants were made, of which four were non-performance. The remaining three awards were performance based awards
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 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 awards subject only to non-market based performance conditions (such as the EPS and ROIC conditions) the
Black-Scholes model was used. The Black-Scholes model was also 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.
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
2020
£1.28
Nil
34.7%
2.5 years
0.00%
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 £1.15 (2019: £1.25).
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 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.
Annual Report and Accounts 2020
Serco Group plc
205
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
35. Share based payment expense continued
Performance Share Plan (PSP) continued
On the performance related awards, the performance measures are Earnings per Share (EPS), Total Shareholder Return (TSR) and Return
on Invested Capital (ROIC).
If options remain unexercised after a period of ten years from the date of grant, then the options expire.
Outstanding at 1 January
Exercised during the year
Lapsed during the year
Outstanding at 31 December
Number of
options or shares
under award
2020
thousands
Weighted
average
exercise price
2020
£
Number of
options or shares
under award
2019
thousands
Weighted
average
exercise price
2019
£
28,485
(5,834)
(3,560)
19,091
0.02
0.02
0.02
0.02
43,551
(10,906)
(4,160)
28,485
0.02
0.02
0.02
0.02
Of these awards, 6,459,304 (2019: 4,373,694) were exercisable at the end of the year. The awards outstanding at 31 December 2020 had a
weighted average contractual life of 6.2 years (2019: 6.9 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) the
Black-Scholes model was used. The Black-Scholes model was also 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 granted under the Performance Share Plan in the year.
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
Outstanding at 31 December
Number of shares
under award
2020
thousands
Weighted
average
exercise price
2020
£
Number of
shares under
award
2019
thousands
Weighted
average
exercise price
2019
£
3,380
594
(1,928)
2,046
Nil
Nil
Nil
Nil
5,021
496
(2,137)
3,380
Nil
Nil
Nil
Nil
The awards over shares outstanding at 31 December 2020 and 2019 were all unvested and had a weighted average contractual life of 1.3
years (2019: 1.0 years).
There were 593,920 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 the 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
2020
£1.29
Nil
34.5%
2.6 years
-0.03%
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 £1.29 (2019: £1.46).
206 Serco Group plc
Annual Report and Accounts 2020
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
2020
thousands
Weighted
average
exercise price
2020
£
Number of
shares under
award
2019
thousands
Weighted
average
exercise price
2019
£
308
600
908
Nil
Nil
Nil
–
308
308
Nil
Nil
Nil
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
The awards over shares outstanding at 31 December 2020 were all unvested and had a weighted average contractual life of 2.0 years (2019:
2.3 years).
There were 599,869 new awards granted under the Equity Settled Bonus Plan in the year. The awards were valued using the 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
2020
£1.31
Nil
30.6%
3 years
0.09%
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 £1.31 (2019: £1.23).
36. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are related parties, have been eliminated on consolidation
and are not disclosed in this note. Transactions between the Group and its joint venture undertakings and associates are disclosed below.
Transactions
During the year, Group companies entered into the following transactions with joint ventures and associates:
Sale of goods and services
Joint ventures
Associates
Other
Dividends received – joint ventures
Dividends received – associates
Receivable from consortium for tax – joint ventures
Total
Transactions 2020
£m
Current outstanding
at 31 December
2020
£m
Non current
outstanding
at 31 December
2020
£m
0.1
2.3
4.3
15.5
(0.1)
22.1
–
0.2
–
–
2.0
2.2
–
–
–
–
–
0.1
0.1
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. No guarantees have been given or received.
Annual Report and Accounts 2020
Serco Group plc
207
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
36. Related party transactions continued
Sale of goods and services
Joint ventures
Associates
Other
Dividends received – joint ventures
Dividends received – associates
Receivable from consortium for tax – joint ventures
Total
Transactions 2019
£m
31 December 2019*
£m
Outstanding at
1.3
8.4
7.8
17.6
4.4
39.5
0.1
0.5
–
–
4.8
5.4
* All amounts outstanding as at 31 December 2019 are due within 12 months of the balance sheet date.
