29th Aug 2012 07:00
29 August 2012
Good performance held back by challenging US conditions
Serco Group plc - 2012 half year results
6 months to 30 June 2012 2011 Change Revenue
£2,341.7m £2,245.8m +4.3%
Adjusted operating profit (i.e. excludes exceptional items) before
£139.6m £133.8m +4.3% reorganisation costs
Adjusted operating profit (i.e. excludes exceptional items)
£123.9m £133.8m (7.4%) Operating profit* £142.3m £122.0m +16.6%
Adjusted profit before tax (i.e. excludes exceptional items) before
£117.8m £123.6m (4.7%) reorganisation costs
Adjusted profit before tax (i.e. excludes exceptional items)
£102.1m £123.6m (17.4%)
Profit before tax*
£120.5m £111.8m +7.8%
Adjusted earnings per share (i.e. excludes exceptional items) before
17.94p 18.74p (4.3%) reorganisation costs
Adjusted earnings per share (i.e. excludes exceptional items)
15.52p 18.74p (17.2%) Earnings per share* 19.85p 16.74p +18.6% Dividend per share 2.65p 2.50p +6.0% Group free cash flow £0.9m £51.8m (£50.9m)
* Includes £31m exceptional net profit on disposals of subsidiaries and operations; full definitions of adjusted measures are provided on page 2 and the income statement is presented on page 25
Excellent contract win performance
£4.2bn of awards in the period (2011: £2.5bn); £3.7bn signed and £0.5bn appointed preferred bidder
Increase in order book to £19.4bn as at 30 June 2012 (£17.9bn at 31 December 2011)
98% revenue visibility for 2012, 83% for 2013 and 71% for 2014
Challenging US market conditions largely offset by resilience of broad portfolio
Conditions remain very difficult and uncertain for US federal outsourcing market
Further excellent revenue growth in AMEAA and areas of improvement in the UK have provided balance
Successful launch of Global Services BPO division; excellent underlying revenue growth in the period
Of total Group revenue: 46% is now generated outside the UK (2011: 42%); 13% is Business Process Outsourcing (BPO) (2011: 10%)
Strong pipeline including newly identified prospects
An estimated £31bn total value of opportunities reflects ongoing demand for efficient, high quality and innovative service provision
New opportunities added across frontline services markets; strong increase in the AMEAA region; expected further opening up of certain UK public sector markets
Strong growth prospects in the global BPO market with both private and public sector customers
Proactive portfolio management and organisational changes position the Group for the future
Intelenetfully integrated within Global Services and delivering to plan
Additional recent infill acquisitions such as Vertex UK public sector BPO operations bring further capabilities and market access
Exits from non-core operations reflect focus on strategic fit, performance and returns
Reorganisation successfully concluded: cost impact on first half profits to be recovered in the second half as expected
Remain confident in the overall outlook
Forecasts reflect a balance of risks and opportunities across our markets
2012 expected to deliver another year of good organic revenue growth for the Group overall; first half decline of 2% to improve to a strong second half growth driven by previously announced contract wins
2012 Adjusted operating margin to increase by a similar amount to 2011, reflecting second half revenue growth and underlying efficiencies
Action taken this year will position the Group well for future growth in revenue and profits
Christopher Hyman, Chief Executive of Serco Group plc, said: "I am pleased withthe overall performance of the business over the last six months, particularlythe quality and efficiency of the services delivered by our people. As wecontinue to build Serco's international portfolio, our newly established globalBusiness Process Outsourcing division has already seen a high level of contractwins and many with private sector customers. Our business in Australasia andthe Middle East continues to grow strongly and, while significant challenges inthe US remain, we see conditions in the UK starting to improve. The recentlevel of new contract wins across the group will help us deliver theanticipated strong financial performance in the second half of the year." Notes:Adjusted operating profit and Adjusted profit before tax are beforeamortisation of intangibles arising on acquisitions, acquisition-related costsand exceptional items (being profits or losses on disposals of subsidiaries andoperations), as shown on the face of the Group's consolidated income statementand the accompanying notes.Adjusted earnings per share is calculated on the basis of earnings beforeamortisation of intangibles arising on acquisitions, acquisition-related costsand exceptional items (being profits or losses on disposals of subsidiaries andoperations), together with the tax effect of these adjusting items.Given the timing of implementation costs for the Group's reorganisationactivity undertaken in the first half of the year, to aid comparability we havealso provided underlying measures of financial performance. These are based onthe above definitions but are also before the £15.7m of reorganisation costs.
Group free cash flow is free cash flow from subsidiaries and dividends received from joint ventures, and is reconciled to movements in cash and cash equivalents in Section 3 of the Finance Review.
Performance at constant currency has been calculated by translating non-Sterling revenue and earnings for the half year to 30 June 2012 into Sterling at the average exchange rates for the same period in 2011.
The order book is the value of future revenues based on all existing signedcontracts. It excludes contracts at the preferred bidder stage and excludesthe award of Indefinite Delivery, Indefinite Quantity (IDIQ) contract vehicleswhere we are one of a number of companies able to bid for specific task orderswithin the IDIQ. New IDIQ awards enable us to compete for specific task ordersissued under the IDIQ, with the value of the task orders recognised within theorder book when subsequently won.
The pipeline is the estimated value of all future potential opportunities that are clearly defined and identifiable.
For further information please contact Serco:
Stuart Ford, Head of Investor Relations T +44 (0) 1256 386 227
Marcus De Ville, Head of Media Relations T +44 (0) 1256 386 226
Presentation
A presentation for investors and analysts will be held at Holborn Bars, 138-142 Holborn, London EC1N 2NQ at 9.30am today. The presentation will be webcast live on www.serco.com and subsequently available on demand.
Overview
The first half of 2012 has seen some very positive progress, particularly interms of the substantial level of contract awards and the continued significantprogress in ensuring that our business is positioned to deliver strongly forthe future. Revenue and Adjusted operating profit before reorganisation costsboth grew 4% to £2,342m and £139.6m respectively. After reorganisation costsand higher net financing costs, Adjusted profit before tax was reduced to £102.1m for the period. However, as previously indicated, our financialperformance (including revenue growth, margin progression and free cashgeneration) will be weighted to the second half of the year when we expect
astrong financial result.
After achieving an excellent level of contract awards totalling £4.2bn in theperiod, our order book has grown to £19.4bn. The pipeline of identifiedopportunities has been replenished to stand now at an estimated £31bn. Ourproactive portfolio management has seen both acquisitions and disposals toappropriately position the Group strategically for the future, with thesuccessful completion of the reorganisation activity also supporting this. Challenging US market conditions remain, although balance is provided from verystrong revenue growth in AMEAA, areas of improvement in the UK, and thesuccessful launch of our Global Services BPO division which achieved excellentunderlying growth and has strong future prospects. The Group has thereforecontinued to demonstrate that our global reach and breadth of operationsprovides both access to future growth and resilience in times of varied marketconditions. We remain, therefore, confident in the outlook for the fullfinancial year and beyond.
Summary of financial result for the period
For the first half of 2012, reported Group revenues were £2,341.7m, representing total growth of 4.3%. Growth at constant currency was 4.2%. Organic revenues, excluding acquisitions and currency effects, declined by 2.1%, the impact of challenging US market conditions being largely offset by growth in other parts of our broad portfolio.
The period saw further very strong revenue growth in AMEAA - up 22%organically. Global Services, our newly created BPO division, achievedunderlying growth of over 20% but this was outweighed by the effects of thetransfer of the Bradford education contract and the government funding cuts toour previous work for the Regional Development Agencies, resulting in anorganic revenue decline of 11%. Our UK & Europe frontline services divisionsaw an organic revenue decline of 1% as the headwind from fewer contracts inthe welfare to work market offset other improvements. Conditions that remainvery difficult and uncertain for the US federal outsourcing market resulted ina 16% decline in organic revenues for the Americas division. Our divisionalperformance is described fully in the Operating Review. Adjusted operating profit, before reorganisation costs of £15.7m, increased by4.3% to £139.6m, representing an operating margin maintained at 6.0%. Netfinance costs were £11.6m higher, principally reflecting the incremental costof funding the acquisitions made in 2011. Adjusted profit before tax, beforereorganisation costs, declined by 4.7% to £117.8m, and Adjusted earnings pershare before reorganisation costs declined by 4.3% to 17.94p. The financialperformance for the period was further reduced by the reorganisation costs, butthe successful completion of this programme will result in the delivery ofsavings in the second half, leading to a broadly neutral impact for the fullyear. Following successful portfolio management activity, there was a £31.0mnet exceptional profit on disposals of subsidiaries and operations in theperiod, leading to growth in unadjusted financial performance when the impactof these one-off exceptional gains is included. Group free cash flow was £0.9m compared with £51.8m in 2011. Cashreorganisation costs were approximately £12m in the period. The remainder ofthe reduction was driven principally by a greater working capital outflow. Around £30m reflected the timing of a small number of customer payments aroundthe half-year balance sheet date that have now subsequently been received, aswell as the timing of transition and mobilisation stages on new contractawards. There is also an approximate £10m effect from the typically higherlevel of working capital investment required for BPO-related contracts. Our policy is to increase the total dividend each year broadly in line with theincrease in underlying earnings. Accordingly, the Board has declared aninterim dividend of 2.65p per share, representing an increase of 6% on the 2011dividend. The interim dividend will be paid on 19 October 2012 to shareholderson the register on 7 September 2012.
Our earnings, cash flow, financing and related matters are described fully in the Finance Review.
Excellent contract win performance
In the first half of 2012, across our wide portfolio of markets andgeographies, we signed contracts valued at £3.7bn and were appointed preferredbidder for a further £0.5bn. The total £4.2bn of awards compares with £2.5bnin the equivalent period in 2011. Our wins included smaller and medium-sizedawards which are fundamental to our growth, as well as significant rebids,extensions, expansions and new contracts. As a result of the substantial levelof awards, our order book grew to £19.4bn at 30 June 2012 (£17.9bn at 31December 2011).
The period's notable contract awards, along with approximate total value and contract length where appropriate, included:
Ferry services to the Northern Isles in Scotland (£350m over six years);
UK asylum applicant support services (£175m over five years);
NHS Suffolk community health services (£140m over three years);
Integrated facilities management for East Kent NHS Foundation Trust (£140m over ten years);
Next pricing period signed for Atomic Weapons Establishment (AWE) management and operation (£1.5bn over five years);
Pre-deployment training and support for the British Army (£55m over three years);
Leadership for corporate services (DBS) for the UK Ministry of Defence (£36m over four years);
Procurement services for Defence Science & Technology Laboratory (Dstl) (£90m over nine years);
US Army base closure support in Afghanistan (US$57m over three years);
US IDIQ task orders - across areas including IT services & solutions, human capital management and logistics & programme management - totalling over US$40m
WiriPrison operating contract in New Zealand (majority of maximum NZ$900m total price over 25 years);
Young Adults Facility in Western Australia (A$50m over five years);
Major BPO contract with leading UK retailer Shop Direct Group (£430m over ten years);
Anglia Support Partnership shared services operation for UK health sector (£ 120m over four years);
Customer support services for large Indian financial services organisation (£ 31m over three years);
Loyalty programme support for global online travel company (US$34m over three years).
More details of these and other contract awards can be found in the OperatingReview, with further information and other smaller and medium-sized contractawards during the year described in the contract news updates and otherannouncements available on our website, www.serco.com.
Visibility of future earnings remains high due to the signed contracts that make up our order book, contracts that we expect to extend and rebid, and contracts at the preferred bidder stage which we expect to sign. At 30 June 2012, revenue visibility was 98% for 2012, 83% for 2013 and 71% for 2014.
Challenging US market conditions largely offset by resilience of broad portfolio
A key element of the Group's strategy is to build a balanced portfolio, aimingto reduce risk and increase opportunities across markets. This reduces ourexposure to market fluctuations, enables us to select the best opportunitieswhichever market they are in, and allows us to transfer expertise from onemarket to another.
In the US federal outsourcing market conditions remain very difficult, significantly impacting the performance of our Americas division. However, offset has been provided by further very strong revenue growth in the AMEAA region and areas of improvement in the UK.
In addition, the launch of our Global Services BPO division has been a key partof positioning Serco to access attractive markets. In the period, theunderlying revenue growth in our BPO-related operations was excellent, and thedivision achieved awards totalling over £800m. Research by NelsonHall, theleading analyst and advisory firm for the BPO industry, ranks Serco's level ofcontract awards in 2012 to date as top amongst global BPO providers.
The breadth of our portfolio is such that 46% of total Group revenue is now generated outside the UK, an increase from 42%. Our BPO operations now account for 13% of Group revenue, up from 10%, and BPO is expected to increase significantly further as a proportion of the Group's revenue mix.
Strong pipeline including newly identified prospects
A significant level of opportunities was successfully converted to awards inthe period. Newly identified prospects across our portfolio have increased thepipeline to an estimated total value of £31bn. The increase reflects theongoing demand for efficient, high quality and innovative service provisionfrom public and private sector customers around the world. There is a strong pipeline increase in AMEAA, with new opportunities includingthose in the growing health markets in the region, and in the justice sector. There remain substantial prospects in defence support, transportation marketsand integrated facilities management services. In the UK, markets continue to show stabilisation and increasing signs ofimprovement. There are further indications of new markets opening up,supported by the agenda for public service reform. New opportunities includethose driven by the growth in commissioning of health services, defenceorganisation strategic partnerships and competition being introduced tonumerous areas of the home affairs market. Near-term opportunities include theoutcome of the current round of prison bids. There are strong growth prospects in the global BPO market. New opportunitiesadded in the period include further strategic partnerships with localauthorities to transform their services, with prospects for future centralgovernment shared service centres also continuing to develop. In the privatesector, further prospects are being pursued following significant recent winsacross a number of vertical markets including life and pensions, retail, traveland utilities.
Proactive portfolio management and organisational changes position the Group for the future
In 2011 Serco added significant global capability in the fast growing, highermargin BPO market. The Intelenet acquisition was strategically important forSerco's development in this area, as were other smaller infill acquisitionssuch as The Listening Company in the UK and Excelior in Australia, with theseadding specific customer contact capabilities and geographic reach. Intelenetis now fully integrated as part of Serco Global Services and is delivering toplan as set out at the time of the acquisition. In June 2012 Serco acquired Vertex's UK public sector BPO operations, bringingadditional expertise and strategic partnerships to support expansion into newareas of middle and back office support and at the same time increase Serco'soperational scale. This will help develop future opportunities in both thelocal government and central government markets, with Vertex bringingsignificant customer referenceability and specific skills in HR and payroll,revenues and benefits, complex case management and administration services.
