2008 Interim Results
27 August 2008
Strong performance and attractive markets
Serco Group plc - 2008 Interim Results
2008 2007
Revenue £1,491m £1,349m up 10.5%
Adjusted profit before tax £67.3m £56.2m up 19.8%
Profit before tax £62.8m £52.0m up 20.8%
Adjusted earnings per share 10.18p 8.48p up 20.0%
Earnings per share 9.35p 7.71p up 21.3%
Dividend per share 1.48p 1.23p up 20.3%
Group free cash flow £33.0m £28.8m up 14.6%
Continuing progress in existing and new markets
Signed £2.0bn of contracts in the period
Strong international performance - overseas contracts of more than £700m signed
Win rates of one in two for new bids and 90% of rebids
Significant new market wins - Dubai Metro (£500m); Glasgow City Council
partnership (£265m)
Increased presence in existing markets: environmental services - London Borough
of Hammersmith & Fulham (£140m); light rail - Al Safooh (preferred bidder, £
120m); defence support - UK Naval Air Command (£76m); US defence - Aviation
Technical Maintenance and Support Services (US$167m); Australia Garrison
Support (AUS$175m)
Strong financial performance
Revenue growth of 10.5%
Adjusted profit before tax (Adjusted PBT) margin increase of 30 basis points to
4.5%
Group free cash flow increase of 14.6% to £33.0m
Agreement to acquire SI International positions Serco in substantial US
government services market
Agreement (subject to shareholder and regulatory approvals) to acquire SI
International, a US government services provider, for approximately US$423m,
creates a strong platform across the US armed forces and civil federal
government agencies
Further details are given in a separate press release issued today
Substantial contract base underpins excellent revenue visibility
Order book of £15.1bn at 30 June 2008
Preferred bidder on £0.8bn of contracts
Visibility of 99% of planned revenue for 2008, 83% for 2009 and 73% for 2010
£26bn of further opportunities identified
Growing markets support confident outlook
Increasing demand for our skills in UK and international markets
Drivers include government efficiency programmes, demand for better public
services and global challenges including migration, climate change, security
and congestion
Remain confident of double-digit revenue growth for 2008 and the foreseeable
future
Guidance reiterated for current business for 30 basis point increase in
Adjusted PBT margin in 2008 and 2009
Christopher Hyman, Chief Executive of Serco Group plc, said: "Our growth
strategy is founded on our ability to deliver excellent service, build
relationships, enhance our capabilities and select the right opportunities. We
have made a strong start to 2008 and we see excellent growth opportunities
ahead as our customers experience increasing global economic and social
pressures. In the US market, the proposed acquisition of SI International will
enhance our scale, capabilities, relationships and market access in the world's
largest contracting market."
.
Note: Adjusted profit before tax and Adjusted earnings per share shown above
are before amortisation of acquired intangibles as shown on the face of the
Group's income statement and the accompanying notes. Group free cash flow is
from subsidiaries and joint venture dividends and is reconciled in Section 3 of
the Finance Review.
For further information please contact Serco Group plc: +44 (0) 1256 745 900
Charles King, Head of Investor Relations
Dominic Cheetham, Corporate Communications Director
www.serco.com
Presentation
A presentation for investors and analysts will be held at JP Morgan Cazenove,
20 Moorgate, London EC2R 6DA at 10.00 am today.
Overview
Strong performance as markets continue to develop
Serco performed strongly in the first half of 2008. We grew revenue by 10.5% to
£1,491m, Adjusted profit before tax (Adjusted PBT) rose by 19.8% to £67.3m and
Adjusted earnings per share grew 20.0% to 10.18p. The Adjusted PBT margin
increased by 30 basis points to 4.5%. Profit before tax rose by 20.8% to £62.8m
and earnings per share were 21.3% higher at 9.35p.
Group free cash flow increased by 14.6% to £33.0m. Our balance sheet remains
strong, with Group recourse net debt at £140.2m (2007: £137.9m).
In accordance with our policy of increasing the total dividend each year
broadly in line with the increase in underlying earnings, the Board has
declared an interim dividend of 1.48p per share, representing an increase on
the 2007 interim dividend of 20.3%. The interim dividend will be paid on 17
October 2008 to shareholders on the register on 5 September 2008.
The strength of our business model, including our ability to deepen our
presence in existing markets and enter new markets, was again demonstrated by
our contract wins in the first half. We signed significant new business, and
our delivery of excellent service was reflected in our success in expanding the
scope and scale of existing services, both on rebids and during the contract
term. Overall, we maintained our win rates of more than 90% on rebids and one
in two new bids, and in total we won £2.0bn of new work during the first six
months of 2008.
In the UK, we began work on our first local authority strategic partnership.
The £265m contract with Glasgow City Council will help us build our presence in
this new market. We also renewed and enlarged our contract with Walsall Council
to provide education and children's services. The new agreement is valued at
around £345m and is for a longer term of 12 years reflecting our previous
success in improving pupils' exam performance.
We were pleased to be selected for a £140m, maximum 14 years, contract to
deliver a range of innovative environmental services to the London Borough of
Hammersmith & Fulham. Since the half year end, we have been appointed preferred
bidder by Milton Keynes Council for a £160m environmental services contract
over a maximum of 14 years, which uses similar technological and environmental
innovations.
In our UK defence business, we expanded our aircraft operational support
operations with a contract, valued at £76m over its maximum ten year term, to
provide the Naval Air Command with engineering and aircraft support services at
Yeovilton and Culdrose air stations.
The Australian Defence Organisation has renewed a contract with Serco Sodexho
Defence Services, a Serco joint venture, to provide garrison support services
at six defence bases in the Northern Territory.
The contract's value to Serco is up to AUS$175m over nine years.
In the US, we won a rebid to deliver Aviation Technical Maintenance and Support
Services to the US Navy. The contract has a total potential value of US$167m
over five years and significantly increases the support we provide to the Space
and Naval Warfare Systems Center.
In the nuclear market, while we were disappointed that our consortium did not
win the Sellafield nuclear decommissioning contract, we see good growth
potential for our assurance business and we will consider the remaining
decommissioning opportunities as they arise.
We have also announced today a significant development in our strategy to
increase our capabilities and reach in the US market, in agreeing to acquire SI
International, a provider of services to US military and civil federal
government agencies, for approximately US$423m. Full details are given in a
separate announcement released this morning.
In the United Arab Emirates, we opened a new market by leveraging the transport
capabilities we have developed in the UK. The £500m, 12.5 year contract is to
operate and maintain the new Dubai Metro, which is due to start service in
September 2009. Serco is also part of a consortium which was selected as
preferred bidder for the Al Safooh tramway in Dubai, which is due to come into
operation in 2011. We will be responsible for the operation of the contract,
valued at £120m over 18 years.
Our visibility of future revenues remains excellent. As at 30 June 2008, we had
identified 99% of planned revenue for 2008, 83% for 2009 and 73% for 2010. Our
order book rose to £15.1bn, and we were preferred bidder on contracts valued at
£0.8bn.
We continue to benefit from our actions to improve margins, which include
managing our contract portfolio and enhancing our operating efficiency through
initiatives such as the roll-out of our SAP system and strategic procurement of
goods and services. In the future, we expect that winning higher margin work
will increasingly contribute to this improvement.
We continue to see strong opportunities for further growth. With growing
markets and new opportunities identified, our pipeline now stands at a
substantial £26bn.
