2021 Full Year Results

RNS Number : 6405C

Serco Group PLC

24 February 2022

 

2021 full year results

24 February 2022

Another year of strong operational and financial delivery from our businesses around the world; guidance for 2022 maintained.  Our unique Business-to-Government platform set to deliver attractive growth from 2022 onwards.

Year ended 31 December	2021	2020	Change at reported currency	Change at constant currency
Revenue(1)	£4,424.6m	£3,884.8m	14%	16%
Underlying Trading Profit (UTP)(2)	£228.9m	£163.1m	40%	45%
Trading Profit	£233.4m	£175.7m	33%
Reported Operating Profit(2)	£216.2m	£179.2m	21%
Underlying Earnings Per Share (EPS), diluted(3)	12.56p	8.43p	49%
Reported EPS (i.e. after exceptional items), diluted	24.43p	10.67p	129%
Dividend Per Share (recommended)	2.41p	1.40p	72%
Free Cash Flow(4)	£189.5m	£134.9m	40%
Adjusted Net Debt(5)	£178.0m	£57.8m	208%
Reported Net Debt(6)	£608.3m	£460.4m	32%

Highlights

· Revenue : grew by 14% to £4.4bn, with organic growth of 10%.

· Underlying Trading Profit : increased by 40% to £229m.  Margin increased from 4.2% to 5.2%.  Around two-thirds of our profit was from outside of the UK⁽⁷⁾.

· Reported Operating Profit : increased by 21%, or £37m, to £216m; prior year included exceptional credit of £12.5m.

· Earnings per Share : increased by 49% on an underlying basis and 129% on a reported basis, the latter including the recognition of UK deferred tax assets.

· Free Cash Flow : increased by 40% to £190m, Underlying Trading Profit cash conversion of 112%.

· Adjusted Net Debt : increased by only £120m to £178m despite acquisition spend of around £250m. Covenant leverage at the year-end was 0.7x EBITDA.

· Return on Invested Capital : increased from 19.1% to 23.7%.

· Order Intake : very strong at £5.5bn, 125% book-to-bill.

· Closing Pipeline : up more than 50% year-on-year at £9.9bn despite strong order intake.

· Dividends : the Board recommends a final dividend of 1.61p, +15% year-on-year.

· New £90m share buyback agreed by the Board : prompt return of surplus capital to shareholders as financial leverage is below our target range of 1-2x net debt: EBITDA.  Still leaves ample headroom for investment.

· £10m of one-off payments supporting employees. 50,000 colleagues received ex-gratia payments recognising their hard work in the year at a cost of £6m.  New charity Serco Peoples' Fund to support colleagues in times of distress set up with a company donation of £4m. Together, Serco Peoples' Fund and Serco Foundation now have funds of over £10m.

· Strong start to 2022.

Rupert Soames, Serco Group Chief Executive, said:

This was a year in which Serco delivered an outstanding financial and operational performance across the world in the face of constant challenge and disruption.  Being a contract manager or team leader, responsible for the daily delivery of vital public services, is never an easy job, but 2021 was the toughest operational environment I have seen; around the world shortages of every type of skill - HGV drivers, Prisoner Escort Officers, engineers, welders, porters, IT staff to name a few;  customers eager to restore services (and themselves critically short of staff); large numbers of unplanned absences as Omicron spread; all made operational delivery incredibly stressful, and I want to pay tribute to the resilience, the skill and commitment of not only the front-line colleagues, but also of their line managers, for many of whom 2021 has been a year of relentless pressure. 

Notwithstanding this challenging environment, the business excelled; we dealt with wildly fluctuating demand - in the UK, the number of people contracted to support tracing rose from 4,000 in April to 13,000 in August, and was down to 600 in December; the number of asylum seekers we found accommodation for increased by over 6,000 in the year.  In Australia we mobilised over 1,000 people to support the Department of Health in Victoria with their Covid-19 response; in Canada we have been working to clear a backlog of driving tests, which stood at around 500,000 in November 2021.  And whilst this was being delivered on the front line, our business development teams secured our largest ever order intake of £5.5bn, a further increase in the order book, and a closing qualified prospect pipeline of nearly £10bn.  Since 2017, when our turnaround started to gain momentum, we have taken orders worth over £20bn, whilst billing revenue of £17bn, giving a book-to-bill ratio approaching 120% over a five-year period.  There can be no clearer indication of the health of the business, and its strong competitive position than this, particularly when matched to the financial performance since 2017, with our Underlying Trading Profit margins having climbed from 2.3% (2017) to 5.2% (2021), cash conversion improved from 31% to over 100% and Return on Invested Capital increased from 9.0% to 23.7%.  And whilst supporting governments in their response to Covid has provided a short-term uplift to revenues and profits, it has left an enduring legacy of a much more capable and efficient organisation, strong customer relationships, and lower debt.  Crucially, our non-Covid business has continued to grow apace during the last two years of crisis, and we expect revenues and trading profit in a largely post-Covid 2022 to be, respectively, around 30% and 60% higher than in pre-Covid 2019.

We completed three acquisitions in the year for a total consideration of around £250m; Facilities First in Australia for £42m, WBB in the US for £207m, and Clemaco in Belgium for £1m.  Despite being very different businesses - FFA is a facilities management company, and WBB a high-end defence consultancy business - both have a high proportion of their business dependent on short-term contracts or task orders, and both found that the second and third waves of Covid-19, which we did not foresee at the time of acquisition, disrupted the flow of new work and their ability to hire additional people.  FFA and Clemaco ended the year on budget for Trading Profit, while WBB was about $5m short.  We remain confident that this disruption will prove temporary and that all these acquisitions will meet our strategic and financial expectations in the years ahead, and in the meantime we have made good progress integrating the businesses.  Both FFA and WBB have had encouraging starts to 2022; WBB in particular won over $100m of contracts since the start of the year and has a strong pipeline.

Work supporting governments' response to Covid-19 lasted much longer than we expected at the start of 2021.  As we became more efficient at delivery of Covid-related work, and better at mitigating the negative impacts of Covid-19 across the business, the net contribution to our profits of this work was significantly larger in 2021 than in 2020; whilst it is difficult to precisely untangle what revenue was and was not directly attributable to Covid, and its impact on profit, we estimate that revenues partially or wholly attributable to Covid support work for governments worldwide were around £700m in 2021.  Some impacts such as increased volumes on certain contracts are likely to continue in the medium term; for example, it will likely take some time to reduce the numbers of asylum seekers being looked after to pre-Covid levels.  On balance, we estimate that of the £229m of Underlying Trading Profit in 2021, around £60m related to Covid will not recur in 2022.

The strong financial performance enables us to deliver all aspects of our capital allocation strategy: investing in the business to drive growth and efficiency; increasing returns to shareholders by increasing dividends (2021 final dividend increasing by 15% on 2020); using share buybacks to keep our leverage within our target range of 1-2x EBITDA; maintaining plenty of headroom to fund bolt-on acquisitions and other investment opportunities which may appear.  With covenant leverage at 0.7x EBITDA, we plan to spend £90m on a share buyback programme over the next 12 months.  Based on our 2022 guidance the buyback amount would return us to the lower end of our target leverage range, and at a share price of £1.26 (the closing price on 23 February) would reduce the share count by around 6%.

Our Annual Report will detail the strong progress we have made on matters related to ESG, including launching our international Serco Goes Green initiative.  Also, recognising that for many colleagues 2021 was no less demanding than 2020 and that we have once again delivered an outstanding financial performance, we repeated the ex-gratia payments made in 2020 of £100 to all employees not receiving bonuses, which benefitted around 50,000 people at a cost of £6m in the year.  In addition, we set up a new charity called the Serco People's Fund in the year with a remit to help employees who for one reason or another are suffering distress and would benefit from financial support; the Group made a one-off donation to the charity in 2021 of £4m to ensure it had the funds to make a meaningful difference to people's lives.  The People's Fund will complement the work of the existing Serco Foundation, which was established in 2013 and now has funds of around £6m, whose focus is on supporting community work and supporting causes sponsored by Serco colleagues.  The £10m now at their disposal will make a very significant social impact over time.

Guidance for 2022

We have had a strong start to 2022, with order intake of over £600m and trading consistent with our full-year guidance. We have been awarded the contract to manage the new HMP Glen Parva prison on behalf of the UK Ministry of Justice, which we expect to generate revenue of over £300m during the 10-year term; we have also seen strong order intake in the US, and our new WBB business has won important pieces of work.  In addition, the US Navy has announced the award to Serco of the Ship Acquisition Programme / Project Management (SHAPM) contract, which has an expected value of over £200m; this award has not been included in our order intake as it has been protested by a competitor.  In January the US Government Accountability Office (GAO) upheld our protest against the award of the US Navy SEA21 contract to a competitor, and we have subsequently been awarded an extension of the existing contract. 