While remaining primarily focused on organic growth, Serco will continue to look at potential acquisitions that bring new skills, capabilities and market access.
Our proactive portfolio management also involves ongoing assessment of ourexisting operations for their strategic fit, together with their expectedfuture levels of performance and returns. As part of this, Serco made twodisposals that were non-core to the future development of the Group. Thesewere our Technical Services business which provided consulting and projectsolutions to the UK civil and nuclear defence markets, and secondly themajority of our mainly defence-related operations in Germany. We will continueto serve the defence and science sectors, focusing on our long-term contractmodel that looks to develop the best opportunities and a balanced portfolio. The successful conclusion in the period of the Group's reorganisation has alsoenhanced the Group's position. This has created the new BPO division, ourfirst global business, bringing together all of Serco's middle and back officeskills and capabilities. This is improving the services we provide tocustomers and enabling better targeting of opportunities around the world inboth the private and public sector. The reorganisation has also created asingle UK & Europe division. This is supporting the delivery of bettercustomer relationship management and service development, as well as increasedinternal efficiencies. Since 1 July 2012, the Global Services division hasbeen operating a wider-reaching shared service centre for the Group itself. These organisational changes, which have led to headcount reductions inmanagement and our own back office support functions, have resulted in costs of£15.7m in the first half of the year which will deliver equivalent savings
inthe second half of the year.
Remain confident in the overall outlook
Our forecasts reflect a balance of risks and opportunities. Whilst we expectchallenging conditions to remain in the US, we anticipate further improvementin UK markets and strong performances from our AMEAA and Global Services BPOoperations. For 2012, we continue to expect to deliver another year of strong total revenuegrowth, including further good organic growth. The organic revenue decline of2% in the first half of the year is anticipated to improve to strong growth inthe second half, reflecting the excellent performance over recent months insecuring new contract awards that will now flow through to revenues. Ourexpectations are also unchanged for an increase in our full-year operatingmargin similar to that achieved in 2011, reflecting the pick-up in second halfrevenue growth and the delivery of underlying efficiencies.
We remain confident in the overall outlook for Serco, the continued delivery of our strategic plan and further improving our financial performance.
Operating Review and Growth Opportunities
This section is presented according to the four divisions based around our principal markets:
UK & Europe,Americas,
AMEAA (Australasia, Middle East, Asia and Africa), and
Global Services.
The section outlines contract awards which are significant because of their value or their strategic contribution to our business. Further details of these, as well as other medium and smaller-sized contracts, can be found on our website at www.serco.com.
UK & Europe - operating review
The UK & Europe division includes our frontline services in: Home Affairs (encompassing justice-related operations, immigration and border security, and welfare); Health; Transport and Local Direct Services; and Defence & Science.
Revenue declined by 1% to £1,266m (2011: £1,284m), and represented 54% of Grouprevenue. Revenue on an organic basis also declined by 1%. Adjusted operatingprofit, before reorganisation costs and corporate expenses, increased by 7% to£86.3m (2011: £80.8m), with the margin increasing to 6.8% (2011: 6.3%). Afterreorganisation costs, Adjusted operating profit reduced to £78.9m.
Underlying revenues were marginally ahead excluding the impact of Serco now operating fewer contracts in the welfare to work market. The ongoing government austerity programme places pressure on discretionary spend with Serco, but this has been offset by the start of new contracts with these continuing to signal an improving outlook. The margin improvement largely reflects lower bid costs year-on-year and the delivery of operational efficiencies.
The creation of a single UK & Europe division has involved significantorganisational change during the period both to increase our own efficiency andcrucially also to support the delivery of better services for our customers. We are now in a stronger position to target future growth, including wherecustomers are looking for more end-to-end services that combine frontlinecapability with middle and back office operations. In such instances, the UK &Europe division as the relationship lead will draw upon the skills andcapabilities of the new Global Services division to deliver fully integratedservices. Home Affairs
Our operations across the Home Affairs market account for approximately 19% of UK & Europe revenues.
HMP Thameside, the new prison at Belmarsh West in London, became operational on30 March 2012. The contract has a value to Serco of approximately £415m over26½ years. This local Category B establishment has an operational capacity of900 convicted and remand male prisoners, and is one of the most technologicallyadvanced prisons in the world. It has, for example, advanced CCTV digitalrecording and monitoring, the latest drug and contrabands interventionequipment, biometric key vending for staff, and in-cell IT for prisonereducation and administration. Meanwhile the Payment by Results pilot underway at HMP & YOI Doncaster isbeginning to show that it has real potential to reduce re-offending. Typicalof the many innovative interventions in place are the Families First Programme,which supports prisoners' relationships with their partners and children, andSecond Shot Productions, which teaches technical and creative skills in filmingand graphic design. Both of these programmes recently won prestigious ButlerTrust Awards.
In the welfare to work market, our Work Programme performance continues to bemarket-leading based on the quarterly performance data released to date by theDepartment for Work and Pensions. Based on the number of referrals andattachments, our two contracts are ranked top out of all 40, thereby continuingto rank Serco the top provider out of all 18.
Health
Our operations across Health account for approximately 8% of UK & Europe revenues.
Amongst our clinical capabilities, Serco's Cornwall and Isles of Scilly GPout-of-hours contract was recently found to be and reported as one of the bestperforming such contracts in the UK by The Primary Care Foundation, as part ofits National Benchmarking Exercise. This was further supported by a surveycarried out by Ipsos-Mori on behalf of the Department of Health. Since theout-of-hours service started, Serco has not scored less than 95% in the monthlypatient satisfaction survey and over 86% of patients rate the service eitherexcellent or good. The contract has also implemented actions to ensure thatall areas identified by the recent Care Quality Commission report are fullycompliant. The transformation continues of Braintree Community Hospital after its takeoverby Serco last year. Clinical services are high quality, readily accessible andbuilt around consultant-led care, and the hospital has now established itselfas a vital part of the NHS in mid Essex. Our GSTS pathology joint venture is focused on delivering necessary efficiencyimprovements in 2012. Its management team has been further strengthened withthe appointment of an independent Chairman, with this new role integral inhelping GSTS take forward its strategy for modernising NHS pathology andimplement its plans to deliver sustainable growth of the business. Serco's track record and the strength of our overall health business have ledto substantial developments during the period that are discussed later in moredetail. These include a shared service centre for the NHS in the East ofEngland; clinical services in community healthcare for NHS Suffolk; andnon-clinical integrated facilities management for the East Kent HospitalsUniversity NHS Foundation Trust.
Transport & Local Direct Services
Our operations across Transport and Local Direct Services account for approximately 35% of UK & Europe revenues.
Our London transport contracts - comprising the Docklands Light Railway (DLR),the Barclays Cycle Hire scheme and traffic management operations - have allachieved excellent operational performance during the period. Serco continuesto support growth in regular journeys as well as annual events such as theLondon marathon, and successfully executed the significant additional workloadinvolved in the Diamond Jubilee and the 2012 Olympic Games. The DLR inparticular was a key part of the London 2012 Games transport network, with theStratford International Extension opened last summer adding four new stationsand connecting five Games venues. According to Transport for London and theOlympic Delivery Authority, during the period of the Olympic Games, over sixmillion journeys were made on the DLR - up by over 100 per cent on normallevels. On the busiest day, the DLR carried a record-breaking 500,000 people. Also impressive was the fact that in July, Barclay's Cycle Hire rentalsexceeded a million for the first time in any month. Our other UK rail franchises in Northern Rail and Merseyrail are alsosupporting growth in passenger numbers and continued strong operationalmetrics. At Northern Rail, our performance has led to a further extension ofthe contract through to 1 April 2014, with the full rebid process therefore
tobegin next year. In direct services for local authorities, a number of contracts becameoperational during the period. In April 2012, Serco began providing refuse andrecycling services for 127,000 households in the London Borough of Wandsworth,helping the council to meet Government recycling targets and reduce costs suchas landfill taxes. The contract is valued at £44m over eight years. Sercoalso has two new contracts with Mansfield District Council and ShropshireCouncil to provide a comprehensive and high quality range of health, leisure,fitness, wellbeing and community-focused services.
Defence & Science
Our operations across Defence and Science account for approximately 38% of UK & Europe revenues.
Our management and operation of the Atomic Weapons Establishment (AWE), as partof a joint venture with Lockheed Martin and Jacobs Engineering, has beenachieving excellent results. The contract is delivering value for money forthe Ministry of Defence (MoD) whilst achieving excellent performance in thequality and timeliness of our programme delivery. In recognition of this,arrangements for the next pricing period through to 31 March 2018 weresuccessfully concluded. During the period the Conventional Forensics Analysis Capability (CFAC)state-of-the-art laboratory was opened, where AWE is pooling its resources andexpertise to support forensic specialists from the police, forensic scienceservice providers and other organisations. At the National Physical Laboratory(NPL), which is also managed and operated by Serco, the Centre for CarbonMeasurement was launched, ensuring the UK is a leading force in climatemodelling, global carbon markets and green technology. Business and governmenthave welcomed the project, highlighting its potential to reduce emissions andstimulate the economy. In April 2012 Serco began operating a new contract for the MoD to providetraining and support to the British Army prior to deployment on operationsoverseas. Known as the Contemporary Operating Environment Force (COEFOR), andawarded by the British Army's Headquarters, critical pre-deployment trainingincludes language, culture and operational environment skills, and the creationof realistic training conditions to prepare UK military forces for operationsin Afghanistan and other theatres around the world. The contract runs toDecember 2014 including an option year and has a total value of approximately £55m. A new Multi-Activity Contract (MAC) for RAF Valley, supporting theircrucial role in training fast jet pilots for both the RAF and the Royal Navy,also became operational in the period. Also starting in April 2012 was Serco's contract to provide an executiveleadership team for Defence Business Services (DBS). DBS provides corporateservices for the MoD such as civilian human resources, finance, information andsecurity vetting. Serco will work with DBS staff to transform the organisationinto a lean and effective shared services centre, building on private sectorbest practice. The contract is valued at around £36m over its initialfour-year duration. Serco has begun overseeing and delivering the Defence Science & TechnologyLaboratory's (Dstl) Helios programme, which will see the relocation of all ofDstl's activities from Fort Halstead to Porton Down and Portsdown West. Theprogramme will help to support Dstl's future strategic goals, protect theircapabilities and provide additional cost benefits, building on an alreadystrong Total Facilities Management (TFM) partnership between Serco and Dstl.
UK & Europe - growth opportunities
The UK, accounting for the vast majority of the division's operations, showssigns of increasing activity and good growth potential. Competitiveoutsourcing supports the government's aim of achieving savings while improvingservices and social outcomes. The reform of public services provision will bean ongoing process, but the Cabinet Office and spending departments appearincreasingly focussed on picking up the pace of bringing opportunities tomarket. The recent restructuring into a single division places Serco in abetter position for future growth opportunities across the wider public sector,and we continue to strengthen our brand and account relationships at alllevels, including central government, the devolved administrations in Scotlandand London, in local government and in public service frontline organisationssuch as the police and NHS. Home AffairsAfter the initial market testing in 2011 of opening up to competition existingpublic sector prisons, Serco is currently bidding to add further prisons to thesix we currently run in England and Scotland. A successful outcome would addadditional revenues in 2013, with further public sector prisons likely to cometo market; in England and Wales, there are currently 133 prisons with theprivate sector operating 14 of these. The programme forms part of the Ministryof Justice's 'Competition Strategy for Offender Services' set out in 2011. In non-custodial sentencing, the Ministry of Justice has consulted on openingup to competition an approximate £600m per year market for probation servicesnot directly provided by Probation Trusts. Community Payback schemes are apart of this, and Serco has successfully bid for London as the first region putto market. The contract, in partnership with the London Probation Trust, isdue to start later this year and has an estimated total value to Serco of £38mover four years. The growing use of court fines is also expected to generateopportunities for our collection services business, as well as a largeropportunity for the overarching management of compliance and enforcement thatwould draw upon skills and capabilities from within the Global Servicesdivision. Serco is currently in the process of rebidding its electronicmonitoring contracts in England and Wales, with the current arrangements comingto an end on 31 March 2013.
Serco will begin later this year the operation of its contract with the UKBorder Agency (UKBA) to deliver the COMPASS project, providing accommodation,associated services and transport for asylum applicants in two regions of theUK; the five-year contract has an estimated total value of approximately £175m. Serco was awarded places on the Health and Disability Assessment ServicesFramework for two Lots - UK National and Northern Ireland. We look forward toworking with the Department for Work and Pensions, the Departmentfor SocialDevelopment in Northern Irelandand other authorities in providing serviceswhich combine the highest standards of professionalism and fairness at thepoint of delivery with good value for the taxpayer. Serco is also shortlistedfor the West Midlands police operational support framework agreement. This andsimilar opportunities are expected to see Serco well-placed to partner in thedelivery of services considered non-core to frontline policing.
Health
The UK health market is being driven by the impact of fiscal pressure and theproposed structural reforms which require increased introduction of competitiveforces. In clinical services, we are developing opportunities to operate both hospitaland community-based services. Since the period end Serco has now signed and isdue to begin operating from October community health services in Suffolk. Thisthree-year, £140m contract provides a wide range of services includingcommunity nursing, specialist nursing, management and operation of communityhospitals, speech and language therapy, specialist children's services andcommunity equipment services. The Department of Health currently spends £12bnper annum on community services, with this anticipated to grow, and theDepartment's national 'Transforming Community Services' guidance stipulatesthat all primary care trusts will no longer directly provide community servicesand will instead commission them. There is a growing market for enabling services - both in the UK and elsewherearound the world - that combine facilities management, support services andpatient administration to improve service quality and productivity. From July2012, Serco has been providing integrated facilities management (FM) servicesto the East Kent Hospitals University NHS Foundation Trust, delivering servicesto three acute hospitals, two community hospitals and several small clinics inthe area. The contract has a total value of approximately £140m over a maximumten-year period. Further similar opportunities are being pursued.
Transport and Local Direct Services
Serco has begun operating lifeline freight and passenger ferry services to theNorthern Isles in Scotland, building on our experience of managing andtransforming critical local transport services such as Northern Rail, ScatstaAirport on the Shetland Islands and London's Woolwich Ferry. This six-yearcontract has a total value of approximately £350m, and contributes to revenuegrowth from the beginning of the second half of the current financial year.
Our excellent credentials in transportation systems will support selecting future growth opportunities in the UK and elsewhere around the world. Our current contract for the DLR runs to 31 March 2013, with the potential for an extension for a further two years.