Operating Review
Civil Government
Civil Government is our largest segment and includes home affairs, information
technology and business process outsourcing, health, education and children's
services, integrated facilities management, consulting and much of our work in
the private sector. Segmental revenue increased by 9.5% to £543m, representing
36% of Group revenue (2007: 37%). As well as expanding the scope and scale of
existing contracts, we were awarded contracts by a number of new private sector
and consulting clients.
In the home affairs market, rising prisoner numbers are driving the need for
more places. We began construction on extensions to two prisons we manage, HMP
Dovegate and HMP Lowdham Grange, which will add 260 places to each site and
more than £100m to the contracts' combined operating value over their remaining
terms. We also began an extension to the Hassockfield Secure Training Centre.
Serco now provides health services to 16 prisons and immigration removal
centres across both the public and private sectors. The latest contract win by
our health business is with Doncaster Primary Care Trust, valued at over £4m
over three years and involves providing nursing and related services in
Doncaster for HMP Lindholme, Lindholme Immigration Removal Centre and HMP
Moorlands.
In May, we acquired the UK's leading independent occupational health service
company, the Grosvenor Health Group, for £19m. Grosvenor provides us with
greater access to the fast growing occupational health sector, and also adds
new capabilities in managed health services so that we are well placed to
address further outsourcing of private, public and voluntary sector health
services. In 2007, Grosvenor had revenue of approximately £13m.
In UK local government, we began our £265m partnership with Glasgow City
Council to transform the Council's land, property and information and
communications technology (ICT) services. We completed the transition phase in
just eight weeks, transferring 270 employees with minimal disruption to
business.
Customer service levels are already improving and we have met all our service
targets to date. We were also pleased to expand our existing contract, signed
last year with Ealing Council, which widened our portfolio by the addition of
HR Service Centre expertise.
In order to devolve our capability closer to the contract level, improve
efficiency and simplify structures, at the end of July we reorganised the
central IT services team within our technology business.
We were pleased to be selected for a £140m, maximum 14 years, contract to
deliver a range of innovative environmental services to the London Borough of
Hammersmith & Fulham. Since the half year end, we have been appointed preferred
bidder by Milton Keynes Council for a £160m environmental services contract
over a maximum of 14 years, which uses similar technological and environmental
innovations.
In addition to signing our significant new contract with Walsall Council, our
Education business won a number of other contracts, collectively valued at more
than £12m over the next three years. These contracts are to support carers of
disabled children, provide training programmes for Children's Centre leaders
and to train school bursars and business school managers. The Serco-led
"Together for Children" was successful in achieving the roll-out of 2,500
Children's Centres ahead of its 1 April 2008 target.
In the UK business support market, two of our existing contracts expanded.
Additional funding of £14m per annum was confirmed for the businesslink.gov
programme to develop its online business support services. We have been
responsible for developing and delivering this programme since 2005, and have
received a positive independent review of the programme from the National Audit
Office. Our contract to provide support to rural enterprise in Cornwall, Devon
and Somerset also grew with additional funding of around £9m per annum.
In our private sector business, we were awarded a contract by Volkswagen,
valued at around £16m per annum, to provide learning, technical, audit and a
range of other support services. We also won a five year contract valued at
over €20m to provide facilities support services to Wyeth Medica at their
biotech campus in Dublin, Ireland, and were awarded a contract for the delivery
of support services to Coca-Cola's UK headquarters in Hammersmith, London with
a value of up to £10m over five years.
Our integrated facilities management business was appointed preferred bidder
for a contract as part of a consortium led by Macquarie Bank to provide
services to the Office of Public Works Decentralisation PPP project in the
Republic of Ireland. The project involves the design, construction, financing
and maintenance of three large new government office buildings. Serco will
manage the maintenance and support service delivery of the new offices in a
contract valued at approximately £20m over 15 years.
Our consulting business won a number of contracts with new customers
particularly with Central Government clients. The acquisition of ER Consultants
and Cornwell Management Consultants in 2007 has enhanced our capability and
expertise in the growing areas of HR consultancy and organisational
development. Consulting has won approximately £3m of new work, with new
customers including: the Home Office, Fidelity International, the Metropolitan
Police Service, Atomic Weapons Establishment and the Ministry of Defence (MoD).
Defence
Revenue in Defence increased by 11.3% to £375m, representing 25% of Group
revenue (2007: 25%).
United Kingdom
We won good levels of new business in the UK defence market, primarily in
support of the Royal Navy and Royal Air Force.
The UK MoD's Defence Equipment and Support organisation selected Serco for a
ten year contract to provide "surface finish" services for the RAF across 16
sites, including the Falkland Islands. The contract, worth around £64m,
involves the provision of painting and finishing services for a range of
aircraft, ground-based vehicles and support equipment.
In aircraft operational support, we were awarded a contract with BAE Systems to
support the VC-10 aircraft fleet based at Brize Norton, where Serco already
supports the Royal Air Force Tristar Fleet. The contract, which aims to improve
efficiency and aircraft availability and includes depth maintenance and supply
services, is valued at around £8m over five years. We have also been appointed
preferred bidder for a maintenance contract for the RAF glider fleet valued at
around £6m over its maximum term of seven years.
We were also appointed preferred bidder for an Air Surveillance and Control
Systems contract, valued at around £24m over eight years, to deliver
multi-activity support services at a variety of sites across the United
Kingdom.
North America
In the US, we continued to develop our business in supporting military
personnel and their families through a number of contract wins. We won our
first contract with US Army Medical Command Europe to place 25 licensed
clinical social workers at US Army Medical Treatment Facilities at
installations in Germany, Italy and Belgium. As well as extending our military
personnel and family support services to the US Army internationally, this
broadens our scope to include higher level clinical services. The contract is
valued at approximately US$19m over five years.
Other wins include contracts with the US Army under its Freedom Team Salute
(FTS) program to support a number of commendation, awareness and recognition
programs, and operate and maintain the FTS website. These contracts were bid
with our partner, Summit Marketing, and are valued at over US$21m to Serco for
a base year plus one option year.
The US Army also awarded a team, including Serco, contracts under the PMSS-2
(Project Management Support Services) programme. Of the programme's nine
functional areas, Serco has the lead for Integrated Logistics Support, Human
Resource Information Systems, Information Assurance and support for Business
Process Re-engineering, Information System Security and IT Related Systems
(including Biometrics). The value to us is estimated at US$25m over five years.
With Akima Infrastructure, we won the Fort Gordon Georgia Adjutant General
Military Personnel Division contract. The contract value is approximately
US$30m over five years.
Middle East and Asia Pacific
In the Middle East, as previously reported, we were disappointed to be informed
in February that the Oman Ministry of Defence no longer wished to proceed with
its project to develop a military training college.
In Australia, the Australian Defence Organisation has renewed a contract with
Serco Sodexho Defence Services, a Serco joint venture, to provide garrison
support services at six defence bases in the Northern Territory. The contract's
value to Serco is up to AUS$175m over nine years.
Transport
Transport revenue grew by 7.3% to £306m, representing 21% of Group revenue
(2007: 21%). Using skills developed in the UK, we won new business in the
Middle East and the US and delivered strong performance in our existing
services.
United Kingdom
Northern Rail and Merseyrail, which we operate in joint ventures with
NedRailways, continued to perform well, with good passenger volume growth.
