31st Aug 2005 06:00
Serco Group plcInterim results for the six months ended 30 June 2005 2005 2004 Revenue ‚£1,074.9m ‚£804.5m up 33.6% Profit before tax and amortisation ‚£43.7m ‚£34.4m up 27.0% Earnings per share before amortisation 6.78p 5.53p up 22.6% Profit before tax ‚£37.3m ‚£30.7m up 21.5% Earnings per share 5.61p 4.84p up 15.9% Dividend per share 0.91p 0.81p up 12.3% Strong organic growthRevenue before acquisitions and disposals up by 20.8%Profit before tax, amortisation and acquisitions up 14.5%Continued win rates of over 90% on rebids and over 50% on new bidsContracts signed valued at ‚£0.7bn in the period, appointed preferred bidder oncontracts worth a further ‚£1.5bnContinuing focus on cash generationGroup EBITDA to cash conversion of 70% (2004 - 58%) contributing to Group freecash flow of ‚£19.4m (2004 - ‚£23.5m)Acquisitions' performance on targetCompleted purchase of ITNET in February and RCI in MarchAcquisitions added ‚£134.4m of revenue and ‚£9.3m (‚£4.3m after funding costs) ofprofit before tax and amortisationManagement reorganisations complete, integration proceeding well and customersresponding positivelyHigh visibility of future revenuesForward order book of ‚£12.9bn at 30 June 200599% of 2005 planned revenue secured, 85% for 2006 and 74% for 2007Bids worth ‚£4.5bn submitted and under evaluation, including ‚£1.7bn at preferredbidderIn excess of ‚£18bn of further opportunities identifiedNote: Group EBITDA is earnings from subsidiaries before interest, tax,depreciation and intangible amortisation. Group free cash flow is fromsubsidiaries and is reconciled in Section 4 of the Finance ReviewExecutive Chairman Kevin Beeston said:"This has been another excellent period for Serco. Our service delivery recordhas enabled us to deliver organic revenue growth of 21% and our acquisitionshave made the expected contribution in their first few months under ourownership. Market conditions remain strongly in our favour and we see numerousopportunities to grow in the UK and internationally. Our actions to developleadership, streamline our structure and improve efficiency will contribute togrowth and enhance our profitability, resulting in increasing margins overtime. We look forward to further strong performance in the second half and areconfident of achieving double digit growth for the foreseeable future."- Ends -For further information please contact Serco Group plc: +44 (0) 1256 745 900Dominic Cheetham, Corporate Communications DirectorRichard Hollins, Head of Investor Relationswww.serco.comConference CallA conference call for investors will be held today at 14.30 UK time.Participants outside the US should call: +44 (20) 7019 0810US participants should call: +1 210 795 0466The passcode for the conference call is `Serco'Copies of the presentation slides will be available from 12.00 UK time fromwww.serco.com.Further AnnouncementsSeparately today, Serco has released its Business Review for the six monthsended 30 June 2005. This includes further details of the Group's markets,contract wins and operating performance.In addition, a separate announcement today (Transition to InternationalFinancial Reporting Standards ("IFRS")) sets out the impact of IFRS on theGroup's results and financial position.Chairman's statementSerco Group plc ("Serco") has had an excellent first half, achievingsignificant growth both organically and from our recent acquisitions. A strongoperating performance saw profits before tax and amortisation rise by 27.0% onrevenue that rose 33.6%. Our cash performance remains robust, with Group EBITDAto cash conversion of 70% (2004 - 58%) contributing to a Group free cash flowof ‚£19.4m in the first half.Business summarySerco's growth is being fuelled by the continuing shift towards privateprovision of public services in our chosen markets, combined with our abilityto deliver customers' desired outcomes. This ability has helped us developlong-term relationships with clients and build trust and credibility with thepeople who ultimately use our services.Excellent service delivery is key to driving the organic growth that remainsthe cornerstone of our strategy. Our track record does more than position us toretain business. It also gives our clients the confidence to enable us toexpand the scope and scale of our services to them, leveraging our expertiseacross national borders and industry sectors.During the six months, organic revenue growth was 20.8%. On rebids, our successrate was maintained at over 90%, while we continued to win more than 50% of newbids.Our two recent acquisitions, ITNET and RCI, had the anticipated positiveimpact, adding ‚£134.4m to revenue and ‚£9.3m (‚£4.3m after funding costs) toprofit before tax and amortisation.We have maintained the high visibility of our future revenue. At 30 June 2005,our forward order book stood at ‚£12.9bn, nearly eight times 2004's revenue. Todate, we have secured 99% of planned revenue for 2005, 85% for 2006 and 74% for2007. In addition, at the half year we had a further ‚£1.7bn of contracts atpreferred bidder stage and another ‚£2.8bn of bids - where we are down to thelast two or three bidders - are under evaluation by customers. We have alsoidentified a pipeline of opportunities exceeding ‚£18bn .Organic GrowthDuring the first half, we signed contracts and extensions valued at ‚£0.7bn andwere appointed preferred bidder on contracts worth a further ‚£1.5bn.Early in the year, we secured one of our most significant defence wins, the23-year, ‚£400m Defence Academy Campus Integrator contract to deliver aworld-class academic centre of excellence for senior commanders and staff fromthe Ministry of Defence ("MoD").In March, our joint venture with SNC-Lavalin was appointed preferred bidder tooperate a rapid rail transit link in Vancouver, Canada - a project worthC$16-20m per annum to Serco, over 30 years.Our joint venture with Equion, a division of John Laing plc, was appointedpreferred bidder for a 35-year agreement worth around ‚£1.2bn to support threeLeicester hospitals as part of the city's Pathway private finance initiative.Serco was also successful in winning or extending more than 100 smaller andmedium-sized contracts during the first half such as the Dubai Airport airtraffic services rebid, the contract to supply the MoD's Integrated SensorManagement System, and the contract to support the Mechanical and ElectricalEngineering Departments of the European Space Agency.Meanwhile, Northern Rail, our largest-ever contract, delivered strongoperational performance in its first few months under our joint venture'smanagement. Northern has consistently exceeded service performance targets,delivering real improvements for the thousands of passengers who use thenetwork daily. As the consolidation of the two previous franchises intoNorthern continues on schedule, we expect to achieve further performanceenhancements while maximising efficiencies.We have also continued to expand our consulting business. As well ascontributing to our profits, consulting helps us to shape our markets throughthe provision of advice to existing and potential clients at a senior level. Inconjunction with the Serco Institute, this helps to position us as thoughtleaders