In local government frontline services, growth in environmental services andother areas of integrated facilities management such as leisure services mayemerge. For example, Serco has recently won a new eight-year, £20m contractfor waste and recycling services for Derbyshire Dales District Council whichwill begin in the coming months. Reductions in funding and increased servicedemands from citizens are also driving more interest in strategic partnering,service sharing and personalisation of services.
Defence & Science
The defence market is expected to develop further opportunities for support inareas such as infrastructure management, business process and whole enterpriseoutsourcing, and technical and engineering services. Serco will also seeksimilar opportunities in the science market and emerging markets for energymanagement.
Developing from Serco's operation of Defence Business Services and supported by the skills and capabilities of the Global Services division, we will be pursuing opportunities for strategic partnerships such as the Defence Infrastructure Organisation (DIO). The DIO is responsible for managing and maintaining land and property for the MoD in the UK and abroad, with the potential for further efficiencies to be achieved across its operations.
We are committed to managing and operating critical assets and researchestablishments, with the ongoing potential to add new responsibilities andexpand existing customer relationships. Signing the next five-year pricingperiod for the Atomic Weapons Establishment will see Serco's share of revenueexpected to remain around £300m a year, although under the agreedincentivisation arrangements the earnings and margin rate in the initial yearswill be similar to those achieved in the initial years of the current pricingperiod. We are currently also pursuing an extension to our contract for theNational Physical Laboratory, and continue to review other whole enterpriseoutsourcing opportunities of Public Sector Research Establishments (PSREs). Within the scope of the original Dstl contract, options can be exercised foradditional Target Services. Last year Serco successfully began providing a newmanaged service for Calibration, Maintenance, Servicing and Repair (CSMR) ofequipment critical to the delivery of science services. This enhanced theclose working relationship between Serco and Dstl and has led to Serco nowbeing awarded a further Target Service, which is to provide an end-to-endprocurement service for laboratory assets across Dstl's three core sites, witha potential value of approximately £90m over the remaining nine years of thecontract. Americas - operating reviewOur Americas segment provides professional, technology and management servicesfocused primarily on the US federal government including every branch of themilitary, a broad range of civilian agencies and the National Intelligencecommunity. We also provide services to the Canadian government, selected USstate governments and municipal governments. Revenue on a constant currency as well as on an organic basis declined by 16%. Revenue on a reported currency basis, given the marginal strengthening of theUS dollar, fell by 15% to £381m (2011: £446m) and represented 16% of Grouprevenue. Adjusted operating profit, before corporate expenses, reduced by 20%on a reported currency basis to £29.6m (2011: £37.0m), with the margindecreasing to 7.8% (2011: 8.3%). The US federal contracting market has remained very difficult. Our decline inrevenues, against a relatively robust performance in the comparative period,reflects the challenges that have faced the US Government's 2012 annual federalbudgeting process, with a series of continuing resolutions again beingnecessary due to political difficulties in reaching agreement on funding. Boththe Department of Defense and civilian agencies face the threat of future cuts,potentially on an automatic basis from the start of 2013 via a mechanism knownas 'sequestration'. These factors have continued to severely disrupt theindustry, with government agencies further postponing contract awardannouncements, delaying work under existing contracts and cancelling orreducing the scope of many contracts and task orders. Further pressures haveincluded an increase in 'small business set asides' in our served markets thatrestrict our ability to be prime contractor in some cases, and the federalgovernment shifting to awarding primarily on a methodology of "Lowest PriceTechnically Acceptable" rather than "Best Value". Significant cost reduction was undertaken in 2011, allowing margins to be heldat the time. Whilst cost actions have continued, the challenging marketconditions have now led inevitably to some margin pressure, and are likely tocontinue to do so while the very difficult and uncertain environment persists.
Whilst revenues have reduced due to the delays, cancellations and scope reductions brought about by the market conditions, new task orders, contract awards and rebids do continue to be secured in numerous areas that are less affected by the general budgetary challenges.
Serco provides logistics expertise to the US Army under the Logistics CivilAugmentation Program (LOGCAP), where we provide programme management, costanalysis, logistics planning and administrative services around the world insupport of the United States and allied forces during operations. Additionaltask orders awarded in the first half of the year are valued in total atUS$12m. Also for the US Army, we have been awarded a new contract for a full range oftechnical support services to assist in forecasts that reflect the changes inthe political and military climate. The contract has a total value of US$9mover a maximum five years. Under an IDIQ vehicle with the US Navy, Serco hasalso been awarded a US$11m task order for similar work to provide forecastingmodels to support Navy personnel readiness. Under the same IDIQ a furtherUS$4m task order has been awarded to provide counsellors in support of woundedSailors and Coast Guardsmen.
Serco successfully rebid its contract to support undersea surveillance for the US Navy, where we provide programme management, policy development, procurement, technical research, configuration management outfitting and warehousing. The contract has a total value of US$19m over a maximum five years.
Serco has won new work supporting the US Air Force. We are part of the CACIteam awarded an IT Service Provider contract for the NexGen enterprisetransformation program that was established to provide the Air Force withaccurate, real-time data necessary to make strategic decisions and bettermanage their resources. Serco will assist with the deployment of theintegrated workplace management system to 170 Air Force bases around theworld. For the US Air Force Materiel Command, Serco has also been awarded anadditional task order valued at US$11m to provide analytical, technical, andprogram office support. Serco provides a range of mission-critical engineering and IT services to theDepartment of Defence under the C4I2TSR contract vehicles (Command, Control,Communications, Computers, Intelligence, Technology, Surveillance, andReconnaissance). These services include engineering, systems integration,hardware procurement, software development, technical support, installationtesting operations and maintenance. Additional task orders awarded in thefirst half of year are valued in total at US$20m. Serco provides equivalentservices to US Navy's Space and Naval Warfare Systems Command (SPAWAR) withfurther task orders under the Sea Enterprise IDIQ being won. During the periodSerco was also officially granted ISO/IEC 20000 certification which measuresour approach and capability in delivering world-class IT managed services.
Americas - growth opportunities
The federal contracting market is likely to face continued attrition due to theongoing uncertainty regarding budgets, the upcoming Presidential election andthe challenges facing Congress in dealing with the growing national debt. There remains the threat of sequestration, as included in last summer's debtceiling deal, which is due to take effect from 2 January 2013 unless some formof agreement is reached by the government on tax and spending issues. In themeantime, more Continuing Resolutions are likely, which often limit commitmentsto new programs. As a result, we expect the outlook for spending on governmentservices to remain unclear into 2013. Deltek, an industry studies forecastinggroup, expects that the budget addressable by government contractors coulddecline by 10% in fiscal 2013 and would not bottom out until fiscal 2014 at
theearliest. As is normal for our Americas division, there is a higher frequency of rebidsthan is typical for our operations elsewhere around the world. The developmentof our business will also be shaped by the successful outcome of rebids withina challenging market environment. Significant rebids due before the end of2013 include contracts with the Federal Retirement Thrift Investment Board,Ontario Driver Examination Services, San Francisco parking services, theNational Visa Center, the Department of Veteran Affairs and a majorintelligence agency programme. Serco continues to focus on markets that we expect will receive ongoing fundingsupport, and on assisting government customers to achieve greater efficienciesand higher productivity with constrained resources. Our key areas are:Logistics & Program Management; Communication & Information Systems; NationalIntelligence; Human Capital Management; Business Process Outsourcing; andTransportation & Asset Management. US government agencies are increasinglyusing multi-award contract vehicles to issue task orders on a rapid-cycle,competitive basis. Continuing to qualify for and win business under such IDIQcontract vehicles will be a key contributor to Serco's growth. In the area of mission critical logistical support services, Serco has startedin recent weeks a new contract valued in total at US$57m over a maximum threeyears. This supports the United States Forces Afghanistan (USFOR-A) baseclosure and transition initiative through the coordination of logistics anddeconstruction of bases throughout Afghanistan. Similar to the services weprovided in Iraq, Serco's Base Closure Assistance Teams (BCATs) are assistingmilitary units with the key aspects of redeployment. In IT services and solutions, Serco is one of 54 awardees on a government-wideacquisition contract (GWAC) with a ceiling value of US$20bn over a ten-yearperiod. Serco will bid on a range of task orders for all federal civilian andDepartment of Defense (DoD) agencies that require services and solutionsincluding biomedical IT systems, cloud computing, cybersecurity, mobility,telecommunications, and data center consolidation. Serco is also one of eightawards on a new Multiple Award Contract (MAC) framework supporting SPAWARSystems Center (SSC) Atlantic with integrated Command and Control (C2)engineering and technical support services for command centers. This MAC has apotential ceiling value of US$145m over a maximum three years. Serco was recently awarded a new contract beginning in the second half of thefinancial year to provide equipment and system upgrades to C4ISR equipment onDepartment of Defense Mine Resistant Ambush Protected (MRAP) vehicles. Sercowill deploy teams to Afghanistan, Kuwait, and Qatar to analyse, install andtest the systems on-site. The fifteen-month contract valued at US$73m has anine-month base period and a six-month option period. Serco was also recently awarded an expansion of work on its Army Career AlumniProgram (ACAP) contract to provide career transition services to all Soldiersin the US Army. Previously covering only active Soldiers, the services willnow also cover Army Guard and Army Reserves. Serco expects to hireapproximately 250 additional employees at locations around the world to enablethe delivery of these enhanced services. The contract expansion is valued atUS$38m over the two remaining option years. Serco will continue to pursue taskorders under our HRsolutions IDIQs which help to streamline the acquisition ofhuman resource services for the US Army. Serco has been awarded a place on the new Consultant, Advisory, and TechnicalServices (CATS) contract vehicle that will provide support services to the USAir Force Medical Service (AFMS) at 69 Air Force Medical Treatment Facilitiesin the United States and its territories. Serco is among 13 awardees on theIDIQ contract, which is valued at US$985m over a five-year ordering period. Serco will compete for task orders for Advisory & Assistance Services (A&AS)that will help reduce critical workload demands being placed on the Air ForceMedical Service. Services will include support in the areas of healthcareadministration, executive assistance, financial analysis, business processconsulting, policy analysis, engineering and technical services. Serco Americas pipeline includes numerous further areas of longer termopportunity. For our Navy customers, we expect growth through modernisationwork to extend the service life of the existing fleet. The Department ofDefense is expected to increase its focus on areas such as Intelligence,Surveillance and Reconnaissance (ISR), unmanned flight, space andcybersecurity. Human capital management and transformation programmes arewidening in scope to support future changes to the size and shape of the armedforces. BPO opportunities with federal and other customers will be pursued todeliver enhanced service and more cost-effective solutions. We plan toleverage our strong capabilities in economic cost analysis and programmemanagement to support the Department of Defense's drive for cost savings. Thetransportation market is expected to provide opportunities for our air trafficcontrol, traffic management systems and other transport infrastructure andoperational management skills and capabilities. We will also continue toreview markets in both North America and South America for potential totransfer more of Serco's skills and capabilities. AMEAA - operating review
Our AMEAA segment consists of Australasia, Middle East, Asia and Africa, in which we provide a range of frontline services including transport, justice, immigration, health, defence and other direct services such as facilities management.
Revenue on a reported currency basis grew 32% to £400m (2011: £302m), andrepresented 17% of Group revenue, up from 13% in 2011. Revenue on a constantcurrency basis grew by 29%. Excluding the contribution from acquisitions,revenue on an organic basis grew by 22%. Adjusted operating profit, beforecorporate expenses, reduced by 4% on a reported currency basis to £26.7m (2011:£27.9m), with the margin decreasing to 6.7% (2011: 9.2%). The very strong organic growth reflects revenue from new contracts that werenot in operation in the comparable period of 2011, as well as the expansion ofexisting contracts, particularly a considerable increase in the amount of workdone for the Australian Department of Immigration and Citizenship (DIAC).
The reduction in margin principally reflects the continued return to a more normal level of margin on the DIAC contract, together with increased investment in management infrastructure and capability to develop the significant new growth opportunities in the region.
In Immigration Services in Australia, the pace of irregular maritime arrivalshas not slowed throughout the first half of 2012, with arrivals continuing atrecord levels. While we managed the arrival of 4,892 people into immigrationdetention, a large number were placed on bridging visas or in communitydetention. We successfully managed the opening of new detention centres in theNorthern Territory and Western Australia, and since the half year, the numbersof people in our care have increased; however, the number is still likely tofluctuate and future levels will also reflect prevailing government policy andthe speed of visa processing. While it is not clear at this very early stagehow the Australian Government's new off-shore processing legislation willimpact our current operations, we are working very closely with DIAC andexploring a range of options. Serco continues to have a strong relationshipwith the customer, with both parties working to maintain a safe and stablenetwork of centres, responding with humanity and respect in the operation ofthis sensitive contract. A number of other contract awards in Australia generated incremental revenueversus the comparable period. Serco began operating on 31 July 2011 CourtSecurity and Custodial Services (CSCS) for the Western Australian Department ofCorrective Services. The contract has a value to Serco of around A$210m(approximately £140m) over five years (with potential to extend to 15 years intotal), and has already achieved over 35,000 client movements. A new contractvalued at A$50m over five years (with potential to extend to 15 years in total)for a new Young Adults Facility in Western Australia was signed in March 2012. Serco has also expanded its contracts compared with the same period last yearat Acacia Prison in Western Australia and for the new South QueenslandCorrectional Centre (SQCC) which replaced the previous facility at Borallon. Our involvement has been growing in the pre-operational phase of the new-buildFiona Stanley Hospital near Perth. Plans are on track for the opening in 2014,at which point Serco's full facilities management and support services contractto ensure the smooth running of the whole hospital will begin. Elsewhere inour transport operations, Great Southern Rail has continued to hold revenuebroadly stable in adverse conditions for the Australian tourism market, butadditional operating investment has been required in part to achieve this. Indefence, DMS Maritime (our 50:50 joint venture with P&O Maritime Services)which provides harbour and offshore services to the Royal Australian Navy hascontinued to show good organic growth.
In New Zealand, Serco's operation of the Mount Eden Corrections facility in Auckland completed its transition in August 2011. This new contract is valued at NZ$300m over the full ten years.
In the Middle East, Serco began operating logistics and base support for theAustralian Defence Force (ADF) in September 2011. This provides healthcare,maintenance, ground re-fuelling, accommodation and catering services in aninitial two-year contract valued at A$50m. Service on the Dubai Metro hascontinued to see world class operational standards, with 99.9% of all trains ontime. It has also added additional engineering and maintenanceresponsibilities required to support network expansion. Our integratedfacilities management operations in the region have also delivered growth.
