1st Mar 2005 07:01
Issued: 01 March 2005 Release: 01 March 2005 Contact: Please see below SERCO GROUP PLC Preliminary results for the year ended 31 December 2004 2004 2003 Turnover ‚£1,637m ‚£1,556m up 5.2% Profit before tax pre-amortisation ‚£73.9m ‚£67.0m up 10.3% Earnings per share pre-amortisation 12.20p 11.03p up 10.6% Profit before tax ‚£57.4m ‚£52.9m up 8.6% Earnings per share 8.37p 7.75p up 8.1% Dividend per share 2.63p 2.34p up 12.4%Continued strong sales, profit and cash growth * Underlying turnover (excluding disposals and contracts exited) up 14.0% * Underlying profit before tax, amortisation and 2003 exceptionals up 16.4% * Recommended final dividend of 1.82p, giving a total of 2.63p for the year, up 12.4% * Group EBITDA to cash conversion of 94.9% (2003 - 80.7%) * Free cash flow of ‚£55.8m (2003 - ‚£47m) Strong organic growth * 82% of the increase in underlying turnover came from growth in existing contracts and new wins * Continued win rates of over 90% on rebids and over 50% on new bids * Contracts won valued at ‚£4.1bn, including ‚£2bn share of Northern Rail franchise, Electronic Monitoring and FAA Air Traffic Control Towers Acquisitions strengthen our capabilities where we see strong organic growthopportunities * ITNET plc - one of the UK's leading suppliers of IT and business process outsourcing services to local authorities, with expected 2004 sales of ‚£ 209m * Resource Consultants Inc (RCI) - supplier to US federal government of business process management and IT services, with expected 2004 sales US$293m * ITNET acquisition completed in February 2005. RCI expected to complete in March 2005 High visibility of future earnings * Record forward order book of ‚£12.7bn at year end * 91% of 2005 planned turnover secured, 76% for 2006, 64% for 2007 * Bids worth ‚£4.7bn submitted and under evaluation * Strong start to 2005 with new wins of ‚£0.4bn and contracts at preferred bidder valued at ‚£0.9bn * Over ‚£16bn of further potential opportunities identified Note: EBITDA is earnings before interest, tax, depreciation and intangibleamortisation. Free cash flow is reconciled in Section 3 of the finance review.Executive Chairman Kevin Beeston said:"Today's results demonstrate once again how Serco's focus on customer serviceand relationships is building a strong business around the world. UnderlyingGroup turnover and profit have grown by 14% and 16% - principally through highlevels of organic growth. The drive for better value for money public servicesaround the globe puts Serco in an excellent position to continue its stronggrowth, further enhanced by our recently completed acquisition of ITNET in theUK and the planned acquisition of RCI in the US." - Ends - INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS)Serco has today issued a separate stock exchange announcement providing anupdate on its transition to IFRS.WEBCASTA webcast of the results presentation will also be available on www.serco.comfrom 1800hrs (GMT) on the day of announcement. To pre-register for viewingplease visit: http://www.axisto.com/webcast/media/serco/010305/index.htmCONTACTSFor further information please contact Serco Group plc: T: +44 (0)1256 745900Dominic Cheetham - Corporate Communications Director Richard Hollins - Head of Investor Relations Chairman's statement2004 was another very good year for Serco, and 2005 has started in excellentfashion too.Our ability to achieve continued strong growth is rooted in a number of factorsthat are fundamental to Serco. These include our broad range of markets andservices, our good reputation and the commitment and professionalism of ourstaff. We work in partnership with clients and stakeholders to deliver valuefor money and real service improvements.As in the past, more than half our sales growth was achieved by expanding thescale and scope of existing contracts. This organic growth remains the primaryfocus for our business. We can only deliver it through high levels of customersatisfaction and a proactive and thoughtful approach to deepening our customerrelationships and services.We continued to strengthen our cash position and maintained our outstandingearnings visibility. By the end of 2004 we had achieved preferred bidder statuson ‚£0.9bn of contracts and had secured 91% of our planned revenues for 2005,76% for 2006 and 64% for 2007. Over the year our forward order book rose from ‚£10.3bn to ‚£12.7bn, substantially boosted by our largest-ever contract win - theNorthern Rail franchise, valued at some ‚£2bn to Serco. Other wins included a ‚£300m seven-year contract to provide court escort and custody services.Successful rebids included our air traffic control contract with the US FederalAviation Administration (FAA) and multi-activity contracts with the UK's RoyalAir Force and Naval Air Command. In fact, our defence business had its bestyear ever, with a good combination