Half-yearly Report

29 August 2012

 

Good performance held back by challenging US conditions

 

Serco Group plc - 2012 half year results

 

6 months to 30 June                                                                2012      2011      Change  
                                                                                                             
Revenue                                                                            £2,341.7m £2,245.8m +4.3%        
                                                                                                             
Adjusted operating profit (i.e. excludes exceptional items) before                 £139.6m   £133.8m   +4.3%   
reorganisation costs                                                                                         
                                                                                                             
Adjusted operating profit (i.e. excludes exceptional items)                        £123.9m   £133.8m   (7.4%)  
                                                                                                             
Operating profit*                                                                  £142.3m   £122.0m   +16.6%  
                                                                                                             
Adjusted profit before tax (i.e. excludes exceptional items) before                £117.8m   £123.6m   (4.7%)  
reorganisation costs                                                                                         
                                                                                                             
Adjusted profit before tax (i.e. excludes exceptional items)                       £102.1m   £123.6m   (17.4%) 
                                                                                                             
Profit before tax*                                                                 £120.5m   £111.8m   +7.8%   
                                                                                                             
Adjusted earnings per share (i.e. excludes exceptional items) before               17.94p    18.74p    (4.3%)  
reorganisation costs                                                                                         
                                                                                                             
Adjusted earnings per share (i.e. excludes exceptional items)                      15.52p    18.74p    (17.2%) 
                                                                                                             
Earnings per share*                                                                19.85p    16.74p    +18.6%  
                                                                                                             
Dividend per share                                                                 2.65p     2.50p     +6.0%   
                                                                                                             
Group free cash flow                                                               £0.9m     £51.8m    (£50.9m)
                                                                                                             

*  Includes £31m exceptional net profit on disposals of subsidiaries and
operations; full definitions of adjusted measures are provided on page 2 and
the income statement is presented on page 25

 

Excellent contract win performance

£4.2bn of awards in the period (2011: £2.5bn); £3.7bn signed and £0.5bn
appointed preferred bidder

Increase in order book to £19.4bn as at 30 June 2012 (£17.9bn at 31 December
2011)

98% revenue visibility for 2012, 83% for 2013 and 71% for 2014

 

Challenging US market conditions largely offset by resilience of broad
portfolio

Conditions remain very difficult and uncertain for US federal outsourcing
market

Further excellent revenue growth in AMEAA and areas of improvement in the UK
have provided balance

Successful launch of Global Services BPO division; excellent underlying revenue
growth in the period

Of total Group revenue: 46% is now generated outside the UK (2011: 42%); 13% is
Business Process Outsourcing (BPO) (2011: 10%)

 

Strong pipeline including newly identified prospects

An estimated £31bn total value of opportunities reflects ongoing demand for
efficient, high quality and innovative service provision

New opportunities added across frontline services markets; strong increase in
the AMEAA region; expected further opening up of certain UK public sector
markets

Strong growth prospects in the global BPO market with both private and public
sector customers

 

Proactive portfolio management and organisational changes position the Group
for the future

Intelenetfully integrated within Global Services and delivering to plan

Additional recent infill acquisitions such as Vertex UK public sector BPO
operations bring further capabilities and market access

Exits from non-core operations reflect focus on strategic fit, performance and
returns

Reorganisation successfully concluded: cost impact on first half profits to be
recovered in the second half as expected

 

Remain confident in the overall outlook

Forecasts reflect a balance of risks and opportunities across our markets

2012 expected to deliver another year of good organic revenue growth for the
Group overall; first half decline of 2% to improve to a strong second half
growth driven by previously announced contract wins

2012 Adjusted operating margin to increase by a similar amount to 2011,
reflecting second half revenue growth and underlying efficiencies

Action taken this year will position the Group well for future growth in
revenue and profits

 

Christopher Hyman, Chief Executive of Serco Group plc, said: "I am pleased with
the overall performance of the business over the last six months, particularly
the quality and efficiency of the services delivered by our people.  As we
continue to build Serco's international portfolio, our newly established global
Business Process Outsourcing division has already seen a high level of contract
wins and many with private sector customers.  Our business in Australasia and
the Middle East continues to grow strongly and, while significant challenges in
the US remain, we see conditions in the UK starting to improve.  The recent
level of new contract wins across the group will help us deliver the
anticipated strong financial performance in the second half of the year."

 

 

Notes:

Adjusted operating profit and Adjusted profit before tax are before
amortisation of intangibles arising on acquisitions, acquisition-related costs
and exceptional items (being profits or losses on disposals of subsidiaries and
operations), as shown on the face of the Group's consolidated income statement
and the accompanying notes.

Adjusted earnings per share is calculated on the basis of earnings before
amortisation of intangibles arising on acquisitions, acquisition-related costs
and exceptional items (being profits or losses on disposals of subsidiaries and
operations), together with the tax effect of these adjusting items.

Given the timing of implementation costs for the Group's reorganisation
activity undertaken in the first half of the year, to aid comparability we have
also provided underlying measures of financial performance.  These are based on
the above definitions but are also before the £15.7m of reorganisation costs.

Group free cash flow is free cash flow from subsidiaries and dividends received
from joint ventures, and is reconciled to movements in cash and cash
equivalents in Section 3 of the Finance Review.

Performance at constant currency has been calculated by translating
non-Sterling revenue and earnings for the half year to 30 June 2012 into
Sterling at the average exchange rates for the same period in 2011.

The order book is the value of future revenues based on all existing signed
contracts.  It excludes contracts at the preferred bidder stage and excludes
the award of Indefinite Delivery, Indefinite Quantity (IDIQ) contract vehicles
where we are one of a number of companies able to bid for specific task orders
within the IDIQ.  New IDIQ awards enable us to compete for specific task orders
issued under the IDIQ, with the value of the task orders recognised within the
order book when subsequently won.

The pipeline is the estimated value of all future potential opportunities that
are clearly defined and identifiable.

 

 

For further information please contact Serco:

Stuart Ford, Head of Investor Relations T [phone]

Marcus De Ville, Head of Media Relations T [phone]

 

Presentation

A presentation for investors and analysts will be held at Holborn Bars, 138-142
Holborn, London EC1N 2NQ at 9.30am today.  The presentation will be webcast
live on www.serco.com and subsequently available on demand.

Overview

The first half of 2012 has seen some very positive progress, particularly in
terms of the substantial level of contract awards and the continued significant
progress in ensuring that our business is positioned to deliver strongly for
the future.  Revenue and Adjusted operating profit before reorganisation costs
both grew 4% to £2,342m and £139.6m respectively.  After reorganisation costs
and higher net financing costs, Adjusted profit before tax was reduced to £
102.1m for the period.  However, as previously indicated, our financial
performance (including revenue growth, margin progression and free cash
generation) will be weighted to the second half of the year when we expect a
strong financial result.

 

After achieving an excellent level of contract awards totalling £4.2bn in the
period, our order book has grown to £19.4bn.  The pipeline of identified
opportunities has been replenished to stand now at an estimated £31bn.  Our
proactive portfolio management has seen both acquisitions and disposals to
appropriately position the Group strategically for the future, with the
successful completion of the reorganisation activity also supporting this. 
Challenging US market conditions remain, although balance is provided from very
strong revenue growth in AMEAA, areas of improvement in the UK, and the
successful launch of our Global Services BPO division which achieved excellent
underlying growth and has strong future prospects.  The Group has therefore
continued to demonstrate that our global reach and breadth of operations
provides both access to future growth and resilience in times of varied market
conditions.  We remain, therefore, confident in the outlook for the full
financial year and beyond.

 

Summary of financial result for the period

For the first half of 2012, reported Group revenues were £2,341.7m,
representing total growth of 4.3%.  Growth at constant currency was 4.2%. 
Organic revenues, excluding acquisitions and currency effects, declined by
2.1%, the impact of challenging US market conditions being largely offset by
growth in other parts of our broad portfolio.

 

The period saw further very strong revenue growth in AMEAA - up 22%
organically.  Global Services, our newly created BPO division, achieved
underlying growth of over 20% but this was outweighed by the effects of the
transfer of the Bradford education contract and the government funding cuts to
our previous work for the Regional Development Agencies, resulting in an
organic revenue decline of 11%.  Our UK & Europe frontline services division
saw an organic revenue decline of 1% as the headwind from fewer contracts in
the welfare to work market offset other improvements.  Conditions that remain
very difficult and uncertain for the US federal outsourcing market resulted in
a 16% decline in organic revenues for the Americas division.  Our divisional
performance is described fully in the Operating Review.

 

Adjusted operating profit, before reorganisation costs of £15.7m, increased by
4.3% to £139.6m, representing an operating margin maintained at 6.0%.  Net
finance costs were £11.6m higher, principally reflecting the incremental cost
of funding the acquisitions made in 2011.  Adjusted profit before tax, before
reorganisation costs, declined by 4.7% to £117.8m, and Adjusted earnings per
share before reorganisation costs declined by 4.3% to 17.94p.  The financial
performance for the period was further reduced by the reorganisation costs, but
the successful completion of this programme will result in the delivery of
savings in the second half, leading to a broadly neutral impact for the full
year.  Following successful portfolio management activity, there was a £31.0m
net exceptional profit on disposals of subsidiaries and operations in the
period, leading to growth in unadjusted financial performance when the impact
of these one-off exceptional gains is included.

 

Group free cash flow was £0.9m compared with £51.8m in 2011.  Cash
reorganisation costs were approximately £12m in the period.  The remainder of
the reduction was driven principally by a greater working capital outflow. 
Around £30m reflected the timing of a small number of customer payments around
the half-year balance sheet date that have now subsequently been received, as
well as the timing of transition and mobilisation stages on new contract
awards.  There is also an approximate £10m effect from the typically higher
level of working capital investment required for BPO-related contracts.

 

Our policy is to increase the total dividend each year broadly in line with the
increase in underlying earnings.  Accordingly, the Board has declared an
interim dividend of 2.65p per share, representing an increase of 6% on the 2011
dividend.  The interim dividend will be paid on 19 October 2012 to shareholders
on the register on 7 September 2012.

 

Our earnings, cash flow, financing and related matters are described fully in
the Finance Review.

 

Excellent contract win performance

In the first half of 2012, across our wide portfolio of markets and
geographies, we signed contracts valued at £3.7bn and were appointed preferred
bidder for a further £0.5bn.  The total £4.2bn of awards compares with £2.5bn
in the equivalent period in 2011.  Our wins included smaller and medium-sized
awards which are fundamental to our growth, as well as significant rebids,
extensions, expansions and new contracts.  As a result of the substantial level
of awards, our order book grew to £19.4bn at 30 June 2012 (£17.9bn at 31
December 2011).

 

The period's notable contract awards, along with approximate total value and
contract length where appropriate, included:

Ferry services to the Northern Isles in Scotland (£350m over six years);

UK asylum applicant support services (£175m over five years);

NHS Suffolk community health services (£140m over three years);

Integrated facilities management for East Kent NHS Foundation Trust (£140m over
ten years);

Next pricing period signed for Atomic Weapons Establishment (AWE) management
and operation (£1.5bn over five years);

Pre-deployment training and support for the British Army (£55m over three
years);

Leadership for corporate services (DBS) for the UK Ministry of Defence (£36m
over four years);

Procurement services for Defence Science & Technology Laboratory (Dstl) (£90m
over nine years);

US Army base closure support in Afghanistan (US$57m over three years);

US IDIQ task orders - across areas including IT services & solutions, human
capital management and logistics & programme management - totalling over US$40m

WiriPrison operating contract in New Zealand (majority of maximum NZ$900m total
price over 25 years);

Young Adults Facility in Western Australia (A$50m over five years);

Major BPO contract with leading UK retailer Shop Direct Group (£430m over ten
years);

Anglia Support Partnership shared services operation for UK health sector (£
120m over four years);

Customer support services for large Indian financial services organisation (£
31m over three years);

Loyalty programme support for global online travel company (US$34m over three
years).

 

More details of these and other contract awards can be found in the Operating
Review, with further information and other smaller and medium-sized contract
awards during the year described in the contract news updates and other
announcements available on our website, www.serco.com.

 

Visibility of future earnings remains high due to the signed contracts that
make up our order book, contracts that we expect to extend and rebid, and
contracts at the preferred bidder stage which we expect to sign.  At 30 June
2012, revenue visibility was 98% for 2012, 83% for 2013 and 71% for 2014.

 

Challenging US market conditions largely offset by resilience of broad
portfolio

A key element of the Group's strategy is to build a balanced portfolio, aiming
to reduce risk and increase opportunities across markets.  This reduces our
exposure to market fluctuations, enables us to select the best opportunities
whichever market they are in, and allows us to transfer expertise from one
market to another.

 

In the US federal outsourcing market conditions remain very difficult,
significantly impacting the performance of our Americas division.  However,
offset has been provided by further very strong revenue growth in the AMEAA
region and areas of improvement in the UK.

 

In addition, the launch of our Global Services BPO division has been a key part
of positioning Serco to access attractive markets.  In the period, the
underlying revenue growth in our BPO-related operations was excellent, and the
division achieved awards totalling over £800m.  Research by NelsonHall, the
leading analyst and advisory firm for the BPO industry, ranks Serco's level of
contract awards in 2012 to date as top amongst global BPO providers.

 

The breadth of our portfolio is such that 46% of total Group revenue is now
generated outside the UK, an increase from 42%.  Our BPO operations now account
for 13% of Group revenue, up from 10%, and BPO is expected to increase
significantly further as a proportion of the Group's revenue mix.

 

Strong pipeline including newly identified prospects

A significant level of opportunities was successfully converted to awards in
the period.  Newly identified prospects across our portfolio have increased the
pipeline to an estimated total value of £31bn.  The increase reflects the
ongoing demand for efficient, high quality and innovative service provision
from public and private sector customers around the world.

 

There is a strong pipeline increase in AMEAA, with new opportunities including
those in the growing health markets in the region, and in the justice sector. 
There remain substantial prospects in defence support, transportation markets
and integrated facilities management services.

 

In the UK, markets continue to show stabilisation and increasing signs of
improvement.  There are further indications of new markets opening up,
supported by the agenda for public service reform.  New opportunities include
those driven by the growth in commissioning of health services, defence
organisation strategic partnerships and competition being introduced to
numerous areas of the home affairs market.  Near-term opportunities include the
outcome of the current round of prison bids.

 

There are strong growth prospects in the global BPO market.  New opportunities
added in the period include further strategic partnerships with local
authorities to transform their services, with prospects for future central
government shared service centres also continuing to develop.  In the private
sector, further prospects are being pursued following significant recent wins
across a number of vertical markets including life and pensions, retail, travel
and utilities.

 

Proactive portfolio management and organisational changes position the Group
for the future

In 2011 Serco added significant global capability in the fast growing, higher
margin BPO market.  The Intelenet acquisition was strategically important for
Serco's development in this area, as were other smaller infill acquisitions
such as The Listening Company in the UK and Excelior in Australia, with these
adding specific customer contact capabilities and geographic reach.  Intelenet
is now fully integrated as part of Serco Global Services and is delivering to
plan as set out at the time of the acquisition.

 

In June 2012 Serco acquired Vertex's UK public sector BPO operations, bringing
additional expertise and strategic partnerships to support expansion into new
areas of middle and back office support and at the same time increase Serco's
operational scale.  This will help develop future opportunities in both the
local government and central government markets, with Vertex bringing
significant customer referenceability and specific skills in HR and payroll,
revenues and benefits, complex case management and administration services. 
While remaining primarily focused on organic growth, Serco will continue to
look at potential acquisitions that bring new skills, capabilities and market
access.

 

Our proactive portfolio management also involves ongoing assessment of our
existing operations for their strategic fit, together with their expected
future levels of performance and returns.  As part of this, Serco made two
disposals that were non-core to the future development of the Group.  These
were our Technical Services business which provided consulting and project
solutions to the UK civil and nuclear defence markets, and secondly the
majority of our mainly defence-related operations in Germany.  We will continue
to serve the defence and science sectors, focusing on our long-term contract
model that looks to develop the best opportunities and a balanced portfolio.

 

The successful conclusion in the period of the Group's reorganisation has also
enhanced the Group's position.  This has created the new BPO division, our
first global business, bringing together all of Serco's middle and back office
skills and capabilities.  This is improving the services we provide to
customers and enabling better targeting of opportunities around the world in
both the private and public sector.  The reorganisation has also created a
single UK & Europe division.  This is supporting the delivery of better
customer relationship management and service development, as well as increased
internal efficiencies.  Since 1 July 2012, the Global Services division has
been operating a wider-reaching shared service centre for the Group itself. 
These organisational changes, which have led to headcount reductions in
management and our own back office support functions, have resulted in costs of
£15.7m in the first half of the year which will deliver equivalent savings in
the second half of the year.

 

Remain confident in the overall outlook

Our forecasts reflect a balance of risks and opportunities.  Whilst we expect
challenging conditions to remain in the US, we anticipate further improvement
in UK markets and strong performances from our AMEAA and Global Services BPO
operations.