in our field.Since the start of the second half, our joint venture with BNFL and LockheedMartin has signed a contract that significantly increases the scale of our workfor the MoD at the Atomic Weapons Establishment. The organic growth from thiscontract is valued at over ‚£350m to Serco over the next three years.Serco has also been appointed preferred bidder on important contracts in theearly part of the second half. These include a strategic partnership with theDefence Science and Technology Laboratory ("Dstl"), which will be worth around‚£400m to us. Serco will manage the design and build of new facilities for Dstl,the migration of 1,600 scientists to these facilities, and provide supportservices ranging from laboratory set-up to travel management across the entireDstl estate for 15 years.We are also close to securing more than ‚£180m of opportunities across homelandsecurity and offender management.More detail on our first half wins and operating performance can be found inthe Business Review, which has been released separately today and is alsoavailable on our website, www.serco.com.AcquisitionsThe business case underpinning the acquisitions of ITNET and RCI remainscompelling. The efficiency of their integration testifies to the strength ofthe compatibility between the acquisitions and the rest of our business. Italso demonstrates our ability to integrate organisations successfully into theGroup.ITNET, now renamed Serco Solutions, is a leading supplier of IT services,business process management, consulting and e-services to UK local authoritiesand private sector organisations. It has performed in line with our forecastssince its February acquisition, contributing ‚£83.9m in revenue and ‚£6.1m inprofit from operations.Although, as anticipated, its first half revenue was below the correspondingperiod last year, Serco Solutions continues to receive positive feedback fromcustomers as opportunities for organic growth increase. In June, SercoSolutions announced its selection by IBM as sub-contractor to manage key ITplatforms and services for Bradford Council. The award is part of a widerbusiness transformation programme led by IBM, with a contract valued at ‚£158mto the consortium. By the end of the first half, Serco Solutions had alsosecured important contract extensions and additional work with several clientsin the local government sector, including Coventry City Council and the Londonboroughs of Ealing, Enfield, Richmond and Southwark. It also renewed itscontract with Cadbury Schweppes plc and won an extension to its work for Wales& West Utilities.Serco Solutions has begun to establish itself as the Group's centre of ITexcellence. It is working closely with other parts of Serco - notably in homeaffairs, health and education - and has been shortlisted for a contract worthup to ‚£80m over four years in a joint bid with our science business.RCI - now renamed Serco Inc. - supplies business process management, ITservices, supply chain management, systems engineering and strategic consultingto the US Federal Government, primarily in defence. It has a particularlystrong reputation in human resources management programmes for the army andnavy. Since the acquisition was completed in March, Serco Inc. has contributed‚£50.5m in revenue and ‚£3.2m in profit from operations.Under Serco's ownership, Serco Inc. has maintained its strong position on theUS Army's HR Solutions Program through a series of multi-award contracts usedby the US Army to acquire personnel-related IT and business process services,studies and analysis, and recruitment and retention support for uniformed staffworldwide. The combined value of the program to Serco is expected to exceed$300m over the next five years.In addition, Serco Inc. recently retained its position as provider of the USArmy's transition services through the award of the Army Career and AlumniProgram task order valued at $15m annually. Serco was awarded a new contractwith the Army to provide services aimed at preventing sexual assault andharassment.Financial performanceResultsTotal revenue during the period increased by 33.6% to ‚£1,074.9m. Of thisincrease, ‚£136.0m came from organic growth, and acquisitions contributed ‚£134.4m. The effect of last year's contract disposals was to reduce revenue by ‚£26m, thereby resulting in underlying revenue growth of 20.8%.In the six months to June 2005, profit before tax and amortisation grew 27.0%to ‚£43.7m. Profit before tax, amortisation and acquisitions increased by 14.5%.Earnings per share before intangible amortisation grew 22.6% to 6.78p.Profit before tax after amortisation grew 21.5% to ‚£37.3m and earnings pershare after intangible amortisation grew by 15.9% to 5.61p.Free cash generation remains a high priority for Serco. During the half yearGroup free cash flow totalled ‚£19.4m, (2004 - ‚£23.5m), down largely due toone-off tax benefits in the previous year. Group EBITDA to cash conversion was70% (2004 - 58%). This was a consistent performance and working capitalmanagement remains strong.DividendWe have increased the interim dividend by 12.3% to 0.91p per ordinary share,from 0.81p in 2004. It will be paid on 19 October 2005 to shareholders on theregister at close of business on 9 September 2005.International Financial Reporting Standards ("IFRS")This half year is the first period Serco has reported under IFRS. The mainareas of impact are covered in the Finance Review. Further detail can be foundin our separate announcement released today, which is also available from ourwebsite www.serco.com.Market development - a global visionOur global outlook - based on our conviction that a balanced and internationalportfolio will, over time, become essential for sustaining long-term growth -distinguishes us from our competitors. Our ability to transfer our businessmodel and management system across national borders, as well as industrysectors, means that we are able to capitalise on international opportunities asthey emerge.These opportunities are created by two principal factors: the necessity forcentral and local governments to control their spending; and their need torespond to social pressures for improved public services.As more governments recognise the value of private sector partnership in thedelivery of essential public services, we will continue to establish and growour presence in the countries with the greatest potential. The climate in theUK, US and parts of Europe is working strongly in our favour. We also seelonger term potential in selected countries in the Middle East and AsiaPacific.In the UK, the Labour government's election manifesto endorsed the privatesector's role in delivering public services. Post-election, issues such astransforming homeland security, offender management, transport systems, healthand education, are high on the political agenda and offer substantialopportunities for Serco.The home affairs market - homeland security, law enforcement, offendermanagement and immigration control - is driven by the change in governmentfocus from implementing initiatives to the delivery of outcomes - reducingcrime and the fear of crime. At the same time, homeland and border security arecritical issues. We are bidding