On 31 May 2020, the Group disposed of its 33% interest in Viapath Analytics LLP, Viapath Services LLP and Viapath Group LLP (together
“Viapath”). As part of the transaction, the Group received an amount of £11.0m for its share in the net assets of the joint venture. At the
same time as disposing of the Group’s interest in Viapath, the Group recovered a loan into the joint venture of £1.2m and £2.9m of profit
share which was previously considered to be irrecoverable.
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
2020
£m
9.3
5.4
14.7
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
(2020: 18 individuals, 2019: 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 awards
2020
£m
3.6
3.4
3.6
10.6
2019
£m
3.9
3.0
5.1
12.0
None of the Directors are members of the Company’s defined benefit or money purchase pension schemes.
Further information about the remuneration of individual Directors is provided in the audited part of the Directors’ Remuneration Report
on pages 105 to 133.
208 Serco Group plc
Annual Report and Accounts 2020
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
37. Notes to the Consolidated Cash Flow statement
Year ended 31 December
Operating profit for the year
Adjustments for:
Share of profits in joint ventures and associates
Exceptional distribution from joint venture
Share based payment expense
Impairment of property, plant and equipment – owned
Impairment of property, plant and equipment – leased
Depreciation of property, plant and equipment – owned
Depreciation of property, plant and equipment – leased
Amortisation of intangible assets – owned
Exceptional profit on disposal of subsidiaries and operations
Reversal of impairment on loans to JVs
Profit on early termination of leases
Profit on disposal of property, plant and equipment
Loss on disposal of intangible assets
Increase/(decrease) in provisions
Other non cash movements
Total non cash items
Operating cash inflow/(outflow) before movements in
working capital
(Increase)/decrease in inventories
Increase in receivables
(Decrease)/increase in payables
Movements in working capital
Cash generated by operations
Tax paid
Non cash R&D expenditure
Net cash inflow/(outflow) from operating activities
2020
Before
exceptional
items
£m
2020
Exceptional
items
£m
2019
Before
exceptional
items
£m
2019
Exceptional
items
£m
2020
Total
£m
2019
Total
£m
166.7
12.5
179.2
125.9
(23.4)
102.5
(12.7)
–
11.2
0.3
0.4
15.9
93.5
23.0
–
–
(2.9)
(0.4)
0.6
16.2
–
145.1
311.8
(2.9)
(0.1)
(2.3)
(5.3)
306.5
(35.9)
(0.1)
270.5
–
(1.9)
–
–
–
–
–
–
(11.0)
(1.2)
–
–
–
(4.0)
–
(18.1)
(5.6)
–
–
3.6
3.6
(2.0)
–
–
(2.0)
(12.7)
(1.9)
11.2
0.3
0.4
15.9
93.5
23.0
(11.0)
(1.2)
(2.9)
(0.4)
0.6
12.2
–
127.0
306.2
(2.9)
(0.1)
1.3
(1.7)
304.5
(35.9)
(0.1)
268.5
(27.5)
–
11.6
2.4
16.5
15.3
59.1
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
2.4
16.5
15.3
59.1
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
38. Post balance sheet events
Facilities First Australia
On 4 January 2021, the Group acquired 100% of the issued share capital of Facilities First Australia Holdings Pty Limited (“FFA”), for
consideration of AU Dollars $52.6m (£29.8m) in cash, on a cash free, debt free basis, subject to standard working capital and completion
adjustments. At the same time, the Group transferred AU Dollars $25.2m (£14.3m) to allow FFA to settle existing debt and debt-like
balances. FFA is a specialist provider of cleaning, facility maintenance and management services in Australia. The financial results and
impact of this transaction have not been recognised in these Consolidated Financial Statements, the operating results, assets and
liabilities will be recognised with effect from 4 January 2021. The amounts shown below in respect of the assets and liabilities acquired
remain provisional until the Group has finalised the associated acquisition accounting.