Our guidance for 2022 is unchanged from that we issued at our Capital Markets Event on 2 December 2021, other than to adjust for a lower opening position on Net Debt, as a result of the better-than-expected cash performance in 2021, and the new £90m share buyback recently agreed by the Board.  As we have consistently said, our success in providing Covid-related services to governments worldwide inevitably means that revenues and profits will fall as, hopefully, life returns to normal; we expect revenues directly related to these services to be immaterial beyond the first half.  Partially mitigating this, we have a number of new contracts starting to contribute in 2022; in addition, some overhead and IT investment costs incurred in 2021 will fall away, enabling us to offset a substantial proportion of the non-recurring Covid-related impact.

Serco is well-protected from inflationary effects as the great majority of our contracts have either indexation provisions or are spot-priced under framework contracts.  In our budgeting we assumed low-single digit indexation impacts, and whilst inflation expectations have increased since then - and so would tend to increase revenues - higher inflation will also result in higher costs, leaving the effect on profits broadly neutral.

	2021	2022
	Actual	Initial guidance	New guidance
Revenue	£4.4bn	£4.1bn-£4.2bn	£4.1bn-£4.2bn
Organic sales growth	10%	~(8)%	~(8)%
Underlying Trading Profit	£229m	~£195m	~£195m
Net finance costs	£24m	~£25m	~£25m
Underlying effective tax rate	24%	~25%	~25%
Free Cash Flow	£190m	~£100m	~£100m
Adjusted Net Debt	£178m	~£160m	~£220m

NB: The guidance uses an average GBP:USD exchange rate of 1.34 in 2022 and GBP:AUD of 1.90.  New Net Debt guidance includes the £90m share buyback programme.  We expect a weighted average number of shares in 2022 of 1,195m for basic EPS and 1,217m for diluted EPS.

For further information please contact Serco:

Paul Checketts, Head of Investor Relations, tel: [phone] or email: [e-mail]

Marcus De Ville, Head of Media Relations; tel [phone] or email: [e-mail]

Presentation:

A presentation for institutional investors and analysts will be held at the London Stock Exchange today starting at 10.00am.  The presentation will be webcast live on www.serco.com and subsequently available on demand.  A dial-in facility is available on [phone] (USA: [phone]) with participant pin code 4936797.

Notes to financial results summary table and highlights:

(1) Revenue is as defined under IFRS, which excludes Serco's share of revenue of its joint ventures and associates.  Organic revenue growth is the change at constant currency after adjusting to exclude the impact of relevant acquisitions or disposals.  Change at constant currency is calculated by translating non-sterling values for the year ended 31 December 2021 into sterling at the average exchange rates for the prior year.

(2) Trading Profit is defined as IFRS Operating Profit excluding amortisation of intangibles arising on acquisition as well as exceptional items.  Consistent with IFRS, it includes Serco's share of profit after interest and tax of its joint ventures and associates.  Underlying Trading Profit additionally excludes Contract & Balance Sheet Review adjustments (principally Onerous Contract Provision (OCP) releases or charges) and other material one-time items.  A reconciliation of Underlying Trading Profit to Trading Profit and Reported Operating Profit is as follows:

Year ended 31 December 2021 £m	2021	2020
Underlying Trading Profit	228.9	163.1
Include: non-underlying items
OCP charges and releases	1.3	5.8
Other Contract & Balance Sheet Review adjustments and one-time items	3.2	6.8
Trading Profit	233.4	175.7
Amortisation of intangibles arising on acquisition	(16.0)	(9.0)
Operating Profit before exceptional items	217.4	166.7
Operating exceptional items	(1.2)	12.5
Reported Operating Profit	216.2	179.2

(3) Underlying EPS reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs and related tax effects.

(4) Free Cash Flow is the net cash flow from operating activities before exceptional items as shown on the face of the Group's Consolidated Cash Flow Statement, adding dividends we receive from joint ventures and associates, and deducting net interest and net capital expenditure on tangible and intangible asset purchases. 

(5) Adjusted Net Debt has been introduced by Serco as an additional non-IFRS Alternative Performance Measure (APM) used by the Group.  This measure more closely aligns with the covenant measure for the Group's financing facilities than Reported Net Debt because it excludes all lease liabilities including those newly recognised under IFRS16. 

(6) Reported Net Debt includes all lease liabilities, including those newly recognised under IFRS16.  A reconciliation of Adjusted Net Debt to Reported Net Debt is as follows:

As at 31 December £m	2021	2020
Adjusted Net Debt	178.0	57.8
Include: all lease liabilities accounted for in accordance with IFRS16	430.3	402.6
Reported Net Debt	608.3	460.4

(7) Refers to non-UK Underlying Trading Profit as a proportion of group Underlying Trading Profit before corporate costs. Our Underlying Trading Profit before corporate costs in 2021 was £278.8m.

(8) Our outlook for 2022 is based upon currency rates as 31 January 2022.  The rates used, along with their estimated impact on revenue and UTP are as follows:

Year ended 31 December	2022 outlook	2021 actual	2020 actual
Average FX rates:
US Dollar	1.34	1.38	1.29
Australian Dollar	1.90	1.83	1.88
Euro	1.20	1.16	1.13
Year-on-year impact:
Revenue	~£1m	(£73m)	(£24m)
UTP	~£1m	(£7m)	(£1m)

Reconciliations and further detail of financial performance are included in the Finance Review on pages 18-32.  This includes full definitions and explanations of the purpose and usefulness of each non-IFRS Alternative Performance Measure (APM) used by the Group.  The condensed Consolidated Financial Statements and accompanying notes are on pages 33-69. 
 

Chief Executive's Review

Summary of financial performance

Revenue, Underlying Trading Profit and Underlying Earnings Per Share

Revenue increased by 14%, or £540m, to £4,425m (2020: £3,885m).  Of the growth, 10% (£391m) was organic, acquisitions contributed 6% (£221m) and currency movements were a drag of 2% (£73m). The high level of organic growth was driven by very strong performances from our UK and Australian businesses.  About £700m of our global revenue was from services supporting governments' response to Covid-19, which compares to around £400m in 2020.

Underlying Trading Profit (UTP) increased by 40%, or £66m, to £229m (2020: £163m). Excluding the adverse currency movement of £7m, growth at constant currency was 45%.  Acquisitions added 11%, or £18m, of the growth, with the rest being organic.  The organic growth arose from continued strong demand for our Covid-19 work and growth in a range of other contracts, notably in Justice & Immigration and Citizens Services.  Our core operating platform was able to respond efficiently to the additional demand and, as a consequence, all of our regions improved their Underlying Trading Profit margins by around 90 basis points or more, helping drive our UTP margin from 4.2% to 5.2%.

Year ended 31 December 2021 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	2,131.6	1,120.0	908.4	264.6	-	4,424.6
Change	+20%	+5%	+26%	(18%)		+13.9%
Change at constant currency	+20%	+12%	+24%	(13%)		+15.8%
Organic change at constant currency	+20%	+2%	+8%	(13%)		+10.1%
Underlying Trading Profit	96.0	117.8	51.3	13.7	(49.9)	228.9
Margin	4.5%	10.5%	5.6%	5.2%	(1.1%)	5.2%
Change	130bps	105bps	111bps	89bps	-7bps	97bps
Contract & Balance Sheet Review adjustments	1.3	-		-	-	1.3
Other one-time items	2.5	-	0.7-	-	-	3.2
Trading Profit/(Loss)	99.8	117.8	52.0	13.7	(49.9)	233.4
Amortisation of intangibles arising on acquisition	(0.8)	(11.7)	(3.5)	-	-	(16.0)
Operating profit/(loss) before exceptionals	99.0	106.1	48.5	13.7	(49.9)	217.4

Diluted Underlying Earnings Per Share increased by 49% to 12.56p (2020: 8.43p).  The percentage improvement was higher than the increase in UTP as the leverage effect of higher profit and a lower finance cost more than offset a 0.9% increase in the effective tax rate.

The Revenue and Underlying Trading Profit performances are discussed in more detail in the Divisional Reviews, starting on page 14. 

Cash flow and Net Debt

Free Cash Flow was very strong at £190m (2020: £135m).  The improvement was a result of the £66m increase in underlying profits and a working capital inflow of £25m, despite revenue growth of £540m.  The strong working capital performance was helped by the successful collection of some older receivables, including on our Dubai Metro contract following its conclusion, efforts by governments to support their supply chains by ensuring prompt payments and favourable timing of some receipts round the period end.  Average working capital days reduced with debtor days of 19 (2020: 23 days) and creditor days of 23 (2020: 25 days).  We are proud to say that 89% of UK supplier invoices were paid in under 30 days (2020: 89%) and 95% were paid in under 60 days (2020: 97%).  No working capital financing facilities were utilised in this or the prior year. 

Adjusted Net Debt increased to £178m at 31 December (31 December 2020: £58m, 30 June 2021: £225m).  The £120m increase since the prior year end includes spend on acquisitions of around £250m, £27m of dividend payments and £41m of share purchases.