on a number of identified programmes and seeothers emerging as the market evolves.New opportunities are also arising in science, with the formation of theNuclear Decommissioning Agency, a market worth around ‚£2bn per year, with 13 ofthe 20 nuclear sites being competed by 2008. We have established positions inhealth and education, which are among the largest and fastest growing areas ofgovernment spending. The UK Government will spend some ‚£89bn on health in 2005/6, up 9% on the previous year and education expenditure, at ‚£70bn, will be up8% resulting in many opportunities within our addressable markets. Other areasof government, in contrast, are seeing budget pressure and in response arechanging the way they work. This plays to our strengths. In UK defence, forexample, we expect our addressable market to double to ‚£8bn by 2010, as the MoDfocuses resources and seeks cost savings.With the political framework in place where efficiency, choice, competition anddiversity are all important factors, we are confident that the drive to improvethe UK's public services will continue.A similar pattern is emerging in North America, the largest services market inthe world. The market is estimated at $2,000bn, of which around one third is atthe Federal level and the remainder with state and local governments. The USdefence budget is nearly $400bn and rising, while homeland security spendingwill be in excess of $30bn this year. Some market segments, such astransportation, are looking at private sector service provision for the firsttime and we are bidding in the traffic management arena. More establishedmarkets are moving to more sophisticated, performance-based contracting, as theemphasis shifts from lowest cost to best value, a trend which plays to Serco'sstrengths.In the US, the Bush Administration is pressing forward with Agency scorecardsdesigned to ensure the use of competitive sourcing for the provision of publicservice across the US Federal government. The global war on terrorism is alsoaccelerating the shift towards private sector involvement, resulting inlong-lasting changes that are moving uniformed military personnel fromadministrative support functions into more direct roles. By leveraging ourworldwide defence expertise, we expect to make a long-term contribution inhelping to support the US's homeland defence capability. Other importantfactors expanding our markets include the US Federal deficit and an ageingcivilian workforce. Given the strength of these drivers, we anticipate a strongflow of opportunities.In March 2005, we established Serco Europe as a standalone division to harnessemerging opportunities in two potentially profitable areas: the Europeanscientific agency network and the German public sector.In Germany, economic conditions are accelerating the trend towards publicprivate partnerships. There is a widening gap between the supply of publicfunds and demand for investment in the country's essential infrastructure.These pressures are felt at federal, state and local government levels,resulting in a broad range of opportunities emerging for Serco. Our primaryfocus is in the defence and justice markets, with transport also likely toprovide exciting opportunities. Although a general election is scheduled forSeptember, the economic pressures are unlikely to change. As a result, we areconfident that the shift towards a growing role for the private sector inGermany will continue.A further milestone this year was the opening of our new office in Shanghai inMay. From there, we are exploring how we can assist the regional government tomeet its ambitious public service objectives. As China's growth continues, weare confident that Serco can have a role in unlocking the country's massivepotential.PeopleAs a service organisation, we know that our people will always be the keyfactor in providing customers with great value and making Serco a great placeto work. And our people have demonstrated a strong public service ethos in anumber of major events so far this year.This was so clearly demonstrated during the London bombings, which tragicallyclaimed the life of one of our colleagues. Our hearts go out to his wife andfamily.And our thanks go out to all those remarkable Serco people who were directlyinvolved in supporting the emergency services in the series of major incidentsthat took place in London.Teams working on the Docklands Light Railway, the London Heliport and theHelicopter Emergency Medical Service played a vital part in the city's calm,prompt and courageous response to these attacks.Serco people were also involved in managing demonstrations surrounding the G8Conference in Scotland, and, in more positive circumstances, in the ceremonialreview of the Royal Navy commemorating the 200th anniversary of the Battle ofTrafalgar.This year, we introduced a new brand positioning statement for Serco -`bringing service to life'. This statement links our vision to our daily work.Our people make this statement a reality, every day. I would like to thank eachone of them for their commitment, energy and professionalism.To ensure we have the capability to maintain our growth, we have reinforced thebreadth and depth of our management. As well as expanding our executive team,we continue to invest in identifying and developing leadership talent at everylevel of our business.Earlier this year, another 12 of our leaders were awarded the Institute ofDirectors prestigious Certificate in Company Direction, while two other leadersattained the high ranking Diploma. At present, 77 Serco leaders have receivedthe certificate and another 30 hold the diploma - a record that demonstratesour commitment to nurturing strong and capable leaders.We are committed to developing excellence at every level of our business.Serco's `Skills for You' programme, for example, offers our employees essentialskills training alongside work-based learning. In July 2005, the programme wonthe Rentokil Initial Skills For Life Award at the annual Business in theCommunity awards in London.It is inspiring to see that `Skills for You' is helping to enrich life beyondwork, as more participants take their positive learning experiences back totheir homes and communities.Corporate responsibilityA highly developed sense of corporate responsibility characterises everythingthat Serco does. We strive to foster a productive dialogue with stakeholdersand communities wherever we operate. With an uncompromising emphasis on safety,we seek to have a positive impact on the public and the environment.Our employees' wholehearted response to last December's tsunami disasterexemplifies this philosophy in practice. With the challenge to match the ‚£100,000 donated by Serco, employee fundraising initiatives exceeded ‚£120,000within six weeks of the disaster. Serco also provided support to enable 70employees from businesses in the UK, Middle East, Europe and the AscensionIslands to travel to Sri Lanka with the charity Habitat for Humanity to helprebuild homes for local people. Another 15 employees from other worldwide Sercolocations will be undertaking the same project in November.Meanwhile, and equally importantly, we continue to demonstrate our commitmentto safety