of organic growth and new business wins. Andwe further strengthened our position in the growing justice and nationalsecurity markets.To continue building our capabilities in areas where we see strong organicgrowth opportunities, in December we announced two significant acquisitionsthat will bring additional skills and capabilities in the UK and US, currentlythe world's largest public service outsourcing markets.ITNET plc is a leading supplier of IT services, business process management andconsulting to UK local authorities and private sector companies.Resource Consultants Inc (RCI) supplies business process management, ITservices, supply chain management, systems engineering and consulting to the USfederal government, primarily in defence. We expect this acquisition tocomplete during March 2005.We expect both acquisitions to be earnings enhancing in 2005 and to furtherincrease our ability to develop in current and emerging markets.PeopleUltimately, Serco's continued success stems from the achievements of dedicated,passionate people. Through the annual Chairman's Recognition Awards weacknowledge those individuals and teams who make exceptional contributions.Their stories emphasise how - day in, day out - the people of Serco arebringing service to life.Leaders of the UK's major companies have recognised our employees' efforts byrating Serco as the UK's most admired support services company, and the sixthmost admired company in the UK, in the Management Today 2004 annual survey.This recognition from peers and analysts is a tribute to the effort andcommitment of everyone in the company. We congratulate and thank them all.Financial performanceSales and profitTurnover grew 5.2% to ‚£1,636.8m. After adjusting for the effect of disposalsand contracts exited, underlying turnover growth was 14.0%.Pre-tax profit rose 10.3% to ‚£73.9m before intangible amortisation and 8.6% to‚£57.4m after intangible amortisation. The previous year's profit figurebenefited from exceptional items with a net profit of ‚£3.6m; excluding these,the underlying profit growth before intangible amortisation was 16.4%.Earnings per share rose 10.6% to 12.20p before intangible amortisation and 8.1%to 8.37p after intangible amortisation.Cash performanceOur cash performance continues to strengthen. Free cash generation increased to‚£55.8m, compared with ‚£47.0m in 2003. Conversion of Group EBITDA (earningsbefore interest, tax, depreciation and intangible amortisation) into cash was95%, ahead of the previous year's 81%. This is a significant achievement in arapidly growing business.DividendThe recommended final dividend of 1.82p per share gives a total for the year of2.63p - an increase of 12.4% over 2003. It will be paid on 11 May toshareholders on the register on 11 March 2005.StrategyOrganic growthOrganic growth is Serco's primary strategic aim - and it delivered 82% of ourunderlying turnover increase in 2004. The majority (61%) came from extendingthe duration or scope of existing contracts and a further 21% came from newbusiness wins. We aim to leverage the value of every new contract win. Byworking in partnership with clients and stakeholders to deliver value for moneyand real service improvements, we create opportunities to broaden and deepenour relationships.In 2004, for example, we were awarded an extended court escort contract valuedat ‚£300m over seven years: double the size of the original contract. We alsomaintained our 90% success rate in rebids, including our contract to manage theUK's National Physical Laboratory, valued at over ‚£500m, our US$118m airtraffic control contract in the US and the ‚£55m contract at RAF Northolt andUxbridge.Our strategy is to remain focused on areas with the right scope for growththrough service delivery. In line with this strategy, we disposed of a numberof smaller asset management contracts in Australia and New Zealand. In the UK,as agreed with Network Rail, we ended our rail maintenance contract for theEast Midlands zone in January 2004.AcquisitionsIn tandem with our strong organic growth, we make acquisitions to gaincapabilities or market access as a foundation for future organic development.In the UK, the business transformation and local government outsourcing marketsare set to grow by 50% by 2007 and we have sought to increase our presentcapabilities. The ITNET acquisition strengthens our offering to localgovernment and brings expertise in business process management, an importantelement in the broader outsourcing contracts that we are increasingly pursuing.ITNET's consulting expertise, through French Thornton, complements our owngrowing consultancy business, which is helping to stimulate favourable changein our key markets. We also see opportunities to strengthen our serviceoffering to markets such as health, justice, transport and defence, both in theUK and overseas.The US is the world's largest