Northern Rail won further awards in recognition of its success, including
'Train Operator of the Year' and 'Rail Business of the Year'. Merseyrail's
increased passenger volumes were underpinned by excellent operational
performance.
Serco has been awarded a multi-million pound contract, signed in February this
year, by Transport for London (TfL), to maintain traffic control equipment in
central London and the City. The five year contract, which could be extended
for a further two years, makes Serco responsible for maintaining traffic
signals, pedestrian crossings, traffic information signs and safety cameras and
includes important transport link points for the 2012 Olympics.
North America
In the US, our transportation management business was awarded a US$23m two year
contract by the City and County of San Francisco to procure, install and manage
an integrated smart parking system. The advanced technology will improve
traffic flow, reduce pollution and optimise parking availability. This win
followed the award of a separate US$8m, two year extension of our parking meter
counting and collection services contract with the San Francisco Municipal
Transportation Agency.
Middle East
Following the signing in April of our £500m, 12.5 year contract with the Dubai
Government Roads and Transport Authority (RTA) to operate and maintain the
first two lines of the new Dubai Metro, we began the recruitment and training
of staff, and to undertake pre-launch consultancy and planning ahead of the
service's start in September 2009. Construction of the Metro is on schedule and
the testing of a number of trains on completed sections of the track has
attracted significant local interest.
Also in Dubai, at the end of April, the ABS consortium, consisting of Serco,
Alstom and Besix, was appointed preferred bidder by the RTA for the delivery of
the first phase of the Al Safooh tramway transit system. We will be responsible
for the operation of the contract, which is valued at £120m over 18 years,
starting in 2011. Pre-launch consultancy and planning is underway.
Our strong relationship with the RTA also enabled us to win additional
contracts to support the implementation of their Bus Master plan for Dubai and
to provide a real-time journey planner for Dubai which will be available
online, on mobile technology and through a customer service centre. Each
contract is valued at around £2m.
AsiaPacific
Having shown good growth in 2007, Great Southern Rail, our Australian rail
operation, maintained its passenger numbers despite a softer tourism market.
The deluxe Platinum service cabins on the Ghan have been successfully launched
with strong forward sales from their introduction into service in September
2008.
In Hong Kong, we were pleased to renew our contract to operate the Aberdeen
Tunnel which we were first awarded in 1998. The new agreement runs for six
years and is valued at around £14m.
Science
Science revenue grew by 15.4% to £267m, representing 18% of Group revenue
(2007: 17%).
Our joint venture with BNFL and Lockheed Martin to manage and operate the UK's
Atomic Weapons Establishment (AWE) is performing strongly. The facility to
house the Orion research project opened on schedule in March 2008, and the
project is due for completion in 2010. AWE's excellent health, safety and
environmental performance was recognised again in the annual RoSPA awards,
including the Astor Trophy for excellence in occupational health, the
International Dilmun Environmental Award and the sectoral award for outstanding
performance in health and safety. As previously reported, BNFL is in the
process of disposing of its shareholding in AWE and we hope this will be
completed by the end of the year.
Serco won a number of rebids and new business, valued around £30m, to provide
technical and assurance services. These contracts include a one year, £4m
renewal with the UK MoD to provide nuclear submarine assurance support and a £
4m contract with TfL to operate its rail test track.
In the civil nuclear market, Serco is one of four partners which will provide
British Energy with engineering and technical support at its nuclear power
stations valued up to £30m over five years.
Market Development
Governments and commercial organisations around the world are increasingly
dealing with similar challenges: climate change, declining energy reserves,
migration, ageing populations, transport congestion, economic growth and the
threat of terrorism. These significant issues are heightened by increasing
costs, consumers' demands for better public services and unwillingness to pay
higher taxes and the impact of technology and globalisation.
We have proven skills and capabilities in delivering people-led change and
excellent service delivery, and are consequently well positioned to help our
customers address these challenges. Our broad capabilities across a number of
markets also mean that we are well positioned to select the best opportunities
and reduce our exposure to any fluctuations in individual markets. While many
international markets are at an early stage of development, India, the Emirates
and other countries in the Middle East look likely to present opportunities in
the medium term.
The significant scale, impact and potential for growth for the UK's public
services market has been assessed for the first time. The independent review
for the UK Government was led by Dr DeAnne Julius and concluded that the UK is
the world leader in outsourced public services.
The Julius review also calculated that the contribution of outsourced public
services to the UK economy has grown 130% since 1995 and that the UK now has
the most developed public service industry in the world, second in size only to
the US. With revenue of £79bn, generating £45bn of value added per year, the
industry contributes more to the UK economy than key industries such as
communications, electricity, gas and water supply. The report concluded that
companies and the third sector are making major contributions to deliver better
value for money services and the industry could grow substantially in the UK
and become an export success story, confirming the opportunities we see in our
home markets and internationally.
In the UK, the Government is further encouraging private sector involvement.
The Operational Efficiency Review, announced in July and due to report in 2009,
is seeking to draw on the best private and public sector experience to save
billions of pounds from public spending, following the £23bn saved through the
Gershon review.
In addition, a Green Paper on welfare reform published in July 2008 highlighted
the need to develop new solutions to help more people get back to work,
including through private sector and voluntary providers.
In individual markets, we see strong opportunities in UK home affairs,
principally through the Government's drive to increase capacity to meet the
growth in prisoner numbers and immigration removal targets.
In health, the Grosvenor acquisition has broadened our capabilities into the
fast-growing occupational health services market to both public, not-for-profit
and private sector organisations. We have identified opportunities in the NHS
to deliver better value-for-money clinical services to the primary sector and
to provide fully-managed healthcare solutions that deliver the information and
support needed by clinicians and patients.
UK local authorities provide strong opportunities for Serco. Our innovative
approach to improving environmental services is resulting in significant new
business. In addition, strategic partnerships are seen as an attractive way to
deliver innovation and achieve a 3% annual efficiency gain as required by the
2007 Comprehensive Spending Review. As a result, our partnership with Glasgow
City Council is receiving significant attention and we have identified a strong
pipeline of opportunities for further local authority strategic partnerships.
In UK defence, we are working with the MoD as it refreshes its Defence
Industrial Strategy to provide battle-winning capability to the front line and
good value for the taxpayer. We have a strong position given our track record
in the provision of operational support services to the front line commands and
our independence from equipment manufacturers. We also expect our skills as an
integrator of people, infrastructure, training and technology to help the MoD
deliver through-life capability management.
In the UK nuclear decommissioning market, following the decision on Sellafield,
the Nuclear Decommissioning Authority indicated that it expects to announce a
plan for the remaining sites before the end of the year. These include the
decommissioning of the Magnox reactors, Dounreay and other smaller sites. We
will review the attraction of these opportunities as the market develops.
In transport, our skills and capabilities in rail and traffic management,
developed in the UK, are opening up opportunities in international markets. We
have established a substantial foothold in the United Arab Emirates through our
contracts with the Dubai RTA, and expect further opportunities from the rapid
expansion of the metro and other transport systems in Dubai and from schemes in
other Emirates, notably in Abu Dhabi. Our ability to deliver high service
levels and to work closely with our customers is delivering a substantial range
of opportunities across this division.
In the US, the acquisition of SI International will provide a strong foundation
for growth and delivery of higher value services into the substantial US
government services market. SI International will make us a top 30 provider in
this market, and enhance the depth of our capabilities in professional,
administrative and management support and information and communications
technology. It will provide access to higher growth areas within Department of
Defense and Federal civil agency spending, and broaden and deepen our customer
relationships by extending our presence into all of the Armed Services, as well
as US intelligence and other security agencies, and the numerous Federal civil
government agencies.