Acquisition related intangibles
Property, plant and equipment
Deferred tax asset
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Borrowings
Current tax liabilities
Non current payables
Acquisition date fair value of consideration transferred
Acquisition of shares
Total Cash Consideration
Provisional fair
value
AU Dollars $m
Provisional fair
value
£m
78.0
7.0
3.3
28.3
3.6
(42.9)
(16.5)
(1.3)
(6.9)
52.6
52.6
52.6
44.2
4.0
1.9
16.0
2.0
(24.3)
(9.4)
(0.7)
(3.9)
29.8
29.8
29.8
Annual Report and Accounts 2020
Serco Group plc
209
Financial StatementsCorporate Governance
Notes to the Consolidated Financial
Statements continued
38. Post balance sheet events continued
Whitney, Bradley & Brown, Inc
On 16 February 2021, the Group announced that it had agreed to acquire Whitney, Bradley & Brown, Inc (“WBB”), a leading provider of
advisory, engineering and technical services to the US Military, for $295m from an affiliate of H.I.G. Capital. The acquisition will increase the
scale, breadth and capability of Serco’s North American defence business and will give Serco a strong platform from which to address all
major segments of the US defence services market. The acquisition will be immediately accretive to earnings and will be funded through
existing debt facilities; it is expected to complete in the second quarter of 2021, subject to regulatory approvals. As the transaction is yet
to complete, the financial results and impact of the transaction have not been recognised in these Consolidated Financial Statements.
Serco share repurchase programme
On 31 December 2020, the Group announced that with effect from 4 January 2021, it was commencing a programme to purchase its
own shares with a value of up to £40m over the period to 11 June 2021, subject to a maximum number of shares of 122,338,063 being
purchased. These shares will subsequently be transferred into treasury, either to be used for existing employee share schemes or to
be cancelled.
Dividends
Subsequent to the year end, the Board has recommended the payment of a final dividend in respect of the year ended 31 December 2020
of 1.4p. 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 Consolidated Financial Statements.
Financing facility
On 24 February 2021, the Group entered into a new financing facility totalling £75m with a syndicate of banks. The three year facility is
undrawn, but it is anticipated that it will be drawn at completion of the acquisition of WBB, currently expected to be during the second
quarter of 2021.
210 Serco Group plc
Annual Report and Accounts 2020
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
Corporation tax asset
Cash at bank and in hand
Total assets
Creditors: amounts falling due within one year
Trade and other payables
Loans
Provisions
Derivative financial instruments
Net current assets
Creditors: amounts falling due after more than one year
Trade and other payables
Loans
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
43
44
45
46
43
44
45
48
49
50
51
53
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
2020
£m
0.1
2,032.7
2,032.8
5.0
366.1
4.5
1.0
206.2
582.8
2019
£m
0.1
2,029.5
2,029.6
4.6
211.9
2.9
0.4
14.2
234.0
2,615.6
2,263.6
(73.2)
(89.7)
(11.3)
(9.2)
(183.4)
399.4
–
(299.1)
(1,046.5)
(41.1)
(1,386.7)
(1,570.1)
1,045.5
24.7
463.1
0.1
493.0
66.7
(2.1)
–
(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)
–
1,045.5
1,056.5
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 24 February 2021 and signed on its
behalf by:
Rupert Soames
Group Chief Executive Officer
Angus Cockburn
Group Chief Financial Officer
Annual Report and Accounts 2020
Serco Group plc
211
Financial StatementsCorporate Governance
Company Statement of Changes in Equity
At 1 January 2019
Total comprehensive income for the year
Issue of share capital
Shares transferred to award holders on exercise of
share awards
Awards over parent’s shares made to employees of
subsidiaries
Expense in relation to share based payments
At 1 January 2020
Total comprehensive income for the year
Issue of share capital
Shares transferred to award holders on exercise of
share awards
Awards over parent’s shares made to employees of
subsidiaries
Expense in relation to share based payments
Share
premium
account
£m
Capital
redemption
reserve
£m
Share
capital
£m
22.0
–
2.5
–
–
–
327.9
–
135.0
–
–
–
24.5
–
0.2
462.9
–
0.2
–
–
–
–
–
–
Profit
and loss
account
£m
580.0
(64.5)
–
Share
based
payment
reserve
£m
60.7
–
–
Own
shares
reserve
£m
(18.7)
–
(0.3)
–
–
–
515.5
(22.5)
–
(14.4)
14.6
7.8
3.8
57.9
–
–
–
–
(4.4)
–
(0.2)
–
–
–
(2.4)
2.5
3.2
8.0
–
–
0.1
–
–
–
–
–
0.1
–
–
–
–
–
Hedging
and
translation
reserve
£m
Total
shareholders’
equity
£m
(0.2)
0.2
–
–
–
–
–
–
–
–
–
–
–
971.8
(64.3)
137.2
0.2
7.8
3.8
1,056.5
(22.5)
0.2
0.1
3.2
8.0
1,045.5
At 31 December 2020
24.7
463.1
0.1
493.0
66.7
(2.1)
The accompanying notes form an integral part of the financial statements.