 

For 2012, we continue to expect to deliver another year of strong total revenue
growth, including further good organic growth.  The organic revenue decline of
2% in the first half of the year is anticipated to improve to strong growth in
the second half, reflecting the excellent performance over recent months in
securing new contract awards that will now flow through to revenues.  Our
expectations are also unchanged for an increase in our full-year operating
margin similar to that achieved in 2011, reflecting the pick-up in second half
revenue growth and the delivery of underlying efficiencies.

 

We remain confident in the overall outlook for Serco, the continued delivery of
our strategic plan and further improving our financial performance.

 

Operating Review and Growth Opportunities

This section is presented according to the four divisions based around our
principal markets:

UK & Europe,

Americas,

AMEAA (Australasia, Middle East, Asia and Africa), and

Global Services.

 

The section outlines contract awards which are significant because of their
value or their strategic contribution to our business.  Further details of
these, as well as other medium and smaller-sized contracts, can be found on our
website at www.serco.com.

 

 

UK & Europe - operating review

The UK & Europe division includes our frontline services in: Home Affairs
(encompassing justice-related operations, immigration and border security, and
welfare); Health; Transport and Local Direct Services; and Defence & Science.

 

Revenue declined by 1% to £1,266m (2011: £1,284m), and represented 54% of Group
revenue.  Revenue on an organic basis also declined by 1%.  Adjusted operating
profit, before reorganisation costs and corporate expenses, increased by 7% to
£86.3m (2011: £80.8m), with the margin increasing to 6.8% (2011: 6.3%).  After
reorganisation costs, Adjusted operating profit reduced to £78.9m.

 

Underlying revenues were marginally ahead excluding the impact of Serco now
operating fewer contracts in the welfare to work market.  The ongoing
government austerity programme places pressure on discretionary spend with
Serco, but this has been offset by the start of new contracts with these
continuing to signal an improving outlook.  The margin improvement largely
reflects lower bid costs year-on-year and the delivery of operational
efficiencies.

 

The creation of a single UK & Europe division has involved significant
organisational change during the period both to increase our own efficiency and
crucially also to support the delivery of better services for our customers. 
We are now in a stronger position to target future growth, including where
customers are looking for more end-to-end services that combine frontline
capability with middle and back office operations.  In such instances, the UK &
Europe division as the relationship lead will draw upon the skills and
capabilities of the new Global Services division to deliver fully integrated
services.

 

Home Affairs

Our operations across the Home Affairs market account for approximately 19% of
UK & Europe revenues.

 

HMP Thameside, the new prison at Belmarsh West in London, became operational on
30 March 2012.  The contract has a value to Serco of approximately £415m over
26½ years.  This local Category B establishment has an operational capacity of
900 convicted and remand male prisoners, and is one of the most technologically
advanced prisons in the world.  It has, for example, advanced CCTV digital
recording and monitoring, the latest drug and contrabands intervention
equipment, biometric key vending for staff, and in-cell IT for prisoner
education and administration.

 

Meanwhile the Payment by Results pilot underway at HMP & YOI Doncaster is
beginning to show that it has real potential to reduce re-offending.  Typical
of the many innovative interventions in place are the Families First Programme,
which supports prisoners' relationships with their partners and children, and
Second Shot Productions, which teaches technical and creative skills in filming
and graphic design.  Both of these programmes recently won prestigious Butler
Trust Awards.

 

In the welfare to work market, our Work Programme performance continues to be
market-leading based on the quarterly performance data released to date by the
Department for Work and Pensions.  Based on the number of referrals and
attachments, our two contracts are ranked top out of all 40, thereby continuing
to rank Serco the top provider out of all 18.

 

Health

Our operations across Health account for approximately 8% of UK & Europe
revenues.

 

Amongst our clinical capabilities, Serco's Cornwall and Isles of Scilly GP
out-of-hours contract was recently found to be and reported as one of the best
performing such contracts in the UK by The Primary Care Foundation, as part of
its National Benchmarking Exercise.  This was further supported by a survey
carried out by Ipsos-Mori on behalf of the Department of Health.  Since the
out-of-hours service started, Serco has not scored less than 95% in the monthly
patient satisfaction survey and over 86% of patients rate the service either
excellent or good.  The contract has also implemented actions to ensure that
all areas identified by the recent Care Quality Commission report are fully
compliant.

 

The transformation continues of Braintree Community Hospital after its takeover
by Serco last year.  Clinical services are high quality, readily accessible and
built around consultant-led care, and the hospital has now established itself
as a vital part of the NHS in mid Essex.

 

Our GSTS pathology joint venture is focused on delivering necessary efficiency
improvements in 2012.  Its management team has been further strengthened with
the appointment of an independent Chairman, with this new role integral in
helping GSTS take forward its strategy for modernising NHS pathology and
implement its plans to deliver sustainable growth of the business.

 

Serco's track record and the strength of our overall health business have led
to substantial developments during the period that are discussed later in more
detail.  These include a shared service centre for the NHS in the East of
England; clinical services in community healthcare for NHS Suffolk; and
non-clinical integrated facilities management for the East Kent Hospitals
University NHS Foundation Trust.

 

Transport & Local Direct Services

Our operations across Transport and Local Direct Services account for
approximately 35% of UK & Europe revenues.

 

Our London transport contracts - comprising the Docklands Light Railway (DLR),
the Barclays Cycle Hire scheme and traffic management operations - have all
achieved excellent operational performance during the period.  Serco continues
to support growth in regular journeys as well as annual events such as the
London marathon, and successfully executed the significant additional workload
involved in the Diamond Jubilee and the 2012 Olympic Games.  The DLR in
particular was a key part of the London 2012 Games transport network, with the
Stratford International Extension opened last summer adding four new stations
and connecting five Games venues.  According to Transport for London and the
Olympic Delivery Authority, during the period of the Olympic Games, over six
million journeys were made on the DLR - up by over 100 per cent on normal
levels.  On the busiest day, the DLR carried a record-breaking 500,000 people. 
Also impressive was the fact that in July, Barclay's Cycle Hire rentals
exceeded a million for the first time in any month.

 

Our other UK rail franchises in Northern Rail and Merseyrail are also
supporting growth in passenger numbers and continued strong operational
metrics.  At Northern Rail, our performance has led to a further extension of
the contract through to 1 April 2014, with the full rebid process therefore to
begin next year.

 

In direct services for local authorities, a number of contracts became
operational during the period.  In April 2012, Serco began providing refuse and
recycling services for 127,000 households in the London Borough of Wandsworth,
helping the council to meet Government recycling targets and reduce costs such
as landfill taxes.  The contract is valued at £44m over eight years.  Serco
also has two new contracts with Mansfield District Council and Shropshire
Council to provide a comprehensive and high quality range of health, leisure,
fitness, wellbeing and community-focused services.

 

Defence & Science

Our operations across Defence and Science account for approximately 38% of UK &
Europe revenues.

 

Our management and operation of the Atomic Weapons Establishment (AWE), as part
of a joint venture with Lockheed Martin and Jacobs Engineering, has been
achieving excellent results.  The contract is delivering value for money for
the Ministry of Defence (MoD) whilst achieving excellent performance in the
quality and timeliness of our programme delivery.  In recognition of this,
arrangements for the next pricing period through to 31 March 2018 were
successfully concluded.

 

During the period the Conventional Forensics Analysis Capability (CFAC)
state-of-the-art laboratory was opened, where AWE is pooling its resources and
expertise to support forensic specialists from the police, forensic science
service providers and other organisations.  At the National Physical Laboratory
(NPL), which is also managed and operated by Serco, the Centre for Carbon
Measurement was launched, ensuring the UK is a leading force in climate
modelling, global carbon markets and green technology.  Business and government
have welcomed the project, highlighting its potential to reduce emissions and
stimulate the economy.

 

In April 2012 Serco began operating a new contract for the MoD to provide
training and support to the British Army prior to deployment on operations
overseas.  Known as the Contemporary Operating Environment Force (COEFOR), and
awarded by the British Army's Headquarters, critical pre-deployment training
includes language, culture and operational environment skills, and the creation
of realistic training conditions to prepare UK military forces for operations
in Afghanistan and other theatres around the world.  The contract runs to
December 2014 including an option year and has a total value of approximately £
55m.  A new Multi-Activity Contract (MAC) for RAF Valley, supporting their
crucial role in training fast jet pilots for both the RAF and the Royal Navy,
also became operational in the period.

 

Also starting in April 2012 was Serco's contract to provide an executive
leadership team for Defence Business Services (DBS).  DBS provides corporate
services for the MoD such as civilian human resources, finance, information and
security vetting.  Serco will work with DBS staff to transform the organisation
into a lean and effective shared services centre, building on private sector
best practice.  The contract is valued at around £36m over its initial
four-year duration.

 

Serco has begun overseeing and delivering the Defence Science & Technology
Laboratory's (Dstl) Helios programme, which will see the relocation of all of
Dstl's activities from Fort Halstead to Porton Down and Portsdown West.  The
programme will help to support Dstl's future strategic goals, protect their
capabilities and provide additional cost benefits, building on an already
strong Total Facilities Management (TFM) partnership between Serco and Dstl.

 

UK & Europe - growth opportunities

 

The UK, accounting for the vast majority of the division's operations, shows
signs of increasing activity and good growth potential.  Competitive
outsourcing supports the government's aim of achieving savings while improving
services and social outcomes.  The reform of public services provision will be
an ongoing process, but the Cabinet Office and spending departments appear
increasingly focussed on picking up the pace of bringing opportunities to
market.  The recent restructuring into a single division places Serco in a
better position for future growth opportunities across the wider public sector,
and we continue to strengthen our brand and account relationships at all
levels, including central government, the devolved administrations in Scotland
and London, in local government and in public service frontline organisations
such as the police and NHS.

 

Home Affairs

After the initial market testing in 2011 of opening up to competition existing
public sector prisons, Serco is currently bidding to add further prisons to the
six we currently run in England and Scotland.  A successful outcome would add
additional revenues in 2013, with further public sector prisons likely to come
to market; in England and Wales, there are currently 133 prisons with the
private sector operating 14 of these.  The programme forms part of the Ministry
of Justice's 'Competition Strategy for Offender Services' set out in 2011.

 

In non-custodial sentencing, the Ministry of Justice has consulted on opening
up to competition an approximate £600m per year market for probation services
not directly provided by Probation Trusts.  Community Payback schemes are a
part of this, and Serco has successfully bid for London as the first region put
to market.  The contract, in partnership with the London Probation Trust, is
due to start later this year and has an estimated total value to Serco of £38m
over four years.  The growing use of court fines is also expected to generate
opportunities for our collection services business, as well as a larger
opportunity for the overarching management of compliance and enforcement that
would draw upon skills and capabilities from within the Global Services
division.  Serco is currently in the process of rebidding its electronic
monitoring contracts in England and Wales, with the current arrangements coming
to an end on 31 March 2013.

 

Serco will begin later this year the operation of its contract with the UK
Border Agency (UKBA) to deliver the COMPASS project, providing accommodation,
associated services and transport for asylum applicants in two regions of the
UK; the five-year contract has an estimated total value of approximately £175m.

 

Serco was awarded places on the Health and Disability Assessment Services
Framework for two Lots - UK National and Northern Ireland.  We look forward to
working with the Department for Work and Pensions, the Departmentfor Social
Development in Northern Irelandand other authorities in providing services
which combine the highest standards of professionalism and fairness at the
point of delivery with good value for the taxpayer.  Serco is also shortlisted
for the West Midlands police operational support framework agreement.  This and
similar opportunities are expected to see Serco well-placed to partner in the
delivery of services considered non-core to frontline policing.

 

Health

The UK health market is being driven by the impact of fiscal pressure and the
proposed structural reforms which require increased introduction of competitive
forces.

 

In clinical services, we are developing opportunities to operate both hospital
and community-based services.  Since the period end Serco has now signed and is
due to begin operating from October community health services in Suffolk.  This
three-year, £140m contract provides a wide range of services including
community nursing, specialist nursing, management and operation of community
hospitals, speech and language therapy, specialist children's services and
community equipment services.  The Department of Health currently spends £12bn
per annum on community services, with this anticipated to grow, and the
Department's national 'Transforming Community Services' guidance stipulates
that all primary care trusts will no longer directly provide community services
and will instead commission them.

 

There is a growing market for enabling services - both in the UK and elsewhere
around the world - that combine facilities management, support services and
patient administration to improve service quality and productivity.  From July
2012, Serco has been providing integrated facilities management (FM) services
to the East Kent Hospitals University NHS Foundation Trust, delivering services
to three acute hospitals, two community hospitals and several small clinics in
the area.  The contract has a total value of approximately £140m over a maximum
ten-year period.  Further similar opportunities are being pursued.

Transport and Local Direct Services

Serco has begun operating lifeline freight and passenger ferry services to the
Northern Isles in Scotland, building on our experience of managing and
transforming critical local transport services such as Northern Rail, Scatsta
Airport on the Shetland Islands and London's Woolwich Ferry.  This six-year
contract has a total value of approximately £350m, and contributes to revenue
growth from the beginning of the second half of the current financial year. 
Our excellent credentials in transportation systems will support selecting
future growth opportunities in the UK and elsewhere around the world.  Our
current contract for the DLR runs to 31 March 2013, with the potential for an
extension for a further two years.

 

In local government frontline services, growth in environmental services and
other areas of integrated facilities management such as leisure services may
emerge.  For example, Serco has recently won a new eight-year, £20m contract
for waste and recycling services for Derbyshire Dales District Council which
will begin in the coming months.  Reductions in funding and increased service
demands from citizens are also driving more interest in strategic partnering,
service sharing and personalisation of services.

 

Defence & Science

The defence market is expected to develop further opportunities for support in
areas such as infrastructure management, business process and whole enterprise
outsourcing, and technical and engineering services.  Serco will also seek
similar opportunities in the science market and emerging markets for energy
management.

 

Developing from Serco's operation of Defence Business Services and supported by
the skills and capabilities of the Global Services division, we will be
pursuing opportunities for strategic partnerships such as the Defence
Infrastructure Organisation (DIO).  The DIO is responsible for managing and
maintaining land and property for the MoD in the UK and abroad, with the
potential for further efficiencies to be achieved across its operations.

 

We are committed to managing and operating critical assets and research
establishments, with the ongoing potential to add new responsibilities and
expand existing customer relationships.  Signing the next five-year pricing
period for the Atomic Weapons Establishment will see Serco's share of revenue
expected to remain around £300m a year, although under the agreed
incentivisation arrangements the earnings and margin rate in the initial years
will be similar to those achieved in the initial years of the current pricing
period.  We are currently also pursuing an extension to our contract for the
National Physical Laboratory, and continue to review other whole enterprise
outsourcing opportunities of Public Sector Research Establishments (PSREs).

 

Within the scope of the original Dstl contract, options can be exercised for
additional Target Services.  Last year Serco successfully began providing a new
managed service for Calibration, Maintenance, Servicing and Repair (CSMR) of
equipment critical to the delivery of science services.  This enhanced the
close working relationship between Serco and Dstl and has led to Serco now
being awarded a further Target Service, which is to provide an end-to-end
procurement service for laboratory assets across Dstl's three core sites, with
a potential value of approximately £90m over the remaining nine years of the
contract.

 

Americas - operating review

Our Americas segment provides professional, technology and management services
focused primarily on the US federal government including every branch of the
military, a broad range of civilian agencies and the National Intelligence
community.  We also provide services to the Canadian government, selected US
state governments and municipal governments.

 

Revenue on a constant currency as well as on an organic basis declined by 16%. 
Revenue on a reported currency basis, given the marginal strengthening of the
US dollar, fell by 15% to £381m (2011: £446m) and represented 16% of Group
revenue.  Adjusted operating profit, before corporate expenses, reduced by 20%
on a reported currency basis to £29.6m (2011: £37.0m), with the margin
decreasing to 7.8% (2011: 8.3%).

 

The US federal contracting market has remained very difficult.  Our decline in
revenues, against a relatively robust performance in the comparative period,
reflects the challenges that have faced the US Government's 2012 annual federal
budgeting process, with a series of continuing resolutions again being
necessary due to political difficulties in reaching agreement on funding.  Both
the Department of Defense and civilian agencies face the threat of future cuts,
potentially on an automatic basis from the start of 2013 via a mechanism known
as 'sequestration'.  These factors have continued to severely disrupt the
industry, with government agencies further postponing contract award
announcements, delaying work under existing contracts and cancelling or
reducing the scope of many contracts and task orders.  Further pressures have
included an increase in 'small business set asides' in our served markets that
restrict our ability to be prime contractor in some cases, and the federal
government shifting to awarding primarily on a methodology of "Lowest Price
Technically Acceptable" rather than "Best Value".

 

Significant cost reduction was undertaken in 2011, allowing margins to be held
at the time.  Whilst cost actions have continued, the challenging market
conditions have now led inevitably to some margin pressure, and are likely to
continue to do so while the very difficult and uncertain environment persists.

 

Whilst revenues have reduced due to the delays, cancellations and scope
reductions brought about by the market conditions, new task orders, contract
awards and rebids do continue to be secured in numerous areas that are less
affected by the general budgetary challenges.