People
The commitment, skills and enthusiasm of our 40,000 people are key in
delivering the high quality services our customers have come to expect from
Serco, and therefore to sustaining our long-term relationships with them.
We were therefore delighted to recognise in May the achievement of some of the
extraordinary individuals and teams within our organisation who have excelled
in delivering the standards we set in dealing with colleagues, customers,
suppliers or shareholders. The Pulse Awards, recognised excellence in five
categories: innovation, leadership, commitment, impact, and the "heart" award
recognising bravery and courage. Profiles of the award winners can be found on
www.serco.com.
In the first half, we launched a new employee Sharesave scheme, and were
pleased that over 8,000 of our employees participated.
Outlook
Our continued strong performance and the growth and wide range of high-quality
opportunities in our markets, both in the UK and internationally, underpins our
confidence in delivering double-digit growth for the foreseeable future. At the
same time, our focus on managing our contract portfolio, enhancing our
efficiency and bidding selectively for higher value work supports our guidance
for the current business of a 30 basis point increase in Adjusted PBT margin
for both this year and next. We remain confident for the rest of 2008 and
beyond.
Risk Management
Our business, results and financial condition could be affected by a broad
range of risks and uncertainties. For a full understanding of these risks, see
pages 38 to 42 of the Serco Group plc 2007 Annual Review and Accounts.
The Group risk register identifies the principal risks facing the business,
including those that are managed directly at a Group level. The Group risk
register is updated at least quarterly, reviewed six-monthly by the
Risk Oversight Group and discussed at quarterly Board meetings. Active risks
are ranked by importance and grouped under the following six headings:
Strategic- covering threats to the long term deliverability of the Group's
strategy
Financial/commercial- covering threats to short to medium term performance
Compliance- covering compliance with all relevant legislation and regulations
Safety and security- covering threats to the safety of staff, sub-contractors,
members of the public and the environment and the security of the Group's
assets and staff
Operational- covering threats to the continuity of business operations
Management- covering possible internal failures of managers or management
systems.
For the Group, the most significant risks relate to the strategy and safety
areas. Social, environmental and ethical issues, while recognised within a
number of the Group's risks, do not represent significant threats to the
Group's strategy at present.
The principal risks and uncertainties for the remaining six months of the
financial year are unchanged from those stated in the Serco Group plc 2007
Annual Review and Accounts.
Finance Review
1. Financial performance
The first six months of 2008 was another strong period of revenue growth for
Serco, coupled with a further increase in margins and rising free cash flow
contributing to ongoing balance sheet strength.
Serco's income statement for the period is summarised in Figure 1 below. This
includes the results of joint ventures which are proportionately consolidated.
Figure 1: Income statement
Six months ended 30 June 2008 2007 Increase
£m £m
Revenue 1,490.5 1,349.0 10.5%
Gross profit 217.6 195.1 11.5%
Administrative expenses (140.8) (129.4)
Adjusted operating profit 76.8 65.7 16.9%
Investment revenue and finance costs (9.5) (9.5)
Adjusted profit before tax 67.3 56.2 19.8%
Amortisation of acquired intangibles (4.5) (4.2)
Profit before tax 62.8 52.0 20.8%
Tax (16.9) (14.6)
Profit for the period 45.9 37.4 22.7%
Effective tax rate 26.9% 28.1%
Adjusted earnings per share 10.18p 8.48p 20.0%
Earnings per share 9.35p 7.71p 21.3%
Dividend per share 1.48p 1.23p 20.3%
1.1 Revenue
Revenue grew by 10.5% to £1,490.5m, benefiting from the growth of existing
contracts and the contribution of new wins.
1.2 Gross margin
Gross margin - the average contract margin across our portfolio - was 14.6%, a
small increase on the first half of 2007.
1.3 Investment revenue and finance costs
Investment revenue and finance costs totalled a net cost of £9.5m (2007: £
9.5m). The effect of a reduction in the Group's underlying borrowing costs was
offset by an increase in the net pension funding cost charged to the income
statement.
1.4 Profit before tax
Adjusted profit before tax was £67.3m, an increase of 19.8%. This represented a
margin of 4.5%, up from 4.2% in the first half of last year. Profit before tax
increased by 20.8% to £62.8m.
1.5 Tax
The tax charge of £16.9m (2007: £14.6m) represents an effective rate of 26.9%,
compared with 28.1% in the first half of 2007. The reduction reflects
principally the fall in the UK corporation tax rate from 30% to 28% effective
April 2008.
1.6 Earnings per share (EPS)
Adjusted EPS rose by 20.0% to 10.18p. EPS grew by 21.3% to 9.35p.
EPS and Adjusted EPS are calculated on an average share base of 487.1m during
the period (2007: 479.9m). The increase in the average share base resulted
principally from the exercise of employees' share options.
2. Dividend
Serco's policy is to increase the total dividend each year broadly in line with
the increase in underlying earnings. The Board has declared an interim dividend
of 1.48p per share, representing an increase on the 2007 interim dividend of
20.3%. The interim dividend will be paid on 17 October 2008 to shareholders on
the register on 5 September 2008.
3. Cash flow
The Group generated a free cash inflow of £33.0m (2007: £28.8m), an increase of
14.6%.
Figure 2 analyses the cash flow. As in previous years, we have designed the
analysis to show the true cash performance of the Group - the cash flows
generated by subsidiaries plus the dividends received from joint ventures. It
therefore differs from the consolidated cash flow on page 26, which
proportionately consolidates the cash flows of joint ventures. The adjustment
line in Figure 2 reconciles the movement in Group cash to the consolidated cash
flow.
Figure 2: Cash flow
Six months ended 30 June 2008 2007
£m £m
Operating profit excluding joint ventures 48.8 41.4
Non cash items 23.6 25.6
Group EBITDA 72.4 67.0
Working capital movement (24.6) (18.2)
Group operating cash flow 47.8 48.8
Interest (12.4) (11.5)
Tax (3.1) (0.7)
Expenditure on tangible and intangible assets (19.1) (24.9)
Dividends from joint ventures 19.8 17.1
Group free cash flow 33.0 28.8
Disposal of subsidiaries 1.6 1.4
Acquisition of subsidiaries (21.3) (7.9)
Other financing 12.5 (23.3)
Special pension contribution - (51.0)
Dividends paid (14.5) (12.0)
Group net increase/(decrease) in cash and cash equivalents 11.3 (64.0)
Adjustment to include joint venture cash impacts 15.1 15.0
Net increase/(decrease) in cash and cash equivalents 26.4 (49.0)
Note: Group EBITDA is earnings from subsidiaries (excluding joint ventures)
before interest, tax, depreciation, intangible amortisation and
other non cash items.
3.1 Group operating cash flow
Group operating cash flow of £47.8m (2007: £48.8m) reflects a conversion of
Group EBITDA into cash of 66% (2007: 73%). The working capital movement of £
24.6m reflects the strong level of organic growth in the period.
3.2 Interest
Net interest paid was £12.4m, compared to £11.5m in 2007.
3.3 Tax
Tax paid was £3.1m (2007: £0.7m). Cash tax is below the equivalent charge in
the income statement as a result of accelerated capital allowances, other
timing differences and tax relief on the special pension contribution made in
2007.