The period end Net Debt compares to a daily average of £216m (2020: £209m) and a peak of £346m (2020: £356m).  The relatively large range for these was due to the acquisition of WBB in May and the favourable timing of receipts at the end of the period.  As usual, we have not used any financing or efforts out of the ordinary to reduce period end Net Debt.

Our measure of Adjusted Net Debt excludes lease liabilities, which aligns more closely with the covenants on our financing facilities. Lease liabilities totalled £430m at the year-end (2020: £403m), the majority being leases on housing for asylum seekers under the AASC contract. The terms of these leases are generally aligned to the contract we have with the customer.

At the closing balance sheet date, our leverage for debt covenant purposes was 0.7x EBITDA (2020: 0.5x).  This compares with the covenant requirement for net debt to be less than 3.5x EBITDA and our target range of 1-2x.

More detailed analysis of earnings, cash flow, financing and related matters is included in the Finance Review.

Capital allocation and returns to shareholders

At our Capital Markets Day on 2 December 2021 we explained our capital allocation priorities.  We aim to maintain a strong balance sheet with our target financial leverage of 1x to 2x net debt to EBITDA, and consistent with this, the Board's priorities will be to:

· Invest in the business to support organic growth ahead of the overall market.

· Increase ordinary dividends so shareholders are rewarded with a growing and sustainable income stream.

· Selectively invest in bolt on acquisitions that add capability, scale or access to new markets and have attractive returns.

· Return any surplus cash to shareholders through share buybacks.

In 2021, we have deployed all aspects of our capital allocation policy:

· Invest to support organic growth : we took the opportunity of our strong performance to accelerate investments in our systems and processes, costing about £10m in the second half.

·   Increase ordinary dividends : the Board is recommending a final dividend of 1.61p, 15% higher than the prior year. Following the interim dividend of 0.8p, this results in a full year dividend of 2.41p, an increase of 72% compared to 2020.

·       Invest in acquisitions : we acquired three businesses in the year, WBB, FFA and Clemaco.

· Return surplus cash to shareholders : with leverage being below the bottom end of our preferred range, the Board has agreed that it intends to buy back up to £90m of its shares over the next 12 months.

The full year ordinary dividend of 2.41p represents dividend cover of 5.2x.  When we resumed paying dividends in respect of 2020, we were targeting a starting level of cover of around 4x, but the strong performance on our Covid-related activities has increased cover temporarily.  As these earnings fall away and dividends increase, the level of cover will naturally fall.  As laid out in our Capital Markets Day, our strong balance sheet, confidence in the outlook and good cash generation, mean we intend to reduce dividend cover progressively towards 3x over the coming years.  Regarding potential further share buybacks, we will review our financial position and capital requirements on a regular basis and return surplus capital to shareholders as appropriate.

Contract awards, order book, rebids and pipeline

Contract awards

Order intake was strong in 2021 with £5.5bn of work won, a book-to-bill rate of 125%.  There were 56 contract awards worth more than £10m each and 5 with a total contract value of more than £200m. Around 60% of order intake came from the UK & Europe, 25% from the Americas and the remaining 10% from Asia Pacific and 5% from the Middle East.

Of the order intake, approximately 60% was represented by the value of new business and 40% was rebids and extensions of existing work.  This is the opposite of the position in the same period last year.  The win rate by value for new work, which has averaged slightly less than 30% over the last five years, was unusually high at around 55%.  The win rate by value for securing existing work was approximately 75%, which is lower than the 80-90% we typically see, as a result of the loss of our Dubai Metro contract. Win rates by number of tenders were 60% for new bids and around 90% for rebids and extensions.

VIVO Defence Services, our joint venture with Engie, was successful in securing several contracts from the UK Ministry of Defence (MOD) Defence Infrastructure Organisation (DIO) as part of the Future Defence Infrastructure Services (FDIS) programme, the largest facilities management procurement currently running across Europe.  In Lot 3, which awarded contracts to provide asset and facilities management services for the UK defence built estate, VIVO won the largest two regions of the four that were competed.  These have an estimated total potential value to Serco of around £1.7bn over the initial seven-year period.  VIVO also secured the largest two regions in Lot 2B, which provides repairs and maintenance work for Service Family Accommodation, with an estimated total potential value to Serco of around £200m.  Also in the UK, we were awarded contracts by the Department of Work and Pensions as part of their Restart programme, which will help unemployed people back into work. We estimate that the combined value over the initial four and a half-year contract period will be around £350m, with the amount dependent on the number of people who find employment. The order intake also includes our Australian Immigration Services contract, which was successfully extended to 2023, the £400m contract renewal to provide support services at the Canadian Forces Base in Goose Bay and our award to continue to provide services at Covid-19 testing centre locations in the UK.

Order book

The order book increased from £13.5bn at the start of the year to £13.7bn at the end of December.  This is lower than might be expected when order intake has been so high as, consistent with our usual treatment of joint ventures, our order book does not include the £1.9bn of order intake arising from our VIVO joint venture with Engie; this is on the logic that as a joint venture, we report its profits but not revenues.  More widely, our order book definition gives our assessment of the future revenue expected to be recognised from the remaining performance obligations on existing contractual arrangements.  This excludes unsigned extension periods and the order book would be £1.2bn (2020: £0.9bn) higher if option periods in our US business, which always tend to be exercised, were included.   

Rebids

In our portfolio of existing work, we have around 80 contracts with annual revenue of £5m or more where an extension or rebid will be required before the end of 2024.  Excluding our NHS Test & Trace contracts, which are short-term in nature and we expect the work to come to a natural finish, contracts which will either end or need to be extended in 2022 have an annual contract value of around £0.5bn.  The annual value rises in 2023 to approximately £0.9bn, which includes our Center for Medicare & Medicaid Services (CMS) in the US and our Immigration Services contract in Australia, before reducing to £0.3bn in 2024.  The current CMS and Immigration Services contracts end, respectively, in July and December 2023, and we will be re-bidding both.

Pipeline

Our measure of pipeline is probably more narrowly defined than is common in our industry. It includes only opportunities for new business that have an estimated annual contract value (ACV) of at least £10m and which we expect to bid and to be adjudicated within a rolling 24-month timeframe. We cap the total contract value (TCV) of individual opportunities at £1bn, to lessen the impact of single large opportunities. The definition does not include rebids and extension opportunities, and in the case of framework, or call-off, contracts such as 'ID/IQ' (Indefinite Delivery / Indefinite Quantity contracts), which are common in the US, we only take the value of individual task orders into our pipeline as the customer confirms them.  Our published pipeline is thus a relatively small proportion of the total universe of opportunities, many of which have annual revenues less than £10m, are likely to be decided beyond the next 24 months, or are rebids and extensions.

Our pipeline was £9.9bn at the end of 2021, an increase of more than 50% on the £6.4bn level at the end of 2020 and around 70% higher than the £5.8bn at the end of June 2021.  It is pleasing to see the pipeline replenish so well given 2021 was a strong year for wins, with £5.5bn of orders secured. The pipeline consists of around 40 bids with an ACV averaging approaching £40m and a contract length averaging more than six years.  The pipeline of opportunities for new business that have an estimated ACV of less than £10m has also increased, with the value rising from £1.7bn to £2.0bn in the year.

As we have noted before, in the services industry in which Serco operates, pipelines are often lumpy, as individual opportunities can be very large, and when they come in and out of the pipeline they can have a material effect on reported values.  Since the year end two of the larger opportunities in the pipeline have come out due to award decisions; HMP Glen Parva, a new prison in the UK which we won, and Frankston Hospital in Australia, which we lost.  We expect that the value of the pipeline, having increased from £5.8bn in June 2021 to £10bn in December 2021, will reduce during the first half as some of the large opportunities are adjudicated.

Acquisitions

We regard acquisitions as an important part of our strategic toolkit, which, if deployed correctly, can add significant value to the business; but they should be in addition to, and designed to deliver, new opportunities for organic growth.   They require discipline and process, and for M&A we follow our head office mantra of having a few good people rather than a lot of average ones.  Much of our work we do in-house although we also use advisers where appropriate.  We look at many opportunities, and reject most of them.  Generally speaking, we regard acquisitions as higher risk than organic growth, so any candidates have to meet our stringent criteria of being both financially and strategically compelling; strategically we judge potential acquisitions against three criteria: do they add new, or strengthen existing capability?  Do they add scale which we can use to add efficiency?  Do they bring us access to new and desirable customers and markets?  We also recognise that acquisition opportunities come in different shapes, sizes and sectors, and a small one can be strategically important to a region, but not necessarily significant at Group level.  But large or small, all acquisitions are centrally managed by Group and follow the same rigorous process. 

Since 2014 we have undertaken six acquisitions:

· In 2017, we acquired BTP systems, a US defence engineering company, for $20m (£13m).

· In 2018 we acquired parts of the Carillion Healthcare business, for £18m.

· In 2019 we undertook a major acquisition in North America in the form of the Naval Systems Business Unit of Alion, a leading provider of naval design, systems engineering and acquisition & programme management, for a consideration of $225m (£186m).