212 Serco Group plc
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Notes to the Company Financial
Statements
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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. These financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure
Framework (“FRS 101”). In preparing these financial statements, the Company applies the recognition, measurement and disclosure
requirements of international accounting standards in conformity with the requirements of the Companies Act 2006 (“Adopted IFRSs”),
but makes amendments where necessary in order to comply with Companies Act 2006 and has set out below where advantage of the FRS
101 disclosure exemptions has been taken.
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 £22.5m (2019: £64.5m), and loss in total comprehensive income for the year was a loss of £22.5m (2019: loss of £64.3m).
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 (2019: £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 2019
Awards over parent’s shares made to employees of subsidiaries
At 1 January 2020
Awards over parent’s shares made to employees of subsidiaries
At 31 December 2020
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
£m
2,021.7
7.8
2,029.5
3.2
2,032.7
% ownership
100%
2020
£m
5.0
2019
£m
4.6
Included within other debtors is prepaid intercompany interest of £4.2m (2019 £2.6m), amounts owed by other subsidiary companies £0.7m
(2019: £0.8m) and other prepayments of £0.1m (2019: £1.2m).
Amounts due after more than one year
Amounts owed by subsidiary companies
2020
£m
366.1
2019
£m
211.9
Annual Report and Accounts 2020
Serco Group plc
213
Financial StatementsCorporate Governance
Notes to the Company Financial
Statements continued
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. 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
2020
£m
55.6
0.4
15.9
1.3
73.2
2020
£m
–
2020
£m
89.7
64.9
124.6
109.6
388.8
(89.7)
299.1
Included within amounts repayable within one year is £nil (2019: £50.0m) related to the draw down on the revolving credit facility.
45. Provisions
At 1 January 2020
Charged to income statement
At 31 December 2020
Analysed as:
Current
Non-current
Contract
£m
6.2
2.3
8.5
8.5
–
8.5
Other
£m
43.9
–
43.9
2.8
41.1
43.9
2019
£m
49.7
0.3
14.6
2.6
67.2
2019
£m
0.1
2019
£m
56.1
93.9
155.0
–
305.0
(56.1)
248.9
Total
£m
50.1
2.3
52.4
11.3
41.1
52.4
Other provisions are held for indemnities given on disposed businesses, legal and other costs that the Company expects to incur over an
extended period, in respect of past events, for which a provision has been recorded. 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 twelve months
or over a longer period with the majority expected to be settled by 31 December 2023.
214 Serco Group plc
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46. Derivative financial instruments
Forward foreign exchange contracts
Analysed as:
Current
Assets
2020
£m
4.5
4.5
Liabilities
2020
£m
(9.2)
(9.2)
Assets
2019
£m
2.9
2.9
Liabilities
2019
£m
(1.8)
(1.8)
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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 recognised is as follows:
At 31 December
Depreciation in excess of capital allowances
Short-term timing differences
Losses
48. Called up share capital
2020
£m
0.2
1.3
40.0
41.5
2019
£m
0.3
0.9
31.8
33.0
Issued and fully paid
1,223,380,637 (2019: 1,098,564,237) ordinary shares of 2p each at 1 January
Issue: 10,000,000 (2019: 124,816,400) ordinary shares of 2p
1,233,380,637 (2019: 1,223,380,637) ordinary shares of 2p each at 31 December
2020
£m
24.5
0.2
24.7
Number
2020
millions
1,223.4
10.0
1,233.4
2019
£m
22.0
2.5
24.5
Number
2019
millions
1,098.6
124.8
1,223.4
In the year, 10,000,000 (2019: 13,600,000) shares were issued to the Employee Share Ownership Trust to satisfy awards under the Group’s
share plan schemes.