3.4 Expenditure on tangible and intangible assets
Expenditure on tangible and intangible assets in the period was £19.1m (2007: £
24.9m). This represents 1.7% of revenue excluding joint ventures (2007: 2.5%).
Expenditure in 2007 included the cost of the roll-out of our SAP system in the
UK.
3.5 Dividends from joint ventures
Dividends received from joint ventures totalled £19.8m (2007: £17.1m), a
conversion rate of 93% (2007: 99%) of joint ventures' profit after tax and
minority interest, excluding costs allocated by Group.
3.6 Acquisition of subsidiaries
Acquisition of subsidiaries comprises principally the acquisition of the
Grosvenor Health Group, an occupational health service provider, for £19.2m, in
May 2008.
3.7 Other financing
The movement in other financing resulted primarily from a drawdown on our
committed facility to finance the Grosvenor Health Group acquisition.
4. Net debt
Figure 3 analyses Serco's net debt.
Figure 3: Net debt
At 30 June 2008 31 December 2007
£m £m
Group - cash and cash equivalents 153.3 138.1
Group - loans (280.4) (263.3)
Group - obligations under finance leases (13.1) (12.7)
Group recourse net debt (140.2) (137.9)
Joint venture recourse net cash 52.8 34.9
Total recourse net debt (87.4) (103.0)
Group non recourse debt (32.9) (59.3)
Total net debt (120.3) (162.3)
4.1 Group recourse net debt
Group recourse net debt remained broadly stable at £140.2m. Included within
Group recourse net debt is £12.8m (31 December 2007: £11.9m) of encumbered
cash. This is cash securing credit obligations and customer advance payments.
4.2 Group non recourse debt
The Group's debt is non recourse if no Group company other than the relevant
borrower has an obligation to repay the debt under a guarantee or other
arrangement. The debt is excluded from all of our credit agreements and other
covenant calculations, and therefore has no impact on the Group's ability to
borrow.
Group non recourse debt reduced by £26.4m to £32.9m during the first half, due
to the disposal of our equity stake in Kilmarnock Prison Services Ltd. We
retain the operating contract for Kilmarnock Prison. The remaining non recourse
debt relates to our Driver Examination Services contract in Canada.
5. Pensions
At 30 June 2008, the net liability included in the balance sheet arising from
our defined benefit pension scheme obligations was £101.9m (31 December 2007: £
52.2m), on an asset base of £1.3bn. The net liability has risen principally as
a result of lower than expected equity returns in the period and a change to
the RPI assumption used to value the schemes. Figure 4 provides further
analysis.
Figure 4: Defined benefit pension schemes
At 30 June 31 December 2007
2008
£m
£m
Group schemes - non contract specific (122.7) (67.9)
Contract specific schemes
- reimbursable (96.5) (60.7)
- not certain to be reimbursable (24.2) (14.0)
(243.4) (142.6)
Net retirement benefit liabilities
Intangible assets arising from rights to operate franchises and contracts 15.9 17.4
Reimbursable rights debtor 96.5 60.7
Deferred tax assets 29.1 12.3
(101.9) (52.2)
Net balance sheet liabilities
Serco has three main types of scheme which are accounted for as defined benefit
pension schemes. Each type has its own accounting treatment under International
Financial 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 recognised income and expense (the
SORIE);
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 or
franchises, where the deficit will pass back to the customer or on to the next
contractor at the end of the contract. For these schemes, we charge the
actuarial gain or loss on our share of the deficit for the period to the SORIE,
recognise a recoverable intangible asset on the balance sheet at the start of
the contract or franchise and amortise the intangible asset to the income
statement over the contract or franchise life.
Serco has limited commercial risk in relation to the contract specific schemes,
due to either the right of cost reimbursement or because the deficit will, in
general, pass back to the customer or on to the next contractor at the end of
the contract. Among our non contract specific schemes, the largest is the Serco
Pension and Life Assurance Scheme (SPLAS). At 30 June 2008, SPLAS had a deficit
of £68.4m (31 December 2007: £28.7m). The increase in the deficit reflects
lower than expected equity market returns in the period and an increase in RPI
since the year end of 0.5%.
Figure 5 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 5: Pension assumption sensitivities
Change in assumption Change in liability
Discount rate +0.5% (9)%
(0.5)% +10%
Price inflation +0.5% +7%
(0.5)% (7)%
Salary +0.5% +3%
(0.5)% (3)%
Longevity Increase by one year +3%
6. Treasury
The Group's principal debt finance consists of a £400m bank credit facility
comprising a term loan facility and a revolving credit facility. At 30 June
2008 we had £141m (31 December 2007: £141m) outstanding on the term loans and £
20m drawn down on the revolving facility. Interest is charged at a rate of 40
basis points over the relevant LIBOR on borrowings under the facility. The
facility is unsecured and matures in December 2009.
Serco has also issued loan notes under a private placement of £118m, which will
be repaid evenly from 2011 to 2015.
Responsibility statement
We confirm that to the best of our knowledge:
(a) the condensed set of financial statements has been prepared in accordance
with IAS 34 'Interim Financial Reporting';
(b) the interim management report includes a fair review of the information
required by DTR 4.2.7R (indication of important events during the first six
months and description of principal risks and uncertainties for the remaining
six months of the year); and
(c) 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,
Signature
Christopher Hyman
Chief Executive
27 August 2008
Signature
Andrew Jenner
Finance Director
27 August 2008
Independent review report to Serco Group plc
Introduction
We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30 June
2008 which comprises the condensed consolidated income statement, the condensed
consolidated statement of recognised income and expense, the condensed
consolidated balance sheet, the condensed consolidated cash flow statement and
related notes 1 to 14. We have read the other information contained in the
half-yearly financial report and considered whether it contains any apparent
misstatements or material inconsistencies with the information in the condensed
set of financial statements.
This report is made solely to the company in accordance with International
Standard on Review Engagements 2410 issued by the Auditing Practices Board.
Our work has been undertaken so that we might state to the company those
matters we are required to state to them in an independent review report and
for no other purpose. To the fullest extent permitted by law, we do not accept
or assume responsibility to anyone other than the company, for our review work,
for this report, or for the conclusions we 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 are
prepared in accordance with IFRSs as adopted by the European Union. 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 European Union.
Our responsibility
Our responsibility is to express to the company a conclusion on the condensed
set of financial statements in the half-yearly financial report based on our
review.
Scope of review
We conducted our review in accordance with International Standard on Review
Engagements (UK and Ireland) 2410, ‛Review of Interim Financial Information
Performed by the Independent Auditor of the Entity' issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim financial
information consists of making inquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures. A review is substantially less in scope than an audit conducted in
accordance with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would become aware
of 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 to
believe that the condensed set of financial statements in the half-yearly
financial report for the six months ended 30 June 2008 is not prepared, in all
material respects, in accordance with International Accounting Standard 34 as
adopted by the European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority.