 

Serco provides logistics expertise to the US Army under the Logistics Civil
Augmentation Program (LOGCAP), where we provide programme management, cost
analysis, logistics planning and administrative services around the world in
support of the United States and allied forces during operations.  Additional
task orders awarded in the first half of the year are valued in total at
US$12m.

 

Also for the US Army, we have been awarded a new contract for a full range of
technical support services to assist in forecasts that reflect the changes in
the political and military climate.  The contract has a total value of US$9m
over a maximum five years.  Under an IDIQ vehicle with the US Navy, Serco has
also been awarded a US$11m task order for similar work to provide forecasting
models to support Navy personnel readiness.  Under the same IDIQ a further
US$4m task order has been awarded to provide counsellors in support of wounded
Sailors and Coast Guardsmen.

 

Serco successfully rebid its contract to support undersea surveillance for the
US Navy, where we provide programme management, policy development,
procurement, technical research, configuration management outfitting and
warehousing.  The contract has a total value of US$19m over a maximum five
years.

 

Serco has won new work supporting the US Air Force.  We are part of the CACI
team awarded an IT Service Provider contract for the NexGen enterprise
transformation program that was established to provide the Air Force with
accurate, real-time data necessary to make strategic decisions and better
manage their resources.  Serco will assist with the deployment of the
integrated workplace management system to 170 Air Force bases around the
world.  For the US Air Force Materiel Command, Serco has also been awarded an
additional task order valued at US$11m to provide analytical, technical, and
program office support.

 

Serco provides a range of mission-critical engineering and IT services to the
Department of Defence under the C4I2TSR contract vehicles (Command, Control,
Communications, Computers, Intelligence, Technology, Surveillance, and
Reconnaissance).  These services include engineering, systems integration,
hardware procurement, software development, technical support, installation
testing operations and maintenance.  Additional task orders awarded in the
first half of year are valued in total at US$20m.  Serco provides equivalent
services to US Navy's Space and Naval Warfare Systems Command (SPAWAR) with
further task orders under the Sea Enterprise IDIQ being won.  During the period
Serco was also officially granted ISO/IEC 20000 certification which measures
our approach and capability in delivering world-class IT managed services.

 

Americas - growth opportunities

The federal contracting market is likely to face continued attrition due to the
ongoing uncertainty regarding budgets, the upcoming Presidential election and
the challenges facing Congress in dealing with the growing national debt. 
There remains the threat of sequestration, as included in last summer's debt
ceiling deal, which is due to take effect from 2 January 2013 unless some form
of agreement is reached by the government on tax and spending issues.  In the
meantime, more Continuing Resolutions are likely, which often limit commitments
to new programs.  As a result, we expect the outlook for spending on government
services to remain unclear into 2013.  Deltek, an industry studies forecasting
group, expects that the budget addressable by government contractors could
decline by 10% in fiscal 2013 and would not bottom out until fiscal 2014 at the
earliest.

 

As is normal for our Americas division, there is a higher frequency of rebids
than is typical for our operations elsewhere around the world.  The development
of our business will also be shaped by the successful outcome of rebids within
a challenging market environment.  Significant rebids due before the end of
2013 include contracts with the Federal Retirement Thrift Investment Board,
Ontario Driver Examination Services, San Francisco parking services, the
National Visa Center, the Department of Veteran Affairs and a major
intelligence agency programme.

 

Serco continues to focus on markets that we expect will receive ongoing funding
support, and on assisting government customers to achieve greater efficiencies
and higher productivity with constrained resources.  Our key areas are:
Logistics & Program Management; Communication & Information Systems; National
Intelligence; Human Capital Management; Business Process Outsourcing; and
Transportation & Asset Management.  US government agencies are increasingly
using multi-award contract vehicles to issue task orders on a rapid-cycle,
competitive basis.  Continuing to qualify for and win business under such IDIQ
contract vehicles will be a key contributor to Serco's growth.

 

In the area of mission critical logistical support services, Serco has started
in recent weeks a new contract valued in total at US$57m over a maximum three
years.  This supports the United States Forces Afghanistan (USFOR-A) base
closure and transition initiative through the coordination of logistics and
deconstruction of bases throughout Afghanistan.  Similar to the services we
provided in Iraq, Serco's Base Closure Assistance Teams (BCATs) are assisting
military units with the key aspects of redeployment.

 

In IT services and solutions, Serco is one of 54 awardees on a government-wide
acquisition contract (GWAC) with a ceiling value of US$20bn over a ten-year
period.  Serco will bid on a range of task orders for all federal civilian and
Department of Defense (DoD) agencies that require services and solutions
including biomedical IT systems, cloud computing, cybersecurity, mobility,
telecommunications, and data center consolidation.  Serco is also one of eight
awards on a new Multiple Award Contract (MAC) framework supporting SPAWAR
Systems Center (SSC) Atlantic with integrated Command and Control (C2)
engineering and technical support services for command centers.  This MAC has a
potential ceiling value of US$145m over a maximum three years.

 

Serco was recently awarded a new contract beginning in the second half of the
financial year to provide equipment and system upgrades to C4ISR equipment on
Department of Defense Mine Resistant Ambush Protected (MRAP) vehicles.  Serco
will deploy teams to Afghanistan, Kuwait, and Qatar to analyse, install and
test the systems on-site.  The fifteen-month contract valued at US$73m has a
nine-month base period and a six-month option period.

 

Serco was also recently awarded an expansion of work on its Army Career Alumni
Program (ACAP) contract to provide career transition services to all Soldiers
in the US Army.  Previously covering only active Soldiers, the services will
now also cover Army Guard and Army Reserves.  Serco expects to hire
approximately 250 additional employees at locations around the world to enable
the delivery of these enhanced services.  The contract expansion is valued at
US$38m over the two remaining option years.  Serco will continue to pursue task
orders under our HRsolutions IDIQs which help to streamline the acquisition of
human resource services for the US Army.

 

Serco has been awarded a place on the new Consultant, Advisory, and Technical
Services (CATS) contract vehicle that will provide support services to the US
Air Force Medical Service (AFMS) at 69 Air Force Medical Treatment Facilities
in the United States and its territories.  Serco is among 13 awardees on the
IDIQ contract, which is valued at US$985m over a five-year ordering period. 
Serco will compete for task orders for Advisory & Assistance Services (A&AS)
that will help reduce critical workload demands being placed on the Air Force
Medical Service.  Services will include support in the areas of healthcare
administration, executive assistance, financial analysis, business process
consulting, policy analysis, engineering and technical services.

 

Serco Americas pipeline includes numerous further areas of longer term
opportunity.  For our Navy customers, we expect growth through modernisation
work to extend the service life of the existing fleet.  The Department of
Defense is expected to increase its focus on areas such as Intelligence,
Surveillance and Reconnaissance (ISR), unmanned flight, space and
cybersecurity.  Human capital management and transformation programmes are
widening in scope to support future changes to the size and shape of the armed
forces.  BPO opportunities with federal and other customers will be pursued to
deliver enhanced service and more cost-effective solutions.  We plan to
leverage our strong capabilities in economic cost analysis and programme
management to support the Department of Defense's drive for cost savings.  The
transportation market is expected to provide opportunities for our air traffic
control, traffic management systems and other transport infrastructure and
operational management skills and capabilities.  We will also continue to
review markets in both North America and South America for potential to
transfer more of Serco's skills and capabilities.

 

 

AMEAA - operating review

Our AMEAA segment consists of Australasia, Middle East, Asia and Africa, in
which we provide a range of frontline services including transport, justice,
immigration, health, defence and other direct services such as facilities
management.

 

Revenue on a reported currency basis grew 32% to £400m (2011: £302m), and
represented 17% of Group revenue, up from 13% in 2011.  Revenue on a constant
currency basis grew by 29%.  Excluding the contribution from acquisitions,
revenue on an organic basis grew by 22%.  Adjusted operating profit, before
corporate expenses, reduced by 4% on a reported currency basis to £26.7m (2011:
£27.9m), with the margin decreasing to 6.7% (2011: 9.2%).

 

The very strong organic growth reflects revenue from new contracts that were
not in operation in the comparable period of 2011, as well as the expansion of
existing contracts, particularly a considerable increase in the amount of work
done for the Australian Department of Immigration and Citizenship (DIAC).

 

The reduction in margin principally reflects the continued return to a more
normal level of margin on the DIAC contract, together with increased investment
in management infrastructure and capability to develop the significant new
growth opportunities in the region.

 

In Immigration Services in Australia, the pace of irregular maritime arrivals
has not slowed throughout the first half of 2012, with arrivals continuing at
record levels.  While we managed the arrival of 4,892 people into immigration
detention, a large number were placed on bridging visas or in community
detention.  We successfully managed the opening of new detention centres in the
Northern Territory and Western Australia, and since the half year, the numbers
of people in our care have increased; however, the number is still likely to
fluctuate and future levels will also reflect prevailing government policy and
the speed of visa processing.  While it is not clear at this very early stage
how the Australian Government's new off-shore processing legislation will
impact our current operations, we are working very closely with DIAC and
exploring a range of options.  Serco continues to have a strong relationship
with the customer, with both parties working to maintain a safe and stable
network of centres, responding with humanity and respect in the operation of
this sensitive contract.

 

A number of other contract awards in Australia generated incremental revenue
versus the comparable period.  Serco began operating on 31 July 2011 Court
Security and Custodial Services (CSCS) for the Western Australian Department of
Corrective Services.  The contract has a value to Serco of around A$210m
(approximately £140m) over five years (with potential to extend to 15 years in
total), and has already achieved over 35,000 client movements.  A new contract
valued at A$50m over five years (with potential to extend to 15 years in total)
for a new Young Adults Facility in Western Australia was signed in March 2012. 
Serco has also expanded its contracts compared with the same period last year
at Acacia Prison in Western Australia and for the new South Queensland
Correctional Centre (SQCC) which replaced the previous facility at Borallon.

 

Our involvement has been growing in the pre-operational phase of the new-build
Fiona Stanley Hospital near Perth.  Plans are on track for the opening in 2014,
at which point Serco's full facilities management and support services contract
to ensure the smooth running of the whole hospital will begin.  Elsewhere in
our transport operations, Great Southern Rail has continued to hold revenue
broadly stable in adverse conditions for the Australian tourism market, but
additional operating investment has been required in part to achieve this.  In
defence, DMS Maritime (our 50:50 joint venture with P&O Maritime Services)
which provides harbour and offshore services to the Royal Australian Navy has
continued to show good organic growth.

 

In New Zealand, Serco's operation of the Mount Eden Corrections facility in
Auckland completed its transition in August 2011.  This new contract is valued
at NZ$300m over the full ten years.

 

In the Middle East, Serco began operating logistics and base support for the
Australian Defence Force (ADF) in September 2011.  This provides healthcare,
maintenance, ground re-fuelling, accommodation and catering services in an
initial two-year contract valued at A$50m.  Service on the Dubai Metro has
continued to see world class operational standards, with 99.9% of all trains on
time.  It has also added additional engineering and maintenance
responsibilities required to support network expansion.  Our integrated
facilities management operations in the region have also delivered growth.

 

AMEAA - growth opportunities

The AMEAA region has experienced the fastest growth of our portfolio for a
number of years and we continue to see good opportunities for further strong
growth.  Our existing operations in Australasia, the Middle East and India each
present prospects.  In addition, there is further growth potential from
expanding into other regions as emerging market governments take steps to adopt
international best practice in procurement processes to support their social
infrastructure improvement programmes.

 

In the justice sector we see further opportunities in the operation of
new-build and existing prisons as governments deal with capacity and efficiency
challenges.  For example, Serco's consortium has been selected by the New
Zealand Government as preferred bidder for the new Wiri prison in Auckland. 
The value of Serco's 25-year operating contract remains to be confirmed, but
forms the majority of the maximum potential price of NZ$900m which also
includes design and construction.  Our defence business in Australia has a
strong base from which to expand services, including garrison and maritime
support, engineering and maintenance.

 

In the emerging and rapidly growing health markets in the region, governments
are increasingly looking to involve private sector provision.  Across the
region Serco will be pursuing potential opportunities for the operation of
hospitals and related services, building on the strength of our UK operations
and the recent Fiona Stanley Hospital win in Australia.  Serco was also awarded
a new support services contract for the Prince of Wales Hospital, one of the
busiest in Hong Kong with over 1,000 beds and complex facilities.  This
contract for non-clinical facilities management has a total value of
approximately HK$90m over two years.

 

In transport, Serco is seeking to leverage its international expertise
particularly in urban transportation.  Numerous bidding opportunities are
expected to support metro systems in India and other locations, as well as in
traffic management systems and other rail and road transportation operation and
maintenance contracts.  Serco is a global leader in air navigation, and sees
opportunities to expand services both within the region and into new
geographies such as North Africa.  In July, Serco expanded its services to
Erbil International Airport in Iraqi Kurdistan, in an initial contract valued
at approximately £7m a year.  Serco is awaiting a decision on its bid for
operations for the Abu Dhabi Airport Company, which would increase the scope of
our current operations.

 

Serco's operations of integrated facilities management contracts in the
commercial and other sectors are expected to grow, particularly given ongoing
completion of major construction projects in the UAE.  Last year's acquisition
of a small regional specialist in the region is delivering strong results, and
we also expect to capitalise on Serco's new business development presence in
the Kingdom of Saudi Arabia.

 

The AMEAA division will also be supported by the Global Services division in
joint growth opportunities for its customers.  For example, relationships,
skills and capabilities will be pooled for opportunities such as providing
shared services to government departments.

 

 

Global Services - operating review

Serco has created a new global BPO division, bringing together all of Serco's
middle and back office skills and capabilities.  The new Global Services
division will improve the services we provide to customers and address a wider
range of opportunities in both the private and public sectors.  Customers
around the world are increasingly looking for end-to-end services that combine
frontline capability with middle and back office operations, helping them to
drive more efficiency and better quality services.  In addition to seeking
specific BPO opportunities, the division will also work alongside the regional
divisions to deliver fully integrated services for their customers.  By the end
of 2012, the establishment and growth of Serco Global Services will be such
that it will have annual revenues in excess of $1 billion, placing us as a top
tier international BPO organisation.

 

In the period under review, Global Services revenue on a reported currency
basis grew 38% to £294m (2011: £214m).  This represented 13% of Group revenue,
up from 10% in 2011.  Revenue on a constant currency basis grew by 43%. 
Excluding the contribution from acquisitions, principally Intelenet, revenue on
an organic basis declined by 11%.  In the prior period there were revenues from
the Bradford education contract which transferred back to the Council in
September 2011, and from our Business Link services the majority of which have
now closed due to the government funding cuts borne by the Regional Development
Agencies (RDAs).  Excluding these two areas, underlying revenue growth for our
new global BPO division has been over 20%.

 

Adjusted operating profit, before reorganisation costs and corporate expenses,
increased by 68% on a reported currency basis to £18.1m (2011: £10.8m), with
the margin increasing to 6.2% (2011: 5.1%).  After reorganisation costs,
Adjusted operating profit increased to £14.4m.

 

The overall margin increase in the period reflected a number of factors.  The
major positive influence was the contribution from the higher margin Intelenet
operations.  Partially offsetting this were increased investment costs
supporting the creation of the new global BPO division and its strong pipeline
of growth opportunities, together with the reduction from mid-2011 in our
higher margin Business Link services.

 

The period under review has largely concluded the significant programme of
operational integration of the acquisitions made in 2011, putting them together
with Serco's previously existing strength in IT-enabled service delivery. 
There have been major investments in rolling out tools such as Workforce
Management, as well as standardising and strengthening all management and
compliance procedures.  Significant investment has been made in IT integration,
and this will continue to be a feature to place the business in the strongest
position for future growth.

 

The acquisition of Intelenet is meeting our expectations as set out a year
ago.  Intelenet has been a key part of the strong underlying revenue growth for
the whole of Serco Global Services.  As well as incremental revenues already
achieved, there have been numerous major strategic wins in the period which
will add revenues from the second half of the year.  These are covered in the
growth opportunities section.

 

Numerous new private sector BPO operations began in the period.  In retail, in
a £55m ten-year contract with Freemans Grattan Holdings, Serco is delivering
all aspects of customer contact services including customer enquiries, inbound
and outbound sales, credit applications, payments, order processing, white mail
and e-mail handling; Serco has also begun operating a contract for similar
services for Ideal Shopping.  For a large banking and financial services
company in India, 1,800 customer contact employees are now delivering the
customer enquiries, inbound and outbound sales, e-mail handling and web chat. 
For a leading global online travel company based in the US, Serco is supporting
the booking processes for travel and hospitality services for an award-winning
loyalty program.  While for Pru Health, a leading UK-based healthcare insurance
provider, Serco has set up off-shore delivery centres to provide back office
services such as indexing, invoice processing, claims adjudication and policy
maintenance.

 

In the public sector, The Anglia Support Partnership (ASP), which has an
initial value of £120m over four years, began operating in April 2012.  This is
Serco's first shared services proposition in the emerging market for middle and
back office support to the UK health sector.  Current support services include
operational and specialist IT, finance operations, employment services,
contracts management, procurement, primary care support services, occupational
health, risk management, catering and estates and property.  The framework
agreement also permits the call-off of additional services and other NHS
organisations to access services.