In May 2019, the Company completed a placement of 111,216,400 new ordinary shares of 2p, each raising net proceeds of £138.7m.
There were no such placements in 2020.
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
2020
£m
462.9
0.2
463.1
2019
£m
327.9
135.0
462.9
The movement on the account in the year is the release of an accrual for costs associated with the 2019 share issue that will no longer be
incurred.
50. Profit and loss account
At 1 January
Loss for the year
At 31 December
2020
£m
515.5
(22.5)
493.0
2019
£m
580.0
(64.5)
515.5
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 £22.5m (2019: loss of £64.5m), and loss in total comprehensive income for the year was a loss of
£22.5m (2019: loss of £64.3m).
Annual Report and Accounts 2020
Serco Group plc
215
Financial StatementsCorporate Governance
Notes to the Company Financial
Statements continued
50. Profit and loss account continued
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. As a result of this transaction, the Group has sufficient distributable reserves to facilitate the payment of
distributions by Serco Group plc.
51. Share based payment reserve
At 1 January
Awards over parent’s shares made to employees of subsidiaries
Share based payment charge
Shares transferred to award holders on exercise of share awards
At 31 December
2020
£m
57.9
3.2
8.0
(2.4)
66.7
2019
£m
60.7
7.8
3.8
(14.4)
57.9
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 held by the Serco Group plc Employee Share Ownership Trust
(ESOT) to satisfy awards under the Group’s share plan schemes. At 31 December 2020, the ESOT held 7,036,349 (2019: 4,805,612) shares
equal to 0.6% of the current allotted share capital (2019: 0.4%). The market value of shares held by the ESOT as at 31 December 2020 was
£8.4m (2019: £7.8m).
53. Hedging and translation reserve
At 1 January
Fair value gain on cash flow hedges during the period
At 31 December
2020
£m
–
–
–
2019
£m
(0.2)
0.2
–
54. Contingent liabilities
The Company has guaranteed overdrafts, leases, and bonding facilities of its joint ventures and associates up to a maximum value of
£3.8m (2019: £4.3m). The actual commitment outstanding at 31 December 2020 was £3.8m (2019: £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 2020 was
£228.6m (2019: £239.8m).
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.
Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the
reduction in Serco’s share price in 2013, the Group has continued to assess 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. Any outcome 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.
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.
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.
216 Serco Group plc
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Appendix: List of subsidiaries and related
undertakings
Serco Group
interest
Registered office address
Company name
Aeradio Technical Services LLC2
Aeradio Technical Services WLL2/4
AWE Management Limited3
AWE Pension Trustees Limited
AWE plc
Cardinal Insurance Company Limited
COMPASS SNI Limited
Conflucent Innovations, L.L.C.
Djurgardens Farjetrafik AB
DMS Maritime Pty Limited
Hong Kong Parking Limited
Innu Serco Inc.
Innu Serco Limited Partnership
24%
49%
24.5%
24.5%
24.5%
100%
100%
49%
50%
100%
40%
49%
49%
International Aeradio (Emirates) L.L.C. – Abu Dhabi
49%
International Aeradio (Emirates) L.L.C. – Dubai
JBI Properties Services Company L.L.C.
Joint Integrated Range Solutions, L.L.C.
Khadamat Facilities Management L.L.C.
Logtec Inc.
Mahani Technical Services, L.L.C.
Merseyrail Electrics 2002 Limited
Merseyrail Infraco Limited
Merseyrail Services Holding Company Limited3
Northern Rail Holdings Limited
Northern Rail Limited
Priority Properties North West Limited
Serco (Jersey) Limited
Serco Australia Pty Limited3
Serco Belgium S.A.