AMEAA - growth opportunities
The AMEAA region has experienced the fastest growth of our portfolio for anumber of years and we continue to see good opportunities for further stronggrowth. Our existing operations in Australasia, the Middle East and India eachpresent prospects. In addition, there is further growth potential fromexpanding into other regions as emerging market governments take steps to adoptinternational best practice in procurement processes to support their socialinfrastructure improvement programmes.
In the justice sector we see further opportunities in the operation of new-build and existing prisons as governments deal with capacity and efficiency challenges. For example, Serco's consortium has been selected by the New Zealand Government as preferred bidder for the new Wiri prison in Auckland.
The value of Serco's 25-year operating contract remains to be confirmed, but forms the majority of the maximum potential price of NZ$900m which also includes design and construction. Our defence business in Australia has a strong base from which to expand services, including garrison and maritime support, engineering and maintenance.
In the emerging and rapidly growing health markets in the region, governmentsare increasingly looking to involve private sector provision. Across theregion Serco will be pursuing potential opportunities for the operation ofhospitals and related services, building on the strength of our UK operationsand the recent Fiona Stanley Hospital win in Australia. Serco was also awardeda new support services contract for the Prince of Wales Hospital, one of thebusiest in Hong Kong with over 1,000 beds and complex facilities. Thiscontract for non-clinical facilities management has a total value ofapproximately HK$90m over two years. In transport, Serco is seeking to leverage its international expertiseparticularly in urban transportation. Numerous bidding opportunities areexpected to support metro systems in India and other locations, as well as intraffic management systems and other rail and road transportation operation andmaintenance contracts. Serco is a global leader in air navigation, and seesopportunities to expand services both within the region and into newgeographies such as North Africa. In July, Serco expanded its services toErbil International Airport in Iraqi Kurdistan, in an initial contract valuedat approximately £7m a year. Serco is awaiting a decision on its bid foroperations for the Abu Dhabi Airport Company, which would increase the scope ofour current operations. Serco's operations of integrated facilities management contracts in thecommercial and other sectors are expected to grow, particularly given ongoingcompletion of major construction projects in the UAE. Last year's acquisitionof a small regional specialist in the region is delivering strong results, andwe also expect to capitalise on Serco's new business development presence inthe Kingdom of Saudi Arabia.
The AMEAA division will also be supported by the Global Services division in joint growth opportunities for its customers. For example, relationships, skills and capabilities will be pooled for opportunities such as providing shared services to government departments.
Global Services - operating review
Serco has created a new global BPO division, bringing together all of Serco'smiddle and back office skills and capabilities. The new Global Servicesdivision will improve the services we provide to customers and address a widerrange of opportunities in both the private and public sectors. Customersaround the world are increasingly looking for end-to-end services that combinefrontline capability with middle and back office operations, helping them todrive more efficiency and better quality services. In addition to seekingspecific BPO opportunities, the division will also work alongside the regionaldivisions to deliver fully integrated services for their customers. By the endof 2012, the establishment and growth of Serco Global Services will be suchthat it will have annual revenues in excess of $1 billion, placing us as a toptier international BPO organisation. In the period under review, Global Services revenue on a reported currencybasis grew 38% to £294m (2011: £214m). This represented 13% of Group revenue,up from 10% in 2011. Revenue on a constant currency basis grew by 43%. Excluding the contribution from acquisitions, principally Intelenet, revenue onan organic basis declined by 11%. In the prior period there were revenues fromthe Bradford education contract which transferred back to the Council inSeptember 2011, and from our Business Link services the majority of which havenow closed due to the government funding cuts borne by the Regional DevelopmentAgencies (RDAs). Excluding these two areas, underlying revenue growth for ournew global BPO division has been over 20%. Adjusted operating profit, before reorganisation costs and corporate expenses,increased by 68% on a reported currency basis to £18.1m (2011: £10.8m), withthe margin increasing to 6.2% (2011: 5.1%). After reorganisation costs,Adjusted operating profit increased to £14.4m. The overall margin increase in the period reflected a number of factors. Themajor positive influence was the contribution from the higher margin Intelenetoperations. Partially offsetting this were increased investment costssupporting the creation of the new global BPO division and its strong pipelineof growth opportunities, together with the reduction from mid-2011 in ourhigher margin Business Link services. The period under review has largely concluded the significant programme ofoperational integration of the acquisitions made in 2011, putting them togetherwith Serco's previously existing strength in IT-enabled service delivery. There have been major investments in rolling out tools such as WorkforceManagement, as well as standardising and strengthening all management andcompliance procedures. Significant investment has been made in IT integration,and this will continue to be a feature to place the business in the strongestposition for future growth. The acquisition of Intelenet is meeting our expectations as set out a yearago. Intelenet has been a key part of the strong underlying revenue growth forthe whole of Serco Global Services. As well as incremental revenues alreadyachieved, there have been numerous major strategic wins in the period whichwill add revenues from the second half of the year. These are covered in thegrowth opportunities section.
Numerous new private sector BPO operations began in the period. In retail, ina £55m ten-year contract with Freemans Grattan Holdings, Serco is deliveringall aspects of customer contact services including customer enquiries, inboundand outbound sales, credit applications, payments, order processing, white mailand e-mail handling; Serco has also begun operating a contract for similarservices for Ideal Shopping. For a large banking and financial servicescompany in India, 1,800 customer contact employees are now delivering thecustomer enquiries, inbound and outbound sales, e-mail handling and web chat. For a leading global online travel company based in the US, Serco is supportingthe booking processes for travel and hospitality services for an award-winningloyalty program. While for Pru Health, a leading UK-based healthcare insuranceprovider, Serco has set up off-shore delivery centres to provide back officeservices such as indexing, invoice processing, claims adjudication and policymaintenance. In the public sector, The Anglia Support Partnership (ASP), which has aninitial value of £120m over four years, began operating in April 2012. This isSerco's first shared services proposition in the emerging market for middle andback office support to the UK health sector. Current support services includeoperational and specialist IT, finance operations, employment services,contracts management, procurement, primary care support services, occupationalhealth, risk management, catering and estates and property. The frameworkagreement also permits the call-off of additional services and other NHSorganisations to access services. The Peterborough City Council strategic partnership, which has an initial valueof £100m over 10 years, saw the transfer to Serco of the in-house sharedservice centre late in 2011. Serco is already successfully growing thiscontract with further services such as procurement being brought into scope aspart of the Council's transformation. The Hertfordshire County Counciloperations which commenced in April 2011 have also widened their scope, withstaff numbers approximately double those of a year earlier. Additionally,Serco's property and IT joint venture with Glasgow City Council, known asACCESS, has seen Information, Communications and Technology (ICT) support forthe authority's schools added to its responsibilities. In the period, our operations have continued to win various accolades in thecrucial area of employee development. According to NASSCOM's ranking of IT-BPOemployers in India, Serco Global Services is now the largest pure-play BPObusiness. Awards in 2012 include recognition within 'Asia's Best EmployerBrand Awards' and 'India's Best Companies to Work For', the latter being for'Best Company in Career Growth'.
Global Services - growth opportunities
Over the last 18 months, Serco has added significant capability in the fastgrowing, higher margin BPO market, broadening Serco's customer and geographicreach. This has added scale and depth to provide our customers with a range ofend-to-end business services as they seek to reduce costs and improveefficiencies by transforming their operations. We are addressing a large number of private sector market opportunities. Thesignificant pipeline of prospects continues to be spread across our four broadgroups of vertical markets: Banking, Financial Services & Insurance; Travel,Hospitality & Transportation; Retail, Healthcare, Utilities, & Manufacturing;Telecom, Technology, Online Services & Media. Serco's approach is increasingly recognised for leadership in transforming acustomer's operations as opposed to simple 'lift and shift' solutions. Serco'sbids benefit from our substantial scale and the ability to provide a blend ofon-shore, near-shore and off-shore service provision. Two significant earlymilestones - Shop Direct and AEGON - are private sector contact centreoperations that provide excellent short-term growth as these becomeoperational, but more importantly strong referenceability for similar work
inthe future. From July 2012 Serco has begun operating a new ten-year contract for ShopDirect Group, the UK's leading online and home shopping retailer, valued intotal at approximately £430m. Serco has taken over responsibility forproviding, and enhancing the efficiency of, customer contact services acrossShop Direct's brands. The partnership will work together to significantlyenhance service levels and efficiency through investment in the latesttechnology, such as web chat and mobile digital services, which are designed tointegrate seamlessly online and mobile into customer contact management. Oursolution combines capabilities from the Intelenet and The Listening Companyacquisitions as well as the additional scale advantage from Serco's other BPOoperations. AEGON, the leading life and pensions company, recently entered exclusive talkswith Serco and in the coming months we expect to begin operating a ten-yearcontract with a total estimated value of approximately £150m. Serco willdeliver a wide range of customer contact and support services for AEGON'sUK-based protection business, including managing all aspects of the customerjourney from initial underwriting through to claims management, and will coverpolicy servicing and claims for some small 'closed book' policies. Thiscontract marks an important entry into the life and pensions segment of thefinancial services market.
Other recent awards that support future growth and reflect the breadth of operations include those for esure insurance services, easyJet airline and travel, British Gas household utilities and a major European media company.
Our strength in transformation, multi-channel customer contact and our geographic reach for supporting operations has been key to these wins.
In the public sector, the Global Services division is working alongside the regional divisions in order to bid and deliver fully integrated solutions for their customers. Significant revenue synergies have already been achieved where the Group's combined capabilities and holistic offering is able to transform public services, and we expect more to continue to emerge in the future.
In the UK, there are tenders expected for the Home Office in areas such as visaservices and policing support. The Global Services division will providesignificant input to the bidding process for operations such as contact centreservices, case management, identity verification, transaction processing, ICT,human resources and payroll, finance and accounting, and any other middle orback office support function that is required. For the Ministry of Justice,Global Services is providing support to the UK & Europe division for courtfines and compliance and enforcement, electronic monitoring and prisonmanagement. The future development of the Ministry of Defence's DefenceInfrastructure Organisation (DIO) opportunity, similar in nature to the DefenceBusiness Services (DBS) contract already led by the UK & Europe division, wouldalso see Global Services support. The ASP contract is expected to be a key enabler to growing Serco's combinationof health support services and BPO operations. We are already seeing growth inareas such procurement services, and expect the framework agreement to supportsignificant further growth. Other opportunities in providing business servicesto NHS organisations are also being pursued. We have recently signed a new contract to provide multi-channel contact centreservices to the Department of Health to cover a range of public healthprogrammes. The contract commences in October 2012 and has a total value ofapproximately £15m over three years. Other central government shared servicecentre opportunities are expected to be developed. For example, the DWP isassessing the case for a shared services centre to process claims andpayments. There is also the potential to expand the scope of support forexisting customers such as Job Centre Plus. Other areas of significantinterest include the processing of rural payments on behalf of Defra andemerging BPO opportunities for transport departments. Our work with local authorities to transform their services continues to show astrong pipeline of opportunities. Local authorities are further developingtheir strategies based on a smaller proportion of services that they deem to becore, thereby increasing the potential to outsource other non-core supportingoperations. Existing Serco strategic partnerships at Hertfordshire, Glasgowand Peterborough have all demonstrated the potential for expansion, and theaddition of the Thurrock and Westminster contracts previously operated byVertex adds to our ability to increase the scope of services. The Westminstercontract has recently been extended with an option through to 2014. Serco islooking to develop numerous other prospects over the next 18 months. Latestresearch by YouGov supports the view that local authorities are looking tooutsource more, with this increasingly needing to focus on transformational
change. Finance Review OverviewFor the first half of 2012 reported Group revenues were £2,342m, representingtotal growth of 4.3%. Growth at constant currency was 4.2%. Organic revenues,excluding acquisition and currency effects, declined by 2.1%. Adjustedoperating profit before reorganisation costs grew by 4.3%.
During the first half, as anticipated, we incurred £15.7m for implementation costs of organisational changes. Furthermore, we disposed of our Technical Services business and the majority of our operations in Germany; these disposals yielded a net £31.0m exceptional gain before tax. Hence, whilst Adjusted profit before tax declined by 17.4%, profit before tax grew 7.8%.
Group free cash flow was £0.9m; as anticipated, this is significantly lowerthan 2011 principally due to timing differences on receiving customer payments,together with absorption of working capital by the higher volume of contractstart ups in our growing BPO segment. As previously communicated, we expectcash generation will be weighted to the second half of 2012. 1. Income statement Serco's income statement for the half year is summarised in Figure 1 below.This includes the results of joint ventures which are proportionatelyconsolidated.Figure 1: Income statementSix months ended 30 June 2012 2012 2012 2011 Before exceptional Exceptional item item Total £m £m £m £m Revenue 2,341.7 - 2,341.7 2,245.8 4.3% Gross profit 346.4 - 346.4 333.0 4.0% Administrative expenses before reorganisation costs (206.8) - (206.8) (199.2) Adjusted operating profit before reorganisation costs 139.6 - 139.6 133.8 4.3% Reorganisation costs (15.7) - (15.7) - Adjusted operating profit 123.9 - 123.9 133.8 (7.4%) Investment revenue and finance costs (21.8) - (21.8) (10.2) Adjusted profit before tax* 102.1 - 102.1 123.6 (17.4%) Net profit on disposal of subsidiaries and operations - 31.0 31.0 - Amortisation of acquired intangibles (11.5) - (11.5) (8.4) Acquisition-related costs (1.1) - (1.1) (3.4) Profit before tax 89.5 31.0 120.5 111.8 7.8% Tax (22.8) - (22.8) (29.6) Profit for the period 66.7 31.0 97.7 82.2 18.9% Effective tax rate 25.5% - 18.9% 26.5% Adjusted operating margin before reorganisation costs 6.0% 6.0% 6.0% Adjusted earnings per share 15.52p 15.52p 18.74p (17.2%) Adjusted earnings per share before reorganisation costs 17.94p 17.94p 18.74p (4.3%) Earnings per share 13.55p 6.30p 19.85p 16.74p 18.6% Dividend per share 2.65p 2.50p 6.0%
* Adjusted profit before tax and reorganisation costs is £117.8m (2011: £ 123.6m)
1.1 RevenueRevenue grew by 4.3% to £2,341.7m (4.2% excluding currency effects). Organicrevenue, which excludes currency effects and acquisitions, declined by 2.1%.Drivers of the revenue performance are discussed in the divisional operatingreviews. Revenue, excluding income from disposed operations, increased by
4.8%. 1.2 Adjusted operating profitAdjusted operating profit decreased by 7.4% to £123.9m representing an Adjustedoperating profit margin of 5.3%. £15.7m of reorganisation costs were incurredduring the period which are described in more detail in section 1.5 below. Adjusted operating profit before reorganisation costs increased by 4.3%representing an Adjusted operating profit before reorganisation costs margin of6.0% which is consistent with the comparative period. Drivers of the marginperformance are discussed in the divisional operating reviews.