 

The Peterborough City Council strategic partnership, which has an initial value
of £100m over 10 years, saw the transfer to Serco of the in-house shared
service centre late in 2011.  Serco is already successfully growing this
contract with further services such as procurement being brought into scope as
part of the Council's transformation.  The Hertfordshire County Council
operations which commenced in April 2011 have also widened their scope, with
staff numbers approximately double those of a year earlier.  Additionally,
Serco's property and IT joint venture with Glasgow City Council, known as
ACCESS, has seen Information, Communications and Technology (ICT) support for
the authority's schools added to its responsibilities.

 

In the period, our operations have continued to win various accolades in the
crucial area of employee development.  According to NASSCOM's ranking of IT-BPO
employers in India, Serco Global Services is now the largest pure-play BPO
business.  Awards in 2012 include recognition within 'Asia's Best Employer
Brand Awards' and 'India's Best Companies to Work For', the latter being for
'Best Company in Career Growth'.

 

Global Services - growth opportunities

Over the last 18 months, Serco has added significant capability in the fast
growing, higher margin BPO market, broadening Serco's customer and geographic
reach.  This has added scale and depth to provide our customers with a range of
end-to-end business services as they seek to reduce costs and improve
efficiencies by transforming their operations.

 

We are addressing a large number of private sector market opportunities.  The
significant pipeline of prospects continues to be spread across our four broad
groups of vertical markets: Banking, Financial Services & Insurance; Travel,
Hospitality & Transportation; Retail, Healthcare, Utilities, & Manufacturing;
Telecom, Technology, Online Services & Media. 

 

Serco's approach is increasingly recognised for leadership in transforming a
customer's operations as opposed to simple 'lift and shift' solutions.  Serco's
bids benefit from our substantial scale and the ability to provide a blend of
on-shore, near-shore and off-shore service provision.  Two significant early
milestones - Shop Direct and AEGON - are private sector contact centre
operations that provide excellent short-term growth as these become
operational, but more importantly strong referenceability for similar work in
the future.

 

From July 2012 Serco has begun operating a new ten-year contract for Shop
Direct Group, the UK's leading online and home shopping retailer, valued in
total at approximately £430m.  Serco has taken over responsibility for
providing, and enhancing the efficiency of, customer contact services across
Shop Direct's brands.  The partnership will work together to significantly
enhance service levels and efficiency through investment in the latest
technology, such as web chat and mobile digital services, which are designed to
integrate seamlessly online and mobile into customer contact management.  Our
solution combines capabilities from the Intelenet and The Listening Company
acquisitions as well as the additional scale advantage from Serco's other BPO
operations.

 

AEGON, the leading life and pensions company, recently entered exclusive talks
with Serco and in the coming months we expect to begin operating a ten-year
contract with a total estimated value of approximately £150m.  Serco will
deliver a wide range of customer contact and support services for AEGON's
UK-based protection business, including managing all aspects of the customer
journey from initial underwriting through to claims management, and will cover
policy servicing and claims for some small 'closed book' policies.  This
contract marks an important entry into the life and pensions segment of the
financial services market.

 

Other recent awards that support future growth and reflect the breadth of
operations include those for esure insurance services, easyJet airline and
travel, British Gas household utilities and a major European media company. 
Our strength in transformation, multi-channel customer contact and our
geographic reach for supporting operations has been key to these wins.

 

In the public sector, the Global Services division is working alongside the
regional divisions in order to bid and deliver fully integrated solutions for
their customers.  Significant revenue synergies have already been achieved
where the Group's combined capabilities and holistic offering is able to
transform public services, and we expect more to continue to emerge in the
future.

 

In the UK, there are tenders expected for the Home Office in areas such as visa
services and policing support.  The Global Services division will provide
significant input to the bidding process for operations such as contact centre
services, case management, identity verification, transaction processing, ICT,
human resources and payroll, finance and accounting, and any other middle or
back office support function that is required.  For the Ministry of Justice,
Global Services is providing support to the UK & Europe division for court
fines and compliance and enforcement, electronic monitoring and prison
management.  The future development of the Ministry of Defence's Defence
Infrastructure Organisation (DIO) opportunity, similar in nature to the Defence
Business Services (DBS) contract already led by the UK & Europe division, would
also see Global Services support.

 

The ASP contract is expected to be a key enabler to growing Serco's combination
of health support services and BPO operations.  We are already seeing growth in
areas such procurement services, and expect the framework agreement to support
significant further growth.  Other opportunities in providing business services
to NHS organisations are also being pursued.

 

We have recently signed a new contract to provide multi-channel contact centre
services to the Department of Health to cover a range of public health
programmes.  The contract commences in October 2012 and has a total value of
approximately £15m over three years.  Other central government shared service
centre opportunities are expected to be developed.  For example, the DWP is
assessing the case for a shared services centre to process claims and
payments.  There is also the potential to expand the scope of support for
existing customers such as Job Centre Plus.  Other areas of significant
interest include the processing of rural payments on behalf of Defra and
emerging BPO opportunities for transport departments.

 

Our work with local authorities to transform their services continues to show a
strong pipeline of opportunities.  Local authorities are further developing
their strategies based on a smaller proportion of services that they deem to be
core, thereby increasing the potential to outsource other non-core supporting
operations.  Existing Serco strategic partnerships at Hertfordshire, Glasgow
and Peterborough have all demonstrated the potential for expansion, and the
addition of the Thurrock and Westminster contracts previously operated by
Vertex adds to our ability to increase the scope of services.  The Westminster
contract has recently been extended with an option through to 2014.  Serco is
looking to develop numerous other prospects over the next 18 months.  Latest
research by YouGov supports the view that local authorities are looking to
outsource more, with this increasingly needing to focus on transformational
change.

 

 

 

Finance Review

 

Overview

For the first half of 2012 reported Group revenues were £2,342m, representing
total growth of 4.3%.  Growth at constant currency was 4.2%.  Organic revenues,
excluding acquisition and currency effects, declined by 2.1%.  Adjusted
operating profit before reorganisation costs grew by 4.3%.

During the first half, as anticipated, we incurred £15.7m for implementation
costs of organisational changes.  Furthermore, we disposed of our Technical
Services business and the majority of our operations in Germany; these
disposals yielded a net £31.0m exceptional gain before tax.  Hence, whilst
Adjusted profit before tax declined by 17.4%, profit before tax grew 7.8%.

Group free cash flow was £0.9m; as anticipated, this is significantly lower
than 2011 principally due to timing differences on receiving customer payments,
together with absorption of working capital by the higher volume of contract
start ups in our growing BPO segment.  As previously communicated, we expect
cash generation will be weighted to the second half of 2012.

 

1.       Income statement

 

Serco's income statement for the half year is summarised in Figure 1 below.
This includes the results of joint ventures which are proportionately
consolidated.

Figure 1: Income statement

Six months ended 30 June               2012        2012    2012    2011        
                                                                               
                                     Before                                    
                                exceptional Exceptional                        
                                       item        item   Total                
                                                                               
                                         £m          £m      £m      £m        
                                                                               
Revenue                             2,341.7           - 2,341.7 2,245.8    4.3%
                                                                               
Gross profit                          346.4           -   346.4   333.0    4.0%
                                                                               
Administrative expenses                                                        
before reorganisation costs         (206.8)           - (206.8) (199.2)        
                                                                               
Adjusted operating profit                                                      
before reorganisation costs           139.6           -   139.6   133.8    4.3%
                                                                               
Reorganisation costs                 (15.7)           -  (15.7)       -        
                                                                               
Adjusted operating profit             123.9           -   123.9   133.8  (7.4%)
                                                                               
Investment revenue and                                                         
finance costs                        (21.8)           -  (21.8)  (10.2)        
                                                                               
Adjusted profit before tax*           102.1           -   102.1   123.6 (17.4%)
                                                                               
Net profit on disposal of                                                      
subsidiaries and operations               -        31.0    31.0       -        
                                                                               
Amortisation of acquired                                                       
intangibles                          (11.5)           -  (11.5)   (8.4)        
                                                                               
Acquisition-related costs             (1.1)           -   (1.1)   (3.4)        
                                                                               
Profit before tax                      89.5        31.0   120.5   111.8    7.8%
                                                                               
Tax                                  (22.8)           -  (22.8)  (29.6)        
                                                                               
Profit for the period                  66.7        31.0    97.7    82.2   18.9%
                                                                               
Effective tax rate                    25.5%           -   18.9%   26.5%        
                                                                               
Adjusted operating margin                                                      
before reorganisation costs            6.0%                6.0%    6.0%        
                                                                               
Adjusted earnings per share          15.52p              15.52p  18.74p (17.2%)
                                                                               
                                                                               
Adjusted earnings per share                                                    
before reorganisation costs          17.94p              17.94p  18.74p  (4.3%)
                                                                               
Earnings per share                   13.55p       6.30p  19.85p  16.74p   18.6%
                                                                               
                                                                               
                                                                               
Dividend per share                                        2.65p   2.50p    6.0%
                                                                               

* Adjusted profit before tax and reorganisation costs is £117.8m (2011: £
123.6m)

 

1.1     Revenue

Revenue grew by 4.3% to £2,341.7m (4.2% excluding currency effects). Organic
revenue, which excludes currency effects and acquisitions, declined by 2.1%.
Drivers of the revenue performance are discussed in the divisional operating
reviews.  Revenue, excluding income from disposed operations, increased by
4.8%.

 

1.2     Adjusted operating profit

Adjusted operating profit decreased by 7.4% to £123.9m representing an Adjusted
operating profit margin of 5.3%.  £15.7m of reorganisation costs were incurred
during the period which are described in more detail in section 1.5 below. 
Adjusted operating profit before reorganisation costs increased by 4.3%
representing an Adjusted operating profit before reorganisation costs margin of
6.0% which is consistent with the comparative period.  Drivers of the margin
performance are discussed in the divisional operating reviews. 

 

1.3     Investment revenue and finance costs

Investment revenue and finance costs totalled a net cost of £21.8m (2011: £
10.2m), an increase of £11.6m. The principal reason for this increase has been
the Group's higher level of debt since 30 June 2011 following the acquisition
of Intelenet on 7 July 2011. 

 

1.4     Profit before tax and Adjusted profit before tax

Profit before tax increased by 7.8% to £120.5m.  Adjusted profit before tax was
£102.1m, a decrease of 17.4%.

 

1.5     Reorganisation costs

As described in the Annual report and accounts for the year ended 31 December
2011, from April 2012 we have implemented organisational changes to reflect
developments in market needs, how we target future growth and the way Serco
delivers services for customers.  In completing this programme we have incurred
£15.7m of costs, principally relating to redundancies.  The impact of
reorganisation costs on reportable segmental Adjusted operating profit is shown
in Figure 2 below.

 

Figure 2: Reportable segments Adjusted operating profit

                                                                                           
                                                                                           
                                                 UK &                                      
                                               Europe Americas AMEAA Global Services  Total
                                                                                           
Six months ended 30 June 2012                      £m       £m    £m              £m     £m
                                                                                           
Segment Adjusted operating profit                                                          
                                                                                           
before reorganisation costs                      86.3     29.6  26.7            18.1  160.7
                                                                                           
Reorganisation costs                            (7.4)        -     -           (3.7) (11.1)
                                                                                           
Segment Adjusted operating profit                78.9     29.6  26.7            14.4  149.6
                                                                                           
Corporate expenses before reorganisation costs                                       (21.1)
                                                                                           
Corporate reorganisation costs                                                        (4.6)
                                                                                           
Adjusted operating profit                                                             123.9
                                                                                           
                                                                                           
                                                                                           
                                                                                           
                                                 UK &                                      
                                               Europe Americas AMEAA Global Services  Total
                                                                                           
Six months ended 30 June 2011                      £m       £m    £m              £m     £m
                                                                                           
Segment Adjusted operating profit                80.8     37.0  27.9            10.8  156.5
                                                                                           
Corporate expenses                                                                   (22.7)
                                                                                           
Adjusted operating profit                                                             133.8
                                                                                           

1.6     Exceptional item

The £31.0m exceptional item represents net profit on disposals of subsidiaries
and operations which arises from transactions during the period that are
described in more detail in section 5 below.

 

1.7     Acquisition-related costs

These represent incremental costs principally arising from the acquisition of
Vertex Public Services Limited during the period. 

 

1.8     Tax

The tax charge of £22.8m (2011: £29.6m) represents an effective tax rate of
18.9%. This rate is lower than the comparative period primarily due to the
profit on disposal of subsidiaries not being subject to tax. Excluding the tax
effect on adjusted items, the Adjusted effective tax rate was 25.0% (2011:
25.6%).

 

1.9     Earnings per share (EPS)

EPS grew by 18.6% to 19.85p.  Adjusted EPS reduced by 17.2% to 15.52p. Adjusted
EPS before reorganisation costs decreased by 4.3% to 17.94p. EPS, Adjusted EPS
and Adjusted EPS before reorganisation costs are calculated on a weighted
average share base of 492.1m during the period (2011: 490.3m).

 

2.       Dividend

Serco's policy is to increase the total dividend each year broadly in line with
the increase in underlying earnings. The Board has proposed an interim dividend
of 2.65p per share, representing an increase on the 2011 interim dividend of
6.0%. The interim dividend will be paid on 19 October 2012 to shareholders on
the register as at 7 September 2012.

 

3.       Cash flow

The Group generated a free cash inflow of £0.9m (2011: £51.8m), the reduction
arising principally as a result of an increase in working capital and the
impact of the reorganisation costs.

 

 Figure 3 analyses the cash flow. As in previous periods, we have designed the
analysis to show the underlying cash performance of the Group - the cash flows
generated by subsidiaries plus the dividends received from joint ventures. It
therefore differs from the condensed consolidated cash flow on page 41, which
proportionately consolidates the cash flows of joint ventures. The adjustment
line in Figure 3 reconciles the movement in Group cash to the consolidated cash
flow.

 

Figure 3: Cash flow

Six months ended 30 June                                            2012   2011
                                                                               
                                                                      £m     £m
                                                                               
Adjusted operating profit excluding joint ventures and             102.4   97.0
reorganisation costs                                                           
                                                                               
Reorganisation costs                                              (15.7)      -
                                                                               
Adjusted operating profit excluding joint ventures                  86.7   97.0
                                                                               
Non cash items                                                      25.4   31.3
                                                                               
Adjusted EBITDA excluding joint ventures                           112.1  128.3
                                                                               
Working capital movement                                          (74.5) (36.3)
                                                                               
Operating cash flow excluding joint ventures                        37.6   92.0
                                                                               
Interest                                                          (25.5) (12.9)
                                                                               
Tax                                                               (15.5) (14.9)
                                                                               
Net expenditure on tangible and intangible assets                 (27.1) (40.6)
                                                                               
Dividends from joint ventures                                       31.4   28.2
                                                                               
Group free cash flow                                                 0.9   51.8
                                                                               
Acquisition of subsidiaries                                       (67.5) (23.9)
                                                                               
Disposal of subsidiaries and operations                            132.8      -
                                                                               
Acquisition-related costs                                          (1.3)  (2.1)
                                                                               
Purchase of own shares and issue proceeds of share capital           4.7 (22.6)
                                                                               
Financing                                                         (72.0)   72.6
                                                                               
Special pension contribution                                           - (40.0)
                                                                               
Dividends paid                                                    (28.9) (25.2)
                                                                               
Group net (decrease)/ increase in cash and cash equivalents       (31.3)   10.6
                                                                               
Adjustment to include joint venture cash impacts                   (2.4)   15.2
                                                                               
Net (decrease)/ increase in cash and cash equivalents before      (33.7)   25.8
exchange loss                                                                  
                                                                               
Exchange loss                                                      (2.3)  (0.1)
                                                                               
Net (decrease)/ increase in cash and cash equivalents             (36.0)   25.7
                                                                               

Notes:

Adjusted EBITDA excluding joint ventures is earnings before interest, tax,
depreciation, intangible amortisation, profit on disposals of subsidiaries and
operations and other non cash items. 

Net expenditure on tangible and intangible assets excludes assets funded under
finance lease arrangements.

Financing is stated net of directly reimbursed capital expenditure.

 

3.1     Operating cash flow excluding joint ventures

Operating cash flow excluding joint ventures of £37.6m (2011: £92.0m) reflects
a conversion of Adjusted EBITDA into cash of 33.5% (2011: 71.7%).

 

3.2     Working capital movement

The increase in the working capital movement compared to 2011 includes an
impact of approximately £30m reflecting the timing of a small number of
customer payments including those from Australia's Department of Immigration
and Citizenship (DIAC), as well as the timing of transition and mobilisation
stages on new contract awards. There is also an approximate £10m effect from
the typically higher level of working capital investment required for
BPO-related contracts.

 

3.3     Interest

Net interest paid increased by £12.6m to £25.5m, principally due to the Group's
higher level of debt following the acquisition of Intelenet in July 2011.