service contracting market and the announcedacquisition of RCI deepens our access to federal government, where demand foroutsourced services is accelerating. RCI has strong customer relationships indefence, which accounts for more than 75% of federal spending on services andis an area where we have much to offer. In the North American market, RCI'sfederal focus complements our existing customer base, which is largely civilagencies, and state and local governments. And RCI's significant businessprocess management and IT service capabilities complement our existing changemanagement and service delivery resources.International strategyOur international strategy remains clear. As markets develop, we leverage ourskills from one geographic market into another. In turn, increased diversityacross borders and markets helps reduce risk. In 2004 we continued to transferskills and capabilities around the globe, notably in defence, aerospace, prisonservices and road traffic management.Consistent valuesTo deliver the service, relationships and growth we aspire to, it is essentialto develop and nurture consistent values and principles. Our four governingprinciples - to foster an entrepreneurial culture, enable our people to excel,deliver our promises, and build trust and respect - are embedded in all ourpolicies and processes.Operational highlightsBringing service to lifeAround the globe, people are experiencing a quality of service from Serco thatmakes a genuine difference to their lives.Our rail businesses had a particularly good year in 2004. Merseyrail continuedto set new performance standards and the Docklands Light Railway carried recordnumbers of passengers. In Australia, our iconic train The Ghan also carriedrecord passenger numbers and ran its longest-ever trains on the world's firstNorth-South transcontinental service. In England, with our partner NedRailways,we successfully phased-in the combination of two previously separate operationsto launch the new Northern Rail franchise, which is already improvingpunctuality and modernising ticketing systems.In other UK markets, pupils in Walsall are receiving significantly improvededucation thanks to the partnership between Serco's Education Walsall and theborough's council. An official inspection described the improvements as`spectacular'. The young people in our care at Ashfield Young OffendersInstitution near Bristol are receiving significantly improved education andsupport to reduce reoffending, thanks to a dramatic 15-month turnaroundprogramme praised by the Chief Inspector of Prisons.An MoD customer survey rated Serco among the best of its `key suppliers'.In the US, our focus on safety and service to pilots was recognised with asecond award from the FAA, for which we now operate 54 air traffic controltowers.In Asia Pacific, the first of 12 new patrol boats being supplied by our jointventure was launched. We are also currently installing a traffic informationand management system which will benefit commuters on the Shenzhen corridor,linking Hong Kong with mainland China.Strong start to 2005While still focused on growing the scope and scale of our existing services, wecontinue to win a broad range of new work.In the UK we have signed the ‚£400m Defence Academy Campus Integrator contract,which runs for nearly 24 years, to join the MoD's three existing postgraduateeducation colleges into an international academic centre of excellence forsenior military and civilian personnel. We already manage one of the threecolleges on the Defence Academy campus - the Joint Services Command and StaffCollege.In the United Arab Emirates (UAE) we have entered into an agreement to form ajoint venture to provide facilities management services to the UAE University'snew campus in Al Ain for a minimum period of 10 years.Market developmentOur vision to be the leading company in our chosen markets requires us to be athought leader, proactively helping to shape the way our markets develop. SercoGovernment Consulting is bringing our expertise to the leading edge of publicpolicy and service development by contributing strategic and operationalexpertise across a range of UK government departments. In the past year it hasworked with the BBC, Department for Constitutional Affairs, Department forEnvironment, Food and Rural Affairs, Department of Health, Office of the DeputyPrime Minister and a number of local authorities.In addition, the Serco Institute researches trends in competition andcontracting and is stimulating debate worldwide on how governments can providebetter public services.Corporate responsibilityWe are responsible for providing services that are essential to everyday life.For those working at the heart of society, corporate responsibility has to besecond nature. At Serco it is. It underpins the culture and values that helpdistinguish us in our markets and is an explicit part