Deloitte & Touche LLP
Chartered Accountants
London
27 August 2008
Condensed consolidated income statement
For the six months ended 30 June 2008
6 months to 6 months to Year to 31
30 June 30 June December
2008 2007 2007
£m £m £m
Note (unaudited) (unaudited) (audited)
Continuing operations
Revenue 3 1,490.5 1,349.0 2,810.7
Cost of sales (1,272.9) (1,153.9) (2,404.5)
Gross profit 217.6 195.1 406.2
Administrative expenses (140.8) (129.4) (264.2)
Other expenses - amortisation of
intangibles arising on
acquisition (4.5) (4.2) (8.6)
Total administrative expenses (145.3) (133.6) (272.8)
Operating profit 3 72.3 61.5 133.4
Investment revenue 2 4.6 6.2 12.2
Finance costs 2 (14.1) (15.7) (31.0)
Profit before tax 62.8 52.0 114.6
Tax (16.9) (14.6) (32.2)
Profit for the period 45.9 37.4 82.4
Attributable to:
Equity holders of the parent 45.5 37.0 81.9
Minority interest 0.4 0.4 0.5
Earnings per share (EPS)
Basic EPS 5 9.35p 7.71p 16.98p
Diluted EPS 5 9.23p 7.62p 16.74p
Condensed consolidated statement of recognised income and expense
For the six months ended 30 June 2008
6 months to 6 months to Year to 31
30 June 2008 30 June 2007 December 2007
£m £m £m
Note (unaudited) (unaudited) (audited)
Net actuarial (loss)/gain on
defined benefit pension schemes 10 (153.7) 135.0 62.2
Actuarial gain/(loss) on
reimbursable rights 10 86.8 (83.0) (19.4)
Net exchange gain on translation
of foreign operations 10 9.7 0.2 12.8
Fair value gain on cash flow
hedges during the period 10 10.5 1.7 9.0
Tax credit/(charge) on items
taken directly to equity 10 14.1 (10.6) (11.5)
Net (expense)/income recognised
directly in equity (32.6) 43.3 53.1
Profit for the period 45.9 37.4 82.4
Total recognised income and
expense for the period 13.3 80.7 135.5
Attributable to:
Equity holders of the parent 12.9 80.3 134.9
Minority interest 0.4 0.4 0.6
Condensed consolidated balance sheet
At 30 June 2008
At 30 June At 30 June At 31 December
2008 2007 2007
£m £m £m
Note (unaudited) (unaudited) (audited)
Non-current assets
Goodwill 566.6 534.5 542.1
Other intangible assets 135.4 131.9 139.4
Property, plant and equipment 100.5 94.5 95.1
Trade and other receivables 118.0 79.8 104.6
Deferred tax assets 65.7 50.9 51.6
Derivative financial instruments 6.2 - 1.2
992.4 891.6 934.0
Current assets
Inventories 50.2 49.3 46.3
Trade and other receivables 571.1 504.2 573.6
Cash and cash equivalents 215.6 169.5 185.0
Derivative financial instruments 4.3 - 1.5
841.2 723.0 806.4
Total assets 1,833.6 1,614.6 1,740.4
Current liabilities
Trade and other payables (682.8) (591.5) (670.0)
Current tax liabilities (19.3) (7.2) (14.8)
Obligations under finance leases (4.2) (9.0) (7.7)
Loans (7.8) (50.5) (13.5)
Derivative financial instruments (1.6) (10.4) (2.1)
(715.7) (668.6) (708.1)
Non-current liabilities
Trade and other payables (12.3) (10.8) (13.3)
Obligations under finance leases (10.5) (7.9) (8.7)
Loans (313.4) (321.8) (317.4)
Derivative financial instruments (8.1) (12.2) (11.2)
Retirement benefit obligations (243.4) (109.7) (142.6)
Provisions (12.7) (18.3) (18.6)
Deferred tax liabilities (15.0) (21.4) (22.0)
(615.4) (502.1) (533.8)
Total liabilities (1,331.1) (1,170.7) (1,241.9)
Net assets 502.5 443.9 498.5
Equity
Share capital 10 9.7 9.7 9.7
Share premium account 10 300.0 296.3 299.3
Capital redemption reserve 0.1 0.1 0.1
Retained earnings 10 291.6 221.6 260.6
Retirement benefit obligations
reserve 10 (140.3) (83.0) (90.2)
Share-based payment reserve 10 37.6 33.3 34.6
Own shares reserve 10 (12.5) (16.1) (15.1)
Hedging and translation reserve 10 14.8 (19.8) (1.8)
Equity attributable to equity holders
of the parent 501.0 442.1 497.2
Minority interest 1.5 1.8 1.3
Total equity 502.5 443.9 498.5
Condensed consolidated cash flow statement
For the six months ended 30 June 2008
Year to 31
6 months to 6 months to December
30 June 2008 30 June 2007 2007
£m £m £m
Note (unaudited) (unaudited) (audited)
Net cash inflow from operating
activities 8 84.5 34.6 134.1
Investing activities
Interest received 4.4 4.2 10.3
Proceeds from disposal of subsidiary
and business undertakings 7 1.6 1.4 2.5
Proceeds from disposal of intangible
assets - - 1.7
Proceeds from disposal of property,
plant and equipment 3.0 - 2.9
Acquisition of subsidiaries and
business undertakings, net of cash
acquired 6 (21.3) (9.5) (9.1)
Purchase of other intangible assets (10.1) (13.5) (30.6)
Purchase of property, plant and
equipment (14.3) (13.4) (26.2)
Net cash outflow from investing
activities (36.7) (30.8) (48.5)
Financing activities
Interest paid (15.4) (15.3) (34.2)
Dividends paid (14.5) (12.0) (17.9)
Dividend paid to minority interest - (0.5) (1.2)
Repayment of borrowings (6.5) (28.6) (74.6)
New loan advances 22.7 0.8 2.2
Capital element of finance lease
repayments (6.3) (4.3) (8.4)
Proceeds from issue of share capital 3.1 11.2 17.1
Repayment of non recourse loans (4.5) (4.1) (8.3)
Net cash outflow from financing
activities (21.4) (52.8) (125.3)
Net increase/(decrease) in cash and
cash equivalents 26.4 (49.0) (39.7)
Cash and cash equivalents at beginning
of period 185.0 217.9 217.9
Net exchange gain 4.2 0.6 6.8
Cash and cash equivalents at end of
period 215.6 169.5 185.0
Notes to the condensed set of financial statements
For the six months ended 30 June 2008
General information and accounting policies
The information for the year ended 31 December 2007 does not constitute
statutory accounts as defined in section 240 of the Companies Act 1985. A copy
of the statutory accounts for that year has been delivered to the Register of
Companies. The auditors' report on those accounts was not qualified and did not
contain statements made under s237(2) or s237(3) of the Companies Act 1985.
The annual financial statements of Serco Group plc are prepared in accordance
with IFRSs as adopted by the European Union. 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 European Union.
The same accounting policies, presentation and methods of computation are
followed in the condensed set of financial statements as applied in the Group's
latest annual audited financial statements. The condensed set of financial
statements includes the results of subsidiaries and joint ventures. Joint
ventures have been proportionately consolidated.
IFRIC 14 'The limit on a defined benefit asset, minimum funding requirements
and their interaction' is effective from 1 January 2008 and is expected to be
endorsed by the EU by the end of the year. The Group has considered IFRIC 14
when determining the value of all pension assets and liabilities.