 

 

 

3.4     Tax

Tax paid increased to £15.5m (2011: £14.9m) and remains lower than the
equivalent charge in the income statement principally as a result of the
availability of accelerated capital allowances and other timing differences.

 

3.5     Net expenditure on tangible and intangible assets

Net expenditure on tangible and intangible assets was £27.1m (2011: £40.6m). 
This represents 1.4% of Group revenue excluding joint ventures (2011: 2.3%). An
increased level of expenditure is anticipated in the second half of the year.

 

3.6     Dividends from joint ventures

Dividends received from joint ventures totalled £31.4m (2011: £28.2m),
reflecting a higher than normal conversion rate of joint ventures' profit after
tax into dividends of 103% (2011: 93%).

 

3.7     Purchase of own shares and issue proceeds of share capital

This represents a £4.7m cash inflow relating to proceeds from the issue of
share capital and exercise of share options.  The comparative balance includes
an outflow of £24.0m relating to the purchase of own shares for the Employee
Share Ownership Trust.

 

3.8     Financing

The movement in financing is primarily due to repayments of loans and finance
leases.  

 

4        Acquisitions

On 13 April 2012, Serco entered into an agreement to acquire the trade and
assets of Anglia Support Partnership (ASP).  ASP provides support services to
the Cambridge and Peterborough NHS Foundation Trust, together with a further
five partnering NHS organisations.  The initial cash consideration in respect
of the business combination was £5.2m. 

On 1 June 2012, Serco acquired 100% of the issued share capital of Priority
Properties North West Limited (PPNW). PPNW is a property management company
specialising in the provision of short and long term housing.  The initial cash
consideration in respect of the acquisition was £0.9m.

On 11 June 2012, Serco acquired 100% of the issued share capital of Vertex
Public Services Limited (Vertex), a provider of high quality business process
outsourcing services to UK local and central government. The initial cash cost
of the acquisition was £55.5m, which is subject to a working capital repayment
of £1.2m.

A deferred cash payment of £6.6m has also been made in relation to the prior
year acquisition of The Listening Company Limited.

£1.1m of acquisition-related costs incurred on the above acquisitions have been
expensed to the income statement.  The cash flow impact of these costs included
in the cash flow statement was £1.3m which includes £0.2m of
acquisition-related costs from prior period acquisitions.

5        Disposals

On 29 June 2012, the Group disposed of its Technical Services business which
provides consulting and project solutions primarily to the UK civil and nuclear
defence markets for a consideration of £139.5m, £2.5m of which is deferred. 
Net assets disposed amounted to £73.8m, giving a gain of £58.4m, after
accounting for disposal costs of £7.3m.

 

On 29 June 2012, the Group disposed of its interest in Serco GmbH.  The fair
value of consideration receivable is £nil.  The business provides support
services for the German air defence radar systems, engineering and
administrative support services for the defence sector as well as training
services, facilities management, field installation and maintenance services,
and IT consulting and related services. Net assets disposed amounted to £21.8m,
giving a loss of £27.4m, after accounting for disposal costs of £5.6m.

 

6        Net debt

Figure 4: Net debt

At                                                   30 June    31 December
                                                        2012           2011
                                                                           
                                                          £m             £m
                                                                           
Group - cash and cash equivalents                      161.1          194.6
                                                                           
Group - loans                                        (777.0)        (819.4)
                                                                           
Group - obligations under finance leases              (57.3)         (45.0)
                                                                           
Group recourse net debt                              (673.2)        (669.8)
                                                                           
Joint venture - cash and cash equivalents               57.7           60.2
                                                                           
Joint venture - loans                                  (5.9)          (7.9)
                                                                           
Joint venture - obligations under finance leases       (0.6)          (0.9)
                                                                           
Total recourse net debt                              (622.0)        (618.4)
                                                                           
Group non recourse debt                               (19.7)         (15.5)
                                                                           
Total net debt                                       (641.7)        (633.9)
                                                                           

 

6.1     Group recourse net debt

Group recourse net debt increased marginally by £3.4m to £673.2m. Sources of
funding are described in section 8 below.

 

Cash and cash equivalents includes encumbered cash of £10.4m (31 December 2011:
£5.5m). This is cash relating to customer advance payments.

 

6.2     Group non recourse debt

The Group's debt is non recourse if no Group company other than the 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 increased by £4.2m to £19.7m.  The increase is mainly
due to £8.3m of additional asset financing of the National Physical Laboratory
contract, net of payments made in line with the debt repayment schedule on our
Driver Examination Services contract in Canada.

 

7.         Pensions

The Group is a sponsor of a number of defined benefit schemes and defined
contribution schemes. At 30 June 2012, the net retirement benefit asset
included in the balance sheet arising from our defined benefit pension scheme
obligations was £24.5m (31 December 2011: net asset of £16.8m), on a pension
scheme asset base of £1.9bn.

Figure 5: Defined benefit pension schemes

At                                                                        30 June 31 December 2011
                                                                             2012                 
                                                                                                £m
                                                                               £m                 
                                                                                                  
Group schemes - non contract specific                                        51.8             58.8
                                                                                                  
Contract specific schemes:                                                                        
                                                                                                  
- reimbursable                                                            (159.6)          (188.7)
                                                                                                  
- not certain to be reimbursable                                           (22.3)           (26.5)
                                                                                                  
                                                                          (130.1)          (156.4)
Net retirement benefit liabilities                                                                
Intangible assets arising from rights to operate franchises and contracts     5.4              6.3
                                                                                                  
Reimbursable rights debtor                                                  159.6            188.7
                                                                                                  
Deferred tax liabilities                                                   (10.4)           (21.8)
                                                                                                  
                                                                             24.5             16.8
Net balance sheet asset                                                                           

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 comprehensive income (the SOCI);

Reimbursable - schemes where we have a right of full cost reimbursement and
therefore include both the pension scheme deficit and offsetting reimbursable
rights debtor in the balance sheet; and

Not certain to be reimbursable - schemes relating to specific contracts 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 SOCI,
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 either to 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 2012, SPLAS had a surplus
of £71.0m (31 December 2011: surplus of £122.3m). This is calculated under IAS
19 using market-derived rates at 30 June 2012. It therefore reflects the effect
of the market conditions on investment returns in the period. 

The increase of £52m in the IFRIC14 adjustment was principally a result of the
disposal of the Technical Services business which decreased the active
membership of SPLAS and therefore reduced the opportunity for the Group to
recover pension surpluses through lower contributions.

The estimated actuarial valuation of SPLAS as at 30 June 2012 was a surplus of
approximately £12m. The value calculated in the latest triennial review was a
deficit of £141m at 6 April 2009.  We continue to review the level of benefits
and contributions under the scheme in the light of our business needs and
changes to pension legislation.

Retirement benefit obligations reduced by £50.5m as a result of the disposal of
Serco GmbH.  The acquisition of Vertex Public Services Limited included the
acquisition of £8.4m of net retirement benefit obligations as at 11 June 2012.

Figure 6 shows the sensitivity of the liabilities of our pension schemes to
changes in discount rates and to adjustments in the actuarial assumptions for
the rate of inflation, members' salary increases and life expectancies.

Figure 6: Pension assumption sensitivities

               Assumption       Change in       Change in present value of scheme  
                               assumption                  liabilities             
                                                                                   
Discount rate     4.70%           +0.5%                       (9%)                 
                                                                                   
                                 (0.5%)                       +10%                 
                                                                                   
Price          2.90% (RPI)        +0.5%                        +9%                 
inflation          and                                                             
                                                                                   
               2.10% (CPI)       (0.5%)                       (8%)                 
                                                                                   
Salary            3.30%           +0.5%                        +2%                 
                                                                                   
                                 (0.5%)                       (2%)                 
                                                                                   
Longevity     21.0 - 24.6*   Increase by one                   +3%                 
                                  year                                             
                                                                                   

*Post retirement mortality range for male and female, current and future
pensioners.

 

8.       Treasury

The Group has committed bank credit of £730.0m (31 December 2011: £726.7m).
This five-year multi-currency revolving credit facility, which was signed on 28
March 2012, matures in March 2017.  This facility replaced all previous
syndicated and bilateral bank credit facilities held by the Group.  As at 30
June 2012, £196.4m had been drawn down (31 December 2011: £241.3m).

In addition to the bank facility, Serco has US private placements totalling £
499.0m which will be repaid between 2012 and 2023.  All of the Group's credit
facilities detailed above are unsecured.

 

9.       Going concern

The Group's revenues are largely derived from long-term contracts with
governments which, historically, have been relatively resilient to changes in
the general economy. The contract portfolio is diverse and a downturn in any
particular market, sector or geography has, therefore, a more limited effect on
the Group as a whole. In addition, with an order book of £19.4bn and high
visibility of future revenue streams (98% in 2012; 83% in 2013 and 71% in
2014), the Group is well placed to manage its business risks despite the
current uncertain economic climate.

The Group's principal financing is through the revolving credit facility and US
private placements.  As at 30 June 2012, the Group had £1,229.0m of committed
credit facilities and headroom of £533.6m. Based on the information set out
above, the Directors believe that it is appropriate to prepare the financial
statements on a going concern basis.

The directors have acknowledged the guidance "An update for Directors of Listed
Companies: Responding to heightened country and currency risk in interim
financial reports" published by the Financial Reporting Council in June 2012. 
The current economic environment remains uncertain, however, with over 90% of
our customers being government bodies and the broad base of our contract
portfolio, the Group is well placed to manage its business risks successfully
and has adequate resources to continue in operational existence for the
foreseeable future.

10.       Principal risks and uncertainties

The principal risks and uncertainties that could materially affect Serco's
results and operations are set out on pages 75 to 81 of the 2011 Annual report
and accounts and the key headline risks for the remainder of 2012 are restated
below. This summary is not intended, and should not be used, as a substitute
for reading the appropriate pages of the Annual report which include further
commentary on the risks and the Group's management of them. While the Group's
view of its principal risks and uncertainties for the remaining six months of
the financial year remains substantially unchanged, there may be additional
risks unknown to Serco and other risks, currently believed to be immaterial,
which could turn out to be material. These risks, whether they materialise
individually or simultaneously, could significantly affect the Group's business
and financial results.

 

(i) Market risks

Significant change in Government policies, expenditure levels and budgetary
constraints

Failure to win a strategic or significant bid or rebid

 

(ii) Operational risks

Any harm to the Group's reputation could adversely impact business

Failure of significant programmes, including operating within agreed fixed
costs

Major information security breach

Major IT failure or prolonged loss of critical IT systems

 

(iii) Governance risks

Significant incident of bribery or corrupt practice

Major accident or incident

Failure to comply with complex laws and regulations

(iv) People risks

Failure to attract and retain senior management and other key employees

Failure to manage union/industrial relations

 

(v) Finance risks

The impairment of goodwill could adversely impact reported results

Additional funding requirements for pension schemes

Fluctuations in foreign currency exchange rates that are not effectively hedged

Fluctuations in interest rates

 

 

 

 

Responsibility statement

We confirm to the best of our knowledge:

the condensed set of financial statements has been prepared in accordance with
IAS 34 Interim Financial Reporting;

the interim management report includes a fair review of the information
required by the DTR 4.2.7R (indication of the important events during the first
six months and description of principal risks and uncertainties for the
remaining six months of the year); and

the interim management report includes a fair review of the information
required by DTR 4.2.8R (disclosure of related parties' transactions and changes
therein).

 

By order of the Board,


Christopher Hyman             Andrew Jenner
Chief Executive               Finance Director

 

28 August 2012

 

 

INDEPENDENT REVIEW REPORT TO SERCO GROUP PLC

We have been engaged by the company to review the condensed set of financial
statements in the half-yearly financial report for the six months ended 30 June
2012 which comprises the condensed consolidated income statement, the condensed
consolidated statement of comprehensive income, the condensed consolidated
statement of changes in equity, 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 (UK and Ireland) 2410 'Review of Interim
Financial Information Performed by the Independent Auditor of the Entity'
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 International Financial Reporting Standards (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 2012 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 LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

28 August 2012

Condensed consolidated income statement

For the six months ended 30 June 2012

 

                                                                                 
                                                                                 
                            Six months ended 30 June 2012                        
                                     (unaudited)                                 
                                                             Six months      Year
                                                                  ended     ended 
                                                                     30        31
                                                                   June  December
                               Before Exceptional                  2011      2011
                          exceptional                                            
                                 item        item     Total (unaudited) (audited)
                                                                                 
                     Note          £m          £m        £m          £m        £m
                                                                                 
Continuing                                                                       
operations                                                                       
                                                                                 
Revenue               2       2,341.7           -   2,341.7     2,245.8   4,646.4
                                                                                 
Cost of sales               (1,995.3)           - (1,995.3)   (1,912.8) (3,946.0)
                                                                                 
Gross profit                    346.4           -     346.4       333.0     700.4
                                                                                 
Administrative                                                                   
expenses                      (222.5)           -   (222.5)     (199.2)   (410.3)
                                                                                 
Adjusted operating                                                               
profit                          123.9           -     123.9       133.8     290.1
                                                                                 
                                                                                 
                                                                                 
Other expenses -                                                                 
amortisation of                                                                  
intangibles arising                                                              
on acquisition                 (11.5)           -    (11.5)       (8.4)    (20.0)
                                                                                 
Other expenses -                                                                 
acquisition-related                                                              
costs                 6         (1.1)           -     (1.1)       (3.4)     (3.9)
                                                                                 
Net profit on                                                                    
disposal of                                                                      
subsidiaries and                                                                 
operations            7             -        31.0      31.0           -         -
                                                                                 
Operating profit                111.3        31.0     142.3       122.0     266.2
                                                                                 
Investment revenue    3           5.7           -       5.7         5.3      12.2
                                                                                 
Finance costs         3        (27.5)           -    (27.5)      (15.5)    (40.1)
                                                                                 
Profit before tax                89.5        31.0     120.5       111.8     238.3
                                                                                 
Tax                            (22.8)           -    (22.8)      (29.6)    (63.1)
                                                                                 
Profit for the                                                                   
period                           66.7        31.0      97.7        82.2     175.2
                                                                                 
Attributable to:                                                                 
                                                                                 
Equity holders of                                                                
the parent                       66.7        31.0      97.7        82.1     175.1
                                                                                 
Non-controlling                                                                  
interest                            -           -         -         0.1       0.1
                                                                                 
Earnings per share                                                               
(EPS)                                                                            
                                                                                 
Basic EPS             5        13.55p       6.30p    19.85p      16.74p    35.70p
                                                                                 
Diluted EPS           5        13.25p       6.16p    19.41p      16.35p    35.08p
                                                                                 

 

The exceptional item represents net profit on disposal of subsidiaries and
operations as described in note 7.

Adjusted operating profit is stated before net profit on disposals of
subsidiaries and operations, the amortisation of intangibles arising on
acquisitions and acquisition-related costs.

Condensed consolidated statement of comprehensive income

For the six months ended 30 June 2012

 

 

                                             Six months Six months                  
                                                  ended      ended                       
                                                30 June    30 June    Year ended 31
                                                   2012       2011    December 2011
                                                                                    
                                            (unaudited) (unaudited)        (audited)
                                                                                    
                                       Note          £m          £m               £m
                                                                                    
Profit for the period                              97.7        82.2            175.2
                                                                                    
Other comprehensive income for the                                                  
period:                                                                             
                                                                                    
Net actuarial gain/(loss) on defined                                                
benefit pension schemes1                14         11.9      (79.6)           (51.0)
                                                                                    
Actuarial (loss)/gain on reimbursable                                               
rights1                                 14       (76.3)        61.1            116.5
                                                                                    
Net exchange (loss)/gain on                                                         
translation of foreign operations2                (5.1)         3.9            (2.2)
                                                                                    
Fair value (loss)/gain on cash flow                                                 
hedges during the period2                        (10.6)        10.4           (35.7)
                                                                                    
Tax relating to components of other                                                 
comprehensive income3                              23.7         2.7            (5.9)
                                                                                    
Recycling of cumulative net hedging                                                 
reserve2                                          (0.6)         0.1              0.3
                                                                                    
Total comprehensive income for the                                                  
period                                             40.7        80.8            197.2
                                                                                    
Attributable to:                                                                    
                                                                                    
Equity holders of the parent                       40.7        80.7            197.1
                                                                                    
Non-controlling interest                              -         0.1              0.1
                                                                                    
                                                                                    
                                                                                    

 

1              Taken to Retirement benefit obligations reserve in condensed
consolidated statement of changes in equity.

2              Taken to Hedging and translation reserve in condensed
consolidated statement of changes in equity.

3              Of the tax credit, £17.3m (30 June 2011: £5.4m, 31 December
2011: debit of £14.7m) was taken to the Retirement benefit obligations reserve;
and £6.4m (30 June 2011: debit of £2.7m, 31 December 2011: £8.8m) was taken to
the Hedging and translation reserve.