and the environment, and, as in the past, have received a number ofawards recognising our achievements.OutlookSerco's culture is infused with the spirit of public service, an ethos that isvital to our growth. By delivering the social outcomes desired by ourcustomers, we encourage them to build long-term relationships with us, and toincrease the scale and scope of the work we do for them. Our ethos is helpingto expand our addressable markets, as governments consider how to extend therole of the private sector in public services.Market conditions, including social, political and economic factors, remainstrongly in our favour. We see numerous opportunities to grow in the UK andinternationally.In recent years we have put in place the building blocks that will allow us toachieve our vision: to be the leading service company in our chosen markets. Wehave developed Serco's leadership, ensuring we have the capability to drive theGroup forward. We have focused on operational efficiency, withdrawing fromareas that do not meet our growth and return criteria, and streamlining ourstructure. Our two recent acquisitions have given us critical mass in NorthAmerica and a fuller suite of products. We will continue to drive synergiesfrom the acquisitions, with the aim of turning promising leads into newbusiness wins and reducing the debt associated with the transactions.Our actions to develop leadership, streamline our structure and improveefficiency will contribute to growth and enhance our profitability, resultingin increasing margins over time.With the breadth of opportunities available to the Group, we look forward tofurther strong performance in the second half and are confident of achievingdouble digit growth for the foreseeable future.Finance Review1. IntroductionThe Group presents its consolidated results for the first time underInternational Financial Reporting Standards ("IFRS").Further explanation of the impact of the transition from previous UK GenerallyAccepted Accounting Principles ("UK GAAP") to IFRS is covered in a separateannouncement `Transition to International Financial Reporting Standards("IFRS")', which has been released today. All comparatives throughout theFinance Review and the interim financial statements included on pages 21 to 32have been restated under IFRS.2. Financial performanceThe performance in the first six months of the year shows continued strongorganic growth, together with the contribution from the acquisitions of ITNETplc ("ITNET") and RCI Holding Corp ("RCI"), which were completed in the period.Analysis of the Group's financial performance in the six months to June 2005,including our joint ventures on a proportionate consolidation basis, is shownin Figure 1.Figure 1: Income statementSix months to 30 June 2005 2004 Increase ‚£m ‚£m Revenue 1,074.9 804.5 33.6% Gross profit 153.5 116.6 31.6% Administrative expenses (101.6) (80.0) 27.0% Investment income and finance costs (8.2) (2.2) Profit before intangible 43.7 34.4 27.0% amortisation and tax Intangible amortisation (6.4) (3.7) Profit before tax 37.3 30.7 21.5% Tax (11.4) (9.7) Profit for the period 25.9 21.0 Minority interest (0.5) (0.2) Retained earnings 25.4 20.8 Effective tax rate 30.5% 31.6% Earnings per share before 5.53p 22.6% intangible amortisation 6.78p Earnings per share after 4.84p 15.9% intangible amortisation 5.61p Dividend per share 0.91p 0.81p 12.3% 2.1 RevenueTotal revenue in the six months to 30 June 2005 increased by 33.6% to ‚£1,074.9m. Excluding the impact of acquisitions in the period (see 7Acquisitions) and disposals in the previous period, revenue increased by 20.8%.Joint venture revenue increased by 111.4% to ‚£254.5m reflecting the full periodimpact of the Northern Rail franchise which became operational in December 2004and the continued strong performances of our Merseyrail and AWE joint ventures.Gross margin on total revenue, representing the average contract margin acrossthe portfolio, is 14.3%.2.2 Investment income and finance costsInvestment income and finance costs of ‚£8.2m (2004 - ‚£2.2m) have increasedprincipally due to the interest on debt funding for the acquisitions. Alsoincluded in investment income and finance costs is the net impact of interestrelating to the assets and liabilities of the defined benefit pension schemes(see 6 Pensions).2.3 Intangible amortisationIntangible amortisation of ‚£6.4m (2004 - ‚£3.7m) primarily arises fromseparately identifiable intangible assets acquired as part of the acquisitionof ITNET and RCI (see 7 Acquisitions), and the rights to manage and operatecontracts and franchises (see 6 Pensions).2.4 Profit before intangible amortisation and taxProfit before intangible amortisation and tax increased 27% to ‚£43.7m (2004 - ‚£34.4m), representing a net margin of 4.1% (2004 - 4.3%). Profit beforeintangible amortisation and the impact of acquisitions and their fundingincreased by 14.5%.2.5 Profit before taxProfit before tax increased by 21.5% to ‚£37.3m.2.6 TaxThe tax charge of ‚£11.4m (2004 - ‚£9.7m) represents an effective rate of 30.5%(2004 - 31.6%). The decrease is primarily due to changes in the geographicalmix of profits.2.7 Earnings per share ("EPS")EPS before intangible amortisation increased by 22.6% to 6.78p. EPS afterintangible amortisation increased by 15.9% to 5.61p. EPS is calculated on anaverage share base of 452.7m, which increased during the period primarily dueto the issue of 30.4m shares in settlement of the share-for-share element ofthe acquisition of ITNET.EPS before intangible amortisation and the effect of acquisitions increased by16.9% to 6.46p, and on a post amortisation basis increased by 11.9% to 5.42p.3. DividendsThe proposed interim dividend of 0.91p per share is a 12.3% increase on 2004.4. Cash flowCash flow is analysed consistently with previous periods to show the trueoperating cash flow of the Group and its use, excluding the proportionateconsolidation of joint ventures. Free cash flow is defined as cash generated bythe operation of the business, including joint venture dividends. Cashmovements on non recourse balances, financing, acquisitions and disposals areaccounted for in reconciling Group free cash flow to the movement in Groupcash. The adjustment line shown in Figure 2 reconciles this to the cash flowincluded on page 24, taking account of joint venture cash balances.Further analysis of the cash flow for the period is shown in Figure 2.Figure 2: Cash flowSix months to 30 June 2005 2004 ‚£m ‚£m Group profit from operations 29.4 21.7 Non cash items 22.9 16.6 Group EBITDA 52.3 38.3 Working capital movement (15.5) (16.0) Group operating cash flow 36.8 22.3 Interest (7.7) (1.0) Taxation (3.2) 4.0 Expenditure on tangible (12.1) (8.0) and intangible assets Dividends from joint ventures 7.7 6.2 Other items (2.1) - Group free cash flow 19.4 23.5 (Acquisitions)/disposals (282.5) 3.6 Other financing 254.4 (10.0) Dividends paid (8.3) (7.0) Non recourse debt financed assets (9.2) (12.7) Group net decrease in cash and cash equivalents (26.2) (2.6) Adjustment to include joint venture cash impacts 29.3 2.1 Net increase/(decrease) in cash and cash 3.1 (0.5) equivalents Note: Group EBITDA is earnings from subsidiaries before interest, tax,depreciation