1.3 Investment revenue and finance costs
Investment revenue and finance costs totalled a net cost of £21.8m (2011: £10.2m), an increase of £11.6m. The principal reason for this increase has beenthe Group's higher level of debt since 30 June 2011 following the acquisitionof Intelenet on 7 July 2011.
1.4 Profit before tax and Adjusted profit before tax
Profit before tax increased by 7.8% to £120.5m. Adjusted profit before tax was £102.1m, a decrease of 17.4%.
1.5 Reorganisation costs
As described in the Annual report and accounts for the year ended 31 December2011, from April 2012 we have implemented organisational changes to reflectdevelopments in market needs, how we target future growth and the way Sercodelivers services for customers. In completing this programme we have incurred£15.7m of costs, principally relating to redundancies. The impact ofreorganisation costs on reportable segmental Adjusted operating profit is shownin Figure 2 below.
Figure 2: Reportable segments Adjusted operating profit
UK & Europe Americas AMEAA Global Services Total
Six months ended 30 June 2012 £m £m £m
£m £m
Segment Adjusted operating profit
before reorganisation costs 86.3 29.6 26.7 18.1 160.7 Reorganisation costs (7.4) - - (3.7) (11.1)
Segment Adjusted operating profit 78.9 29.6 26.7
14.4 149.6
Corporate expenses before reorganisation costs
(21.1)
Corporate reorganisation costs
(4.6) Adjusted operating profit 123.9 UK & Europe Americas AMEAA Global Services Total
Six months ended 30 June 2011 £m £m £m
£m £m
Segment Adjusted operating profit 80.8 37.0 27.9
10.8 156.5 Corporate expenses (22.7) Adjusted operating profit 133.8 1.6 Exceptional item
The £31.0m exceptional item represents net profit on disposals of subsidiaries and operations which arises from transactions during the period that are described in more detail in section 5 below.
1.7 Acquisition-related costs
These represent incremental costs principally arising from the acquisition of Vertex Public Services Limited during the period.
1.8 Tax
The tax charge of £22.8m (2011: £29.6m) represents an effective tax rate of18.9%. This rate is lower than the comparative period primarily due to theprofit on disposal of subsidiaries not being subject to tax. Excluding the taxeffect on adjusted items, the Adjusted effective tax rate was 25.0% (2011:25.6%).
1.9 Earnings per share (EPS)
EPS grew by 18.6% to 19.85p. Adjusted EPS reduced by 17.2% to 15.52p. AdjustedEPS before reorganisation costs decreased by 4.3% to 17.94p. EPS, Adjusted EPSand Adjusted EPS before reorganisation costs are calculated on a weightedaverage share base of 492.1m during the period (2011: 490.3m).
2. Dividend
Serco's policy is to increase the total dividend each year broadly in line withthe increase in underlying earnings. The Board has proposed an interim dividendof 2.65p per share, representing an increase on the 2011 interim dividend of6.0%. The interim dividend will be paid on 19 October 2012 to shareholders onthe register as at 7 September 2012.
3. Cash flow
The Group generated a free cash inflow of £0.9m (2011: £51.8m), the reduction arising principally as a result of an increase in working capital and the impact of the reorganisation costs.
Figure 3 analyses the cash flow. As in previous periods, we have designed theanalysis to show the underlying cash performance of the Group - the cash flowsgenerated by subsidiaries plus the dividends received from joint ventures. Ittherefore differs from the condensed consolidated cash flow on page 41, whichproportionately consolidates the cash flows of joint ventures. The adjustmentline in Figure 3 reconciles the movement in Group cash to the consolidated
cashflow. Figure 3: Cash flowSix months ended 30 June 2012 2011 £m £m
Adjusted operating profit excluding joint ventures and 102.4
97.0reorganisation costs Reorganisation costs (15.7) -
Adjusted operating profit excluding joint ventures 86.7
97.0 Non cash items 25.4 31.3 Adjusted EBITDA excluding joint ventures 112.1 128.3 Working capital movement (74.5) (36.3)
Operating cash flow excluding joint ventures 37.6
92.0 Interest (25.5) (12.9) Tax (15.5) (14.9) Net expenditure on tangible and intangible assets (27.1) (40.6) Dividends from joint ventures 31.4 28.2 Group free cash flow 0.9 51.8 Acquisition of subsidiaries (67.5) (23.9)
Disposal of subsidiaries and operations 132.8
- Acquisition-related costs (1.3) (2.1) Purchase of own shares and issue proceeds of share capital 4.7 (22.6) Financing (72.0) 72.6 Special pension contribution - (40.0) Dividends paid (28.9) (25.2)
Group net (decrease)/ increase in cash and cash equivalents (31.3) 10.6
Adjustment to include joint venture cash impacts (2.4)
15.2
Net (decrease)/ increase in cash and cash equivalents before (33.7) 25.8exchange loss Exchange loss (2.3) (0.1)
Net (decrease)/ increase in cash and cash equivalents (36.0)
25.7 Notes:
Adjusted EBITDA excluding joint ventures is earnings before interest, tax, depreciation, intangible amortisation, profit on disposals of subsidiaries and operations and other non cash items.
Net expenditure on tangible and intangible assets excludes assets funded under finance lease arrangements.
Financing is stated net of directly reimbursed capital expenditure.
3.1 Operating cash flow excluding joint ventures
Operating cash flow excluding joint ventures of £37.6m (2011: £92.0m) reflects a conversion of Adjusted EBITDA into cash of 33.5% (2011: 71.7%).
3.2 Working capital movement
The increase in the working capital movement compared to 2011 includes animpact of approximately £30m reflecting the timing of a small number ofcustomer payments including those from Australia's Department of Immigrationand Citizenship (DIAC), as well as the timing of transition and mobilisationstages on new contract awards. There is also an approximate £10m effect fromthe typically higher level of working capital investment required forBPO-related contracts. 3.3 Interest
Net interest paid increased by £12.6m to £25.5m, principally due to the Group's higher level of debt following the acquisition of Intelenet in July 2011.
3.4 Tax
Tax paid increased to £15.5m (2011: £14.9m) and remains lower than the equivalent charge in the income statement principally as a result of the availability of accelerated capital allowances and other timing differences.
3.5 Net expenditure on tangible and intangible assets
Net expenditure on tangible and intangible assets was £27.1m (2011: £40.6m). This represents 1.4% of Group revenue excluding joint ventures (2011: 2.3%). Anincreased level of expenditure is anticipated in the second half of the year. 3.6 Dividends from joint ventures
Dividends received from joint ventures totalled £31.4m (2011: £28.2m), reflecting a higher than normal conversion rate of joint ventures' profit after tax into dividends of 103% (2011: 93%).
3.7 Purchase of own shares and issue proceeds of share capital
This represents a £4.7m cash inflow relating to proceeds from the issue ofshare capital and exercise of share options. The comparative balance includesan outflow of £24.0m relating to the purchase of own shares for the EmployeeShare Ownership Trust. 3.8 Financing
The movement in financing is primarily due to repayments of loans and finance leases.
4 AcquisitionsOn 13 April 2012, Serco entered into an agreement to acquire the trade andassets of Anglia Support Partnership (ASP). ASP provides support services tothe Cambridge and Peterborough NHS Foundation Trust, together with a furtherfive partnering NHS organisations. The initial cash consideration in respectof the business combination was £5.2m.
On 1 June 2012, Serco acquired 100% of the issued share capital of Priority Properties North West Limited (PPNW). PPNW is a property management company specialising in the provision of short and long term housing. The initial cash consideration in respect of the acquisition was £0.9m.
On 11 June 2012, Serco acquired 100% of the issued share capital of VertexPublic Services Limited (Vertex), a provider of high quality business processoutsourcing services to UK local and central government. The initial cash costof the acquisition was £55.5m, which is subject to a working capital repaymentof £1.2m.
A deferred cash payment of £6.6m has also been made in relation to the prior year acquisition of The Listening Company Limited.
£1.1m of acquisition-related costs incurred on the above acquisitions have beenexpensed to the income statement. The cash flow impact of these costs includedin the cash flow statement was £1.3m which includes £0.2m ofacquisition-related costs from prior period acquisitions.
5 Disposals
On 29 June 2012, the Group disposed of its Technical Services business whichprovides consulting and project solutions primarily to the UK civil and nucleardefence markets for a consideration of £139.5m, £2.5m of which is deferred. Net assets disposed amounted to £73.8m, giving a gain of £58.4m, afteraccounting for disposal costs of £7.3m. On 29 June 2012, the Group disposed of its interest in Serco GmbH. The fairvalue of consideration receivable is £nil. The business provides supportservices for the German air defence radar systems, engineering andadministrative support services for the defence sector as well as trainingservices, facilities management, field installation and maintenance services,and IT consulting and related services. Net assets disposed amounted to £21.8m,giving a loss of £27.4m, after accounting for disposal costs of £5.6m. 6 Net debtFigure 4: Net debtAt 30 June 31 December 2012 2011 £m £m
Group - cash and cash equivalents 161.1 194.6 Group - loans (777.0) (819.4) Group - obligations under finance leases (57.3) (45.0) Group recourse net debt (673.2) (669.8) Joint venture - cash and cash equivalents 57.7 60.2 Joint venture - loans (5.9) (7.9) Joint venture - obligations under finance leases (0.6) (0.9)
Total recourse net debt (622.0) (618.4) Group non recourse debt (19.7) (15.5) Total net debt (641.7) (633.9) 6.1 Group recourse net debt
Group recourse net debt increased marginally by £3.4m to £673.2m. Sources of funding are described in section 8 below.
Cash and cash equivalents includes encumbered cash of £10.4m (31 December 2011: £5.5m). This is cash relating to customer advance payments.
6.2 Group non recourse debt
The Group's debt is non recourse if no Group company other than the relevantborrower has an obligation to repay the debt under a guarantee or otherarrangement. The debt is excluded from all of our credit agreements and othercovenant calculations, and therefore has no impact on the Group's ability toborrow.Group non recourse debt increased by £4.2m to £19.7m. The increase is mainlydue to £8.3m of additional asset financing of the National Physical Laboratorycontract, net of payments made in line with the debt repayment schedule on ourDriver Examination Services contract in Canada.
7. Pensions
The Group is a sponsor of a number of defined benefit schemes and definedcontribution schemes. At 30 June 2012, the net retirement benefit assetincluded in the balance sheet arising from our defined benefit pension schemeobligations was £24.5m (31 December 2011: net asset of £16.8m), on a pensionscheme asset base of £1.9bn.
Figure 5: Defined benefit pension schemes
At 30 June 31 December 2011 2012 £m £m
Group schemes - non contract specific
51.8 58.8 Contract specific schemes: - reimbursable (159.6) (188.7)
- not certain to be reimbursable
(22.3) (26.5) (130.1) (156.4)
Net retirement benefit liabilities Intangible assets arising from rights to operate franchises and contracts
5.4 6.3 Reimbursable rights debtor 159.6 188.7 Deferred tax liabilities (10.4) (21.8) 24.5 16.8Net balance sheet asset Serco has three main types of scheme which are accounted for as defined benefitpension schemes. Each type has its own accounting treatment under InternationalFinancial Reporting Standards. These are:
Non contract specific - schemes which do not relate to specific contracts or franchises. For these schemes we charge the actuarial gain or loss for the period to the consolidated statement of comprehensive income (the SOCI);
Reimbursable - schemes where we have a right of full cost reimbursement and therefore include both the pension scheme deficit and offsetting reimbursable rights debtor in the balance sheet; and
Not certain to be reimbursable - schemes relating to specific contracts orfranchises, where the deficit will pass back to the customer or on to the nextcontractor at the end of the contract. For these schemes, we charge theactuarial gain or loss on our share of the deficit for the period to the SOCI,recognise a recoverable intangible asset on the balance sheet at the start ofthe contract or franchise and amortise the intangible asset to the incomestatement over the contract or franchise life.Serco has limited commercial risk in relation to the contract specific schemes,due either to the right of cost reimbursement or because the deficit will, ingeneral, pass back to the customer or on to the next contractor at the end ofthe contract. Among our non contract specific schemes, the largest is the SercoPension and Life Assurance Scheme (SPLAS). At 30 June 2012, SPLAS had a surplusof £71.0m (31 December 2011: surplus of £122.3m). This is calculated under IAS19 using market-derived rates at 30 June 2012. It therefore reflects the effectof the market conditions on investment returns in the period.
The increase of £52m in the IFRIC14 adjustment was principally a result of the disposal of the Technical Services business which decreased the active membership of SPLAS and therefore reduced the opportunity for the Group to recover pension surpluses through lower contributions.
The estimated actuarial valuation of SPLAS as at 30 June 2012 was a surplus ofapproximately £12m. The value calculated in the latest triennial review was adeficit of £141m at 6 April 2009. We continue to review the level of benefitsand contributions under the scheme in the light of our business needs andchanges to pension legislation.
Retirement benefit obligations reduced by £50.5m as a result of the disposal of Serco GmbH. The acquisition of Vertex Public Services Limited included the acquisition of £8.4m of net retirement benefit obligations as at 11 June 2012.
Figure 6 shows the sensitivity of the liabilities of our pension schemes to changes in discount rates and to adjustments in the actuarial assumptions for the rate of inflation, members' salary increases and life expectancies.
Figure 6: Pension assumption sensitivities
Assumption Change in Change in present value of scheme assumption liabilities Discount rate 4.70% +0.5% (9%) (0.5%) +10% Price 2.90% (RPI) +0.5% +9% inflation and 2.10% (CPI) (0.5%) (8%) Salary 3.30% +0.5% +2% (0.5%) (2%)
Longevity 21.0 - 24.6* Increase by one +3%
year
*Post retirement mortality range for male and female, current and future pensioners.
8. TreasuryThe Group has committed bank credit of £730.0m (31 December 2011: £726.7m).This five-year multi-currency revolving credit facility, which was signed on 28March 2012, matures in March 2017. This facility replaced all previoussyndicated and bilateral bank credit facilities held by the Group. As at 30June 2012, £196.4m had been drawn down (31 December 2011: £241.3m).In addition to the bank facility, Serco has US private placements totalling £499.0m which will be repaid between 2012 and 2023. All of the Group's creditfacilities detailed above are unsecured.