Condensed consolidated statement of changes in equity

For the six months ended 30 June 2012

 

                Share   Share    Capital Retained  Retirement Share-based     Own Hedging and   Total Non-controlling
              capital premium redemption earnings     benefit     payment  shares translation  equity        interest
                      account    reserve          obligations     reserve reserve     reserve                        
                                                      reserve                                                        
                                                                                                                     
                   £m      £m         £m       £m          £m          £m      £m          £m      £m              £m
                                                                                                                     
At 1 January                                                                                                         
2011              9.9   306.7        0.1    568.5     (142.8)        58.7  (27.5)        67.7   841.3               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Total                                                                                                                
comprehensive                                                                                                        
income for                                                                                                           
the period          -       -          -     82.1      (13.1)           -       -        11.7    80.7             0.1
                                                                                                                     
                                                                                                                     
                                                                                                                     
Shares                                                                                                               
transferred                                                                                                          
to option                                                                                                            
holders on                                                                                                           
exercise of                                                                                                          
share options       -     0.6          -        -           -       (1.8)     2.6           -     1.4               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Dividends                                                                                   -                   (0.1)
paid                -       -          -   (25.2)           -           -       -              (25.2)                
                                                                                                                     
                                                                                                                     
                                                                                                                     
Expense in                                                                                                           
relation to                                                                                                          
share-based                                                                                                          
payment             -       -          -        -           -         5.9       -           -     5.9               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Tax credit in                                                                                                        
relation to                                                                                                          
share-based                                                                                                          
payment             -       -          -        -           -         0.8       -           -     0.8               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Purchase of                                                                                                          
own shares                                                                                                           
for Employee                                                                                                         
Share                                                                                                                
Ownership                                                                                                            
Trust (ESOT)        -       -          -        -           -           -  (24.0)           -  (24.0)               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
At 30 June                                                                                                           
2011                                                                                                                 
(unaudited)       9.9   307.3        0.1    625.4     (155.9)        63.6  (48.9)        79.4   880.9               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Total                                                                                                                
comprehensive                                                                                                        
income for                                                                                                           
the period          -       -          -     93.0        63.9           -       -      (40.5)   116.4               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Shares                                                                                                               
transferred                                                                                                          
to option                                                                                                            
holders on                                                                                                           
exercise of                                                                                                          
share options       -    15.4          -        -           -       (0.2)     0.7           -    15.9               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Dividends                                                                                   -                       -
paid                -       -          -   (12.1)           -           -       -              (12.1)                
                                                                                                                     
                                                                                                                     
                                                                                                                     
Expense in                                                                                                           
relation to                                                                                                          
share-based                                                                                                          
payment             -       -          -        -           -         5.3       -           -     5.3               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Tax credit in                                                                                                        
relation to                                                                                                          
share-based                                                                                                          
payment             -       -          -        -           -       (2.6)       -           -   (2.6)               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
At 31                                                                                                                
December 2011                                                                                                        
(audited)         9.9   322.7        0.1    706.3      (92.0)        66.1  (48.2)        38.9 1,003.8               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Total                                                                                                                
comprehensive                                                                                                        
income for                                                                                                           
the period          -       -          -     97.7      (47.1)           -       -       (9.9)    40.7               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Shares                                                                                                               
transferred                                                                                                          
to option                                                                                                            
holders on                                                                                                           
exercise of                                                                                                          
share options     0.1     3.5          -        -           -       (3.0)     4.1           -     4.7               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Dividends                                                                                   -                       -
paid                -       -          -   (28.9)           -           -       -              (28.9)                
                                                                                                                     
                                                                                                                     
                                                                                                                     
Expense in                                                                                                           
relation to                                                                                                          
share-based                                                                                                          
payment             -       -          -        -           -         3.7       -           -     3.7               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
Tax credit in                                                                                                        
relation to                                                                                                          
share-based                                                                                                          
payment             -       -          -        -           -         3.7       -           -     3.7               -
                                                                                                                     
                                                                                                                     
                                                                                                                     
At 30 June                                                                                                           
2012                                                                                                                 
(unaudited)      10.0   326.2        0.1    775.1     (139.1)        70.5  (44.1)        29.0 1,027.7               -
                                                                                                                     
                                                                                                                     
                                                                                                                     

 

Condensed consolidated balance sheet

At 30 June 2012

 

                                                                                 
                                                                                 
                                            At 30 June  At 30 June At 31 December
                                                  2012        2011           2011
                                                                                 
                                           (unaudited) (unaudited)      (audited)
                                                                                 
                                      Note          £m          £m             £m
                                                                                 
Non-current assets                                                               
                                                                                 
Goodwill                                       1,226.8       932.7        1,259.0
                                                                                 
Other intangible assets                          193.5       146.9          184.9
                                                                                 
Property, plant and equipment                    194.7       146.9          194.8
                                                                                 
Trade and other receivables                      233.9       201.9          261.9
                                                                                 
Retirement benefit assets              14         71.0        14.9          122.3
                                                                                 
Deferred tax assets                               50.6        27.7           28.2
                                                                                 
Derivative financial instruments                   0.5         2.2            2.0
                                                                                 
                                               1,971.0     1,473.2        2,053.1
                                                                                 
Current assets                                                                   
                                                                                 
Inventories                                       62.7        70.5           58.8
                                                                                 
Trade and other receivables                      863.3       815.6          798.6
                                                                                 
Current tax assets                                13.2         3.9            9.2
                                                                                 
Cash and cash equivalents                        218.8       305.0          254.8
                                                                                 
Derivative financial instruments                   1.7        15.2            7.6
                                                                                 
                                               1,159.7     1,210.2        1,129.0
                                                                                 
Total assets                                   3,130.7     2,683.4        3,182.1
                                                                                 
Current liabilities                                                              
                                                                                 
Trade and other payables                       (839.2)     (836.1)        (804.2)
                                                                                 
Current tax liabilities                         (13.2)       (9.9)         (17.8)
                                                                                 
Obligations under finance leases                (10.0)       (9.0)         (10.3)
                                                                                 
Provisions                             10        (9.0)           -         (10.4)
                                                                                 
Loans                                           (87.4)     (147.0)        (206.6)
                                                                                 
Derivative financial instruments                (14.0)       (4.8)         (12.3)
                                                                                 
                                               (972.8)   (1,006.8)      (1,061.6)
                                                                                 
Non-current liabilities                                                          
                                                                                 
Trade and other payables                        (58.0)      (28.6)         (61.4)
                                                                                 
Obligations under finance leases                (47.9)      (17.1)         (35.6)
                                                                                 
Loans                                          (715.2)     (457.1)        (636.2)
                                                                                 
Derivative financial instruments                (28.4)       (0.9)         (26.3)
                                                                                 
Retirement benefit obligations         14      (201.1)     (240.2)        (278.7)
                                                                                 
Provisions                             10       (57.6)      (37.2)         (56.2)
                                                                                 
Deferred tax liabilities                        (22.0)      (14.6)         (22.3)
                                                                                 
                                             (1,130.2)     (795.7)      (1,116.7)
                                                                                 
Total liabilities                            (2,103.0)   (1,802.5)      (2,178.3)
                                                                                 
Net assets                                     1,027.7       880.9        1,003.8
                                                                                 
                                                                                 
                                                                                 
Equity                                                                           
                                                                                 
Share capital                                     10.0         9.9            9.9
                                                                                 
Share premium account                            326.2       307.3          322.7
                                                                                 
Capital redemption reserve                         0.1         0.1            0.1
                                                                                 
Retained earnings                                775.1       625.4          706.3
                                                                                 
Retirement benefit obligations                                                   
reserve                                        (139.1)     (155.9)         (92.0)
                                                                                 
Share-based payment reserve                       70.5        63.6           66.1
                                                                                 
Own shares reserve                              (44.1)      (48.9)         (48.2)
                                                                                 
Hedging and translation reserve                   29.0        79.4           38.9
                                                                                 
Equity attributable to equity holders                                            
of the parent                                  1,027.7       880.9        1,003.8
                                                                                 
Non-controlling interest                             -           -              -
                                                                                 
Total equity                                   1,027.7       880.9        1,003.8
                                                                                 

 

Condensed consolidated cash flow statement

For the six months ended 30 June 2012


                                                    Six months  Six months      Year
                                                         ended       ended  ended 31
                                                                                    
                                                       30 June     30 June  December
                                                          2012        2011      2011
                                                                                    
                                                   (unaudited) (unaudited) (audited)
                                                                                    
                                              Note          £m          £m        £m
                                                                                    
Net cash inflow from operating activities      8          51.3        78.9     217.0
                                                                                    
Investing activities                                                                
                                                                                    
Interest received                                          1.3         1.3       3.4
                                                                                    
Increase in security deposits                            (1.8)           -     (8.2)
                                                                                    
Proceeds from disposal of property, plant and                                       
equipment and intangible assets                            1.9         1.0       9.2
                                                                                    
Proceeds on disposal of investments                          -         0.5         -
                                                                                    
Proceeds on disposal of subsidiaries and                                            
operations                                     7         132.8           -         -
                                                                                    
Acquisition of subsidiaries, net of cash                                            
acquired (excluding acquisition-related                                             
costs)                                         6        (67.5)      (23.9)   (325.3)
                                                                                    
Purchase of other intangible assets                     (18.8)      (22.1)    (35.2)
                                                                                    
Purchase of property, plant and equipment               (22.9)      (21.3)    (49.7)
                                                                                    
Net cash inflow/(outflow) from investing                                            
activities                                                25.0      (64.5)   (405.8)
                                                                                    
Financing activities                                                                
                                                                                    
Interest paid                                           (26.8)      (14.0)    (35.8)
                                                                                    
Dividends paid                                 4        (28.9)      (25.2)    (37.3)
                                                                                    
Non-controlling interest dividends paid                      -       (0.1)     (0.1)
                                                                                    
Cash (outflow)/inflow from matured derivative                                       
financial instruments                                    (1.4)         0.2       4.9
                                                                                    
Repayment of loans                                     (421.0)      (99.3)   (559.8)
                                                                                    
Repayment of non recourse loans                          (4.0)       (3.6)     (7.9)
                                                                                    
New loan advances                                        362.6       180.5     818.4
                                                                                    
Capital element of finance lease advances/                                          
(repayments)                                               4.8       (4.5)    (10.7)
                                                                                    
Purchase of own shares for Employee Share                                           
Ownership Trust (ESOT)                                       -      (24.0)    (24.0)
                                                                                    
Proceeds from issue of share capital and                                            
exercise of share options                                  4.7         1.4      17.3
                                                                                    
Net cash (outflow)/inflow from financing                                            
activities                                             (110.0)        11.4     165.0
                                                                                    
Net (decrease)/increase in cash and cash                                            
equivalents                                             (33.7)        25.8    (23.8)
                                                                                    
Cash and cash equivalents at beginning of                                           
period                                                   254.8       279.3     279.3
                                                                                    
Net exchange loss                                        (2.3)       (0.1)     (0.7)
                                                                                    
Cash and cash equivalents at end of period               218.8       305.0     254.8
                                                                                    

 

 

 

Notes to the condensed set of financial statements

For the six months ended 30 June 2012

 

1          General information, going concern and accounting policies

The information for the year ended 31 December 2011 does not constitute
statutory accounts as defined in section 434 of the Companies Act 2006. A copy
of the statutory accounts for that year has been delivered to the Registrar of
Companies. The auditor's report on those accounts was not qualified and did not
contain statements made under s498(2) or (3) of the Companies Act 2006.

 

The annual financial statements of Serco Group plc are prepared in accordance
with IFRSs as adopted by the European Union (EU). The condensed set of
financial statements included in this half yearly financial report has been
prepared in accordance with International Accounting Standard 34 'Interim
Financial Reporting', as adopted by the EU.

 

The Group's business activities, together with the factors likely to affect its
future development, performance and position are set out in the Operating
Review on pages 8 to 23. The Finance Review includes a summary of the Group's
financial position, its cash flows and borrowing facilities.

 

The Group's revenues are largely derived from long-term contracts with
governments which historically have been relatively resilient to changes in the
general economy. The contract portfolio is diverse and therefore a downturn in
any particular market, sector or geography has a more limited effect on the
Group as a whole. In addition, with an order book of £19.4bn and high
visibility of future revenue streams, the Group is well placed to manage its
business risks despite the current economic climate.

 

The Group has committed bank credit of £730.0m (31 December 2011: £726.7m). As
at 30 June 2012, £196.4m had been drawn down on this bank facility.  The
headroom on the facility was £533.6m. In addition to the bank credit facility,
Serco has private placements totalling £499.0m which will be repaid between
2012 and 2023.

 

After making enquiries, the Directors have a reasonable expectation that the
Group has adequate resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the going concern basis
in preparing the condensed set of financial statements.

 

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 with the exception of the
re-presentation noted below. The condensed set of financial statements includes
the results of subsidiaries and joint ventures. Joint ventures have been
proportionally consolidated.

Exceptional item

During the period the Group disposed of subsidiaries and operations which
generated a net profit of £31.0m.  The two disposal transactions are described
in note 7.  As this net profit is specific to these disposals and is
exceptional to the Group's operating profit it has been presented separately on
the face of the condensed consolidated income statement. 

 

1.         General information, going concern and accounting policies
(continued)

Changes in segmental information

As described in the Annual report and accounts for the year ended 31 December
2011, from April 2012 the Group has implemented organisational changes to
reflect developments in market needs, how future growth is targeted and the way
Serco delivers services for customers.  As a result, the Group has created a
Global Services segment bringing together all Serco's middle and back office
skills and capabilities.  The Group has consolidated its frontline Civil
Government; Defence, Science & Nuclear; and Local Government & Commercial
businesses, where operations are based in UK & Europe, into a single segment. 
Non-BPO operations in AMEAA and the business in America continue to be reported
as separate segments. Some corporate expenses have been moved to the reportable
segments.

 

As a consequence of these changes, previously published financial information
has been restated.

 

 

2          Segmental information

 

Information reported to the Chief Operating Decision Maker for the purposes of
resource allocation and assessment of segment performance focuses on the
categories of customer identified using their respective markets.  Details of
the different products and services provided to each operating segment are
included in the Operating Review section of this report.  From 1 April 2012,
the Group has reapportioned its business into four segments.  The Group's
reportable operating segments under IFRS 8 are:

 

Reportable Segments       Operating Segments

UK & Europe               UK and European frontline services in areas
                          including home affairs, defence, health, transportation and local government
                          direct services;
Americas                  US defense frontline and federal civilian agency operations; Canadian operations;
AMEAA                     Frontline contracts in Australasia, Middle East, Asia (including Hong Kong and India) and
                          Africa; and                            
Global Services           Global BPO middle and back office services.

 

The following is an analysis of the Group's revenue and results by operating
segment in the six months ended 30 June 2012. The accounting policies of the
reportable segments are the same as those described in the summary of the
significant accounting policies which are described in the Group's latest
Annual report and accounts.

 

Reportable segments

                                                         UK &                  Global        
                                                       Europe Americas AMEAA Services   Total
                                                                                             
Six months ended 30 June 2012 (unaudited)                  £m       £m    £m       £m      £m
                                                                                             
Revenue                                                                                      
                                                                                             
External sales                                        1,266.3    380.9 400.1    294.4 2,341.7
                                                                                             
Result                                                                                       
                                                                                             
Segment Adjusted operating profit                        78.9     29.6  26.7     14.4   149.6
                                                                                             
Net profit on disposal of subsidiaries and operations    31.0        -     -        -    31.0
                                                                                             
Amortisation of intangibles arising on acquisition      (0.2)    (6.9) (0.1)    (4.3)  (11.5)
                                                                                             
Acquisition-related costs                                   -        -     -    (1.1)   (1.1)
                                                                                             
Segment result                                          109.7     22.7  26.6      9.0   168.0
                                                                                             
Corporate expenses                                                                     (25.7)
                                                                                             
Operating profit                                                                        142.3
                                                                                             
Investment revenue                                                                        5.7
                                                                                             
Finance costs                                                                          (27.5)
                                                                                             
Profit before tax                                                                       120.5
                                                                                             
Tax                                                                                    (22.8)
                                                                                             
Profit after tax                                                                         97.7
                                                                                             

 

Group Adjusted operating profit is £123.9m and comprises segment Adjusted
operating profit of £149.6m less Corporate expenses of £25.7m.

2.         Segmental information (continued)

 

                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                      UK &                  Global        
Restated                                            Europe Americas AMEAA Services   Total
                                                                                          
Six months ended 30 June 2011 (unaudited)               £m       £m    £m       £m      £m
                                                                                          
Revenue                                                                                   
                                                                                          
External sales                                     1,284.3    445.6 302.2    213.7 2,245.8
                                                                                          
Result                                                                                    
                                                                                          
Segment Adjusted operating profit                     80.8     37.0  27.9     10.8   156.5
                                                                                          
Amortisation of intangibles arising on acquisition   (0.1)    (6.8)     -    (1.5)   (8.4)
                                                                                          
Acquisition-related costs                            (0.1)        -     -    (3.3)   (3.4)
                                                                                          
Segment result                                        80.6     30.2  27.9      6.0   144.7
                                                                                          
Corporate expenses                                                                  (22.7)
                                                                                          
Operating profit                                                                     122.0
                                                                                          
Investment revenue                                                                     5.3
                                                                                          
Finance costs                                                                       (15.5)
                                                                                          
Profit before tax                                                                    111.8
                                                                                          
Tax                                                                                 (29.6)
                                                                                          
Profit after tax                                                                      82.2
                                                                                          

 

Group Adjusted operating profit is £133.8m and comprises segment Adjusted
operating profit of £156.5m less Corporate expenses of £22.7m.