and intangible amortisation. Group free cash flow is fromsubsidiaries.4.1 Group operating cash flowThere was a net Group operating cash inflow for the period of ‚£36.8m (2004 - ‚£22.3m), an increase of 65.0%. This represents a conversion of 70.4% (2004 -58.2%) of Group EBITDA into cash. The working capital movement reflects thestrong level of organic growth shown by the Group in the period and continuesto reflect the trend of increasing by approximately one months' incrementalrevenue.4.2 InterestNet cash interest paid is ‚£7.7m (2004 - ‚£1.0m). The increase reflects the drawdown of funds to finance the acquisitions of ITNET and RCI.4.3 TaxationTax paid in the period was ‚£3.2m. The same period last year benefited from anet tax refund of ‚£4.0m arising from the ability to relieve tax losses ofsubsidiaries which were previously joint ventures.4.4 Expenditure on tangible and intangible assetsExpenditure on tangible and intangible assets of ‚£12.1m (2004 - ‚£8.0m)represents around 1.5% of Group revenue, a level broadly similar to that ofprevious periods.4.5 Dividends from joint venturesDividends received from joint ventures during the first half of 2005 of ‚£7.7m(2004 - ‚£6.2m) represents 61% (2004 - 71%) of profit after tax and managementcharges of joint ventures. This anticipated reduction in conversion on the sameperiod last year is primarily due to a low dividend from Northern Rail as thecash generated has been used to repay shareholder loans. We anticipate afurther dividend in the second half of the year.4.6 Acquisitions in the periodThe cash out flow in the period of ‚£282.5m primarily relates to theacquisitions of ITNET and RCI (see 7 Acquisitions).4.7 Other financingOther financing of ‚£254.4m primarily relates to the draw down of loans to fundthe acquisition of ITNET and RCI (see 9 Treasury).4.8 Group non recourse debt financed assetsThe ‚£9.2m outflow relates to the net movement on expenditure on PFI assetsunder construction, non recourse loans and other PFI balance movements. Furtheranalysis is provided in Figure 3.Figure 3: Group non recourse debt financed assetsAs at 30 June 2005 30 June 2004 ‚£m ‚£m Change in PFI balances PFI debtor 4.3 6.0 Assets in the course of construction (3.0) (9.1) Non recourse debt (7.9) (7.6) (6.6) (10.7) Change in other balances Non recourse debt: Ontario Driver (2.6) (2.0) Examination Services Group non recourse debt financed assets (9.2) (12.7) The movements on the PFI balances are the result of timing differences betweenloan repayment/draw-down and asset spend/recovery. Over the lifetime of eachPFI contract, we expect these movements to offset each other.5. Net debtAt the end of June 2005 Group net recourse debt was ‚£315.2m (31 December 2004 -‚£15.3m). Further analysis is provided in Figure 4.Figure 4: Net debtAs at 30 June 31 December 2005 2004 ‚£m ‚£m Group - cash and cash equivalents 148.4 173.9 Group - other loans (440.0) (168.4) Group - obligations under finance leases (23.6) (20.8) Group recourse net debt (315.2) (15.3) Joint venture recourse net cash/(debt) 22.3 (4.6) Total recourse net debt (292.9) (19.9) Group non recourse debt (248.5) (256.5) Joint venture non recourse debt (45.1) (47.1) Total non recourse debt (293.6) (303.6) Total net debt (586.5) (323.5) Within Group net recourse debt the increase in other loans reflects the drawdown required to fund the acquisition of ITNET and RCI. These loans containcovenants consistent with our private placements and allow sufficient headroomto fund known commitments and working capital movements.Non recourse debt (see 8 PFIs) represents long term loans funding theconstruction or ownership of a specific asset secured on the contracts of PFIand other concessions, and not any other assets of the Group. The loans areexcluded from all of our credit agreements and other covenants calculations,therefore having no impact on the Group's ability to borrow. Group non recoursedebt, utilised to fund PFI assets and the acquisition of the DES franchise,reduced during the period to ‚£248.5m (31 December 2004 - ‚£256.5m) due toscheduled repayments of debt across all non recourse debt funded assetprojects.6. PensionsTo provide assistance in understanding the complex impact of accounting forpension schemes under IFRS an overview is provided below, with further detailexplained in our separate announcement, the `Transition to InternationalFinancial Reporting Standards ("IFRS")'. Total pension cost included withinprofit before tax and amortisation for the period is ‚£20.9m (2004 - ‚£16.8m).The net amount included in the balance sheet arising from the Group'sobligations in respect of defined benefit pension schemes is ‚£157.8m (31December 2004 - ‚£124.8m). Further analysis is provided in Figure 5.Figure 5: Defined benefit pension schemesAs at 30 June 31 December 2004 2005 ‚£m ‚£m Group scheme (145.8) (122.3) Other schemes (72.9) (54.4) Joint venture schemes (72.8) (66.2) Retirement benefit liabilities (291.5) (242.9) Intangible asset arising from rights to 21.1 operate franchises and contracts 20.0 Reimbursable rights debtor 61.7 56.0 Deferred tax asset 52.0 41.0 Net balance sheet position (157.8) (124.8) Across our business we have three main types of pension schemes which areaccounted for as defined benefit pension schemes under IFRS, each with theirown accounting treatment in accordance with IAS 19 `Employee Benefits'.Non-contract specific schemes, where the actuarial gain or loss for the periodis charged to the consolidated statement of recognised income and expense (the`Sorie') but no asset is createdSchemes relating to franchises and specific contracts, where the actuarial gainor loss for the period is charged to the Sorie, but a recoverable intangibleasset is recognised on the balance sheet and amortised to the income statementandA contract where there is a right of cost reimbursement, where the deficit isincluded in both assets and liabilities on the balance sheetThe increase in net liabilities as at 30 June 2005 principally relates to thereduction in the AA bond rate in the period, increasing the liabilities on alldefined benefit pensions. These increases, together with the related deferredtax movement, have been reflected in the Sorie in the period.7. AcquisitionsThe acquisition of ITNET was completed on 3 February 2005 for consideration of‚£245.5m, comprising ‚£171.3m of cash and the issue of shares worth ‚£74.2m. Theshare-for-share option was fully subscribed, requiring the issue of 30.4mshares. The acquisition gave rise to goodwill of ‚£262.3m, including fair valueadjustments and acquisition costs of ‚£26.4m. Intangible assets arising on theacquisition have initially been recognised at ‚£20m and will be amortised on astraight-line basis over their expected life of eight years. From the date ofownership ITNET contributed ‚£83.9m to revenue and ‚£6.1m to profit before taxand amortisation.The acquisition of RCI was completed on 21 March 2005 for consideration of ‚£116.3m. The acquisition gave rise to goodwill of ‚£93.0m, including fair valueadjustments and acquisition costs of ‚£6.3m. Intangible assets arising on theacquisition have initially been recognised at ‚£2.2m and will be amortised on astraight-line