· In January 2021, we acquired FFA, a specialist provider of cleaning, facilities maintenance and management services to governments in Australia for A$74m (£42m), including working capital adjustments.

· In April 2021 we acquired WBB, a leading provider of advisory, engineering, and technical services to the US military, for $293m (£207m).

· In July 2021 we acquired Clemaco, which specialises in the support and maintenance of the ships of the Belgian Navy, for around €1m (£1m).

The unexpected persistence of Covid-19 meant that both FFA and WBB faced disruption in both labour supply and order intake; however, both have bedded in well and the integration of them has been successful. 

FFA has seen a different mix of business as a result of the ongoing Covid-19 situation, with lower demand for larger, discretionary facilities maintenance work but higher levels of cleaning.  These two effects have largely broadly offset each other with the business overall delivering profit in-line with expectations for the year.  The strategic logic of acquiring the business was to extend the reach and capability of our Australian business in the government facilities maintenance and management market, which we believe will position us well for numerous bidding opportunities in the coming years.  

WBB has experienced the same market headwinds we saw in our US defence business: repeated and unexpected surges of Covid led to significant delays in new award decisions and tight labour markets, particularly in the highly skilled and sensitive areas in which WBB operates.  As the business typically grows rapidly from securing new work, revenue and profit in the year were ~10-20% lower than anticipated.  However, since the start of 2022, WBB won over $100m of contracts, and recruitment began to improve. And our belief in the strategic merit of the acquisition - to extend our Air Force, Army and the Office of the Secretary of Defense presence - has only been reinforced by owning the business. 

We will continue to search out new opportunities for acquisition which fit our criteria, and in the meantime focus on delivering value from those acquisitions already executed.

Operational progress, transformation, innovation and people

We have an ambition to be the best-managed business in our sector.  Achieving this will require investment in people, processes and systems.  Covid-19 has been hugely disruptive over the last two years and has tested our systems, processes and people in unforeseen ways.

Our first trading statement on Covid-19, issued on 2 April 2020, set out our operational priorities:

"Our priority in this crisis is to support the delivery of essential public services and, within that context, do all we can
to protect our employees from harm and our shareholders from loss…..Our mettle is being tested as never before, and we are determined to rise to the level of events."

It turns out that many of the investments that we have made over recent years have proven their worth during the crisis. In particular, I would point to three themes which have served us well.

The first is a management structure based on our "loose-tight" model. This means that we delegate authority and responsibility for day-to-day operational management to be as close to the customer as possible, but we maintain a tight control over risk management, bidding and cost control, and we have a well-established reporting regime, where transparency and reporting bad news as soon as it happens are mandatory.  During the crisis, we maintained the regimen of monthly reporting, and the Investment Committee, which is a standing committee of the most senior Group executives including the CEO, CFO, COO and Group General Counsel and which oversees bids and investments, met 97 times during 2021. Divisional Performance Reviews, and Business Unit Performance Reviews, continued their monthly rhythm. Our cash performance was reported daily.

The second was cultural: over the past seven years we have laid much emphasis on our values of Trust, Care, Innovation and Pride. These played a significant part in sustaining the ability of the business to deliver under extreme and unprecedent pressure. The levels of Trust built up across the management team allowed us to work seamlessly together across boundaries; the value of Care made it easy to connect company and people's own values with the astonishing efforts that people had to make to look after prisoners, patients, travellers, and hundreds of thousands of often frightened and confused citizens.  Innovation and loose-tight management allowed us to invent new services and business models almost overnight and to adapt our IT platforms to new ways of working.  Pride meant that people understood that the work we do delivering public services is incredibly important and that it is a privilege to be able to make a difference every day to people's lives. Pride and Trust also helped us maintain momentum and morale in the face of public criticism and comment about our work in the early days of NHS Test & Trace in the UK.  Needless to say, much of the criticism was wildly unfair and bore little relationship to the facts, but it was still unsettling to our colleagues to see their hard work being called into question.

What evidence do we have of the impact of our culture and organisational philosophy?  On the operational side, clearly we have the evidence of what has been delivered: on the UK testing programme, to which we are significant contributors, the number of tests per week in 2021 ranged from 117,000 to 1.5 million; on tracing, the number of people we provided to the service rose from 4,000 in April 2021, to 13,000 in August, and back down to 600 in December.  In Australia we had 275 people on tracing in January 2021 for the Department of Health in Victoria, which rose to 1,000 in August and fell back to 300 in December.  Managing this variability is one of Serco's key skills and it has required major investment in IT systems to support the recruitment and management of over 100,000 direct and indirect employees over the last 2 years.

Our Viewpoint engagement survey generated 29,470 individual respondents, about the same as last year; having risen every year from a low of 42 in 2014, our engagement score fell slightly from 73 in 2020 to 70, which is still a good score for a business of our type, and higher than it was in 2018; we sense that it probably reflects the fact that in the second year of Covid, and huge volatility, people are just tired of all the uncertainty and disruption.

Operationally Serco has performed very well during the crisis.  We operated services on Northlink Ferries, MerseyRail, and the Caledonian Sleeper in the face of numerous challenges.  In prisons we had to manage rapidly changing regimes as lockdowns came and went; hospital staff had to deliver cleaning, catering and portering with sickness absence rates of up to 25% in some contracts.

One thing that has suffered during the pandemic is in-person management training.  Several years ago we designed and developed bespoke week long management training programmes with our partners at the Saïd Business School, at the University of Oxford.  Travel restrictions meant we had to suspend these programmes as we believed the week long residential element was critical in being able to build networks across the company. We have now reinstated these programmes, running our Contract Managers programme in February 2022, and we will run our first course specifically designed for women in management in the next few months.  In North America, we have instituted along with LinkedIn remote training programmes that give colleagues access to over 1,000 high-quality training courses. And we have sustained our commitment to recruiting talented young people at a time when many companies have cut back; in the US we increased our Internship programme to over 50 people, and on graduation our recruitment rate is around 90%. In the UK we expanded our graduate recruitment intake and as a result now have placed over 50 people into our graduate programme over the last two years.

The third element that has stood us in good stead has been our investment in IT systems; over the past few years we have been migrating our key management and financial systems to the Cloud, and upgrading them at the same time.  We have invested considerable money and effort in improving our HR systems, and a new front-end to our core HR applications which went live in January 2022.  We also extended the rollout of our Workforce Management System and created a new infrastructure for our VIVO joint venture. 

In January 2021 our European business was the subject of a serious ransomware attack.  Fortunately, the capability we had developed allowed us to respond robustly to this challenge, and we were able to trace the criminals' server; with the assistance of local law enforcement, it was disabled and our stolen data was safely removed. Our ability to deliver services to clients was not disrupted and no ransom was paid, but the time, effort and expense required to achieve a satisfactory outcome was considerable.  

We said at the beginning of the Covid crisis that it would test our mettle; it has, and I am proud beyond words as to how well colleagues and the organisation as a whole have performed since March 2020.  The same words I used in last year's report are worth repeating: for a very large business, we have shown surprising agility. For a business which used to look like a collection of individual contracts, we have demonstrated our ability to act with common purpose, deliver economies of scale, and to maintain rigorous standards of reporting and control in confusing and difficult circumstances.  For a business of any size we have shown great resilience.

Market outlook

In 2021 we conducted a detailed market review, which included using two independent research firms, one British, and one American, to estimate the size and growth rates of our markets.  We now estimate that total outsourcing spend by governments on services in the countries in which we operate (which account for an estimated 65% of the world market, excluding Russia and China) is around £715bn; and that our market share is between 1% and 3%, depending on whether we look at segments we operate in or the market as a whole.  And we estimate that once Covid-19 expenditure has normalised the market will grow at around 2-3% per year in the medium term.  Rather than concentrate on the absolute number, which is likely to have a large margin for error, some key conclusions from our work are:

· The market for private sector delivery of government services is very large.

· The supply-side is fragmented; as a leading international supplier, our market share within our existing footprint, at   around 3%, is small, although it is larger in some specific segments within certain sectors.

· The market is likely to continue to grow and, given our small market share, there is ample opportunity for us to grow   faster than the market.

In terms of the impact of Covid-19 on our markets, we think it will take several years for governments' expenditure patterns to settle down following the pandemic; the immediate aftermath will probably focus on continued need for surveillance of the virus, as well as catching up on the areas of normal expenditure such as healthcare, court hearings and defence infrastructure which have been disrupted during the pandemic.  The private sector has responded extremely well to governments' emergency requirements, and we think it likely that this will remind governments of the value of flexible, resilient and robust supply chains which can support them in both ordinary and extraordinary times.  Nor do we anticipate a lot of change arising from Covid-19 in our basic business model of offering public services delivered by people supported by good technology. On the contrary, we know that governments will be massively more indebted than they were before the crisis and that citizens will be more in need, as well as more demanding, of public services critical to rebuilding society and quality of life - be that services to deal with unemployment, training and skills gaps, social care reform, acute healthcare capacity, building national resilience, sustainable transport growth and more.  And the level of geo-political threat that countries perceive themselves to be facing in 2022 seems if anything higher than in the immediate pre-Covid years; so defence expenditure is likely to remain robust.