 

                                                      UK &                  Global        
Restated                                            Europe Americas AMEAA Services   Total
                                                                                          
Year ended 31 December 2011 (audited)                   £m       £m    £m       £m      £m
                                                                                          
Revenue                                                                                   
                                                                                          
External sales                                     2,595.2    868.2 672.1    510.9 4,646.4
                                                                                          
Result                                                                                    
                                                                                          
Segment Adjusted operating profit                    177.6     73.0  51.4     34.0   336.0
                                                                                          
Amortisation of intangibles arising on acquisition   (0.2)   (13.6)     -    (6.2)  (20.0)
                                                                                          
Acquisition-related costs                            (0.2)        -     -    (3.7)   (3.9)
                                                                                          
Segment result                                       177.2     59.4  51.4     24.1   312.1
                                                                                          
Corporate expenses                                                                  (45.9)
                                                                                          
Operating profit                                                                     266.2
                                                                                          
Investment revenue                                                                    12.2
                                                                                          
Finance costs                                                                       (40.1)
                                                                                          
Profit before tax                                                                    238.3
                                                                                          
Tax                                                                                 (63.1)
                                                                                          
Profit after tax                                                                     175.2
                                                                                          

 

Group Adjusted operating profit is £290.1m and comprises segment Adjusted
operating profit of £336.0m less Corporate expenses of £45.9m.

                                                       Restated        Restated
                             Six months ended  Six months ended   Year ended 31
                                 30 June 2012      30 June 2011   December 2011
                                                                               
Segment assets                    (unaudited)       (unaudited)       (audited)
                                                                               
                                           £m                £m              £m
                                                                               
UK & Europe                           1,064.1           1,111.2         1,126.6
                                                                               
Americas                                648.4             664.8           660.7
                                                                               
AMEAA                                   346.9             292.5           298.0
                                                                               
Global Services                         718.5             216.8           652.5
                                                                               
Corporate assets                         68.0              44.1           142.5
                                                                               
Total segment assets                  2,845.9           2,329.4         2,880.3
                                                                               
Unallocated assets                      284.8             354.0           301.8
                                                                               
Consolidated total assets             3,130.7           2,683.4         3,182.1
                                                                               

 

Segment assets exclude all derivative financial instruments, current and
deferred taxation assets and cash.

2.         Segmental information (continued)

 

 

 

                                                        Restated       Restated
                               Six months ended Six months ended  Year ended 31
                                   30 June 2012     30 June 2011  December 2011
                                                                               
Segment liabilities                 (unaudited)      (unaudited)      (audited)
                                                                               
                                             £m               £m             £m
                                                                               
UK & Europe                             (528.4)          (655.5)        (658.8)
                                                                               
Americas                                (109.1)          (122.9)        (103.9)
                                                                               
AMEAA                                   (144.8)          (107.3)        (128.1)
                                                                               
Global Services                         (253.6)          (142.6)        (199.5)
                                                                               
Corporate liabilities                    (62.4)           (76.6)         (54.0)
                                                                               
Total segment liabilities             (1,098.3)        (1,104.9)      (1,144.3)
                                                                               
Unallocated liabilities               (1,004.7)          (697.6)      (1,034.0)
                                                                               
Consolidated total liabilities        (2,103.0)        (1,802.5)      (2,178.3)
                                                                               

 

Segment liabilities consist of all trade and other payables and retirement
benefit obligations.

 

 

 

                                                                                 
                                                                                 
               Six months ended        Six months ended          Year ended      
Geographic                                                                       
analysis         30 June 2012            30 June 2011         31 December 2011   
                                                                                 
                        Non-current             Non-current           Non-current
            Revenue     assets          Revenue      assets   Revenue      assets
                                                                                 
            (unaudited) (unaudited) (unaudited) (unaudited) (audited)   (audited)
                                                                                 
                     £m          £m          £m          £m        £m          £m
                                                                                 
United                                                                           
Kingdom         1,274.4       953.3     1,290.6       815.9   2,587.3     1,008.8
                                                                                 
United                                                                           
States            351.5       455.3       409.5       449.4     802.1       460.8
                                                                                 
Other                                                                            
countries         715.8       511.3       545.7       178.0   1,257.0       553.3
                                                                                 
Total           2,341.7     1,919.9     2,245.8     1,443.3   4,646.4     2,022.9
                                                                                 

 

Non-current assets exclude derivative financial instruments and deferred tax
assets.

 

 

3          Investmentrevenue and finance costs

 

 

                                                Six months  Six months      Year
                                                     ended       ended  ended 31
                                                                                
                                                   30 June     30 June  December
                                                      2012        2011      2011
                                                                                
                                               (unaudited) (unaudited) (audited)
                                                                                
                                                        £m          £m        £m
                                                                                
Interest receivable on other loans and                                          
deposits                                               1.5         1.6       4.0
                                                                                
Net interest receivable on retirement benefit                                   
obligations                                            4.2         3.7       8.2
                                                                                
Investment revenue                                     5.7         5.3      12.2
                                                                                
Interest payable on non recourse loans               (0.4)       (0.6)     (1.0)
                                                                                
Interest payable and amortisation of                                            
capitalised financing transaction costs on                                      
other loans                                         (24.8)      (13.7)    (35.6)
                                                                                
Interest payable on obligations under finance                                   
leases                                               (1.3)       (0.9)     (2.1)
                                                                                
Movement in discount on provisions and                                          
deferred consideration                               (1.0)       (0.3)     (1.4)
                                                                                
Finance costs                                       (27.5)      (15.5)    (40.1)
                                                                                

 

 

 

4          Dividends

 

                                                Six months  Six months      Year
                                                     ended       ended  ended 31
                                                   30 June     30 June  December
                                                      2012        2011      2011
                                                                                
                                               (unaudited) (unaudited) (audited)
                                                                                
                                                        £m          £m        £m
                                                                                
Amounts recognised as distributions to equity                                   
holders in the period:                                                          
                                                                                
Final dividend for the year ended 31 December                                   
2011 of 5.90p per share on 489.1 million                                        
ordinary shares                                       28.9           -         -
                                                                                
Final dividend for the year ended 31 December                                   
2010 of 5.15 per share on 488.5 million                                         
ordinary shares                                          -        25.2      25.2
                                                                                
Interim dividend for the year ended 31                                          
December 2011 of 2.50p per share on 486.6                                       
million ordinary shares                                  -           -      12.1
                                                                                
                                                      28.9        25.2      37.3
                                                                                

 

 

The proposed interim dividend for the year ending 31 December 2012 is 2.65p per
ordinary share on 488.1 million shares, representing a payment of £12.9m (30
June 2011: 2.50p per ordinary share on 486.6 million shares, representing a
payment of £12.1m).

 

The proposed interim dividend was approved by the Board on 28 August 2012 and
has not been included as a liability as at 30 June  2012.

 

 

5          Earnings per 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 adjusting
items to assist in the understanding of the underlying performance of the
business.  Adjusting items comprise net profit on disposals, amortisation of
intangible assets arising on acquisition and acquisition-related costs.

 

The calculation of the basic and diluted EPS is based on the following data:

 

 

Number of shares                                Six months  Six months      Year
                                                     ended       ended  ended 31
                                                   30 June     30 June  December
                                                      2012        2011      2011
                                                                                
                                               (unaudited) (unaudited) (audited)
                                                                                
                                                  Millions    Millions  Millions
                                                                                
Weighted average number of ordinary shares for                                  
the purpose of basic EPS                             492.1       490.3     490.5
                                                                                
Effect of dilutive potential ordinary shares:                                   
share options                                         11.2        11.7       8.6
                                                                                
Weighted average number of ordinary shares for                                  
the purpose of diluted EPS                           503.3       502.0     499.1
                                                                                

 

 

                       Six months ended        Six months ended         Year ended     
                                                                                       
Earnings per share       30 June 2012            30 June 2011        31 December 2011  
                                                                                       
                                Per share                 Per share           Per share
                    Earnings    amount         Earnings      amount  Earnings    amount
                                                                                       
                    (unaudited) (unaudited) (unaudited) (unaudited) (audited) (audited)
                                                                                       
                             £m       Pence          £m       Pence        £m     Pence
                                                                                       
Earnings for the                                                                       
purpose of basic                                                                       
EPS being net                                                                          
profit attributable                                                                    
to the equity                                                                          
holders of the                                                                         
parent                     97.7       19.85        82.1       16.74     175.1     35.70
                                                                                       
Add back:                                                                              
                                                                                       
                                                                                       
                                                                                       
Profit on disposal                                                                     
of subsidiaries,                                                                       
net of tax of £nil                                                                     
(30 June 2011: £                                                                       
nil, 31 December                                                                       
2011; £nil)              (31.0)      (6.30)           -           -         -         -
                                                                                       
                                                                                       
                                                                                       
Amortisation of                                                                        
intangible assets                                                                      
arising on                                                                             
acquisition, net of                                                                    
tax of £2.7m (30                                                                       
June 2011: £1.7m,            
31 December 2011: £                                                                       
4.3m)                       8.8        1.79         6.7        1.37      15.7      3.20
                                                                                       
                                                                                       
                                                                                       
Acquisition-related                                                                    
costs, net of tax                                                                      
of £0.2m (30 June                                                                      
2011: £0.3m,31                                                                       
December 2011: £                                                                       
0.5m`)                      0.9        0.18         3.1        0.63       3.4      0.69
                                                                                       
Adjusted earnings          76.4       15.52        91.9       18.74     194.2     39.59
                                                                                       
Earnings for the                                                                       
purpose of basic                                                                       
EPS                        97.7       19.85        82.1       16.74     175.1     35.70
                                                                                       
Effect of dilutive                                                                     
potential ordinary                                                                     
shares                        -      (0.44)           -      (0.39)         -    (0.62)
                                                                                       
Diluted EPS                97.7       19.41        82.1       16.35     175.1     35.08
                                                                                       

 

6          Acquisitions

During the period, the Group completed the following acquisitions which have
been accounted for in accordance with IFRS 3 Business Combinations (2008).

 

6 (a)      Vertex Public Services Limited

On 11 June 2012, Serco acquired 100% of the issued share capital of Vertex
Public Services Limited (Vertex), a provider of high quality business process
outsourcing services to UK local and central government. The initial cash cost
of the acquisition was £55.5m, which is subject to a working capital repayment
of £1.2m.  Due to the proximity of the acquisition to the reporting date the
fair values presented are provisional.

 

 

                                           Book  Fair value   Provisional fair
                                                                         value
                                          value adjustments                   
                                                                            £m
Net assets acquired were:                    £m          £m                   
                                                                              
Intangible assets                           0.2        10.4               10.6
                                                                              
Property, plant and equipment               4.7       (4.1)                0.6
                                                                              
Deferred tax asset                            -         2.1                2.1
                                                                              
Trade and other receivables                28.5       (0.7)               27.8
                                                                              
Trade and other payables                 (23.8)           -             (23.8)
                                                                              
Retirement benefit obligations            (8.4)           -              (8.4)
                                                                              
Provisions                                    -       (5.9)              (5.9)
                                                                              
Net assets acquired                         1.2         1.8                3.0
                                                                              
Goodwill                                                                  51.3
                                                                              
Total consideration                                                       54.3
                                                                              
                                                                              
                                                                              
Satisfied by:                                                                 
                                                                              
Cash                                                                      55.5
                                                                              
Working capital adjustment                                               (1.2)
                                                                              
Total consideration                                                       54.3
                                                                              
                                                                              
                                                                              
Net cash outflow arising on acquisition:                                      
                                                                              
Purchase consideration                                                    55.5
                                                                              

 

The provisional fair value of the financial assets acquired includes trade
receivables with a fair value of £24.3m and a gross contractual value of £
24.4m.

 

The goodwill of £51.3m arising from the acquisition represents future
opportunities in the UK outsourced contact centre services industry.  None of
the goodwill is expected to be deductible for corporate income tax purposes.

 

£0.9m of acquisition-related costs incurred on the Vertex acquisition have been
expensed to the income statement.

 

6.         Acquisitions (continued)

6 (b)     Otheracquisitions

 

Anglia Support Partnership

On 13 April 2012, Serco entered into an agreement to acquire the trade and
assets of Anglia Support Partnership (ASP).  ASP provides support services to
the Cambridge and Peterborough NHS Foundation Trust, together with a further
five partnering NHS organisations.  The initial cash cost of the business
combination was £5.2m.  In addition, £3.5m of deferred consideration is payable
on 30 September 2012 plus up to a further £7.2m of deferred consideration
payable from 2012 to 2020, contingent on the financial performance of the
acquired business.  The fair value of this deferred contingent consideration is
£6.8m.  The provisional fair value of net assets acquired totalled £4.0m.  Due
to the proximity of the acquisition to the reporting date the fair values
presented are provisional.

 

£0.2m of acquisition-related costs incurred on this acquisition have been
expensed to the income statement.

 

Priority Properties North West Limited

On 1 June 2012, Serco acquired 100% of the issued share capital of Priority
Properties North West Limited (PPNW). PPNW is a property management company
specialising in the provision of short and long term housing.  The initial cash
cost of the acquisition was £0.9m in cash.  In addition, deferred consideration
of up to £2.2m is payable, £0.2m of which is contingent on finalisation of
specific administrative matters, £0.9m of which is deferred pending
finalisation of working capital and £1.1m of which is contingent on financial
performance in the period to 31 January 2013.  The fair value of this deferred,
contingent consideration is £2.2m.  The provisional fair value of net assets
acquired totalled £1.8m. Due to the proximity of the acquisition to the
reporting date the fair values presented are provisional.

 

Other acquisitions (in aggregate):

                                           Book  Fair value   Provisional fair
                                                                         value
                                          value adjustments                   
                                                                            £m
Net assets acquired were:                    £m          £m                   
                                                                              
Intangible assets                           4.2           -                4.2
                                                                              
Property, plant and equipment               1.2       (0.6)                0.6
                                                                              
Trade and other receivables                 2.2           -                2.2
                                                                              
Cash and cash equivalents                   0.7           -                0.7
                                                                              
Trade and other payables                  (1.2)           -              (1.2)
                                                                              
Provisions                                    -       (0.7)              (0.7)
                                                                              
Net assets acquired                         7.1       (1.3)                5.8
                                                                              
Goodwill                                                                   9.3
                                                                              
Total consideration                                                       15.1
                                                                              
                                                                              
                                                                              
Satisfied by:                                                                 
                                                                              
Cash                                                                       6.1
                                                                              
Contingent consideration arrangement                                       9.0
                                                                              
Total consideration                                                       15.1
                                                                              
                                                                              
                                                                              
Net cash outflow arising on acquisitions:                                     
                                                                              
Purchase consideration                                                     6.1
                                                                              
Cash and cash equivalents acquired                                       (0.7)
                                                                              
Net cash outflow arising on acquisitions                                   5.4
                                                                              

 

 

The Listening Company Limited

During the period, a cash payment of £6.6m was made in respect of deferred
contingent consideration payable following the acquisition of The Listening
Company Limited in 2011.

 

 

 

7          Disposals

During the period, the Group generated the following net profit on disposal of
subsidiaries and operations:

 

                                            Six months   Six months Year ended
                                                 ended        ended         31
                                          30 June 2012 30 June 2011   December
                                                                          2011
                                           (unaudited)  (unaudited)           
                                                                     (audited)
                                                    £m           £m           
                                                                            £m
                                                                              
Gain on disposal of Serco Technical                                           
Services (note 7(a))                              58.4            -          -
                                                                              
Loss on disposal of Serco GmbH (note 7                                        
(b))                                            (27.4)            -          -
                                                                              
Net profit on disposal of subsidiaries                                        
and operations                                    31.0            -          -
                                                                              

 

7 (a)      Serco Technical Services

 

On 29 June 2012, the Group disposed of its Technical Services business which
provides consulting and project solutions primarily to the UK civil and nuclear
defence markets for a consideration of £139.5m, £2.5m of which is deferred. 

 

The net assets at the date of disposal were:                                £m
                                                                              
Goodwill                                                                  64.4
                                                                              
Intangible assets                                                          0.8
                                                                              
Property, plant and equipment                                              1.6
                                                                              
Trade and other receivables                                               17.2
                                                                              
Cash and cash equivalents                                                  0.6
                                                                              
Trade and other payables                                                 (5.6)
                                                                              
Deferred tax liabilities                                                 (5.2)
                                                                              
Net assets disposed                                                       73.8
                                                                              
                                                                              
                                                                              
The profit on disposal is calculated as follows:                              
                                                                              
                                                                            £m
                                                                              
Cash consideration                                                       139.5
                                                                              
Less:                                                                         
                                                                              
Net assets disposed                                                     (73.8)
                                                                              
Disposal-related costs                                                   (7.3)
                                                                              
Profit on disposal                                                        58.4
                                                                              
                                                                              
                                                                              
The net cash inflow arising on disposal is as follows:                        
                                                                              
                                                                            £m
                                                                              
Consideration received                                                   139.5
                                                                              
Less:                                                                         
                                                                              
Deferred consideration                                                   (2.5)
                                                                              
Cash and cash equivalents disposed                                       (0.6)
                                                                              
Disposal-related costs paid during the period                            (2.3)
                                                                              
Net cash inflow on disposal                                              134.1
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              

 

7          Disposals (continued)

 

7 (b)     Serco GmbH

 

On 29 June 2012, the Group disposed of its interest in Serco GmbH.  The fair
value of consideration receivable is £nil.  The business provides support
services for the German air defence radar systems, engineering and
administrative support services for the defence sector as well as training
services, facilities management, field installation and maintenance services,
and IT consulting and related services. 