basis over their expected life of five years. From the date ofownership RCI contributed ‚£50.5m to revenue and ‚£3.2m to profit before tax andamortisation.8. PFIs8.1 PFI portfolioThe current portfolio of PFIs consists of 11 PFI projects, with 10 equityinvestments and 11 operating contracts. Seven of the PFI stakes are 100% owned.JSCSC, a 50% joint venture, is now included in our primary statements underproportionate consolidation. During October 2004, we ceased accounting forLaser (the National Physical Laboratory PFI SPC) as a subsidiary due to thetransfer of control of the PFI asset to the DTI. This has removed the nonrecourse debt and corresponding PFI debtor from the balance sheet.8.2 Accounting for PFI contractsIn March 2005, the International Financial Reporting Interpretations Committee(`IFRIC') issued a draft interpretation on accounting for service concessionarrangements (PFI/PPP). The IFRIC is currently considering the commentsreceived on this draft guidance, with the final guidance expected to be issuedover coming months. Until the final guidance is issued and endorsed by the EUand in the absence of specific guidance within IFRS, the Group has, from 1January 2005, recognised the PFI debtors relating to concession arrangementsheld by PFI companies at amortised costs as defined by IAS 39. The effect ofadopting this policy is to maintain an accounting treatment consistent with UKGAAP whilst ensuring that the accounting treatment remains consistent withexisting IFRS.The draft guidance from IFRIC, if it were issued in final form, wouldpotentially require a number of changes to the accounting treatment of serviceconcession arrangements. One of the more significant aspects would be therequirement to recognise the assets associated with concession arrangements atfair value. This requirement could potentially produce a significant increasein the carrying value of the Group's PFI debtors held within PFI companies.9. Treasury9.1 Credit facilities and liquidity managementThe ‚£420m bank credit facility raised during December 2004 to provide fundingfor the acquisitions together with the two existing private placements provideliquidity for the Group. The first private placement for ‚£43.2m was taken outin 1997 and matures in 2007. The second for ‚£117m was taken out in 2003 andamortises from 2011 to 2015.The Group borrowed ‚£282.3m under the bank credit facility to fund theacquisitions of ITNET and RCI and to cover the costs of acquisition. The loanattracts interest at a rate of 50bp over LIBOR, is unsecured, with covenantsand obligations typical of these types of arrangement and expires in December2009.9.2 Impact of IAS 39The Group adopted IAS 39 `Financial Instruments : Recognition and Measurement'from 1 January 2005 with a ‚£26.9m reduction in opening net assets. Thisprincipally represents a fair value loss from marking to market the interestrate swaps used by the Group to hedge the interest obligations of PFI specialpurpose companies into fixed rate obligations, and the cross-currency swapsused to hedge long term loan notes. The Group has obtained hedge accounting forall designated hedges and, as a result, the impact on the income statement forthe period was immaterial. Fair value gains of ‚£0.7m have been recognised inthe Sorie during the period. The effect of IAS 39 adoption is further explainedin our separate announcement, the `Transition to International FinancialReporting Standards ("IFRS")'.10. IFRS reviewA dedicated report `Transition to International Financial Reporting Standards("IFRS")' has been issued separately to provide a more detailed understandingof the transition to IFRS. The report incorporates:the impact of IAS 1 `Presentation of Financial Statements' on the financialstatementsthe accounting policies adopted and the optional elections made under IFRS 1`First- time Adoption of International Financial Reporting Standards'the financial impact on the consolidated balance sheet as at 1 January 2004,being the date of transition of IFRSthe financial impact on the consolidated balance sheet as at 30 June 2004 and31 December 2004, being the comparatives presented in this reportthe financial impact on the income statement for the six months ended 30 June2004 and the year ended 31 December 2004, being the comparatives presented inthis reportthe financial impact on the consolidated balance sheet as at 1 January 2005 asa result of adopting IAS 32 and IAS 39, both relating to `FinancialInstruments', being the opening balance sheet position for the six months ended30 June 2005explanations for key movements included above.INDEPENDENT REVIEW REPORT TO SERCO GROUP PLCIntroductionWe have been instructed by the company to review the financial information forthe six months ended 30 June 2005 which comprises the consolidated incomestatement, the consolidated statement of recognised income and expense, theconsolidated balance sheet, the consolidated cash flow statement and relatednotes 1 to 8. We have read the other information contained in the interimreport and considered whether it contains any apparent misstatements ormaterial inconsistencies with the financial information.This report is made solely to the company in accordance with Bulletin 1999/4issued 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' responsibilitiesThe interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the directors. The directorsare responsible for preparing the interim report in accordance with the ListingRules of the Financial Services Authority which require that the accountingpolicies and presentation applied to the interim figures are consistent withthose applied in preparing the preceding annual accounts except where anychanges, and the reasons for them, are disclosed.International Financial Reporting StandardsAs disclosed in Note 1, the next annual financial statements of the Group willbe prepared in accordance with IFRS as adopted for use in the EU. Accordingly,the interim report has been prepared in accordance with the recognition andmeasurement criteria of IFRS and the disclosure requirements of the ListingRules. The accounting policies are consistent with those that the Directorsintend to use in the annual financial statements. There is, however, apossibility that the Directors may determine that some changes to thesepolicies are necessary when preparing the full annual financial statements forthe first time in accordance with IFRS as adopted for use in the EU.Review work performedWe conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management andapplying analytical procedures to the financial information and underlyingfinancial data and, based thereon, assessing whether the accounting policiesand presentation have been consistently applied unless otherwise disclosed. Areview excludes audit procedures such as tests of controls and verification ofassets, liabilities and transactions. It is substantially less in scope than anaudit performed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information.Review conclusionOn the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2005.Deloitte & Touche LLPChartered Accountants31 August 2005Interim Financial StatementsThe interim financial statements