The drivers of growth in our markets can be summarised as 'Four Forces', which have existed for some time and we believe will be amplified by the crisis:

· Increasing and changing demand for public services.

· Heightened expectations around the quality and resilience of public services.

· Increased fiscal deficits.

· The unwillingness of voters and corporate taxpayers to tolerate tax increases. 

These will continue to drive governments to want to deliver more public services, of higher quality, for less money. We believe that this imperative to provide more, and better, for less will become even more urgent in the years ahead, and to deliver those objectives governments will need the skills, resources, innovation and nimbleness of the private sector.

Following our review of the market, we held a Capital Markets Event in December 2021.  We described how Serco had evolved over the last seven years from being a collection of largely unrelated contracts, into a powerful and capable business with a well-proven Management Framework and Business-to-Government (B2G) operating platform which enabled us to address our chosen market of international government services and outperform our competitors.  Our Management Philosophy, and B2G platform are described in detail in our Annual Report.

Guidance for 2022

In our Capital Markets Day statement on 2 December, we provided our initial guidance for 2022.  Since then we have again seen the speed at which the impact of Covid-19 can change, as the Omicron variant spread rapidly in December and January.  As a consequence in the first weeks of 2022 there was high demand for Covid-19 testing services, while other parts of the group, such as transport, had lower volumes because of restrictions, or higher cost due to increased employee absence rates.  As case numbers decline, these effects are beginning to reverse, leaving our expectations for 2022 largely unchanged.

We expect a rapid wind-down of Covid-19 related services supplied to governments during 2022, which will have a significant impact on both revenue and profits.  We anticipate around £60m of net profit impacts that arose in 2021 will not recur in 2022, including the frontline bonus and People Fund contribution.  However, a large part of this reduction will be offset by growth in other parts of the business as a result of the very strong order intake in 2021.  We have also had a strong start to 2022, with order intake of over £600m and trading consistent with our full-year guidance.  We have been awarded the contract to manage the new HMP Glen Parva prison on behalf the UK Ministry of Justice which we expect to generate revenue of over £300m during the 10-year term; we have also seen strong order intake in the US, and our new WBB business has won important pieces of work.  In addition, the US Navy has announced the award to Serco of the Ship Acquisition Programme / Project Management (SHAPM) contract, which has an expected value of over £200m; this award has not been included in our order intake as it has been protested by a competitor.  In January the US Government Accountability Office (GAO) upheld our protest against the award of the SEA21 contract to a competitor, and we have subsequently been awarded an extension of the existing contract. 

Serco is well-protected from inflationary effects as the great majority of our contracts have either indexation provisions or are spot-priced under framework contracts.  In our budgeting we assumed low-single digit indexation impacts, and whilst, since then, inflation expectations have increased, so would tend to increase revenues, they will tend to also result in higher costs, leaving the effect on profits broadly neutral.  We have not at this stage increased our revenue guidance to reflect what may be slightly higher indexation benefits, but we will have a better idea of the actual levels of indexation achieved at the half year.

Revenue in 2022 is expected to be £4.1bn-£4.2bn, approximately 6% lower than the £4.4bn in 2021.  This assumes a 1% contribution from acquisitions and a neutral currency impact.  We expect lower demand for Covid-19 related services in 2022 to reduce our revenue by approximately 13%, with organic growth on non-Covid work to be around 5%, in-line with our new medium-term growth targets. 

Underlying Trading Profit (UTP) in 2022 is expected to be around £195m.  As well as the impact of reduced Covid-19 revenues noted above, UTP will be reduced by the ending of the AWE and Dubai Metro contracts; we also expect the increase in National Insurance employers' contributions in the UK to cost around £5 million on an annualised basis.  The impact of these factors is cushioned by the positive effect of new work secured in 2021, such as the DWP Restart Programme and the Defence Infrastructure Organisation contracts moving into profitability, as well as the ending of our accelerated investment programme, and the beneficial impact of the efficiencies we will derive from these investments in 2022.  In terms of wider cost increases, the business has robust mitigation of the impact of inflation as the great majority of contracts have either indexation provisions or the ability to re-price work orders at the time they are contracted.

Net finance costs and tax: Net finance costs are expected to be around £25m, slightly higher than 2021.  The underlying effective tax rate is expected to continue at around 25%, although this is sensitive to the geographic mix of our profit and any changes to current corporate tax rates.

Financial position: Free cash flow is expected to remain strong at around £100m, lower than 2021 reflecting the reduced profitability and more normal working capital absorption following the reduction of Covid-19 services which had beneficial payment terms. We expect Adjusted Net Debt to end the year at around £160m.

Returns to shareholders: Although it is anticipated earnings will reduce in 2022, it is our intention continue on our path of increasing dividends to shareholders as part of our policy of progressively reducing dividend cover towards 3x over the coming years.  The Board will keep future buybacks under review in line with our capital allocation framework and target leverage of 1-2x net debt to EBITDA.

Summary and concluding thoughts

There is a sense of déjà vu in writing this report, because we start 2022 with the same expectation as we did 2021: that life will return to normal during the first half as the impact of Covid faded and became something of the past not the present.  These hopes, dashed by successive waves of infection and Omicron in 2021, seem better founded at the start of 2022 as the vile virus appears to be behaving like its predecessors in decades past in that successive variants tend to be more infectious but less lethal.  More like flu; more endemic than pandemic; something we can live with rather than having to hide from .

And reporting on the results of a single year - 2021 - also permits the eye to look further back.  A single year of strong performance might be a blip; two, even, good fortune.  But the fact that since 2017, Serco's revenues have grown at a compound rate of 11%, and profits by 35%, and that over that extended period we have taken £20bn of orders against £17bn of sales, in a market growing at around 3% per year, suggests that there is something afoot other than blips and luck.

There is a saying that "even turkeys can fly in a hurricane".  And the revenues we have won providing services to governments related to Covid have certainly been a strong tail wind.  But our Management Framework, combined with our Business-to-Government Platform, enabled us to find, and then respond to those winds, to spread our wings, and fly to the aid of our government customers.  And even if you strip out all the recent Covid impact, the business has grown much faster than the market over the last five years.

We are pleased with the way our business model is delivering competitive advantage and differentiation; settled on our strategy of being a focused provider of services to governments; happy with our relationships with customers; delighted with the performance that the business has delivered over the past five years.  But there are two parts of our ecosystem that require careful navigation. 

The first is labour markets; worldwide, we employ more than 50,000 people, and handle around 400,000 job applications a year.  Our business is providing people based-services enabled by technology to governments, and for many years the relationship, the rules of the road, between people who wanted to work and companies who needed to employ them was stable and well understood.  Since Covid, that has no longer been the case, and we see far more difficult labour market conditions than certainly I, in 35 years managing businesses, have previously seen.  It is an international phenomenon, affecting all our markets, and seems to be driven by the experience of Covid causing some people to reconsider the way they think about work.  Some have retired early; some have returned to their home countries; some have found working from home more congenial than travelling to the office; some are fearful of Covid at work; some are caring for relatives or suffering from long-Covid; some, having saved money during lockdowns, have gone walkabout.  Whatever the reason, at the moment it is hard to recruit and retain people.  Hard and frustrating, but not impossible, as the fact that over the last two years we have recruited and managed around 100,000 direct and indirect employees, and the millions of pounds we have invested in the last year in systems to support workforce efficiency and improved HR systems are helping us to manage through what we believe will be a largely temporary phenomenon until the demand and supply side of labour markets find a new equilibrium.

The other part of our eco-system that is complicated to navigate is ESG, to which we devote a significant amount of senior management time.  A company that has been writing Corporate Responsibility Reports since 2003; whose daily work is helping governments to deliver vital public services, often to the most disadvantaged and vulnerable in society; and whose stated purpose is to be a "valued and trusted partner of governments, delivering superb public services, that transform outcomes and make a positive difference for our fellow citizens", is one that clearly "gets" ESG.  On Environment and Governance, by any measure we have a good narrative.  What is required by stakeholders for them to make informed judgements is reasonably clear, and getting clearer by the year with the introduction of recommendations such as the Taskforce on Climate-Related Disclosures, which we are adopting in our 2021 Annual Report, as well as public company regulatory reporting requirements. 