of the Serco ManagementSystem that shapes the way we run our business. Our Corporate Assurance Group,which oversees our approach to corporate responsibility, reports directly tothe Group Board and takes an integrated view of all aspects of our corporategovernance, risk management, health and safety, and social responsibility.In 2004 our investment in community initiatives totalled ‚£0.8m in cash and inkind, representing 1.4% of pre-tax profit.Our staff have begun a coordinated effort in 2005 to support the victims of thetsunami that devastated so many lives. In an effort that has united peopleacross the company in fundraising and volunteering, by mid-February employeeshad already raised ‚£73,000 to match Serco's ‚£100,000 donation to the DisastersEmergency Committee. We look forward to reporting progress in this area duringthe year.Our second corporate responsibility report will be published in March. Itexplains more about our values and objectives, and details many of ourinitiatives. It will be available both in printed form and on our website at www.serco.com/corporate_responsibility.Corporate governanceOur commitment to effective governance embraces the whole organisation throughthe Serco Management System. Group Board members have continued to engage withemployees, customers and investors to develop a deep and consistentunderstanding of our operational and strategic performance and to see at firsthand how we are perceived by stakeholders.In 2004, each Group Board meeting was held at a different Serco location tohelp Board members maintain their understanding of this rapidly expandingbusiness. In addition, our Senior Independent Director attended meetings withinstitutional investors and all Board members attended the AGM. For the thirdsuccessive year, all Directors participated in a formal Board appraisal processand the results and actions were discussed by the full Board. Full details ofSerco's governance arrangements are described in the corporate governancereport within the Annual Review and Accounts.Board developmentsIn March 2004 Iestyn Williams retired as an Executive Director, and in AprilRhidian Jones retired as a Non-Executive Director. Both became Directors of thenewly-created Serco in 1987 after the buyout of RCA's UK business. We thankthem for their significant contribution, commitment and guidance over theyears. In addition to their other Board responsibilities, in April, DeAnneJulius took over the role of Senior Independent Director and David Richardsonbecame Chairman of the Audit Committee. In February 2005 Joanne Roberts wasappointed as Company Secretary - succeeding Julia Cavanagh, who has becomeFinance Director of our Government Services division. We thank Julia for hercontribution over six years as Company Secretary.Executive team developmentsIn light of our two acquisitions we have reorganised and expanded our executiveteam, which reports to the Group Board for Serco's direction, organisation,performance and governance.Two members of our executive team have taken on additional responsibilities.Strategic Projects Director Ian Downie has become Chief Executive of the ITNETbusiness. And Chief Development Officer Steve Cuthill has relocated to the USto become Chairman of Serco North America and to take responsibility forintegrating the RCI acquisition once it has been completed.In addition, we have strengthened the executive team with Grant Rumbles,formerly Chief Executive of Serco Continental Europe & Middle East, as GroupOperations Director; Clive Barton, formerly Chief Operating Officer of SercoSolutions, as Group Marketing Director; and Bridget Blow, formerly ITNET ChiefExecutive, as Group Technology Director.OutlookAcross the world, governments and commercial organisations are increasinglyseeking to deliver better services and gain greater value for money.In the past year we have taken important steps towards our vision: to be theleading service company in our chosen markets. Our service delivery record andcustomer relationships help maintain and grow our business base. Theacquisitions of ITNET and RCI strengthen our position in key markets and ourmajor contract wins provide further scope for development. With our managementfurther strengthened we believe that we have a better platform than ever fordelivering continued strong growth.Finance Review1. Financial performanceAnalysis of the Group's financial performance in 2004 is shown in Figure 1.Figure 1: Profit and loss accountYear to 31 December 2004 2003 Increase ‚£m ‚£m Total turnover 1,636.8 1,555.5 5.2% Group turnover 1,381.4 1,324.3 Joint venture turnover 255.4 231.2 Gross profit 190.9 180.8 5.5% Administration expenses (139.7) (138.5) Exceptional items (net) - 3.6 Joint venture profit 24.8 24.0 Net Group interest (2.1) (2.9) Profit before intangible amortisation and 73.9 67.0 10.3%tax Intangible amortisation (16.5) (14.1) Profit