have been prepared for the first time inaccordance with the recognition and measurement criteria of InternationalFinancial Reporting Standards (IFRS), which have been adopted from 1 January2004 with comparative figures restated accordingly. As permitted by IFRS 1`First-time Adoption of IFRS', the Group has adopted IAS 32 and IAS 39`Financial Instruments' prospectively from 1 January 2005, and comparativefigures have not been restated.Consolidated income statementfor the six months ended 30 June 2005 6 months to 6 months to Year to 30 June 2005 30 June 31 December 2004 2004 ‚£m ‚£m ‚£m (unaudited) Note (unaudited) (audited) Continuing operations 1,074.9 804.5 1,636.9 Revenue Cost of sales (921.4) (687.9) (1,394.3) Gross profit 153.5 116.6 242.6 Administrative expenses (101.6) (80.0) (166.2) Other operating expenses (6.4) (3.7) (7.2) Profit from operations 45.5 32.9 69.2 Investment income 2 16.2 18.6 35.3 Finance costs 2 (24.4) (20.8) (40.5) Profit before taxation 37.3 30.7 64.0 Taxation (11.4) (9.7) (19.5) Profit for the financial period 25.9 21.0 44.5 Attributable to: Equity holders of the parent 25.4 20.8 43.5 Minority interest 0.5 0.2 1.0 Earnings per ordinary share (EPS) Basic EPS 3 5.61 4.84 10.11 Diluted EPS 3 5.51 4.78 9.99 Consolidated statement of recognised income and expensefor the six months ended 30 June 2005 6 months to 6 months to Year to 30 June 30 June 31 December 2005 2004 2004 ‚£m ‚£m ‚£m (unaudited) (unaudited) (audited) Note Net actuarial (loss)/gain 7 (33.9) 21.2 (29.4) on defined benefit pension schemes Fair value gain/(loss) on 7 4.0 (10.7) 13.0 reimbursable rights Goodwill previously written off, - - 0.2 released on sale of subsidiary Expense in relation to 7 2.7 1.8 4.5 share-based payment Net exchange gain/(loss) 7 2.8 (7.3) (3.3) on translation of foreign operations Fair value loss on cash flow 7 (37.9) - - hedges on transition to IAS 39 on 1 January 2005 Fair value gain on cash flow 7 0.7 - - hedges during the financial period Tax credit/(charge) on items 20.3 (3.6) 5.6 taken directly to equity Net (expense)/income recognised (41.3) 1.4 (9.4) directly in equity Profit for the financial period 25.9 21.0 44.5 Total recognised (expense)/income (15.4) 22.4 35.1 for the financial period Attributable to: Equity holders of the parent (15.9) 22.2 34.1 Minority interest 0.5 0.2 1.0 Consolidated balance sheetas at 30 June 2005 As at As at As at 30 June 30 June 2004 31 December 2005 2004 ‚£m ‚£m ‚£m (unaudited) Note (unaudited) (audited) Non current assets Goodwill 539.3 166.8 177.4 Other intangible assets 95.2 70.9 75.0 Property, plant and 104.1 86.9 96.2 equipment Investments - - 13.7 Trade and other 388.5 439.1 390.6 receivables Deferred tax assets 93.8 38.7 50.1 1,220.9 802.4 803.0 Current assets Inventories 33.6 30.0 26.9 Trade and other 481.4 374.8 390.1 receivables Cash and cash equivalents 6 204.1 184.1 200.5 719.1 588.9 617.5 Total assets 1,940.0 1,391.3 1,420.5 Current liabilities Trade and other payables (495.4) (368.3) (417.0) Current tax liabilities (12.9) (10.8) (5.8) Obligations under finance 6 (8.3) (7.5) (8.1) leases Loans (50.1) (16.9) (46.4) Financial instruments (4.2) - - (570.9) (403.5) (477.3) Non current liabilities Trade and other payables (1.8) (4.3) (0.6) Obligations under finance 6 (21.1) (20.8) (18.2) leases Loans (711.1) (561.7) (451.3) Financial instruments (32.1) - - Retirement benefit (291.5) (189.7) (242.9) obligations Provisions (26.4) (6.0) (6.0) Deferred tax liabilities (64.0) (50.7) (55.0) (1,148.0) (833.2) (774.0) (1,718.9) (1,236.7) (1,251.3) Total liabilities Net assets 221.1 154.6 169.2 Equity Share capital 7 9.3 8.7 8.7 Share premium account 7 266.5 190.9 191.5 Capital redemption 7 0.1 0.1 0.1 reserve Retained earnings 7 118.7 85.4 104.4 Retirement benefit 7 (145.0) (111.3) (124.4) obligations reserve Share-based payment 7 8.9 3.5 6.2 reserve Own shares reserve 7 (16.4) (16.9) (16.4) Hedging and translation 7 (23.2) (6.6) (2.6) reserve Equity attributable to 218.9 153.8 167.5 equity holders of the parent Minority interest 2.2 0.8 1.7 Total equity 221.1 154.6 169.2 Consolidated cash flow statementfor six months ended 30 June 2005 6 months to 6 months to Year to 30 June 30 June 31 December 2005 2004 2004 ‚£m ‚£m ‚£m (unaudited) Note (unaudited) (audited) Net cash inflow from operating 5 67.5 29.0 87.6 activities Investing activities Interest paid (23.1) (19.5) (39.4) Interest received 15.4 18.6 35.0 Proceeds from reduction in - 1.2 1.8 investment in joint ventures Disposal of subsidiary and - 3.6 3.2 business undertakings Proceeds from disposal of property, 0.4 0.1 0.4 plant and equipment Purchase of property, plant and (11.3) (8.3) (21.9) equipment Increase in development expenditure (2.4) - (4.1) Acquisition of a franchise - - (4.1) Acquisition of subsidiaries (280.9) - (13.7) Net cash outflow from investing (301.9) (4.3) (42.8) activities Financing activities Dividends paid (8.3) (7.0) (10.4) Decrease in other loans - (4.7) (0.8) Increase in other loans 260.2 3.7 10.2 Capital element of finance lease (3.4) (5.7) (9.0) repayments Proceeds from issue of share 1.4 0.1 0.7 capital Decrease in non recourse loans (12.4) (11.6) (19.2) Net cash inflow/(outflow) 237.5 (25.2) (28.5) from financing activities Net increase/(decrease) 3.1 (0.5) 16.3 in cash and cash equivalents Cash and cash equivalents 200.5 184.6 184.6 at start of period Effect of foreign exchange 0.5 - (0.4) rate gain/(loss) Cash and cash equivalents 204.1 184.1 200.5 at end of period Notes to the accounts1. General informationThe basis of preparation and accounting policies are set out in the `Transitionto International Financial Reporting Standards (IFRS)', a separate announcementissued by the Group today.The accounting policies used in the interim financial statements are consistentwith those that the Directors intend to use in the annual financial statements,but some changes to these policies may be necessary as a result of the IFRIC'sproposed interpretations on service concessions or those standards yet to beendorsed by the European Commission.The interim financial statements are unaudited and do not constitute statutoryaccounts within the meaning of Section 240 of the Companies Act 1985. Thestatutory accounts for the year ended 31 December 2004, which were preparedunder UK GAAP, have been delivered to the Registrar of Companies. The auditor'sopinion on these accounts was unqualified and did not contain a statement madeunder Section 237(2) or Section 237(3) of the Companies Act 1985. The interimfinancial statements for both 2005 and 2004 are unaudited, but have beenreviewed by the auditors and their report to the company is set out on page 19and 20.2. Investment income and finance costs ‚£m(unaudited)‚£m(unaudited)‚£m 6 months to 6 months to Year to 30 June 2005 30 June 2004 31 December 2004 (audited) Interest receivable by PFI 13.3 16.4 31.8 companies Interest receivable on 2.9 2.2 3.5 other loans and deposits Investment income 16.2 18.6 35.3 Interest payable on non (11.2) (14.3) (32.9) recourse loans Interest payable on other (10.7) (4.9) (4.5) loans Other - finance leases (2.5) (1.6) (3.1) and net interest retirement benefit obligations Finance costs (24.4) (20.8) (40.5) 