It is on the "Social" side, which is such an integral part of what we do as a provider of services to government, where we face the most scrutiny, and where there is least consensus on standards to which we can adhere and against which stakeholders can judge us.  Perhaps this is because as greater standardisation applies to the Environmental and Governance dimensions, there is more divergence on the Social dimension; as a consequence we are faced by a wide range of strongly-held, but different, opinions and interpretations of various standards, and a company's Social Value appears to be in the eye of the individual analyst or institution who beholds it.  In August 2021 the CFA Institute published some timely research ( ESG Ratings: Navigating Through the Haze) which shows that on financial measures, such as debt ratings, there was a correlation of around 95% between the main ratings agencies; on ESG matters, the same agencies on the same companies, the correlation was mostly less than 50% in their scoring, and between some of the largest, less than 30%.  In other words, almost none, and certainly not a basis from which we can distil a common view or consensus.

To us, the question of whether what we do has social value is quite straightforward and obvious because of the nature of our customers.  The overwhelming majority of our work is at the instruction of democratically-elected governments, who are signatories to international conventions on social issues and who operate alongside strong legal systems.  If they ask us to do work which is lawful and which they consider is socially useful, we do not think it is for us, as a mere corporate, to second-guess that judgement, except in exceptional circumstances.  And that applies to work in areas which some consider contentious such as justice, immigration and defence.  We rather scratch our heads at institutions who think it is consistent to trade in government bonds, but screen out companies on ESG grounds who do work for the self-same governments and financed by the self-same bonds; and those who regard democracy and law as social goods, but prefer their own institution's interpretation of social value to those of elected governments.

However, our job is to navigate with the world as it is, not as we would like it to be.  We want to ensure that we are within the universe of investible companies of as many funds as possible, but the lack of consistency in how investors judge companies on the social dimension of ESG can make it feel like we are chasing rainbows.  Our approach, therefore, is to get on with our work serving governments, helping them to do the hard things citizens (and investors) expect them to do, and to try and make a positive difference to society whilst treating our colleagues, suppliers and communities with the care and respect they deserve.  And we recognise a responsibility to be transparent about the work we do and respond constructively and helpfully to requests for information so that investors and other stakeholders can make informed judgements.

For us the most important thing is that our customers and our colleagues, who best know the work we do, believe we are doing a good job delivering public services and, by extension, social value.  On the first, order intake in the last five years of over £20bn, £3bn more than our revenues, and the fact that our revenues from governments are growing faster than the market, suggests that our customers think we are doing a good job.  On the second, we have an objective measure to rely on through our annual Viewpoint surveys, to which around 30,000 Serco people respond each year; the vast majority of respondents say they are proud to work for Serco and they feel their work at Serco makes a positive difference.

In conclusion, we think that Serco's record over the last five years is proof positive that our strategy of being a focused supplier of services to governments, organising ourselves around our Management Framework, and using our B2G platform to win and deliver business, has worked well.  Our unique operating platform differentiates us from our competitors and gives us agility, reach, breadth, efficiency and resilience; these things have helped us deliver our objectives of winning good business, executing brilliantly, making Serco a place people are proud to work, and delivering profits that are sustainable.  We believe they will continue to do so over the coming years, and will enable us to deliver a combination of revenues growing faster than the market, profits growing faster than revenues, and shareholder returns growing faster than profits, and all the while being a company that delivers social value through excellent public services which deliver value for money for taxpayers.

Rupert Soames

Group Chief Executive

Serco - and proud of it.

 

Divisional Reviews

Serco's operations are reported as four regional divisions: UK & Europe (UK&E); the Americas; the Asia Pacific region (AsPac); and the Middle East.  Reflecting statutory reporting requirements, Serco's share of revenue from its joint ventures and associates is not included in revenue, while Serco's share of joint ventures and associates' profit after interest and tax is included in Underlying Trading Profit (UTP).  As previously disclosed and for consistency with guidance, Serco's UTP measure excludes contract & balance sheet review adjustments, which were, in any case, immaterial in the period.

Year ended 31 December 2021 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	2,131.6	1,120.0	908.4	264.6	-	4,424.6
Change	+20%	+5%	+26%	(18%)		+13.9%
Change at constant currency	+20%	+12%	+24%	(13%)		+15.8%
Organic change at constant currency	+20%	+2%	+8%	(13%)		+10.1%
UTP	96.0	117.8	51.3	13.7	(49.9)	228.9
Margin	4.5%	10.5%	5.6%	5.2%	(1.1%)	5.2%
Change	130bps	105bps	111bps	89bps	-7bps	97bps
Contract & Balance Sheet Review adjustments	1.3	-		-	-	1.3
Other one-time items	2.5	-	0.7	-	-	3.2
Trading Profit/(Loss)	99.8	117.8	52.0	13.7	(49.9)	233.4
Amortisation of intangibles arising on acquisition	(0.8)	(11.7)	(3.5)	-	-	(16.0)
Operating profit/(loss) before exceptionals	99.0	106.1	48.5	13.7	(49.9)	217.4

Year ended 31 December 2020 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	1,777.4	1,064.3	718.9	324.2	-	3,884.8
UTP	57.0	100.8	32.6	13.9	(41.2)	163.1
Margin	3.2%	9.5%	4.5%	4.3%	(1.1%)	4.2%
Contract & Balance Sheet Review adjustments	5.8	-	-	-	-	5.8
Other one-time items	6.8	-	-	-	-	6.8
Trading Profit/(Loss)	69.6	100.8	32.6	13.9	(41.2)	175.7
Amortisation of intangibles arising on acquisition	(2.0)	(7.0)	-	-	-	(9.0)
Operating profit/(loss) before exceptionals	67.6	93.8	32.6	13.9	(41.2)	166.7

The trading performance and outlook for each Division are described on the following pages.  Reconciliations and further detail of financial performance are included in the Finance Review on pages 18-32.  This includes full definitions and explanations of the purpose of each non-IFRS Alternative Performance Measure (APM) used by the Group.  The Condensed Consolidated Financial Statements and accompanying notes are on pages 33-69.  Included in note 2 to the Group's Consolidated Financial Statements are the Group's policies on recognising revenue across the various revenue streams associated with the diverse range of goods and services discussed within the Divisional Reviews.  The various revenue recognition policies are applied to each individual circumstance as relevant, taking into account the nature of the Group's obligations under the contract with the customer and the method of delivering value to the customer in line with the terms of the contract.
 

UK & Europe (48% of revenue, 34% of Underlying Trading Profit⁽⁷⁾)

Year ended 31 December £m	2021	2020	Growth
Revenue	2,131.6	1,777.4	20%
Organic change	20%	31%
Acquisitions	0%	0%
Currency	0%	0%
Underlying Trading Profit	96.0	57.0	68%
Organic change	68%
Acquisitions	1%
Currency	(1)%
Margin	4.5%	3.2%	130bps

Revenue grew by 20% to £2,132m (2020: £1,777m), with the increase being almost entirely organic.  All our sectors grew with Citizen Services and Justice & Immigration delivering the strongest growth. Growth in Citizen Services was particularly strong due to Covid-19 related work, which included providing support services for approaching 300 Covid-19 regional, local and mobile test centres as well as for the UK Tracing programme.  We delivered around 25% of the UK's Pillar 2 Testing facilities, facilitating over 21 million tests since the start of the programme.  Justice & Immigration also increased revenues, in part because of a full 12 months of the new Prisoner Escorting Contract, and also as a result of increased numbers of asylum seekers under our care.

Underlying Trading Profit increased to £96m (2020: £57m), representing a margin of 4.5% (2020: 3.2%).  Increased volumes and efficient scaling of platform costs supported the margin improvement, as did signs of improvement in those parts of our business that were badly affected in 2020 by Covid-19, notably Leisure and Transport.

Underlying Trading Profit includes the profit contribution of joint ventures and associates, from which interest and tax have already been deducted. If the proportional share of revenue from joint ventures and associates was included and the share of interest and tax cost was excluded, the overall divisional margin would have been 4.2% (2020: 2.8%).  The joint venture and associate profit contribution was lower at £9m (2020: £13m), as a result of the cessation of our Atomic Weapons Establishment contract at the end of June 2021 and some mobilistion expenses related to our new VIVO joint venture.

The UK & Europe division's order intake was strong at around £3.4bn, a book-to-bill ratio of 1.6x and around 60% of the total intake for the Group.  Agreements signed included contracts from the Defence Infrastructure Organisation (DIO) awarded to our VIVO JV with Engie, which we estimate will have a value in aggregate to Serco of £1.9bn over their initial seven-year term.  The contracts include the maintenance of some 200 military sites, 19,000 buildings and around 20,000 homes. The order intake also includes our DWP Restart contract, which has an estimated value of £350m and our Covid-19 Testing Centres contract award, which we value at £190m.

Despite such a strong period for order intake, the pipeline remains healthy, with significant new opportunities across Defence, Space and Justice & Immigration including for new prison operations.