before tax 57.4 52.9 8.6% Tax (20.4) (19.1) Profit after tax 37.0 33.8 Minority interest (1.0) (0.5) Profit for the financial year 36.0 33.3 Effective tax rate 35.5% 36.1% Average number of shares 430.1m 429.9m Earnings per share before intangible 12.20p 11.03p 10.6%amortisation Earnings per share after intangible 8.37p 7.75p 8.1%amortisation Dividend per share 2.63p 2.34p 12.4%1.1 TurnoverTotal turnover for the year to 31 December 2004 increased by 5.2% to ‚£1,636.8m.After adjusting for the effect of disposals and contracts exited (see 6.1Disposals), turnover grew by 14.0%.Turnover for 2004 includes an incremental contribution of ‚£35m from PremierCustodial Group (PCG) following the acquisition of the remaining 50% in July2003. From this date the results of PCG have been included in Group turnover.Gross margin on Group turnover, representing the average contract margin acrossthe portfolio, has increased to 13.8% (2003 - 13.7%).1.2 Exceptional itemsThere were no exceptional items in 2004. During 2003 there were threeexceptional items resulting in a net profit of ‚£3.6m.1.3 Profit before taxProfit before tax and intangible amortisation increased by 10.3% to ‚£73.9m,representing a net margin on turnover of 4.5% (2003 - 4.3%). Profit before tax,intangible amortisation and the contribution from exceptional items in 2003grew by 16.4%.Profit before tax and after intangible amortisation increased by 8.6% to ‚£57.4m.1.4 Intangible amortisationIntangible amortisation, arising primarily from goodwill, was ‚£16.5m in 2004(2003 - ‚£14.1m). The increase results largely from the acquisitions of theremaining 50% of PCG in July 2003 and the Ontario Driver Examination Services(DES) franchise which commenced operation in September 2003.1.5 TaxThe tax charge of ‚£20.4m (2003 - ‚£19.1m) represents an effective rate of 35.5%(2003 - 36.1%). The small decrease in the rate is primarily due to changes inthe geographical mix of profits.1.6 Earnings per shareAs a result of the above, earnings per share before intangible amortisationincreased by 10.6% to 12.20p. Earnings per share after intangible amortisationgrew by 8.1% to 8.37p.2. DividendsThe proposed final dividend of 1.82p per share gives a total dividend for 2004of 2.63p, a 12.4% increase on 2003.3. Cash flowFree cash flow for 2004 was ‚£55.8m (2003 - ‚£47.0m). Further analysis is shownin Figure 2.Figure 2: Cash flowYear to 31 December 2004 2003 ‚£m ‚£m Operating profit before exceptional item 34.7 28.2 Exceptional item: reorganisation costs - (4.5) Operating profit 34.7 23.7 Non-cash items 36.9 33.8 Group EBITDA 71.6 57.5 Working capital movement (3.6) (11.1) Operating cash flow 68.0 46.4 Dividends from joint ventures 14.2 12.6 Interest and taxation (5.2) (7.8) Exceptional item: GSR sale and leaseback - 5.8 Capital expenditure (19.3) (21.8) Disposal of assets - 8.9 Other items (1.9) 2.9 Free cash flow 55.8 47.0 Exceptional item: Norfolk and Norwich refinancing - 4.1 Acquisitions/disposals (9.0) (96.6) Other financing (7.8) 109.5 Dividends paid (10.4) (9.5) Non-recourse debt financed assets (25.2) 47.0 Net cash flow 3.4 101.53.1 Operating cash flowThere was an operating cash inflow for the year of ‚£68.0m (2003 - ‚£46.4m), anincrease of 47%. This represents a conversion of 196% (2003 - 196%) ofoperating profit and 95% (2003 - 81%) of Group EBITDA into cash.The improvement in conversion rates is particularly notable given that ourstrong level of organic growth brings an accompanying demand for workingcapital, typically equivalent to a month's incremental turnover each year.3.2 Dividends from joint venturesDividends received from joint ventures during 2004 of ‚£14.2m (2003 - ‚£12.6m)represent an 85% (2003 - 78%) conversion of profit after tax of joint venturesinto cash.3.3 Interest and taxationThe 2004 outflow of ‚£5.2m (2003 - ‚£7.8m) benefited from the Group being able toutilise tax losses of subsidiaries that were previously joint venturecompanies.3.4 Capital expenditureCapital expenditure for the year, excluding investment in PFI Special PurposeCompanies (SPCs), was ‚£19.3m (2003 - ‚£21.8m). This expenditure represented 1.4%of Group turnover, and is broadly similar to prior years.3.5 Acquisitions / disposalsThe 2004 net outflow of ‚£9.0m primarily relates to the acquisition of shares inITNET plc prior to 31 December 2004 for ‚£13.7m and the disposal of businessesin Australia and New Zealand for ‚£3.2m. Further details are in section 6.3.6 Non-recourse debt financed assetsThe ‚£25.2m outflow relates to the net movement on expenditure on PFI assetsunder construction, non-recourse loans and other PFI balance movements. Furtheranalysis is provided in Figure 3.Figure 3: Non-recourse debt financed assetsYear to 31 December 2004 2003 ‚£m ‚£m Change in PFI balances PFI debtor 6.9 3.7 Assets in the course of construction (16.3) (33.0) Non-recourse debt (12.8) 26.6 (22.2) (2.7) Change in other balances Non-recourse debt: Ontario Driver Examination (3.0) 49.7Services Non-recourse debt financed assets (25.2) 47.0The movements on the PFI balances are the result of timing differences betweenloan repayment/draw-down and asset spend/recovery. Over the lifetime of eachPFI contract, we expect these movements to offset each other. Included withinthe change in PFI balances is ‚£8.7m of equity and subordinated debt investedinto the Traffic Information Services (TIS) PFI SPC in January 2004.4. Net debtAt 31 December 2004 net recourse debt was ‚£14.8 m (2003 - ‚£22.3m). Furtheranalysis is provided in Figure 4.Figure 4: Net debtAs at 31 December 2004 2003 ‚£m ‚£m Closing cash 173.9 170.9 Long term loans (167.4) (165.3) Other loans and finance leases (21.3) (27.9) Recourse net debt (14.8) (22.3) Non-recourse debt (256.4) (357.0) Total net debt (271.2) (379.3)Non-recourse debt (see 7. PFIs) represents long term loans secured on thecontracts of PFI and other concessions, and not any other assets of the Group.The loans are excluded from all of our credit agreement and other covenantscalculations, therefore having no impact on the Group's ability to borrow.Non-recourse debt, utilised to fund PFI assets and the acquisition of the DESfranchise, reduced during the year to ‚£256.4m (2003 - ‚£357.0m), largely due toLaser (see 7. PFIs) and the scheduled part repayment of other debt.In addition to Figure 4, non-recourse debt of ‚£51.4m (2003 - ‚£55.2m) isincluded in joint venture gross liabilities.5. PensionsFor 2004 we have continued to apply the transitional rules and disclosures forthe implementation of FRS 17 Retirement Benefits. This requires the marketvalues of the assets and liabilities for defined benefit schemes to becalculated and disclosed in a note, discussed in more detail in Note 32 to theAnnual Review and Accounts.In summary, at 31 December 2004, there was a net deficit on an FRS 17 basis inrelation to the defined benefit scheme of ‚£75.6m (2003 - ‚£69.7m), and an assetbase of ‚£380.8m (2003 - ‚£350.4m). Long term employer and employee contributionswere increased in 2003 and have remained at the same level to address the levelof deficit in the scheme.6. Acquisitions / disposals6.1 DisposalsIn line with our intention to focus the business on areas with the greatestpotential for growth and profitability, we announced in April 2004 the disposalof a number of small and medium sized contracts in Australia and New Zealand.The annual turnover of these contracts was approximately ‚£38m. The disposalswere completed by August 2004.The above disposals, together with 2003's disposal of a number of our Swedishcontracts and the exiting of our rail maintenance contract with Network Rail inJanuary 2004, have reduced annualised turnover by ‚£140m.6.2 AcquisitionsAlso during December 2004, we invested ‚£13.7m in the shares of ITNET plc, acompany in which we acquired a controlling interest during February 2005. (See10. Post balance sheet events).7. PFIsAt the end of 2004 the Group was involved in 11 PFI projects, with 10 equityinvestments and 11 operating contracts. These contracts contribute ‚£3.2bn tothe Group's order book of ‚£12.7bn. During 2004 PFIs contributed ‚£194m (2003 - ‚£133.4m) to turnover and ‚£14.6m (2003 - ‚£11.9m) to gross profit.At the end of 2004 we had invested ‚£24.0m of equity and subordinated debt intoour SPCs. Cumulatively, as at 31 December 2004, we had generated ‚£26.9m cashfrom these investments, representing a net inflow to the Group of ‚£3.0m.During October 2004, we stopped accounting for Laser (the National PhysicalLaboratory PFI SPC) as a subsidiary due to the discussions surrounding thetransfer of control of the PFI asset to the DTI. This has removed thenon-recourse debt and corresponding PFI debtor from the balance sheet.8. Treasury8.1 Treasury managementThe Group's treasury function is responsible for managing the Group's exposureto treasury risk, and operates within a defined set of policies and proceduresreviewed and approved by the Board.8.2 Credit facilities and liquidity managementThe Group's liquidity during 2004 was principally provided by a ‚£140m revolvingcredit facility, which was undrawn at year-end, and two private debtplacements.The ‚£140m facility was replaced in January 2005 by a five-year ‚£450m term loanand revolving credit facility. The ‚£450m facility is to fund the acquisitionsof ITNET plc and RCI Holding Corporation and is also available to fund theGroup's day-to-day liquidity requirements.The ‚£450m facility is unsecured, with covenants and obligations typical ofthese types of arrangement, which are consistent with our previous facilities.The Group continues to service two private placements which include sterlingand US dollar tranches. The first, for ‚£43.2m, was taken out in 1997 andmatures in 2007. The second, for ‚£117m, was taken out in 