9. Going concern
The Group's revenues are largely derived from long-term contracts withgovernments which, historically, have been relatively resilient to changes inthe general economy. The contract portfolio is diverse and a downturn in anyparticular market, sector or geography has, therefore, a more limited effect onthe Group as a whole. In addition, with an order book of £19.4bn and highvisibility of future revenue streams (98% in 2012; 83% in 2013 and 71% in2014), the Group is well placed to manage its business risks despite thecurrent uncertain economic climate.The Group's principal financing is through the revolving credit facility and USprivate placements. As at 30 June 2012, the Group had £1,229.0m of committedcredit facilities and headroom of £533.6m. Based on the information set outabove, the Directors believe that it is appropriate to prepare the financialstatements on a going concern basis.The directors have acknowledged the guidance "An update for Directors of ListedCompanies: Responding to heightened country and currency risk in interimfinancial reports" published by the Financial Reporting Council in June 2012. The current economic environment remains uncertain, however, with over 90% ofour customers being government bodies and the broad base of our contractportfolio, the Group is well placed to manage its business risks successfullyand has adequate resources to continue in operational existence for theforeseeable future.
10. Principal risks and uncertainties
The principal risks and uncertainties that could materially affect Serco'sresults and operations are set out on pages 75 to 81 of the 2011 Annual reportand accounts and the key headline risks for the remainder of 2012 are restatedbelow. This summary is not intended, and should not be used, as a substitutefor reading the appropriate pages of the Annual report which include furthercommentary on the risks and the Group's management of them. While the Group'sview of its principal risks and uncertainties for the remaining six months ofthe financial year remains substantially unchanged, there may be additionalrisks unknown to Serco and other risks, currently believed to be immaterial,which could turn out to be material. These risks, whether they materialiseindividually or simultaneously, could significantly affect the Group's businessand financial results. (i) Market risks
Significant change in Government policies, expenditure levels and budgetary constraints
Failure to win a strategic or significant bid or rebid
(ii) Operational risks
Any harm to the Group's reputation could adversely impact business
Failure of significant programmes, including operating within agreed fixed costs
Major information security breach
Major IT failure or prolonged loss of critical IT systems
(iii) Governance risks
Significant incident of bribery or corrupt practice
Major accident or incident
Failure to comply with complex laws and regulations
(iv) People risks
Failure to attract and retain senior management and other key employees
Failure to manage union/industrial relations
(v) Finance risks
The impairment of goodwill could adversely impact reported results
Additional funding requirements for pension schemes
Fluctuations in foreign currency exchange rates that are not effectively hedged
Fluctuations in interest rates
Responsibility statement
We confirm to the best of our knowledge:
the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting;
the interim management report includes a fair review of the information required by the DTR 4.2.7R (indication of the important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and
the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).
By order of the Board,Christopher Hyman Andrew JennerChief Executive Finance Director 28 August 2012
INDEPENDENT REVIEW REPORT TO SERCO GROUP PLC
We have been engaged by the company to review the condensed set of financialstatements in the half-yearly financial report for the six months ended 30 June2012 which comprises the condensed consolidated income statement, the condensedconsolidated statement of comprehensive income, the condensed consolidatedstatement of changes in equity, the condensed consolidated balance sheet, thecondensed consolidated cash flow statement and related notes 1 to 14. We haveread the other information contained in the half-yearly financial report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the information in the condensed set of financialstatements.This report is made solely to the company in accordance with InternationalStandard on Review Engagements (UK and Ireland) 2410 'Review of InterimFinancial Information Performed by the Independent Auditor of the Entity'issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone otherthan the company, for our review work, for this report, or for the conclusionswe have formed.Directors' responsibilities
The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.
As disclosed in note 1, the annual financial statements of the Group areprepared in accordance with International Financial Reporting Standards (IFRSs)as adopted by the European Union. The condensed set of financial statementsincluded in this half-yearly financial report has been prepared in accordancewith International Accounting Standard 34, 'Interim Financial Reporting', asadopted by the European Union.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensedset of financial statements in the half-yearly financial report based on ourreview.Scope of Review
We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410 'Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity' issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making inquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly,we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us tobelieve that the condensed set of financial statements in the half-yearlyfinancial report for the six months ended 30 June 2012 is not prepared, in allmaterial respects, in accordance with International Accounting Standard 34 asadopted by the European Union and the Disclosure and Transparency Rules of theUnited Kingdom's Financial Services Authority.
Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
28 August 2012
Condensed consolidated income statement
For the six months ended 30 June 2012
Six months ended 30 June 2012 (unaudited) Six months Year ended ended 30 31 June December Before Exceptional 2011 2011 exceptional item item Total (unaudited) (audited) Note £m £m £m £m £m Continuing operations Revenue 2 2,341.7 - 2,341.7 2,245.8 4,646.4 Cost of sales (1,995.3) - (1,995.3) (1,912.8) (3,946.0) Gross profit 346.4 - 346.4 333.0 700.4 Administrative expenses (222.5) - (222.5) (199.2) (410.3) Adjusted operating profit 123.9 - 123.9 133.8 290.1 Other expenses - amortisation of intangibles arising on acquisition (11.5) - (11.5) (8.4) (20.0) Other expenses - acquisition-related costs 6 (1.1) - (1.1) (3.4) (3.9) Net profit on disposal of subsidiaries and operations 7 - 31.0 31.0 - - Operating profit 111.3 31.0 142.3 122.0 266.2 Investment revenue 3 5.7 - 5.7 5.3 12.2 Finance costs 3 (27.5) - (27.5) (15.5) (40.1) Profit before tax 89.5 31.0 120.5 111.8 238.3 Tax (22.8) - (22.8) (29.6) (63.1) Profit for the period 66.7 31.0 97.7 82.2 175.2 Attributable to: Equity holders of the parent 66.7 31.0 97.7 82.1 175.1 Non-controlling interest - - - 0.1 0.1 Earnings per share (EPS) Basic EPS 5 13.55p 6.30p 19.85p 16.74p 35.70p Diluted EPS 5 13.25p 6.16p 19.41p 16.35p 35.08p
The exceptional item represents net profit on disposal of subsidiaries and operations as described in note 7.
Adjusted operating profit is stated before net profit on disposals of subsidiaries and operations, the amortisation of intangibles arising on acquisitions and acquisition-related costs.
Condensed consolidated statement of comprehensive income
For the six months ended 30 June 2012
Six months Six months ended ended 30 June 30 June Year ended 31 2012 2011 December 2011 (unaudited) (unaudited) (audited) Note £m £m £m Profit for the period 97.7 82.2 175.2
Other comprehensive income for the
period:
Net actuarial gain/(loss) on defined
benefit pension schemes1 14 11.9 (79.6) (51.0)
Actuarial (loss)/gain on reimbursable
rights1 14 (76.3) 61.1 116.5 Net exchange (loss)/gain on
translation of foreign operations2 (5.1) 3.9
(2.2)
Fair value (loss)/gain on cash flow
hedges during the period2 (10.6) 10.4 (35.7)
Tax relating to components of other
comprehensive income3 23.7 2.7 (5.9)
Recycling of cumulative net hedging
reserve2 (0.6) 0.1 0.3
Total comprehensive income for the
period 40.7 80.8 197.2 Attributable to: Equity holders of the parent 40.7 80.7 197.1 Non-controlling interest - 0.1 0.1 1 Taken to Retirement benefit obligations reserve in condensed
consolidated statement of changes in equity.
2 Taken to Hedging and translation reserve in condensed
consolidated statement of changes in equity.
3 Of the tax credit, £17.3m (30 June 2011: £5.4m, 31
December
2011: debit of £14.7m) was taken to the Retirement benefit obligations reserve;and £6.4m (30 June 2011: debit of £2.7m, 31 December 2011: £8.8m) was taken tothe Hedging and translation reserve.
Condensed consolidated statement of changes in equity
For the six months ended 30 June 2012
Share Share Capital Retained Retirement Share-based Own Hedging and Total Non-controlling capital premium redemption earnings benefit payment
shares translation equity interest
account reserve obligations reserve reserve reserve reserve £m £m £m £m £m £m £m £m £m £m At 1 January 2011 9.9 306.7 0.1 568.5 (142.8) 58.7 (27.5) 67.7 841.3 - Total comprehensive income for the period - - - 82.1 (13.1) - - 11.7 80.7 0.1 Shares transferred to option holders on exercise of share options - 0.6 - - - (1.8) 2.6 - 1.4 - Dividends - (0.1)paid - - - (25.2) - - - (25.2) Expense in relation to share-based payment - - - - - 5.9 - - 5.9 - Tax credit in relation to share-based payment - - - - - 0.8 - - 0.8 - Purchase of own shares for Employee Share Ownership Trust (ESOT) - - - - - - (24.0) - (24.0) - At 30 June 2011 (unaudited) 9.9 307.3 0.1 625.4 (155.9) 63.6 (48.9) 79.4 880.9 - Total comprehensive income for the period - - - 93.0 63.9 - - (40.5) 116.4 - Shares transferred to option holders on exercise of share options - 15.4 - - - (0.2) 0.7 - 15.9 - Dividends - -paid - - - (12.1) - - - (12.1) Expense in relation to share-based payment - - - - - 5.3 - - 5.3 - Tax credit in relation to share-based payment - - - - - (2.6) - - (2.6) - At 31 December 2011
(audited) 9.9 322.7 0.1 706.3 (92.0) 66.1 (48.2) 38.9 1,003.8 - Total comprehensive income for the period - - - 97.7 (47.1) - - (9.9) 40.7 - Shares transferred to option holders on exercise of share options 0.1 3.5 - - - (3.0) 4.1 - 4.7 - Dividends - -paid - - - (28.9) - - - (28.9) Expense in relation to share-based payment - - - - - 3.7 - - 3.7 - Tax credit in relation to share-based payment - - - - - 3.7 - - 3.7 - At 30 June 2012
(unaudited) 10.0 326.2 0.1 775.1 (139.1) 70.5
(44.1) 29.0 1,027.7 -
Condensed consolidated balance sheet
At 30 June 2012 At 30 June At 30 June At 31 December 2012 2011 2011 (unaudited) (unaudited) (audited) Note £m £m £m Non-current assets Goodwill 1,226.8 932.7 1,259.0 Other intangible assets 193.5 146.9 184.9
Property, plant and equipment 194.7 146.9
194.8 Trade and other receivables 233.9 201.9 261.9 Retirement benefit assets 14 71.0 14.9 122.3 Deferred tax assets 50.6 27.7 28.2
Derivative financial instruments 0.5 2.2
2.0 1,971.0 1,473.2 2,053.1 Current assets Inventories 62.7 70.5 58.8 Trade and other receivables 863.3 815.6 798.6 Current tax assets 13.2 3.9 9.2 Cash and cash equivalents 218.8 305.0 254.8
Derivative financial instruments 1.7 15.2
7.6 1,159.7 1,210.2 1,129.0 Total assets 3,130.7 2,683.4 3,182.1 Current liabilities Trade and other payables (839.2) (836.1) (804.2) Current tax liabilities (13.2) (9.9) (17.8)
Obligations under finance leases (10.0) (9.0)
(10.3) Provisions 10 (9.0) - (10.4) Loans (87.4) (147.0) (206.6)
Derivative financial instruments (14.0) (4.8)
(12.3) (972.8) (1,006.8) (1,061.6) Non-current liabilities Trade and other payables (58.0) (28.6) (61.4)
Obligations under finance leases (47.9) (17.1)
(35.6) Loans (715.2) (457.1) (636.2)
Derivative financial instruments (28.4) (0.9)
(26.3)
Retirement benefit obligations 14 (201.1) (240.2) (278.7) Provisions 10 (57.6) (37.2) (56.2) Deferred tax liabilities (22.0) (14.6) (22.3) (1,130.2) (795.7) (1,116.7) Total liabilities (2,103.0) (1,802.5) (2,178.3) Net assets 1,027.7 880.9 1,003.8 Equity Share capital 10.0 9.9 9.9 Share premium account 326.2 307.3 322.7 Capital redemption reserve 0.1 0.1 0.1 Retained earnings 775.1 625.4 706.3
Retirement benefit obligations
reserve (139.1) (155.9) (92.0) Share-based payment reserve 70.5 63.6 66.1 Own shares reserve (44.1) (48.9) (48.2)
Hedging and translation reserve 29.0 79.4
38.9
Equity attributable to equity holders
of the parent 1,027.7 880.9 1,003.8 Non-controlling interest - - - Total equity 1,027.7 880.9 1,003.8
Condensed consolidated cash flow statement
For the six months ended 30 June 2012
Six months Six months Year ended ended ended 31 30 June 30 June December 2012 2011 2011 (unaudited) (unaudited) (audited) Note £m £m £m
Net cash inflow from operating activities 8 51.3 78.9
217.0 Investing activities Interest received 1.3 1.3 3.4
Increase in security deposits (1.8) -
(8.2)
Proceeds from disposal of property, plant and equipment and intangible assets 1.9 1.0
9.2
Proceeds on disposal of investments - 0.5
-
Proceeds on disposal of subsidiaries and
operations 7 132.8 - -
Acquisition of subsidiaries, net of cash acquired (excluding acquisition-related
costs) 6 (67.5) (23.9) (325.3)
Purchase of other intangible assets (18.8) (22.1)
(35.2)
Purchase of property, plant and equipment (22.9) (21.3)
(49.7)
Net cash inflow/(outflow) from investing
activities 25.0 (64.5) (405.8) Financing activities Interest paid (26.8) (14.0) (35.8) Dividends paid 4 (28.9) (25.2) (37.3)
Non-controlling interest dividends paid - (0.1)
(0.1)
Cash (outflow)/inflow from matured derivative
financial instruments (1.4) 0.2 4.9 Repayment of loans (421.0) (99.3) (559.8)
Repayment of non recourse loans (4.0) (3.6)
(7.9) New loan advances 362.6 180.5 818.4
Capital element of finance lease advances/
(repayments) 4.8 (4.5) (10.7)
Purchase of own shares for Employee Share
Ownership Trust (ESOT) - (24.0) (24.0)
Proceeds from issue of share capital and
exercise of share options 4.7 1.4 17.3
Net cash (outflow)/inflow from financing
activities (110.0) 11.4 165.0
Net (decrease)/increase in cash and cash
equivalents (33.7) 25.8 (23.8)
Cash and cash equivalents at beginning of
period 254.8 279.3 279.3 Net exchange loss (2.3) (0.1) (0.7)
Cash and cash equivalents at end of period 218.8 305.0
254.8
Notes to the condensed set of financial statements
For the six months ended 30 June 2012
1 General information, going concern and accounting policies
The information for the year ended 31 December 2011 does not constitutestatutory accounts as defined in section 434 of the Companies Act 2006. A copyof the statutory accounts for that year has been delivered to the Registrar ofCompanies. The auditor's report on those accounts was not qualified and did notcontain statements made under s498(2) or (3) of the Companies Act 2006.