Americas (25% of revenue, 42% of Underlying Trading Profit⁽⁷⁾)

Year ended 31 December £m	2021	2020	Growth
Revenue	1,120.0	1,064.3	5%
Organic change	2%	1%
Acquisitions	10%	17%
Currency	(7)%	(1)%
Underlying Trading Profit	117.8	100.8	17%
Organic change	14%
Acquisitions	11%
Currency	(8)%
Margin	10.5%	9.5%	105bps

Revenue grew by 5% to £1,120m (2020: 1,064m), with organic growth of 2% and an acquisition contribution of 10% being partially offset by a 7% adverse translational effect of currency.  The acquisition growth came from WBB, a leading provider of advisory, engineering and technical services to the US Department of Defense.  This acquisition completed at the end of April and contributed £106m to revenues in the year at constant currency.  The two main sectors for our Americas business are Defence and Citizen Services.  Excluding WBB, our Defence business was stable in the year, with growth being held back by continued delays in the award of new contracts.  Citizen Services saw good growth supported by increased demand for our case management services.

Underlying Trading Profit growth outpaced revenue growth, increasing by 17% to £118m (2020: £101m).  Excluding the adverse currency movement of £8m, UTP growth at constant currency was 25%.  Margins increased from 9.5% to 10.5%, due to a strong performance in the existing business and the acquisition of WBB, which has slightly higher margins than the overall division.  WBB contributed around £12m of the growth and we saw improved profit contribution in our existing business from contracts in the Defence and Citizen Services sectors as well as £3m of profit on sale from the divestment of our US parking business.

Order intake was £1.3bn, approximately 25% of the total for the Group and a book-to-bill ratio of approaching 1.2x, despite Covid-19 having led to a backlog of awards and delays in new tenders.  We successfully rebid our contract to provide support services at the 5 Wing Canadian Forces Base in Goose Bay, Canada, with an estimated ceiling value of around C$700m or £400m over the initial 10-year period.  We also successfully rebid our Anti-Terrorism / Force Protection (ATFP) framework contract for US Naval Facilities, which we estimate will be worth approximately £110m over eight years. New business wins totalled in the region of £450m, across a range of contracts, primarily in the defence sector.

The pipeline of major new bid opportunities due for decision within the next 24 months in the Americas remains at more than £2bn with the past year having seen a combination of new opportunities joining the pipeline and award decisions being delayed due to Covid-19.  Defence makes up the bulk of the Americas pipeline, with a broad spread of types of work, and Citizen Services opportunities represent the remainder.

Asia Pacific (21% of revenue, 18% of Underlying Trading Profit⁽⁷⁾)

Year ended 31 December £m	2021	2020	Growth
Revenue	908.4	718.9	26%
Organic change	8%	18%
Acquisitions	15%	0%
Currency	3%	(2)%
Underlying Trading Profit	51.3	32.6	57%
Organic change	34%
Acquisitions	20%
Currency	3%
Margin	5.6%	4.5%	111bps

Revenue increased by 26% to £908m (2020: £719m).  Organic growth was 8% of the increase, with nearly all sectors showing growth.  There was particularly strong growth in the Justice & Immigration, Citizen Services and Defence sectors.  In Justice & Immigration we experienced increased demand for our immigration services partly as a result of the Covid-19 response, and saw increased revenues from Clarence Correctional Centre, where operations commenced in July 2020.  Growth in Defence was supported by the successful delivery of Australia's new Antarctic research icebreaker vessel, RSV Nuyina.  The acquisition of Facilities First added £110m, or 15%, to revenues, having completed at the beginning of January.  Currency movements added 3% to reported revenue growth.

Underlying Trading Profit increased by 57% to £51m (2020: £33m), representing a margin of 5.6% (2020: 4.5%). Excluding the favourable currency movement of £1m, growth at constant currency was 54%.  Facilities First generated profit of £6m, in line with expectations in the first year of our ownership, while our Citizen Services and Justice & Immigration businesses increased both volumes and margins.

Order intake was £0.6bn, around 10% of the Group total.  Having had significant success in recent years, it was a quiet period for securing new work.  We did however have a very high rate of success of retaining existing work; our Immigration Services contract was extended to December 2023 and our contracts to provide contact centre services to the Australian Tax Office and to Services Australia were extended to July 2022.

Our pipeline for new business increased significantly in the year, with new opportunities in the Citizen Services, Health and Defence sectors.

Middle East (6% of revenue, 5% of Underlying Trading Profit ⁽⁷⁾)

Year ended 31 December £m	2021	2020	Growth
Revenue	264.6	324.2	(18)%
Organic change	(13)%	(7)%
Acquisitions	0%	0%
Currency	(5)%	(1)%
Underlying Trading Profit	13.7	13.9	(1)%
Organic change	1%
Acquisitions	0%
Currency	(2)%
Margin	5.2%	4.3%	89bps

Revenue fell by 18% to £265m (2020: £324m).  Adverse currency moves contributed 5% of the decline, with the remaining 13% being an organic decline largely as a result of the end of our contract to operate the Dubai Metro, which we exited in September, and the ongoing impact of Covid-19 on the Transport and Health and other Facilities Management sectors. Covid-19 response work included a short-term contract to provide tracing services.

Despite the sharp revenue contraction, Underlying Trading Profit was stable at £14m (2020: £14m).  This favourable profit outcome was driven by a strong performance in Citizen Services and Defence as well as good cost control in the areas where we experienced subdued demand.  Margins increased from 4.3% to 5.2% as a result.

Order intake was around £0.2bn, or 3% of the total for the Group. The majority of this was new business and included services at Dubai Airport, where demand has been increasing following its reopening.

Our pipeline of major new bid opportunities in the Middle East, which had been limited at the start of 2021, increased significantly over the year.  It includes work in the Transport and Citizen Services sectors.

Corporate costs

Corporate costs relate to typical central function costs of running the Group, including executive, governance and support functions such as HR, finance and IT.  Where appropriate, these costs are stated after allocation of recharges to operating divisions.  The costs of Group-wide programmes and initiatives are also incurred centrally.

Corporate costs increased by £8.7m to £49.9m (2020: £41.2m).  The higher level resulted from increased investment, as we took the opportunity of the strong financial performance to accelerate spending on our systems and processes, a one-off commitment to our recently established Serco People Fund and the normalisation of LTIP costs and provisions, which were lower than usual in 2020. 

Dividend calendar, if approved at the AGM

Ex-dividend date 12 May 2022

Record date 13 May 2022

Final dividend payable 7 June 2022

LEI code: 549300PT2CIHYN5GWJ21

Finance Review

For the year ended 31 December 2021	Underlying £m	Non- underlying items £m	Trading £m	Amortisation and impairment of intangibles arising on acquisition £m	Statutory pre-exceptional £m	Exceptional items £m	Statutory £m
Revenue	4,424.6	-	4,424.6	-	4,424.6	-	4,424.6
Cost of sales	(3,961.1)	4.5	(3,956.6)	-	(3,956.6)	-	(3,956.6)
Gross profit	463.5	4.5	468.0	-	468.0	-	468.0
Administrative expenses	(243.3)	-	(243.3)	-	(243.3)	-	(243.3)
Other exceptional operating items	-	-	-	-	-	(1.2)	(1.2)
Other expenses	-	-	-	(16.0)	(16.0)	-	(16.0)
Share of profits in joint ventures and associates, net of interest and tax	8.7	-	8.7	-	8.7	-	8.7
Profit before interest and tax	228.9	4.5	233.4	(16.0)	217.4	(1.2)	216.2
Margin	5.2%		5.3%		4.9%		4.9%
Net finance costs	(24.0)	-	(24.0)	-	(24.0)	-	(24.0)
Profit before tax	204.9	4.5	209.4	(16.0)	193.4	(1.2)	192.2
Tax (charge)/credit	(48.6)	156.2	107.6	4.3	111.9	(0.2)	111.7
Effective tax rate	23.7%		(51.4%)		(57.9%)		(58.1%)
Profit for the period	156.3	160.7	317.0	(11.7)	305.3	(1.4)	303.9
Minority interest	-		-		-		-
Earnings per share - basic (pence)	12.78		25.93		24.97		24.86
Earnings per share - diluted (pence)	12.56		25.48		24.54		24.43

For the year ended 31 December 2020	Underlying £m	Non- underlying items £m	Trading £m	Amortisation and impairment of intangibles arising on acquisition £m	Statutory pre- exceptional £m	Exceptional items £m	Statutory £m
Revenue	3,884.8	-	3,884.8	-	3,884.8	-	3,884.8
Cost of sales	(3,514.4)	12.6	(3,501.8)	-	(3,501.8)	-	(3,501.8)
Gross profit	370.4	12.6	383.0	-	383.0	-	383.0
Administrative expenses	(220.0)	-	(220.0)	-	(220.0)	-	(220.0)
Exceptional profit on disposal of subsidiaries and operations	-	-	-	-	-	11.0	11.0
Other exceptional operating items	-	-	-	-	-	1.5	1.5
Other expenses	-	-	-	(9.0)	(9.0)	-	(9.0)
Share of profits in joint ventures and associates, net of interest and tax	12.7	-	12.7	-	12.7	-	12.7
Profit before interest and tax	163.1	12.6	175.7	(9.0)	166.7	12.5	179.2
Margin	4.2%		4.5%		4.3%		4.6%
Net finance costs	(25.9)	-	(25.9)	-	(25.9)	-	(25.9)
Profit before tax	137.2	12.6	149.8	(9.0)	140.8	12.5	153.3
Tax (charge)/credit	(31.2)	10.5	(20.7)	1.8	(18.9)	(0.4)	(19.3)
Effective tax rate	22.7%		13.8%		13.4%		12.6%
Profit for the period	106.0	23.1	129.1	(7.2)	121.9	12.1	134.0
Minority interest	0.2		0.2		0.2		0.2
Earnings per share - basic (pence)	8.61		10.49		9.90		10.89
Earnings per share - diluted (pence)	8.43		10.28		9.70		10.67

Alternative Performance Measures (APMs) and other related definitions

Overview

APMs used by the Group are reviewed below to provide a definition and reconciliation from each non-IFRS APM to its IFRS equivalent, and to explain the purpose and usefulness of each APM.