Investment revenue and finance costs
6 months to 6 months to Year to 31
30 June 2008 30 June 2007 December 2007
£m £m £m
(unaudited) (unaudited) (audited)
Interest receivable by PFI companies 1.0 1.6 3.2
Interest receivable on other loans and
deposits 3.2 2.6 5.5
Net interest receivable on retirement
benefit obligations 0.1 1.5 3.2
Fair value adjustment on fair value
hedges and non IAS 39 designated hedges 0.3 0.5 0.3
Investment revenue 4.6 6.2 12.2
Interest payable on non recourse loans (1.8) (2.0) (3.7)
Interest payable on other loans (11.8) (13.4) (26.3)
Interest payable on obligations under
finance leases (0.5) (0.3) (1.0)
Finance costs (14.1) (15.7) (31.0)
3. Segmental information
The Group manages its business on a market segment basis and these segments are
the basis on which the Group reports its primary segment information.
Market segments
Civil
Government Defence Transport Science Total
6 months to 30 June 2008
(unaudited) £m £m £m £m £m
Revenue 542.7 374.8 305.7 267.3 1,490.5
Segment operating profit 25.9 27.0 13.0 25.3 91.2
Unallocated expenses (18.9)
Operating profit 72.3
Investment revenue 4.6
Finance costs (14.1)
Profit before tax 62.8
Tax (16.9)
Profit for the period 45.9
Civil
Government Defence Transport Science Total
6 months to 30 June 2007
(unaudited) £m £m £m £m £m
Revenue 495.8 336.6 284.9 231.7 1,349.0
Segment operating profit 24.0 23.1 10.8 22.0 79.9
Unallocated expenses (18.4)
Operating profit 61.5
Investment revenue 6.2
Finance costs (15.7)
Profit before tax 52.0
Tax (14.6)
Profit for the period 37.4
Civil
Government Defence Transport Science Total
Year ended 31 December 2007
(audited) £m £m £m £m £m
Revenue 952.2 720.5 655.0 483.0 2,810.7
Segment operating profit 46.8 49.8 26.7 45.7 169.0
Unallocated expenses (35.6)
Operating profit 133.4
Investment revenue 12.2
Finance costs (31.0)
Profit before tax 114.6
Tax (32.2)
Profit for the year 82.4
Europe
Geographical segments and
United North Middle
Kingdom America East AsiaPacific Total
Revenue £m £m £m £m £m
6 months to 30 June 2008 (unaudited) 1,121.2 170.8 111.0 87.5 1,490.5
6 months to 30 June 2007 (unaudited) 1,015.0 143.2 109.5 81.3 1,349.0
6 months to 31 December 2007 (audited) 2,125.6 300.9 222.1 162.1 2,810.7
Dividends
6 months to 6 months to Year to 31
30 June 30 June December
2008 2007 2007
£m £m £m
(unaudited) (unaudited) (audited)
Amounts recognised as distributions to equity
holders in the period:
Final dividend for the year ended 31 December
2007 of 3.02p per share on 480.2 million
ordinary shares 14.5
Final dividend for the year ended 31 December
2006 of 2.55p per share on 471.1 million
ordinary shares 12.0 12.0
Interim dividend for the year ended 31
December 2007 of 1.23p per share on 478.9
million ordinary shares 5.9
14.5 12.0 17.9
The proposed interim dividend for the year ended 31 December 2008 is 1.48p per
ordinary share on 485.7 million shares (£7.2m) (30 June 2007: 1.23p (£5.9m)).
The proposed interim dividend was approved by the Board on 22 August 2008 and
has not been included as a liability as at 30 June 2008.
Earnings per share
Basic and diluted earnings per share (EPS) have been calculated in accordance
with IAS 33 'Earnings Per Share'. EPS is shown both before and after
amortisation of intangible assets arising on acquisition to assist in the
understanding of the underlying performance of the business.
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 31
30 June 2008 30 June 2007 December 2007
Millions Millions Millions
(unaudited) (unaudited) (audited)
Weighted average number of ordinary
shares for the purpose of basic EPS 487.1 479.9 482.4
Effect of dilutive potential ordinary
shares: share options 6.4 5.5 6.8
Weighted average number of ordinary
shares for the purpose of diluted EPS 493.5 485.4 489.2
6 months to 30 June 6 months to 30 June
Earnings 2008 2007 Year to 31 December 2007
Per share Per share Per share
Earnings amount Earnings amount Earnings amount
£m Pence £m Pence £m Pence
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
Earnings for
the purpose
of basic EPS
being net
profit
attributable
to the
equity
holders of
the parent 45.5 9.35 37.0 7.71 81.9 16.98
Add back:
Amortisation
of
intangible
assets
arising on
acquisition,
net of tax £
0.4m (30
June 2007: £
0.5m, 31
December
2007: £0.9m) 4.1 0.83 3.7 0.77 7.7 1.59
Adjusted
earnings
before
amortisation
of
intangible
assets
arising on
acquisition,
net of tax 49.6 10.18 40.7 8.48 89.6 18.57
Earnings for
the purpose
of basic EPS 45.5 9.35 37.0 7.71 81.9 16.98
Effect of
dilutive
potential
ordinary
shares - (0.12) - (0.09) - (0.24)
Diluted EPS 45.5 9.23 37.0 7.62 81.9 16.74
Acquisitions
On 30 May 2008, the Group acquired Grosvenor Health Limited for consideration
of £19.2m in cash. Grosvenor Health is a leading independent provider of
occupational health in the UK. The transaction has been accounted for in
accordance with IFRS 3 'Business Combinations'.
Provisional fair value
adjustments
£m
Book Fair
Net liabilities acquired were: value value
£m £m
Intangible assets 5.8 (5.8) -
Property, plant and equipment 0.4 - 0.4
Receivables 2.9 - 2.9
Cash and cash equivalents 0.9 - 0.9
Payables (6.1) - (6.1)
Net liabilities acquired (1.9)
Goodwill 21.1
Total consideration 19.2
Satisfied by:
Cash 19.0
Purchase consideration 19.0
Directly attributable costs 0.2
Total consideration 19.2
Net cash outflow arising on acquisition:
Purchase consideration paid 19.0
Directly attributable costs 0.2
Cash and cash equivalents acquired (0.9)
Cash consideration paid 18.3
The acquisition contributed £1.3m to revenue and £0.1m to the Group's profit
before tax for the period between the date of acquisition and the balance sheet
date. If the acquisition had taken place at the start of the year, the Group's
revenue and profit before tax would have been approximately £7.9m and £0.4m
higher respectively.
As disclosed in the Annual Review and Accounts for 2007, on 31 December 2007,
the Group acquired ER Consultants Limited. The consideration in relation to
this acquisition of £2.9m was paid in January 2008, together with £0.1m of
related directly attributable costs. This has been reflected in the net cash
outflow arising on acquisition in the cash flow statement for the six months
ended 30 June 2008.
Disposals
On 23 June 2008, the Group disposed of its interest in Kilmarnock Prison
Services Ltd, a 100% subsidiary of Serco Limited. As a result of the disposal,
the non recourse debt associated with this PFI has been extinguished (30 June
2007: £23.5m, 31 December 2007: £22.5m). We retain the operating contract for
Kilmarnock Prison.