3. Earnings per shareBasic and diluted earnings per ordinary share have been calculated inaccordance with IAS 33 `Earnings Per Share'. Earnings per share (EPS) is shownboth before and after amortisation of intangible assets to assist in theunderstanding of the impact of IAS 38 `Intangible Assets' on the Groupfinancial statements.The calculation of the basic and diluted EPS is based on the following data:Number of shares 6 months to 6 months to Year to 30 June 2005 30 June 2004 31 December 2004 millions millions millions Weighted average number 452.7 429.9 430.1 of ordinary shares for the purpose of basic EPS Effect of dilutive potential 8.3 4.8 5.3 ordinary shares: share options Weighted average number of ordinary shares for the 461.0 434.7 435.4 purpose of diluted EPS Earnings 6 months ended 6 months ended Year ended 30 June 2005 30 June 2004 31 December 2004 Earnings Per share Earnings Per share Earnings Per share amount amount amount ‚£m pence ‚£m pence ‚£m pence (unaudited) (unaudited) (unaudited) (unaudited) (audited) (audited) Earnings for the purposes of basic EPS being net profit 25.4 5.61 20.8 4.84 43.5 10.11 attributable to the equity holders of Serco Group plc Add back : Amortisation of 5.3 1.17 3.0 0.69 5.8 1.35 intangible assets, net of tax Basic earnings before amortisation of 30.7 6.78 23.8 5.53 49.3 11.46 intangible assets Earnings for the purposes of 25.4 5.51 20.8 4.78 43.5 9.99 diluted EPS Diluted earnings before 30.7 6.65 23.8 5.47 49.3 11.32 amortisation of intangible assets 4. Acquisitionsa) Acquisition of ITNET plcOn 3 February 2005 the Group acquired ITNET plc for consideration of ‚£245.5million comprising cash and the issue of shares. This transaction has beenaccounted for in accordance with IFRS 3 `Business Combinations'. Book Fair value Fair value adjustments value ‚£m ‚£m ‚£m Goodwill 12.8 (12.8) - Other intangible assets - 20.0 20.0 Property, plant and equipment 10.0 (1.4) 8.6 Deferred tax assets 7.7 3.2 10.9 Inventories 6.3 (0.3) 6.0 Trade and other receivables 44.7 (5.2) 39.5 Overdraft (1.0) - (1.0) Trade and other payables (42.5) (4.8) (47.3) Current tax liabilities (0.4) (1.0) (1.4) Provisions (3.9) (18.8) (22.7) Loans (3.0) - (3.0) Retirement benefit obligations (15.3) - (15.3) Obligations under finance leases (5.8) - (5.8) Net liabilities acquired 9.6 (21.1) (11.5) Goodwill 262.3 Total consideration 250.8 Satisfied by: Issue of Serco Group plc ordinary shares 74.2 Cash 171.3 Purchase consideration 245.5 Directly attributable costs 5.3 Total consideration 250.8 Net cash outflow arising on acquisition: Cash consideration paid in 2004 13.7 Cash consideration paid in 2005 162.8 176.5 b) Acquisition of RCI Holding Corp (RCI)On 21 March 2005, the Group acquired all of the issued share capital of RCI forcash consideration of ‚£116.3 million. This transaction has been accounted forin accordance withIFRS 3 `Business Combinations'. Book Fair value Fair value adjustments value ‚£m ‚£m ‚£m Goodwill 4.3 (4.3) - Other intangible assets 0.1 2.1 2.2 Property, plant and equipment 1.9 - 1.9 Deferred tax assets 1.0 0.1 1.1 Inventories 0.6 - 0.6 Trade and other receivables 35.4 - 35.4 Trade and other payables (13.7) (2.3) (16.0) Net assets acquired 29.6 (4.4) 25.2 Goodwill 93.0 Total consideration 118.2 Satisfied by: Cash 116.3 Directly attributable costs 1.9 Total consideration 118.2 Net cash outflow arising on acquisition 118.2 5. Reconciliation of profit from operations to net cash from operatingactivities 6 months to 6 months to 30 June 2005 30 June 2004 Year to 31 December 2004 ‚£m ‚£m (unaudited) ‚£m (audited) (unaudited) Profit from operations 45.5 32.9 69.2 Adjustments for: Share-based payments 2.7 1.8 4.5 Depreciation of property, plant and 15.2 11.5 22.2 equipment Amortisation of intangible assets 6.4 3.7 7.2 Loss on disposal of property, plant 0.4 - 0.8 and equipment Loss on sale of subsidiary - 0.4 0.1 undertakings Operating cash inflows before 70.2 50.3 104.0 movements in working capital Decrease/ (increase) in inventories 0.2 (1.4) 2.3 (Increase)/decrease in receivables (19.5) 2.3 (34.4) Increase/(decrease) in payables 20.0 (19.4) 31.7 Decrease in provisions (0.8) - - Cash generated by operations before 70.1 31.8 103.6 PFI asset expenditure Movement in PFI debtor 4.7 6.3 7.6 Expenditure on PFI assets in the (3.0) (9.2) (16.3) course of construction Cash generated by operations after 71.8 28.9 94.9 PFI asset expenditure Income taxes (paid)/received (4.3) 0.1 (7.3) Net cash inflow from operating 67.5 29.0 87.6 activities 6. Analysis of total net debt As at As at As at 30 June 30 June 31 December 2005 2004 2004 ‚£m ‚£m ‚£m (unaudited) (unaudited) (audited) Cash and cash equivalents 204.1 184.1 200.5 Other loans - current liabilities (23.5) (13.2) (20.0) Other loans - non current liabilities (444.1) (170.4) (174.1) Obligations under finance leases - (8.3) (7.5) (8.1) current liabilities Obligations under finance leases - non (21.1) (20.8) (18.2) current liabilities Recourse net debt (292.9) (27.8) (19.9) Non recourse loans - current (26.6) (3.7) (26.4) liabilities Non recourse loans - non current (267.0) (391.3) (277.2) liabilities Non recourse net debt (293.6) (395.0) (303.6) Total net debt (586.5) (422.8) (323.5) 7. Reserves Share Share Capital Retained Retirement Share-based Own Hedging and Total capital premium redemption earnings benefit payment shares translation account reserve obligations reserve reserve reserve ‚£m ‚£m ‚£m reserve ‚£m ‚£m ‚£m ‚£m ‚£m ‚£m As at 31 December 8.7 191.5 0.1 104.4 (124.4) 6.2 (16.4) (2.6) 167.5 2004 (audited) Shares issued 0.6 - - - - - - - 0.6 Premium on shares - 75.0 - - - - - - 75.0 issued Profit for the - - - 25.4 - - - - 25.4 period attributable to equity holders of the parent Dividends paid - - - (8.3) - - - - (8.3) Net actuarial loss - - - - (33.9) - - - (33.9)on defined benefit pension schemes Fair value gain on - - - - 4.0 - - - 4.0 reimbursable rights Expense in relation - - - - - 2.7 - - 2.7 to share- based payment Fair value loss on - - - (3.5) - - - (34.4) (37.9)cash flow hedges on transition to IAS 39 Fair value gain on - - - - - - - 0.7 0.7 cash flow hedges during the period Net exchange gain - - - - - - - 2.8 2.8 on translation of foreign operations Tax credit on items - - - 0.7 9.3 - - 10.3 20.3 taken directly to equity As at 30 June 2005 9.3 266.5 0.1 118.7 (145.0) 8.9 (16.4) (23.2) 218.9 (unaudited) 8. Joint venturesThe Group's interests in joint ventures are reported in the consolidatedfinancial statements using the proportionate consolidation method. The effectof the Group's joint ventures on the consolidated income statement is asfollows:Income statement 6 months to 6 months to Year to 30 June 2005 30 June 31 December 2004 2004 ‚£m ‚£m ‚£m (unaudited) (unaudited) (audited) Revenue 254.5 120.4 255.5 Profit from operations 16.1 11.2 25.7 Profit before taxation 16.3 11.2 25.2 Taxation (3.6) (2.6) (6.3) Profit for the financial 12.7 8.6 18.9 period Minority interest (0.4) (0.1) (0.6) Attributable to the parent 12.3 8.5 18.3 Included in the above income statement for the six months to 30 June 2005 is acharge of ‚£4.4m to joint ventures from the Group for management services.ENDSERCO GROUP PLCRelated Shares:
Serco