Serco Caledonian Sleepers Limited
49%
49%
49%
49%
100%
49%
50%
50%
50%
50%
50%
100%
100%
100%
100%
100%
Headquarters Building, PO Box 126, Doha, Qatar
Headquarters Building, Building # 1605, Road # 5141, Askar # 951,
PO Box 26803 Manama, Kingdom of Bahrain
Room 20, Building F161.2 Atomic Weapons Establishment,
Aldermaston, Reading, RG7 4PR, England
Room 20, Building F161.2 Atomic Weapons Establishment,
Aldermaston, Reading, RG7 4PR, England
Room 20, Building F161.2 Atomic Weapons Establishment,
Aldermaston, Reading, RG7 4PR, England
Dorey Court, Admiral Park, St Peter Port, GY1 4AT, Guernsey
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 23, 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
7th Floor, Al Sila Tower Abu Dhabi Global Market Square,
Al Maryah Island, Abu Dhabi, United Arab Emirates
8337 W. Sunset Road, Suite 250, Las Vegas, NV 89113, United States
The United Arab Emirates University, Al Jamea Street,
Al Maqam District, PO Box 66718 Al Ain, United Arab Emirates
12930 Worldgate Drive, Suite 600, Herndon VA 20170, United States
511 Duckwater Fall Road, Duckwater, Nevada 89314, United States
Rail House, Lord Nelson Street, Liverpool, Merseyside, L1 1JF,
England
Rail House, Lord Nelson Street, Liverpool, Merseyside, L1 1JF,
England
Eversheds House, 70 Great Bridgewater Street, Manchester,
Lancashire, M1 5ES, England
Eversheds House, 70 Great Bridgewater Street, Manchester,
Lancashire, M1 5ES, England
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
AquaSplash, The Waterfront Centre, La Rue De L’Etau,
St Helier, Jersey, JE2 4HE
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Avenue de Cortenbergh 60 – 1000 Brussels, Belgium
Basement and Ground Floor Premises, 1-5 Union Street, Inverness,
IV1 1PP, Scotland
Annual Report and Accounts 2020
Serco Group plc
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Appendix: List of subsidiaries and related
undertakings continued
Company name
Serco Canada Inc.
Serco Canada Marine Corporation
Serco Citizen Services Pty Ltd
Serco Corporate Services Limited
Serco Czech Republic s.r.o.
Serco Defence Clothing Pty Ltd
Serco Defence S.A.
Serco Defence Services Pty Limited
Serco Environmental Services Limited
Serco Ferries (Guernsey) Crewing Limited
Serco Ferries (HR) Limited
Serco Geografix Limited
Serco Gestión de Negocios S.L.U.
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 S.p.A.
Serco Leasing Limited
Serco Leisure Operating Limited
Serco Limited3
Serco Listening Company Limited
Serco Luxembourg S.A.
Serco Nederland B.V.
Serco New Zealand (Asset Management Services)
Limited
Serco New Zealand Limited
Serco New Zealand Training Limited
Serco North America (Holdings), Inc.
Serco North America Limited
Serco Group
interest
Registered office address
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
330 Bay Street, Suite 400, Toronto, ON, M5H 2S8, Canada
330 Bay Street, Suite 400, Toronto, ON, M5H 2S8, Canada
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
Praha City Centre, Klimentska 46, Prague, 110 02, Czech Republic
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Avenue de Cortenbergh 60-1000 Brussels, Belgium
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
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, England
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
Calle Ayala, 13 1°Dr, 28001 Madrid, Spain
Unit 3103, 31/F, Millennium City 6, 392 Kwun Tong Road, Kwun Tong,
Kowloon, Hong Kong
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
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, England
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, England
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
Rue Sainte Zithe, 33, L-2763, Luxembourg
Kapteynstraat 1, 2201 BB Noordwijk ZH, Netherlands
Level 4, KPMG Centre, 18 Viaduct Harbour Avenue, Auckland, 1010,
New Zealand
Level 4, KPMG Centre, 18 Viaduct Harbour Avenue, Auckland, 1010,
New Zealand
Level 4, KPMG Centre, 18 Viaduct Harbour Avenue, Auckland, 1010,
New Zealand
1209 Orange Street, Wilmington, DE 19801, United States
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
218 Serco Group plc
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Company name
Serco Paisa Limited
Serco PIK Limited
Serco Pension Trustee Limited
Serco Projects L.L.C.