Reconciliation of operating profit to net cash inflow from operating activities
Year to
6 months to 31
30
6 months to 30 December
June 2008 June 2007 2007
£m £m £m
(unaudited) (unaudited) (audited)
Operating profit for the period 72.3 61.5 133.4
Adjustments for:
Share-based payment expense 3.0 2.6 5.0
Depreciation of property, plant and
equipment 12.7 15.5 30.2
Amortisation of intangible assets 13.8 9.6 23.2
(Profit)/loss on disposal of property,
plant and equipment (0.9) 1.4 1.3
Profit on disposal of business
undertakings (2.7) (0.6) (0.7)
Loss/(gain) on derivatives 0.4 - (1.1)
Operating cash inflow before movements
in working capital 98.6 90.0 191.3
(Increase)/decrease in inventories (2.3) 3.1 5.9
Decrease/(increase) in receivables 1.8 (34.6) (101.4)
Increase in payables 2.5 36.8 108.6
Movement in provisions (6.2) (4.4) (4.3)
Special contribution to defined benefit
pension scheme - (51.0) (51.0)
Cash generated by operations before
movement on PFI debtor 94.4 39.9 149.1
Decrease in PFI debtor 0.8 0.7 1.5
Cash generated by operations after
movement on PFI debtor 95.2 40.6 150.6
Tax paid (10.7) (6.0) (16.5)
Net cash inflow from operating
activities 84.5 34.6 134.1
Analysis of net debt
At 30 At 30 At 31
June 2008 June 2007 December
2007
£m £m
£m
(unaudited) (unaudited) (audited)
Cash and cash equivalents 215.6 169.5 185.0
Non recourse loans (related - (23.5) (22.5)
to PFI assets)
Other non recourse loans (32.9) (37.1) (36.8)
Other loans (288.3) (311.7) (271.6)
Obligations under finance (14.7) (16.9) (16.4)
leases
Total net debt (120.3) (219.7) (162.3)
10. Reserves
Share Share Retained Retirement Share-based Own Hedging and
capital premium earnings benefit payment shares translation
account obligations reserve reserve reserve
reserve
£m £m £m £m £m £m £m
At 1 January
2008
(audited) 9.7 299.3 260.6 (90.2) 34.6 (15.1) (1.8)
Shares
transferred
to option
holders on
exercise of
share
options - 0.7 - - (0.2) 2.6 -
Profit for
the period
attributable
to equity
holders of
the parent - - 45.5 - - - -
Dividends
paid - - (14.5) - - - -
Pension
deficit
recognised
on the
adoption of
IFRIC 14 - - - (4.7) - - -
Net
actuarial
loss on
defined
benefit
pension
schemes - - - (153.7) - - -
Actuarial
gain on
reimbursable
rights - - - 91.5 - - -
Expense in
relation to
share-based
payment - - - - 3.0 - -
Fair value
gain on cash
flow hedges
during the
period - - - - - - 10.5
Net exchange
gain on
translation
of foreign
operations - - - - - - 9.7
Loss on
disposal of
hedging
instrument - - - - - - (0.7)
Tax charge
on cash flow
hedges - - - - - - (2.9)
Tax credit
on items
taken
directly to
equity - - - 16.8 0.2 - -
At 30 June
2008
(unaudited) 9.7 300.0 291.6 (140.3) 37.6 (12.5) 14.8
11. Joint ventures
The Group's interests in joint ventures are reported in the condensed
consolidated financial statements using the proportionate consolidation method.
The effect of the Group's joint ventures on the condensed consolidated income
statement is as follows:
6 months to 6 months to Year to 31
30 30
December
June 2008 June 2007 2007
£m £m £m
(unaudited) (unaudited) (audited)
Revenue 354.1 338.8 680.1
Operating profit* 23.5 20.1 41.2
Profit before tax 25.8 22.1 45.2
Tax (6.8) (6.1) (12.1)
Profit for the period 19.0 16.0 33.1
Minority interest (0.4) (0.2) (0.3)
Share of post-tax results of joint
ventures 18.6 15.8 32.8
* Operating profit is after allocating £2.7m of costs incurred by Group (30
June 2007: £1.5m, 31 December 2007: £4.0m).
12. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are
related parties, have been eliminated on consolidation and are not disclosed in
this note. Transactions between the Group and its joint venture undertakings
are disclosed below, with the relevant portion being eliminated on
consolidation.
6 months to 6 months to Year to 31
30 30
December
June 2008 June 2007 2007
£m £m £m
(unaudited) (unaudited) (audited)
Royalties and management fees
receivable 0.7 0.6 1.2
Dividends receivable 19.8 17.1 36.9
20.5 17.7 38.1
The following receivable balances relating to the joint ventures were included
in the condensed consolidated balance sheet:
At 30 At 30 At 31
June 2008 June 2007 December
2007
£m £m
£m
(unaudited) (unaudited) (audited)
Current:
Loans 1.0 1.8 1.7
1.0 1.8 1.7
Non-current:
Loans 0.5 0.7 0.6
0.5 0.7 0.6
13. Share-based payments
In accordance with IFRS 2, a charge of £3.0m (30 June 2007: £2.6m, 31 December
2007: £5.0m) relating to the fair value of share-based schemes granted since 2
November 2002, has been charged to the income statement.
14. Defined benefit schemes
The Group operates defined benefit schemes for qualifying employees of its
subsidiaries in the UK and Europe. In addition, the Group has interests in
joint ventures, which operate defined benefit schemes for qualifying employees.
The assets of the funded plans are held independently of the Group's assets in
separate trustee administered funds. The Group's major plans are valued by
independent actuaries annually using the projected unit credit method. An
analysis of the Group's net pension liability and related assets together with
the amounts included within the SORIE are presented in the tables below.
At 30 At 30 At 31
June 2008 June 2007 December
2007
£m £m
£m
(unaudited) (unaudited) (audited)
Net retirement benefit
liabilities
Group scheme - non contract
specific (122.7) (54.0) (67.9)
Contract schemes specific
- reimbursable (96.5) (36.3) (60.7)
- not certain to be
reimbursable (24.2) (19.4) (14.0)
(243.4) (109.7) (142.6)
Related assets
Intangible assets arising from
rights to operate franchises and
contract 15.9 19.1 17.4
Reimbursable rights debtor 96.5 36.3 60.7
112.4 55.4 78.1
At 30 At 30 At 31
June 2008 June 2007 December
2007
£m £m
£m
(unaudited) (unaudited) (audited)
Actual return on scheme assets (72.5) 30.9 82.6
Less: expected return on scheme
assets (44.7) (40.5) (81.2)
(117.2) (9.6) 1.4
Other actuarial gains and
losses (36.5) 144.6 60.8
Actuarial (losses)/gains
recognised in the SORIE (153.7) 135.0 62.2
Pension deficit recognised on
adoption of IFRIC 14 (4.7) - -
Change in paragraph 58(b) limit (1.5) - -
Change in franchise adjustment 31.9 (35.2) (6.6)
Change in members' share 25.3 (17.1) (7.6)
Movement in reimbursable rights 35.8 (30.7) (5.2)
Actuarial gains/(losses) on
reimbursable rights 86.8 (83.0) (19.4)
Total pension (cost)/credit
recognised in the SORIE (66.9) 52.0 42.8
The net pension liability at 30 June 2008 has been calculated on a year-to-date
basis. The main assumptions adopted in valuing the schemes are as follows.
At 30 At 30 At 31
June 2008 June 2007 December
2007
% %
%
(unaudited) (unaudited) (audited)
Rate of salary increases 3.00-4.70 3.00-4.60 3.00-4.70
Rate of increase in
pensions 3.70 3.10 3.20
Rate of increase in
deferred pensions 3.70 3.10 3.20
Inflation assumption 3.70 3.10 3.20
Discount rate 6.00 5.90 5.70
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