The annual financial statements of Serco Group plc are prepared in accordance with IFRSs as adopted by the European Union (EU). The condensed set of financial statements included in this half yearly financial report has been prepared in accordance with International Accounting Standard 34 'Interim Financial Reporting', as adopted by the EU.
The Group's business activities, together with the factors likely to affect itsfuture development, performance and position are set out in the OperatingReview on pages 8 to 23. The Finance Review includes a summary of the Group'sfinancial position, its cash flows and borrowing facilities. The Group's revenues are largely derived from long-term contracts withgovernments which historically have been relatively resilient to changes in thegeneral economy. The contract portfolio is diverse and therefore a downturn inany particular market, sector or geography has a more limited effect on theGroup as a whole. In addition, with an order book of £19.4bn and highvisibility of future revenue streams, the Group is well placed to manage itsbusiness risks despite the current economic climate. The Group has committed bank credit of £730.0m (31 December 2011: £726.7m). Asat 30 June 2012, £196.4m had been drawn down on this bank facility. Theheadroom on the facility was £533.6m. In addition to the bank credit facility,Serco has private placements totalling £499.0m which will be repaid between2012 and 2023. After making enquiries, the Directors have a reasonable expectation that theGroup has adequate resources to continue in operational existence for theforeseeable future. Accordingly, they continue to adopt the going concern basisin preparing the condensed set of financial statements. The same accounting policies, presentation and methods of computation arefollowed in the condensed set of financial statements as applied in the Group'slatest annual audited financial statements with the exception of there-presentation noted below. The condensed set of financial statements includesthe results of subsidiaries and joint ventures. Joint ventures have beenproportionally consolidated.
Exceptional item
During the period the Group disposed of subsidiaries and operations whichgenerated a net profit of £31.0m. The two disposal transactions are describedin note 7. As this net profit is specific to these disposals and isexceptional to the Group's operating profit it has been presented separately onthe face of the condensed consolidated income statement.
1. General information, going concern and accounting policies (continued)
Changes in segmental information
As described in the Annual report and accounts for the year ended 31 December2011, from April 2012 the Group has implemented organisational changes toreflect developments in market needs, how future growth is targeted and the waySerco delivers services for customers. As a result, the Group has created aGlobal Services segment bringing together all Serco's middle and back officeskills and capabilities. The Group has consolidated its frontline CivilGovernment; Defence, Science & Nuclear; and Local Government & Commercialbusinesses, where operations are based in UK & Europe, into a single segment. Non-BPO operations in AMEAA and the business in America continue to be reportedas separate segments. Some corporate expenses have been moved to the reportablesegments.
As a consequence of these changes, previously published financial information has been restated.
2 Segmental information
Information reported to the Chief Operating Decision Maker for the purposes ofresource allocation and assessment of segment performance focuses on thecategories of customer identified using their respective markets. Details ofthe different products and services provided to each operating segment areincluded in the Operating Review section of this report. From 1 April 2012,the Group has reapportioned its business into four segments. The Group'sreportable operating segments under IFRS 8 are: Reportable Segments Operating SegmentsUK & Europe UK and European frontline services in areas including home affairs, defence, health,
transportation and local government
direct services;Americas US defense frontline and federal civilian agency operations; Canadian operations;AMEAA Frontline contracts in Australasia, Middle East,
Asia (including Hong Kong and India) and
Africa; and Global Services Global BPO middle and back office services. The following is an analysis of the Group's revenue and results by operatingsegment in the six months ended 30 June 2012. The accounting policies of thereportable segments are the same as those described in the summary of thesignificant accounting policies which are described in the Group's latestAnnual report and accounts. Reportable segments UK & Global Europe Americas AMEAA Services Total
Six months ended 30 June 2012 (unaudited) £m £m
£m £m £m Revenue External sales 1,266.3 380.9 400.1 294.4 2,341.7 Result Segment Adjusted operating profit 78.9 29.6
26.7 14.4 149.6
Net profit on disposal of subsidiaries and operations 31.0 - - - 31.0
Amortisation of intangibles arising on acquisition (0.2) (6.9) (0.1) (4.3) (11.5) Acquisition-related costs - - - (1.1) (1.1) Segment result 109.7 22.7 26.6 9.0 168.0 Corporate expenses (25.7) Operating profit 142.3 Investment revenue 5.7 Finance costs (27.5) Profit before tax 120.5 Tax (22.8) Profit after tax 97.7
Group Adjusted operating profit is £123.9m and comprises segment Adjusted operating profit of £149.6m less Corporate expenses of £25.7m.
2. Segmental information (continued) UK & Global Restated Europe Americas AMEAA Services Total Six months ended 30 June 2011 (unaudited) £m £m £m £m £m Revenue External sales 1,284.3 445.6 302.2 213.7 2,245.8 Result
Segment Adjusted operating profit 80.8 37.0 27.9
10.8 156.5
Amortisation of intangibles arising on acquisition (0.1) (6.8) -
(1.5) (8.4) Acquisition-related costs (0.1) - - (3.3) (3.4) Segment result 80.6 30.2 27.9 6.0 144.7 Corporate expenses (22.7) Operating profit 122.0 Investment revenue 5.3 Finance costs (15.5) Profit before tax 111.8 Tax (29.6) Profit after tax 82.2
Group Adjusted operating profit is £133.8m and comprises segment Adjusted operating profit of £156.5m less Corporate expenses of £22.7m.
UK & Global Restated Europe Americas AMEAA Services Total Year ended 31 December 2011 (audited) £m £m £m £m £m Revenue External sales 2,595.2 868.2 672.1 510.9 4,646.4 Result
Segment Adjusted operating profit 177.6 73.0 51.4
34.0 336.0
Amortisation of intangibles arising on acquisition (0.2) (13.6) -
(6.2) (20.0) Acquisition-related costs (0.2) - - (3.7) (3.9) Segment result 177.2 59.4 51.4 24.1 312.1 Corporate expenses (45.9) Operating profit 266.2 Investment revenue 12.2 Finance costs (40.1) Profit before tax 238.3 Tax (63.1) Profit after tax 175.2
Group Adjusted operating profit is £290.1m and comprises segment Adjusted operating profit of £336.0m less Corporate expenses of £45.9m.
Restated Restated Six months ended Six months ended Year ended 31 30 June 2012 30 June 2011 December 2011 Segment assets (unaudited) (unaudited) (audited) £m £m £m UK & Europe 1,064.1 1,111.2 1,126.6 Americas 648.4 664.8 660.7 AMEAA 346.9 292.5 298.0 Global Services 718.5 216.8 652.5 Corporate assets 68.0 44.1 142.5 Total segment assets 2,845.9 2,329.4 2,880.3 Unallocated assets 284.8 354.0 301.8 Consolidated total assets 3,130.7 2,683.4 3,182.1
Segment assets exclude all derivative financial instruments, current and deferred taxation assets and cash.
2. Segmental information (continued) Restated Restated Six months ended Six months ended Year ended 31 30 June 2012 30 June 2011 December 2011 Segment liabilities (unaudited) (unaudited) (audited) £m £m £m UK & Europe (528.4) (655.5) (658.8) Americas (109.1) (122.9) (103.9) AMEAA (144.8) (107.3) (128.1) Global Services (253.6) (142.6) (199.5) Corporate liabilities (62.4) (76.6) (54.0) Total segment liabilities (1,098.3) (1,104.9) (1,144.3) Unallocated liabilities (1,004.7) (697.6) (1,034.0) Consolidated total liabilities (2,103.0) (1,802.5) (2,178.3) Segment liabilities consist of all trade and other payables and retirementbenefit obligations. Six months ended Six months ended Year ended Geographic analysis 30 June 2012 30 June 2011 31 December 2011 Non-current Non-current Non-current Revenue assets Revenue assets Revenue assets (unaudited) (unaudited) (unaudited) (unaudited) (audited) (audited) £m £m £m £m £m £m United Kingdom 1,274.4 953.3 1,290.6 815.9 2,587.3 1,008.8 United States 351.5 455.3 409.5 449.4 802.1 460.8 Other countries 715.8 511.3 545.7 178.0 1,257.0 553.3 Total 2,341.7 1,919.9 2,245.8 1,443.3 4,646.4 2,022.9 Non-current assets exclude derivative financial instruments and deferred taxassets. 3 Investmentrevenue and finance costs Six months Six months Year ended ended ended 31 30 June 30 June December 2012 2011 2011 (unaudited) (unaudited) (audited) £m £m £m
Interest receivable on other loans and
deposits 1.5 1.6 4.0
Net interest receivable on retirement benefit
obligations 4.2 3.7 8.2 Investment revenue 5.7 5.3 12.2
Interest payable on non recourse loans (0.4) (0.6)
(1.0)
Interest payable and amortisation of capitalised financing transaction costs on
other loans (24.8) (13.7) (35.6)
Interest payable on obligations under finance
leases (1.3) (0.9) (2.1)
Movement in discount on provisions and
deferred consideration (1.0) (0.3) (1.4) Finance costs (27.5) (15.5) (40.1) 4 Dividends Six months Six months Year ended ended ended 31 30 June 30 June December 2012 2011 2011 (unaudited) (unaudited) (audited) £m £m £m
Amounts recognised as distributions to equity
holders in the period:
Final dividend for the year ended 31 December 2011 of 5.90p per share on 489.1 million
ordinary shares 28.9 - -
Final dividend for the year ended 31 December 2010 of 5.15 per share on 488.5 million
ordinary shares - 25.2 25.2
Interim dividend for the year ended 31 December 2011 of 2.50p per share on 486.6
million ordinary shares - - 12.1 28.9 25.2 37.3
The proposed interim dividend for the year ending 31 December 2012 is 2.65p perordinary share on 488.1 million shares, representing a payment of £12.9m (30June 2011: 2.50p per ordinary share on 486.6 million shares, representing apayment of £12.1m).
The proposed interim dividend was approved by the Board on 28 August 2012 and has not been included as a liability as at 30 June 2012.
5 Earnings per shareBasic and diluted earnings per share (EPS) have been calculated in accordancewith IAS 33 Earnings per Share. EPS is shown both before and after adjustingitems to assist in the understanding of the underlying performance of thebusiness. Adjusting items comprise net profit on disposals, amortisation ofintangible assets arising on acquisition and acquisition-related costs. The calculation of the basic and diluted EPS is based on the following data: Number of shares Six months Six months Year ended ended ended 31 30 June 30 June December 2012 2011 2011 (unaudited) (unaudited) (audited) Millions Millions Millions
Weighted average number of ordinary shares for
the purpose of basic EPS 492.1 490.3 490.5
Effect of dilutive potential ordinary shares:
share options 11.2 11.7 8.6
Weighted average number of ordinary shares for the purpose of diluted EPS 503.3 502.0 499.1 Six months ended Six months ended Year ended Earnings per share 30 June 2012 30 June 2011 31 December 2011 Per share Per share Per share Earnings amount Earnings amount Earnings amount (unaudited) (unaudited) (unaudited) (unaudited) (audited) (audited) £m Pence £m Pence £m Pence Earnings for the purpose of basic EPS being net profit attributable to the equity holders of the parent 97.7 19.85 82.1 16.74 175.1 35.70 Add back: Profit on disposal of subsidiaries, net of tax of £nil (30 June 2011: £ nil, 31 December 2011; £nil) (31.0) (6.30) - - - - Amortisation of intangible assets arising on acquisition, net of tax of £2.7m (30 June 2011: £1.7m, 31 December 2011: £ 4.3m) 8.8 1.79 6.7 1.37 15.7 3.20 Acquisition-related costs, net of tax of £0.2m (30 June 2011: £0.3m,31 December 2011: £ 0.5m`) 0.9 0.18 3.1 0.63 3.4 0.69 Adjusted earnings 76.4 15.52 91.9 18.74 194.2 39.59 Earnings for the purpose of basic EPS 97.7 19.85 82.1 16.74 175.1 35.70 Effect of dilutive potential ordinary shares - (0.44) - (0.39) - (0.62) Diluted EPS 97.7 19.41 82.1 16.35 175.1 35.08 6 Acquisitions
During the period, the Group completed the following acquisitions which have been accounted for in accordance with IFRS 3 Business Combinations (2008).
6 (a) Vertex Public Services Limited
On 11 June 2012, Serco acquired 100% of the issued share capital of VertexPublic Services Limited (Vertex), a provider of high quality business processoutsourcing services to UK local and central government. The initial cash costof the acquisition was £55.5m, which is subject to a working capital repaymentof £1.2m. Due to the proximity of the acquisition to the reporting date thefair values presented are provisional. Book Fair value Provisional fair value value adjustments £mNet assets acquired were: £m £m Intangible assets 0.2 10.4 10.6
Property, plant and equipment 4.7 (4.1)
0.6 Deferred tax asset - 2.1 2.1 Trade and other receivables 28.5 (0.7) 27.8 Trade and other payables (23.8) - (23.8) Retirement benefit obligations (8.4) - (8.4) Provisions - (5.9) (5.9) Net assets acquired 1.2 1.8 3.0 Goodwill 51.3 Total consideration 54.3 Satisfied by: Cash 55.5 Working capital adjustment (1.2) Total consideration 54.3
Net cash outflow arising on acquisition:
Purchase consideration 55.5
The provisional fair value of the financial assets acquired includes trade receivables with a fair value of £24.3m and a gross contractual value of £ 24.4m.
The goodwill of £51.3m arising from the acquisition represents future opportunities in the UK outsourced contact centre services industry. None of the goodwill is expected to be deductible for corporate income tax purposes.
£0.9m of acquisition-related costs incurred on the Vertex acquisition have been expensed to the income statement.
6. Acquisitions (continued)
6 (b) Otheracquisitions Anglia Support Partnership
On 13 April 2012, Serco entered into an agreement to acquire the trade andassets of Anglia Support Partnership (ASP). ASP provides support services tothe Cambridge and Peterborough NHS Foundation Trust, together with a furtherfive partnering NHS organisations. The initial cash cost of the businesscombination was £5.2m. In addition, £3.5m of deferred consideration is payableon 30 September 2012 plus up to a further £7.2m of deferred considerationpayable from 2012 to 2020, contingent on the financial performance of theacquired business. The fair value of this deferred contingent consideration is£6.8m. The provisional fair value of net assets acquired totalled £4.0m.