Serco Regional Services Limited
Serco Safety Services L.L.C.
Serco Sarl
Serco SAS
Serco Saudi Arabia L.L.C.
Serco Saudi Services L.L.C.
Serco Services GmbH
Serco Services Inc.
Serco Singapore Pte Limited
Serco Switzerland S.A.
Serco Traffic Camera Services (VIC) Pty Limited
Serco-IAL Limited
Serco-IPS Corporation
Vivo Defence Services Limited
Serco Group
interest
Registered office address
50%
100%
100%
49%
100%
49%
100%
100%
100%
60%
100%
100%
100%
100%
100%
100%
100%
50%
Ci Tower, St. George’s Square, New Malden, Surrey, KT3 4TE,
England
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
Global Business Centre 3, Third Floor, Building No. 36, Zone 27,
Street 230, C-Ring Road, PO Box 25422 Doha, State of Qatar
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
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
6987 King Abdul Aziz Road, Al Maseef District, Unit No. 31,
Riyadh, 12467-2444, Kingdom of Saudi Arabia
6987 King Abdul Aziz Road, Al Maseef District, Unit No. 30,
Riyadh, 12467-2444, Kingdom of Saudi Arabia
Lise-Meitner-Strasse 10, 64293 Darmstadt, Germany
12930 Worldgate Drive, Suite 600, Herndon, Virginia 20170,
United States
38 Beach Road, #29-11 South Beach Tower, Singapore, 189767
62 Route de Frontenex Bis 86, 1208 Geneva, Switzerland
Level 23, 60 Margaret Street, Sydney NSW 2000, Australia
Serco House, 16 Bartley Wood Business Park, Bartley Way, Hook,
Hampshire, RG27 9UY, England
12930 Worldgate Drive, Suite 600, Herndon VA 20170, United States
Shared Services Centre Q3 Office, Quorum Business Park,
Benton Lane, Newcastle-Upon-Tyne, NE12 8EX, England
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 2020.
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.
Annual Report and Accounts 2020
Serco Group plc
219
Financial StatementsCorporate Governance
Appendix: Supplementary information
Five-year record (unaudited)
Adjusted Revenue
Less: Share of revenue of joint ventures and associates
Revenue
Underlying Trading Profit
OCP and Contract and Balance Sheet Review adjustments
Include benefit from non-depreciation and amortisation of assets held for sale
Include other one-time items
Trading Profit
Amortisation and impairment of intangibles arising on acquisition
Operating profit before exceptional items
Exceptional profit/(loss) on disposal of subsidiaries and operations
Other exceptional operating items
Operating profit
Net finance costs
Exceptional finance income/(costs)
Other gains
Profit before tax
Tax charge
Profit/(loss) after tax
Net Debt
Earnings per share before exceptional items
Basic earnings/(loss) per share
Dividend per share
2020
£m
2019
£m
2018
£m
2017
(restated*)
£m
2016
£m
4,249.9
(365.1)
3,643.0
(394.6)
3,211.9
(375.1)
3,307.3
(356.4)
3,529.0
(481.0)
3,884.8
3,248.4
2,836.8
2,950.9
3,048.0
163.1
5.8
–
6.8
175.7
(9.0)
166.7
11.0
1.5
179.2
(25.9)
–
–
153.3
(19.3)
134.0
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)
(460.4)
(584.4)
(188.0)
(141.1)
(109.3)
Pence
9.90
10.89
–
Pence
Pence
6.54
4.31
–
8.20
6.16
–
Pence
1.50
(0.76)
–
Pence
6.12
(0.11)
–
* Results for the year ended 31 December 2017 have been restated to reflect the adoption of IFRS15 Revenue from contracts with customers with effect from 1 January
2017. No changes were made to earlier periods hence the results for the year ended 31 December 2016 would need to be restated for the impact of IFRS15 in order
to be prepared in accordance with current International Financial Reporting Standards. IFRS9 Financial instruments has also been implemented during the period
covered by the supplementary information above, however the new standard had no material impact on the Group’s reported financial information, therefore no
such adjustment would be required in respect of the standard.