 

The net assets at the date of disposal were:                                £m
                                                                              
Goodwill                                                                  22.0
                                                                              
Intangible assets                                                          1.2
                                                                              
Property, plant and equipment                                              6.0
                                                                              
Deferred tax asset                                                         5.2
                                                                              
Trade and other receivables                                               22.1
                                                                              
Loans receivable                                                          25.9
                                                                              
Cash and cash equivalents                                                  0.6
                                                                              
Trade and other payables                                                 (9.3)
                                                                              
Bank overdrafts                                                          (1.3)
                                                                              
Retirement benefit obligations                                          (50.5)
                                                                              
Provisions                                                               (0.1)
                                                                              
Net assets disposed                                                       21.8
                                                                              
                                                                              
                                                                              
The loss on disposal is calculated as follows:                                
                                                                              
                                                                            £m
                                                                              
Net assets disposed                                                     (21.8)
                                                                              
Disposal-related costs                                                   (5.6)
                                                                              
Loss on disposal                                                        (27.4)
                                                                              
                                                                              
                                                                              
The net cash outflow arising on disposal is as follows:                       
                                                                              
                                                                            £m
                                                                              
Cash and cash equivalents disposed                                       (0.6)
                                                                              
Disposal-related costs paid during the period                            (0.7)
                                                                              
Net cash outflow on disposal                                             (1.3)
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              
                                                                              

 

8          Reconciliationof operating profit to net cash inflow from operating
activities

 

                                                                            Year
                                             Six months     Six months  ended 31
                                             ended               ended          
                                                                        December
                                             30 June 2012 30 June 2011      2011
                                                                                
                                              (unaudited)  (unaudited) (audited)
                                                                                
                                                       £m           £m        £m
                                                                                
Operating profit for the period                     142.3        122.0     266.2
                                                                                
Adjustments for:                                                                
                                                                                
Share-based payment expense                           3.7          5.9      11.2
                                                                                
Depreciation and impairment of property,                                        
plant and equipment                                  26.9         20.4      46.0
                                                                                
Amortisation and impairment of intangible                                       
assets                                               20.5         19.4      39.5
                                                                                
Profit on disposal of subsidiaries and                                          
operations                                         (31.0)            -         -
                                                                                
Loss/(profit) on disposal of property, plant                                    
and equipment                                         0.9        (0.4)       0.5
                                                                                
Movement in provisions                             (11.7)        (2.0)     (9.8)
                                                                                
Other non cash movements                                -            -       3.4
                                                                                
Operating cash inflow before movements in                                  357.0
working capital                                     151.6        165.3          
                                                                                
(Increase)/decrease in inventories                  (4.7)        (4.8)       9.2
                                                                                
(Increase)/decrease in receivables                 (81.1)       (25.6)      26.8
                                                                                
Increase/(decrease) in payables                      11.6          8.6    (84.5)
                                                                                
Special contribution to defined benefit                                         
pension scheme                                          -       (40.0)    (40.0)
                                                                                
Cash generated by operations                         77.4        103.5     268.5
                                                                                
Tax paid                                           (26.1)       (24.6)    (51.5)
                                                                                
Net cash inflow from operating activities            51.3         78.9     217.0
                                                                                

 

 

 

 

9          Analysisof net debt

                                                                              
                  Cash and cash                                               
                    equivalents                                          Total
                                Nonrecourse   Other  Obligations under        
                             £m     loans£m loans£m   finance leases£m      £m
                                                                              
At 1 January                                                                  
2011                      279.3      (23.7) (490.4)             (26.4) (261.2)
                                                                              
Cash flow                  23.4         3.6  (81.2)                4.5  (49.7)
                                                                              
Acquisitions                2.4           -  (15.9)              (0.8)  (14.3)
                                                                              
Exchange                                                                      
differences               (0.1)           -     3.5                  -     3.4
                                                                              
Non cash                                                                      
movements                     -           -       -              (3.4)   (3.4)
                                                                              
At 30 June 2011                                                               
(unaudited)               305.0      (20.1) (584.0)             (26.1) (325.2)
                                                                              
Cash flow                (55.6)         4.3 (177.4)                6.2 (222.5)
                                                                              
Acquisitions                6.0           -  (57.4)                  -  (51.4)
                                                                              
Exchange                                                                      
differences               (0.6)         0.3   (8.5)                0.2   (8.6)
                                                                              
Non cash                                                                      
movements                     -           -       -             (26.2)  (26.2)
                                                                              
At 31 December                                                                
2011 (audited)            254.8      (15.5) (827.3)             (45.9) (633.9)
                                                                              
Cash flow                (33.2)       (4.3)    58.4              (4.8)    16.1
                                                                              
Disposals of                                                                  
subsidiaries              (1.2)           -  (24.6)                  -  (25.8)
                                                                              
Acquisitions                0.7           -       -                  -     0.7
                                                                              
Exchange                                                                      
differences               (2.3)         0.1    10.1                0.1     8.0
                                                                              
Non cash                                                                      
movements                     -           -     0.5              (7.3)   (6.8)
                                                                              
At 30 June 2012                                                               
(unaudited)               218.8      (19.7) (782.9)             (57.9) (641.7)
                                                                              

 

 

10         Provisions

 

                                    Employee                                   
                                                                               
                                     related  Property  Contract  Other   Total
                                                                               
                                          £m        £m        £m     £m      £m
                                                                               
At 1 January 2011                       11.0       6.6       8.0   14.0    39.6
                                                                               
Charged to income statement              2.4         -         -      -     2.4
                                                                               
Released to income statement               -     (0.2)     (0.4)  (2.0)   (2.6)
                                                                               
Utilised during the period             (0.1)     (0.5)     (1.1)  (0.1)   (1.8)
                                                                               
Unwinding of discount                      -       0.1       0.1      -     0.2
                                                                               
Exchange differences                       -     (0.2)     (0.1)  (0.3)   (0.6)
                                                                               
At 30 June 2011 (unaudited)             13.3       5.8       6.5   11.6    37.2
                                                                               
Arising on acquisitions                  0.4       3.6      29.2    6.9    40.1
                                                                               
Charged to income statement              2.1       0.4         -      -     2.5
                                                                               
Released to income statement               -         -     (0.8)  (1.2)   (2.0)
                                                                               
Utilised during the period             (0.9)     (1.0)     (6.4)      -   (8.3)
                                                                               
Unwinding of discount                      -       0.2       0.1      -     0.3
                                                                               
Exchange differences                     0.1     (0.1)     (2.5)  (0.7)   (3.2)
                                                                               
At 31 December 2011 (audited)           15.0       8.9      26.1   16.6    66.6
                                                                               
Arising on acquisitions                    -       1.0       1.1    4.5     6.6
                                                                               
Charged to income statement*             1.6       0.1       0.2    7.0     8.9
                                                                               
Released to income statement           (0.4)     (0.1)     (2.1)  (1.1)   (3.7)
                                                                               
Utilised during the period             (0.3)     (0.6)     (7.9)  (1.5)  (10.3)
                                                                               
Derecognised on disposals              (0.1)         -         -      -   (0.1)
                                                                               
Unwinding of discount                      -       0.1       0.2      -     0.3
                                                                               
Exchange differences                   (0.2)     (0.2)     (0.9)  (0.4)   (1.7)
                                                                               
At 30 June 2012 (unaudited)             15.6       9.2      16.7   25.1    66.6
                                                                               
Analysed as:                                                                   
                                                                               
Current                                                                     9.0
                                                                               
Non-current                                                                57.6
                                                                               
                                                                           66.6
                                                                               

*The Other category includes £6.6m of provisions in relation to disposal costs
on the two disposals during the period described in note 7.

11         Joint ventures

 

The Group's interest in joint ventures is reported in the condensed set of
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:

 

                                                                   Year ended
                                        Six months    Six months           31
                                             ended         ended             
                                                                     December
                                      30 June 2012  30 June 2011         2011
                                                                             
                                       (unaudited)   (unaudited)    (audited)
                                                                             
                                                £m            £m           £m
                                                                             
Revenue                                      436.2         408.4        819.3
                                                                             
Operating profit*                             38.1          36.8         81.6
                                                                             
Profit before tax                             39.2          37.6         83.6
                                                                             
Tax                                          (8.6)         (8.3)       (20.0)
                                                                             
Share of post-tax results of joint                                           
ventures                                      30.6          29.3         63.6
                                                                             

*Operating profit is after allocating £nil of costs incurred by Group (30 June
2011: £1.0m, 31 December 2011: £1.0m).

 

 

12         Relatedparty transactions

 

Transactions between the Company and its wholly owned subsidiaries, which 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. 

 

                                                                   Year ended
                                       Six months     Six months           31
                                            ended          ended             
                                                                     December
                                     30 June 2012   30 June 2011         2011
                                                                             
                                      (unaudited)    (unaudited)    (audited)
                                                                             
                                               £m             £m           £m
                                                                             
Royalties and management fees                                                
receivable                                    1.1            1.2          1.5
                                                                             
Dividends receivable                         31.4           28.2         64.3
                                                                             
                                             32.5           29.4         65.8
                                                                             

 

 

The following receivable balances relating to the joint ventures were included
in the condensed consolidated balance sheet:

 

                          At 30 June        At 30 June         At 31 December
                                2012              2011                   2011
                                                                             
                         (unaudited)       (unaudited)              (audited)
                                                                             
                                  £m                £m                     £m
                                                                             
Current:                                                                     
                                                                             
Loans                            1.3               0.3                    0.5
                                                                             
Non-current:                                                                 
                                                                             
Loans                            2.5               3.5                    3.2
                                                                             

 

 

13         Share-based payments

 

In accordance with IFRS 2, a charge of £3.7m (30 June 2011: £5.9m, 31 December
2011: £11.2m) relating to the fair value of share schemes granted since 7
November 2002, has been charged to the condensed consolidated income
statement. 

 

 

14         Defined benefit schemes

 

                                                                                               
                                                                                               
                                     Virtually                                                 
                                                                                               
                                       certain                                    Non          
                                         costs                               contract          
                                    reimbursed Not certain costs reimbursed  specific     Total
                                                                                               
At 30 June 2012 (unaudited)                 £m                           £m        £m        £m
                                                                                               
Fair value of scheme assets              265.1                        454.6   1,136.5   1,856.2
                                                                                               
Present value of scheme liabilities    (424.7)                      (624.2) (1,027.7) (2,076.6)
                                                                                               
Net amount recognised                  (159.6)                      (169.6)     108.8   (220.4)
                                                                                               
Members' share of deficit                    -                         45.6       2.0      47.6
                                                                                               
Franchise adjustment                         -                        101.7         -     101.7
                                                                                               
Effect of IFRIC 14                           -                            -    (59.0)    (59.0)
                                                                                               
Net pension (liability)/asset          (159.6)                       (22.3)      51.8   (130.1)
                                                                                               
Analysed as:                                                                                   
                                                                                               
Retirement benefit obligations         (159.6)                       (22.3)    (19.2)   (201.1)
                                                                                               
Retirement benefit assets                    -                            -      71.0      71.0
                                                                                               
                                                                                               
                                                                                               
Related assets                                                                                 
                                                                                               
Intangible assets                            -                          5.4         -       5.4
                                                                                               
Trade and other receivables              159.6                            -         -     159.6
                                                                                               
                                         159.6                          5.4         -     165.0
                                                                                               

 

                                                                                              
                                                                                              
                                     Virtually                                                
                                                                                              
                                       certain                                   Non          
                                         costs                              contract          
                                    reimbursed Not certain costs reimbursed specific     Total
                                                                                              
At 30 June 2011 (unaudited)                 £m                           £m       £m        £m
                                                                                              
Fair value of scheme assets              265.4                        424.7    929.1   1,619.2
                                                                                              
Present value of scheme liabilities    (417.8)                      (561.4)  (978.4) (1,957.6)
                                                                                              
Net amount recognised                  (152.4)                      (136.7)   (49.3)   (338.4)
                                                                                              
Members' share of deficit                    -                         35.9      2.3      38.2
                                                                                              
Franchise adjustment                         -                         74.7        -      74.7
                                                                                              
Effect of IFRIC 14                           -                            -      0.2       0.2
                                                                                              
Net pension liability                   (152.4)                     (26.1)    (46.8)   (225.3)
                                                                                              
Analysed as:                                                                                  
                                                                                              
Retirement benefit obligations          (152.4)                     (26.1)    (61.7)   (240.2)
                                                                                              
Retirement benefit assets                     -                          -      14.9      14.9
                                                                                              
                                                                                              
                                                                                              
Related assets                                                                                
                                                                                              
Intangible assets                            -                          7.9        -       7.9
                                                                                              
Trade and other receivables              152.4                            -        -     152.4
                                                                                              
                                         152.4                          7.9        -     160.3
                                                                                              

 

14.        Defined benefit pension schemes (continued)

 

                                                                                               
                                                                                               
                                     Virtually                                                 
                                                                                               
                                       certain                                    Non          
                                         costs                               contract          
                                    reimbursed Not certain costs reimbursed  specific     Total
                                                                                               
At 31 December 2011 (audited)               £m                           £m        £m        £m
                                                                                               
Fair value of scheme assets              252.6                        429.3   1,065.3   1,747.2
                                                                                               
Present value of scheme liabilities    (441.3)                      (594.9) (1,001.3) (2,037.5)
                                                                                               
Net amount recognised                  (188.7)                      (165.6)      64.0   (290.3)
                                                                                               
Members' share of deficit                    -                         43.7       2.2      45.9
                                                                                               
Franchise adjustment                         -                         95.4         -      95.4
                                                                                               
Effect of IFRIC 14                           -                            -     (7.4)     (7.4)
                                                                                               
Net pension (liability)/asset           (188.7)                     (26.5)       58.8   (156.4)
                                                                                               
Analysed as:                                                                                   
                                                                                               
Retirement benefit obligations          (188.7)                     (26.5)     (63.5)   (278.7)
                                                                                               
Retirement benefit assets                     -                          -      122.3     122.3
                                                                                               
                                                                                               
                                                                                               
Related assets                                                                                 
                                                                                               
Intangible assets                            -                          6.3         -       6.3
                                                                                               
Trade and other receivables              188.7                            -         -     188.7
                                                                                               
                                         188.7                          6.3         -     195.0
                                                                                               

 

 

                                               At 30 June  At 30 June                    
                                                     2012        2011 At 31 December 2011
                                                                                         
                                              (unaudited) (unaudited)           (audited)
                                                                                         
                                                        %           %                   %
                                                                                         
Main assumptions:                                                                        
                                                                                         
Rate of salary increases                             3.30        3.90                3.30
                                                                                         
Rate of increase in pensions in payment (CPI)        2.10        3.00                2.10
                                                                                         
Rate of increase in pensions in payment (RPI)        2.90        3.50                2.90
                                                                                         
Rate of increase in deferred pensions (CPI)          2.10        3.00                2.10
                                                                                         
Rate of increase in deferred pensions (RPI)          2.90        3.50                2.90
                                                                                         
Inflation assumption (CPI)                           2.10        3.00                2.10
                                                                                         
Inflation assumption (RPI)                           2.90        3.50                2.90
                                                                                         
Discount rate                                        4.70        5.50                4.70
                                                                                         
Expected rates of return on scheme assets:                                               
                                                                                         
   Equities                                          7.70        8.40                7.70
                                                                                         
   Bonds except LDI                                  4.70        5.50                4.70
                                                                                         
   LDI                                               3.90        5.00                3.90
                                                                                         
   Gilts                                             3.10        4.30                3.10
                                                                                         
   Property                                          4.35        5.55                4.35
                                                                                         
   Cash and other                                    0.50        0.50                0.50
                                                                                         
   Annuity policies                                  4.70        5.50                4.70
                                                                                         
                                                                                         
                                                                                         
                                               At 30 June  At 30 June                    
                                                     2012        2011 At 31 December 2011
                                                                                         
                                              (unaudited) (unaudited)           (audited)
                                                                                         
                                                    Years       Years               Years
                                                                                         
Post-retirement mortality:                                                               
                                                                                         
   Current pensioners at 65 - male                   21.0        20.9                20.9
                                                                                         
   Current pensioners at 65 - female                 23.5        23.4                23.4
                                                                                         
   Future pensioners at 65   - male                  22.5        22.5                22.5
                                                                                         
   Future pensioners at 65   - female                24.6        24.6                24.6