2003 and amortisesfrom 2011 to 2015.8.3 Foreign exchange riskThe Group does not currently hedge the sterling equivalent of the net assets ofits overseas operations as the net asset value of these businesses does notrepresent a significant proportion of the market value of the Group. Foreignexchange gains and losses therefore do not represent a material risk to theconsolidated net asset value of the Group.The foreign exchange exposure on the US dollar tranches of the privateplacements has been fully hedged into sterling in accordance with the riskprofile set out above.The nature of the Group's business in general does not involve a significantamount of cross-border trade. Consequently the Group is not exposed tosubstantial foreign currency transaction risk as sales and costs areapproximately matched within overseas operations. Material transactionalexposures of individual business units are hedged by forward foreign exchangecontracts.Central funding of individual business units gives rise to monetary assets andliabilities centrally and in the business units. Where the asset or liabilityis denominated in a currency that is not the operating currency of the businessunit involved, and a foreign exchange risk would otherwise result, the foreigncurrency exposure arising is hedged by forward foreign exchange contracts.8.4 Interest rate riskThe Group's exposure to interest rate fluctuations on its borrowing anddeposits is selectively managed, using interest rate swaps.8.5 Credit riskThe Group monitors the credit quality of counterparties and limits creditexposures accordingly.9. International Financial Reporting Standards (IFRS)Serco Group plc will adopt IFRS for accounting periods beginning on 1 January2005. The Group's interim financial statements for the six months ending 30June 2005 will be the first under IFRS.The Group is well positioned to ensure compliance within the requiredtimescale. Reporting systems and procedures have been enhanced to support thenew reporting requirements and the Group's IFRS accounting policies are beingdeveloped. In addition, IFRS training programmes have been provided to ensurethat IFRS knowledge is embedded throughout the organisation.A number of areas of difference between IFRS and UK GAAP, which may impact theGroup's reported results and financial position, have been identified. Theseinclude goodwill and intangible assets, financial instruments, share basedpayment, employee benefits including pensions, joint ventures and taxation.Areas that may require additional disclosure include segment reporting, serviceconcessions and joint ventures.The key points arising from the adoption of IFRS are: * The Group's underlying performance, cash flow and ability to pay dividends will be unaffected. * The impact on year-on-year earnings growth after transition is likely to be minimal. * The fair value concept may introduce volatility into the balance sheet, largely due to the inclusion. of financial instruments and actuarial gains and losses on defined benefit pension schemes * On transition, the Group's profit before tax will be principally affected by non-amortisation of goodwill, partially offset by a charge for share based payment. * On transition, net assets will reduce principally through recognition of actuarial losses on defined benefit pension schemes. The Group's analysis of the effect of IFRS is ongoing. In addition, theinterpretation of standards is evolving so further changes may arise, notablyin accounting for pension schemes and service concessions, including PFIs.10. Post balance sheet eventsDuring December 2004, Serco made a recommended offer to acquire all of theissued and to be issued share capital of ITNET plc, a UK listed company. Theacquisition of ITNET was declared unconditional in all respects on 3 February2005. On 17 February 2005, Serco announced that it had acquired, or contractedto acquire, more than nine tenths in value of ITNET's shares and that Sercointended to compulsorily acquire the outstanding ITNET shares.Also during December 2004, Serco made an offer to purchase RCI HoldingCorporation, an American private company. The process of obtaining USgovernment approvals is continuing, and we expect to reach completion duringMarch 2005.Consolidated Profit and Loss AccountFor the year ended 31 December 2004 2004 2003 2004 Joint 2004 2003 Joint 2003 Group Ventures Total Group Ventures Total Note ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 ‚£'000 Turnover: Group 2 1,381,417 255,440 1,636,857 1,324,271 231,255 1,555,526and share of joint ventures - continuing operations Less: Share of 2 - (255,440) (255,440) - (231,255) (231,255)joint ventures Group turnover 2 1,381,417 - 1,381,417 1,324,271 - 1,324,271 Cost of sales (1,190,531) - (1,190,531) (1,143,418) - (1,143,418) Gross profit 190,886 - 190,886 180,853 - 180,853 Administrative (156,204) - (156,204) (157,144) - (157,144)expenses Amortisation of (16,476) - (16,476) (14,131) - (14,131)intangible assets Other (139,728) - (139,728) (138,516) - (138,516)administrative expenses Exceptional item: - - - (4,497) - (4,497)reorganisation costs Operating 34,682 - 34,682 23,709 - 23,709profit-continuing operations Exceptional item: - - - 3,977 - 3,977GSR sale and leaseback Share of - 25,437 25,437 - 22,700 22,700operating profit in joint ventures Interest 31,171 4,111 35,282 16,760 11,397 28,157receivable and similar income Group 31,171 - 31,171 12,691 - 12,691 Exceptional item: - - - 4,069 - 4,069Norfolk and Norwich refinancing Share of joint - 4,111 4,111 - 11,397 11,397ventures Interest payable (33,259) (4,760) (38,019) (15,609) (10,080) (25,689)and similar charges Group (33,259) - (33,259) (15,609) - (15,609) Share of joint - (4,760) (4,760) - (10,080) (10,080)ventures Profit on 32,594 24,788 57,382 28,837 24,017 52,854ordinary activities before taxation Taxation on (20,371) (19,103)profit on ordinary activities Profit on 37,011 33,751ordinary activities after taxation Share of joint (577) (198)venture minority interest Minority interest (413) (255) Profit for the 36,021 33,298financial year Equity dividends (11,810) (10,050) Retained profit 24,211 23,248for the financial year Earnings per 3 Ordinary Share (EPS) of 2p each Basic EPS, after 8.37p 7.75p amortisation of intangible assets Basic EPS, before 12.20p 11.03p amortisation of intangible assets Diluted EPS, 8.27p 7.74p after amortisation of intangible assets Diluted EPS, 12.06p 11.02p before amortisation of intangible assets The basis of preparation of this statement is set out in Note 1.Consolidated Balance SheetAs at 31 December 2004 2004 2003 Note ‚£'000 ‚£'000 Fixed Assets Intangible assets 215,157 222,950 Tangible assets 79,537 77,398 Investments in joint ventures 27,196 24,886 Share of gross assets 195,475 151,460 Share of gross liabilities (168,279) (126,574) Other investments 13,712 - 335,602 325,234 Current assets Stocks 36,204 39,543 Debtors: Amounts due within one year 4 293,608 278,931 Debtors: Amounts due after more than one 4 333,615 419,589year Cash at bank and in hand 173,886 170,888 837,313 908,951 Creditors: Amounts falling due within one year Trade creditors 76,886 81,335 Other creditors including taxation and 114,179 90,892social security Accruals and deferred income 192,032 177,866 Proposed dividend 8,330 6,958 391,427 357,051 Net current assets 445,886 551,900 Total assets less current liabilities 781,488 877,134 Creditors: Amounts falling due after more 415,088 539,798than one year Provisions for liabilities and charges 61,981 56,526 Net assets 304,419 280,810 Capital and reserves Called up share capital 8,707 8,697 Share premium account 191,510 190,791 Capital redemption reserve 143 143 ESOP reserve (15,815) (16,949) Profit and loss account 119,874 98,128 Equity shareholders' funds 5 304,419 280,810This preliminary announcement was approved by the Board of Directors on 1 March2005 and signed on behalf of the Board:Kevin Beeston Executive Chairman Andrew Jenner Finance DirectorConsolidated Cash Flow StatementFor the year ended 31 December 2004 2004 2003 ‚£'000 ‚£'000 Operating profit 34,682 23,709 Depreciation and amortisation of 35,790 32,532intangible assets Movement in ESOP investment 1,134 1,258 Net increase in working capital (3,642) (11,111) Net cash inflow from operating activities 67,964 46,388before PFI asset expenditure Movement in PFI debtor * 6,902 3,680 Expenditure on PFI assets under (16,278) (33,001)construction * Net cash inflow from operating activities 58,588 17,067after PFI asset expenditure Dividends received from joint ventures 14,239 12,630 Returns on investments and servicing of finance Interest received 31,033 5,652 Interest paid (34,767) (6,054) Exceptional item: Norfolk and Norwich - 4,069refinancing Net cash (outflow)/inflow from returns on (3,734) 3,667investments and servicing of finance Taxation Tax paid (1,479) (7,354) Capital expenditure and financial investment Purchase of tangible fixed assets (19,257) (21,835) Sale of tangible fixed assets 51 8,878 Exceptional item: GSR sale and leaseback - 5,761 Net cashflows with joint ventures (1,960) 2,969 Net cash outflow from capital expenditure (21,166) (4,227)and financial investment Acquisitions and disposals Acquisitions ¢â‚¬ (13,890) (107,463) Net cash acquired with acquisitions - 12,843 Net overdraft/(cash) redeemed upon 16 (3,141)disposal Subscription for shares in joint ventures - (3,354) Proceeds from disposal of subsidiary and 3,159 4,471business undertakings Proceeds from reduction in investment in 1,763 -joint ventures Net cash outflow from acquisitions and (8,952) (96,644)disposals Equity dividends paid Dividends paid (10,438) (9,529) Net cash outflow from equity dividends (10,438) (9,529)paid Net cash inflow/(outflow) befoRelated Shares:
Serco