220 Serco Group plc
Annual Report and Accounts 2020
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.
Dividend
Proposed final dividend
The Directors have recommended payment of a final dividend of
1.4p in respect of the year ended 31 December 2020, subject to
approval by shareholders at the Annual General Meeting.
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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.
Key dates
Annual General Meeting 21 April 2021
Ex-dividend date 13 May 2021
Record date 14 May 2021
Payment date 4 June 2021
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.
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
Managing your shares online
Shareholders can manage their holding online by registering to use
our shareholder portal at www.shareview.co.uk. This free service is
provided by our Registrar, giving quick and easy access to your
shareholding.
Electronic communications
We encourage shareholders to consider receiving their
communications electronically which means you receive information
quickly and securely and allows us to communicate in a more
environmentally friendly and cost-effective way. You can register for
this service online using our share portal at www.shareview.co.uk
Duplicate documents
Some shareholders find that they receive duplicate documentation
due to having more than one account on the share register. If you
think you fall into this group and would like to combine your
accounts, please contact our Registrar, Equiniti.
Changes of address
To avoid missing important correspondence relating to your
shareholding, it is important that you inform our Registrar of your
new address as soon as possible.
Sharegift
If you have a very small shareholding that is uneconomical to sell,
you may want to consider donating it to Sharegift (Registered
Charity no.10526886), a charity that specialises in the donation of
small, unwanted shareholdings to good causes. You can find out
more by visiting www.sharegift.org or by calling +44 (0) 207 930 3737.
Annual Report and Accounts 2020
Serco Group plc
221
Financial StatementsCorporate Governance
Useful Contacts
Serco’s registered office
Serco House
16 Bartley Wood Business Park
Bartley Way
Hook
Hampshire
RG27 9UY
United Kingdom
Telephone: +44 (0)1256 745 900
Email:
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)
www.shareview.co.uk
Website:
Shareholders can securely send queries via the website using the
‘Help’ section.
ADR depositary bank
Deutsche Bank Trust Company Americas
c/o American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn NY 11219
USA
Telephone: +1 866 249 2593 (toll-free within USA)
Website:
Email:
+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’.
All statements other than statements of historical fact are
forward-looking statements. Generally, words such as “expect”,
“anticipate”, “may”, “could”, “should”, “will”, “aspire”, “aim”,
“plan”, “target”, “goal”, “ambition”, “intend” and similar
expressions identify forward- looking statements. By their nature,
these forward-looking statements are subject to a number of
known and unknown risks, uncertainties and contingencies, and
actual results and events could differ materially from those
currently being anticipated as reflected in such statements.
Factors which may cause future outcomes to differ from those
foreseen or implied in forward-looking statements include, but are
not limited to: general economic conditions and business
conditions in Serco’s markets; contracts awarded to Serco;
customers’ acceptance of Serco’s products and services;
operational problems; the actions of competitors, trading
partners, creditors, rating agencies and others; the success or
otherwise of partnering; changes in laws and governmental
regulations; regulatory or legal actions, including the types of
enforcement action pursued and the nature of remedies sought or
imposed; the receipt of relevant third party and/or regulatory
approvals; exchange rate fluctuations; the development and use
of new technology; changes in public expectations and other
changes to business conditions; wars and acts of terrorism;
cyber-attacks; and pandemics, epidemics or natural disasters.
Many of these factors are beyond Serco’s control or influence. For
a description of the principal risks and uncertainties 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 72 to 78.
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
222 Serco Group plc
Annual Report and Accounts 2020
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.
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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