Due
to the proximity of the acquisition to the reporting date the fair values presented are provisional.
£0.2m of acquisition-related costs incurred on this acquisition have been expensed to the income statement.
Priority Properties North West Limited
On 1 June 2012, Serco acquired 100% of the issued share capital of PriorityProperties North West Limited (PPNW). PPNW is a property management companyspecialising in the provision of short and long term housing. The initial cashcost of the acquisition was £0.9m in cash. In addition, deferred considerationof up to £2.2m is payable, £0.2m of which is contingent on finalisation ofspecific administrative matters, £0.9m of which is deferred pendingfinalisation of working capital and £1.1m of which is contingent on financialperformance in the period to 31 January 2013. The fair value of this deferred,contingent consideration is £2.2m. The provisional fair value of net assetsacquired totalled £1.8m. Due to the proximity of the acquisition to thereporting date the fair values presented are provisional.
Other acquisitions (in aggregate):
Book Fair value Provisional fair value value adjustments £mNet assets acquired were: £m £m Intangible assets 4.2 - 4.2 Property, plant and equipment 1.2 (0.6) 0.6 Trade and other receivables 2.2 - 2.2 Cash and cash equivalents 0.7 - 0.7 Trade and other payables (1.2) - (1.2) Provisions - (0.7) (0.7) Net assets acquired 7.1 (1.3) 5.8 Goodwill 9.3 Total consideration 15.1 Satisfied by: Cash 6.1
Contingent consideration arrangement
9.0 Total consideration 15.1
Net cash outflow arising on acquisitions:
Purchase consideration 6.1 Cash and cash equivalents acquired
(0.7)
Net cash outflow arising on acquisitions
5.4 The Listening Company Limited
During the period, a cash payment of £6.6m was made in respect of deferred contingent consideration payable following the acquisition of The Listening Company Limited in 2011.
7 DisposalsDuring the period, the Group generated the following net profit on disposal ofsubsidiaries and operations: Six months Six months Year ended ended ended 31 30 June 2012 30 June 2011 December 2011 (unaudited) (unaudited) (audited) £m £m £m
Gain on disposal of Serco Technical
Services (note 7(a)) 58.4 - -
Loss on disposal of Serco GmbH (note 7
(b)) (27.4) - -
Net profit on disposal of subsidiaries
and operations 31.0 - - 7 (a) Serco Technical Services On 29 June 2012, the Group disposed of its Technical Services business whichprovides consulting and project solutions primarily to the UK civil and nucleardefence markets for a consideration of £139.5m, £2.5m of which is deferred. The net assets at the date of disposal were:
£m Goodwill 64.4 Intangible assets 0.8
Property, plant and equipment
1.6 Trade and other receivables 17.2 Cash and cash equivalents 0.6 Trade and other payables (5.6) Deferred tax liabilities (5.2) Net assets disposed 73.8
The profit on disposal is calculated as follows:
£m Cash consideration 139.5 Less: Net assets disposed (73.8) Disposal-related costs (7.3) Profit on disposal 58.4
The net cash inflow arising on disposal is as follows:
£m Consideration received 139.5 Less: Deferred consideration (2.5) Cash and cash equivalents disposed
(0.6)
Disposal-related costs paid during the period (2.3) Net cash inflow on disposal 134.1 7 Disposals (continued) 7 (b) Serco GmbH On 29 June 2012, the Group disposed of its interest in Serco GmbH. The fairvalue of consideration receivable is £nil. The business provides supportservices for the German air defence radar systems, engineering andadministrative support services for the defence sector as well as trainingservices, facilities management, field installation and maintenance services,and IT consulting and related services. The net assets at the date of disposal were:
£m Goodwill 22.0 Intangible assets 1.2
Property, plant and equipment
6.0 Deferred tax asset 5.2 Trade and other receivables 22.1 Loans receivable 25.9 Cash and cash equivalents 0.6 Trade and other payables (9.3) Bank overdrafts (1.3) Retirement benefit obligations (50.5) Provisions (0.1) Net assets disposed 21.8
The loss on disposal is calculated as follows:
£m Net assets disposed (21.8) Disposal-related costs (5.6) Loss on disposal (27.4)
The net cash outflow arising on disposal is as follows:
£m Cash and cash equivalents disposed
(0.6)
Disposal-related costs paid during the period (0.7) Net cash outflow on disposal (1.3) 8 Reconciliationof operating profit to net cash inflow from operatingactivities Year Six months Six months ended 31 ended ended December 30 June 2012 30 June 2011 2011 (unaudited) (unaudited) (audited) £m £m £m
Operating profit for the period 142.3 122.0
266.2 Adjustments for: Share-based payment expense 3.7 5.9 11.2
Depreciation and impairment of property,
plant and equipment 26.9 20.4 46.0
Amortisation and impairment of intangible
assets 20.5 19.4 39.5
Profit on disposal of subsidiaries and
operations (31.0) - -
Loss/(profit) on disposal of property, plant
and equipment 0.9 (0.4) 0.5 Movement in provisions (11.7) (2.0) (9.8) Other non cash movements - - 3.4
Operating cash inflow before movements in
357.0working capital 151.6 165.3
(Increase)/decrease in inventories (4.7) (4.8)
9.2
(Increase)/decrease in receivables (81.1) (25.6)
26.8
Increase/(decrease) in payables 11.6 8.6
(84.5)
Special contribution to defined benefit
pension scheme - (40.0) (40.0) Cash generated by operations 77.4 103.5 268.5 Tax paid (26.1) (24.6) (51.5)
Net cash inflow from operating activities 51.3 78.9 217.0 9 Analysisof net debt Cash and cash equivalents Total Nonrecourse Other Obligations under £m loans£m loans£m finance leases£m £m At 1 January 2011 279.3 (23.7) (490.4) (26.4) (261.2) Cash flow 23.4 3.6 (81.2) 4.5 (49.7) Acquisitions 2.4 - (15.9) (0.8) (14.3) Exchange differences (0.1) - 3.5 - 3.4 Non cash movements - - - (3.4) (3.4) At 30 June 2011 (unaudited) 305.0 (20.1) (584.0) (26.1) (325.2) Cash flow (55.6) 4.3 (177.4) 6.2 (222.5) Acquisitions 6.0 - (57.4) - (51.4) Exchange differences (0.6) 0.3 (8.5) 0.2 (8.6) Non cash movements - - - (26.2) (26.2) At 31 December 2011 (audited) 254.8 (15.5) (827.3) (45.9) (633.9) Cash flow (33.2) (4.3) 58.4 (4.8) 16.1 Disposals of subsidiaries (1.2) - (24.6) - (25.8) Acquisitions 0.7 - - - 0.7 Exchange differences (2.3) 0.1 10.1 0.1 8.0 Non cash movements - - 0.5 (7.3) (6.8) At 30 June 2012 (unaudited) 218.8 (19.7) (782.9) (57.9) (641.7) 10 Provisions Employee related Property Contract Other Total £m £m £m £m £m At 1 January 2011 11.0 6.6 8.0 14.0 39.6 Charged to income statement 2.4 - - - 2.4 Released to income statement - (0.2) (0.4) (2.0) (2.6) Utilised during the period (0.1) (0.5) (1.1) (0.1) (1.8) Unwinding of discount - 0.1 0.1 - 0.2 Exchange differences - (0.2) (0.1) (0.3) (0.6) At 30 June 2011 (unaudited) 13.3 5.8 6.5 11.6 37.2 Arising on acquisitions 0.4 3.6 29.2 6.9 40.1 Charged to income statement 2.1 0.4 - - 2.5 Released to income statement - - (0.8) (1.2) (2.0) Utilised during the period (0.9) (1.0) (6.4) - (8.3) Unwinding of discount - 0.2 0.1 - 0.3 Exchange differences 0.1 (0.1) (2.5) (0.7) (3.2) At 31 December 2011 (audited) 15.0 8.9 26.1 16.6 66.6 Arising on acquisitions - 1.0 1.1 4.5 6.6 Charged to income statement* 1.6 0.1 0.2 7.0 8.9 Released to income statement (0.4) (0.1) (2.1) (1.1) (3.7) Utilised during the period (0.3) (0.6) (7.9) (1.5) (10.3) Derecognised on disposals (0.1) - - - (0.1) Unwinding of discount - 0.1 0.2 - 0.3 Exchange differences (0.2) (0.2) (0.9) (0.4) (1.7) At 30 June 2012 (unaudited) 15.6 9.2 16.7 25.1 66.6 Analysed as: Current 9.0 Non-current 57.6 66.6
\* The Other category includes £6.6m of provisions in relation to disposal costs on the two disposals during the period described in note 7.
11 Joint ventures
The Group's interest in joint ventures is reported in the condensed set ofconsolidated financial statements using the proportionate consolidation method.The effect of the Group's joint ventures on the condensed consolidated incomestatement is as follows: Year ended Six months Six months 31 ended ended December 30 June 2012 30 June 2011 2011 (unaudited) (unaudited) (audited) £m £m £m Revenue 436.2 408.4 819.3 Operating profit* 38.1 36.8 81.6 Profit before tax 39.2 37.6 83.6 Tax (8.6) (8.3) (20.0)
Share of post-tax results of joint
ventures 30.6 29.3 63.6
*Operating profit is after allocating £nil of costs incurred by Group (30 June 2011: £1.0m, 31 December 2011: £1.0m).
12 Relatedparty transactions Transactions between the Company and its wholly owned subsidiaries, which arerelated parties, have been eliminated on consolidation and are not disclosed inthis note. Transactions between the Group and its joint venture undertakingsare disclosed below, with the relevant portion being eliminated onconsolidation. Year ended Six months Six months 31 ended ended December 30 June 2012 30 June 2011 2011 (unaudited) (unaudited) (audited) £m £m £m
Royalties and management fees
receivable 1.1 1.2 1.5 Dividends receivable 31.4 28.2 64.3 32.5 29.4 65.8
The following receivable balances relating to the joint ventures were included in the condensed consolidated balance sheet:
At 30 June At 30 June At 31 December 2012 2011 2011 (unaudited) (unaudited) (audited) £m £m £m Current: Loans 1.3 0.3 0.5 Non-current: Loans 2.5 3.5 3.2 13 Share-based payments
In accordance with IFRS 2, a charge of £3.7m (30 June 2011: £5.9m, 31 December 2011: £11.2m) relating to the fair value of share schemes granted since 7 November 2002, has been charged to the condensed consolidated income statement.
14 Defined benefit schemes Virtually certain Non costs contract reimbursed Not certain costs reimbursed specific Total At 30 June 2012 (unaudited) £m £m £m £m Fair value of scheme assets 265.1 454.6 1,136.5 1,856.2
Present value of scheme liabilities (424.7) (624.2)
(1,027.7) (2,076.6) Net amount recognised (159.6) (169.6) 108.8 (220.4) Members' share of deficit - 45.6 2.0 47.6 Franchise adjustment - 101.7 - 101.7 Effect of IFRIC 14 - - (59.0) (59.0)
Net pension (liability)/asset (159.6) (22.3)
51.8 (130.1) Analysed as:
Retirement benefit obligations (159.6) (22.3)
(19.2) (201.1) Retirement benefit assets - - 71.0 71.0 Related assets Intangible assets - 5.4 - 5.4 Trade and other receivables 159.6 - - 159.6 159.6 5.4 - 165.0 Virtually certain Non costs contract reimbursed Not certain costs reimbursed specific Total At 30 June 2011 (unaudited) £m £m £m £m Fair value of scheme assets 265.4 424.7 929.1 1,619.2
Present value of scheme liabilities (417.8) (561.4)
(978.4) (1,957.6) Net amount recognised (152.4) (136.7) (49.3) (338.4) Members' share of deficit - 35.9 2.3 38.2 Franchise adjustment - 74.7 - 74.7 Effect of IFRIC 14 - - 0.2 0.2 Net pension liability (152.4) (26.1) (46.8) (225.3) Analysed as:
Retirement benefit obligations (152.4) (26.1)
(61.7) (240.2) Retirement benefit assets - - 14.9 14.9 Related assets Intangible assets - 7.9 - 7.9 Trade and other receivables 152.4 - - 152.4 152.4 7.9 - 160.3 14. Defined benefit pension schemes (continued) Virtually certain Non costs contract reimbursed Not certain costs reimbursed specific Total At 31 December 2011 (audited) £m £m £m £m Fair value of scheme assets 252.6 429.3 1,065.3 1,747.2
Present value of scheme liabilities (441.3) (594.9)
(1,001.3) (2,037.5) Net amount recognised (188.7) (165.6) 64.0 (290.3) Members' share of deficit - 43.7 2.2 45.9 Franchise adjustment - 95.4 - 95.4 Effect of IFRIC 14 - - (7.4) (7.4)
Net pension (liability)/asset (188.7) (26.5)
58.8 (156.4) Analysed as:
Retirement benefit obligations (188.7) (26.5)
(63.5) (278.7) Retirement benefit assets - - 122.3 122.3 Related assets Intangible assets - 6.3 - 6.3
Trade and other receivables 188.7 -
- 188.7 188.7 6.3 - 195.0 At 30 June At 30 June 2012 2011 At 31 December 2011 (unaudited) (unaudited) (audited) % % % Main assumptions: Rate of salary increases 3.30 3.90 3.30
Rate of increase in pensions in payment (CPI) 2.10 3.00
2.10
Rate of increase in pensions in payment (RPI) 2.90 3.50
2.90
Rate of increase in deferred pensions (CPI) 2.10 3.00
2.10
Rate of increase in deferred pensions (RPI) 2.90 3.50
2.90 Inflation assumption (CPI) 2.10 3.00 2.10 Inflation assumption (RPI) 2.90 3.50 2.90 Discount rate 4.70 5.50 4.70
Expected rates of return on scheme assets:
Equities 7.70 8.40 7.70 Bonds except LDI 4.70 5.50 4.70 LDI 3.90 5.00 3.90 Gilts 3.10 4.30 3.10 Property 4.35 5.55 4.35 Cash and other 0.50 0.50 0.50 Annuity policies 4.70 5.50 4.70 At 30 June At 30 June 2012 2011 At 31 December 2011 (unaudited) (unaudited) (audited) Years Years Years
Post-retirement mortality:
Current pensioners at 65 - male 21.0 20.9 20.9 Current pensioners at 65 - female 23.5 23.4 23.4 Future pensioners at 65 - male 22.5 22.5 22.5 Future pensioners at 65 - female 24.6 24.6 24.6
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