In general, APMs are presented externally to meet investors' requirements for further clarity and transparency of the Group's financial performance. The APMs are also used internally in the management of our business performance, budgeting and forecasting, and for determining Executive Directors' remuneration and that of other Management throughout the business.

APMs are non-IFRS measures. Where additional revenue is being included in an APM, this reflects revenues presented elsewhere within the reported financial information, except where amounts are recalculated to reflect constant currency. Where items of profits or costs are being excluded in an APM, these are included elsewhere in our reported financial information as they represent actual profits or costs of the Group, except where amounts are recalculated to reflect constant currency. As a result, APMs allow investors and other readers to review different kinds of revenue, profits and costs and should not be used in isolation. Other commentary within the Strategic Report, including the other sections of this Finance Review, as well as the Consolidated Financial Statements and their accompanying notes, should be referred to in order to fully appreciate all the factors that affect our business. We strongly encourage readers not to rely on any single financial measure, but to carefully review our reporting in its entirety.

The methodology applied to calculating the APMs has not changed since 31 December 2020.

Alternative revenue measures

Reported revenue at constant currency

Reported revenue, as shown on the Group's Consolidated Income Statement on page 33, reflects revenue translated at the average exchange rates for the period. In order to provide a comparable movement on the previous year's results, reported revenue is recalculated by translating non-Sterling values for the year to 31 December 2021 into Sterling at the average exchange rates for the year ended 31 December 2020.

For the year ended 31 December	2021 £m
Reported revenue at constant currency	4,497.6
Foreign exchange differences	(73.0)
Reported revenue at reported currency	4,424.6

Organic Revenue at constant currency

Reported revenue may include revenue generated by businesses acquired during a particular year from the date of acquisition and/or generated by businesses sold during a particular year up to the date of disposal. In order to provide a comparable movement which ignores the effect of both acquisitions and disposals, Organic Revenue at constant currency is recalculated by excluding the impact of any relevant acquisitions or disposals.

There are three acquisitions excluded for the calculation of Organic Revenue in the year to 31 December 2021 being the acquisitions of Facilities First Australia Holdings Pty Ltd, Whitney, Bradley & Brown, Inc and Mercurius Finance S.A.. The acquisitions completed on 4 January 2021, 27 April 2021 and 30 June 2021 respectively.

The Group also disposed of its interest in its Viapath joint venture on 31 May 2020, however no adjustment is required to Organic Revenue since the joint venture results were accounted for on an equity accounting basis and therefore had no impact on Group revenue.

Organic Revenue growth is calculated by comparing the current year Organic Revenue at constant currency exchange rates with the prior year Organic Revenue at reported currency exchange rates.

For the year ended 31 December	2021 £m
Organic Revenue at constant currency	4,277.1
Foreign exchange differences	(68.3)
Organic Revenue at reported currency	4,208.8
Impact of any relevant acquisitions or disposals	215.8
Reported revenue at reported currency	4,424.6

 

For the year ended 31 December	2020 £m
Organic Revenue at reported currency	3,884.8
Impact of any relevant acquisitions or disposals	-
Reported revenue at reported currency	3,884.8

Revenue plus share of joint ventures and associates

Reported revenue, as shown on the Group's Consolidated Income Statement on page 33, excludes the Group's share of revenue from joint ventures and associates, with Serco's share of profits in joint ventures and associates (net of interest and tax) consolidated within reported operating profit as a single line in the Consolidated Income Statement. The alternative measure includes the share of joint ventures and associates for the benefit of reflecting the overall change in scale of the Group's ongoing operations, which is particularly relevant for evaluating Serco's presence in market sectors such as Defence and Transport. The alternative measure allows the performance of the joint venture and associate operations themselves, and their impact on the Group as a whole, to be evaluated on measures other than just the post-tax result.

For the year ended 31 December	2021 £m	2020 £m
Revenue plus share of joint ventures and associates	4,663.0	4,249.9
Exclude share of revenue from joint ventures and associates	(238.4)	(365.1)
Reported revenue	4,424.6	3,884.8

Alternative profit measures

For the year ended 31 December	2021 £m	2020 £m
Underlying Trading Profit	228.9	163.1
Non-underlying items:
OCP charges and releases	1.3	5.8
Other Contract & Balance Sheet Review adjustments and one-time items	3.2	6.8
Total non-underlying items	4.5	12.6
Trading Profit	233.4	175.7
Operating exceptional items	(1.2)	12.5
Amortisation and impairment of intangibles arising on acquisition	(16.0)	(9.0)
Operating profit	216.2	179.2

Underlying Trading Profit (UTP)

The Group uses an alternative measure, Underlying Trading Profit, to make adjustments for unusual items that occur and to remove the impact of historical issues. UTP therefore provides a measure of the underlying performance of the business in the current year.

Charges and releases on all Onerous Contract Provisions (OCPs) that arose during the 2014 Contract & Balance Sheet Review are excluded from UTP in the current and prior years. Charges associated with the creation of new OCPs identified are included within UTP to the extent that they are not considered sufficiently material to require separate disclosure on an individual basis. During the period, net charges on new and existing OCPs of £1.3m (2020: £5.6m) were taken within UTP. OCPs reflect the future multiple year cost of delivering onerous contracts and do not reflect only the current cost of operating the contract in the latest individual year. It should be noted that, as for operating profit, UTP benefits from OCP utilisation of £0.3m in 2021 (2020: £1.8m).

Revisions to accounting estimates and judgements which arose during the 2014 Contract & Balance Sheet Review are reported alongside other one-time items where the impact of an individual item is material. Items recorded within this category during 2021 are a settlement received relating to a judgement made as part of the 2014 Contract & Balance Sheet Review and releases of provisions held against possible contractual requirements that could have required settlement by the Group, but which have now exceeded the period during which such a claim against the Group can be made.

Both OCP adjustments and other Contract & Balance Sheet Review and one-time items are identified and separated from the APM in order to give clarity of the underlying performance of the Group and to separately disclose the progress made on these items.

Underlying trading margin is calculated as UTP divided by statutory revenue.

The non-underlying column in the summary income statement on page 18 includes the tax impact of the above items and tax items that, in themselves, are considered to be non-underlying. Further detail of such items is provided in the tax section below.

Trading Profit

The Group uses Trading Profit as an alternative measure to operating profit, as shown on the Group's Consolidated Income Statement on page 33, by making two adjustments.

First, Trading Profit excludes exceptional items, being those considered material and outside of the normal operating practices of the Group to be suitable for separate presentation and detailed explanation.

Second, amortisation and impairment of intangibles arising on acquisitions are excluded, because these charges are based on judgements about the value and economic life of assets that, in the case of items such as customer relationships, would not be capitalised in normal operating practice.

UTP at constant currency

UTP disclosed above has been translated at the average foreign exchange rates for the year. In order to provide a comparable movement on the previous year's results, UTP is recalculated by translating non-Sterling values for the year to 31 December 2021 into Sterling at the average exchange rate for the year ended 31 December 2020.

For the year ended 31 December	2021 £m
Underlying Trading Profit at constant currency	235.8
Foreign exchange differences	(6.9)
Underlying Trading Profit at reported currency	228.9

Alternative Earnings Per Share (EPS) measures

For the year ended 31 December	2021 pence	2020 pence
Underlying EPS, basic	12.78	8.61
Net impact of non-underlying items and amortisation and impairment of intangibles arising on acquisition	12.19	1.29
EPS before exceptional items, basic	24.97	9.90
Impact of exceptional items	(0.11)	0.99
Reported EPS, basic	24.86	10.89

For the year ended 31 December	2021 Pence	2020 pence
Underlying EPS, diluted	12.56	8.43
Net impact of non-underlying items and amortisation and impairment of intangibles arising on acquisition	11.98	1.27
EPS before exceptional items, diluted	24.54	9.70
Impact of exceptional items	(0.11)	0.97
Reported EPS, diluted	24.43	10.67

Underlying EPS

Reflecting the same adjustments made to operating profit to calculate UTP as described above and including the related tax effects of each adjustment and any other non-underlying tax adjustments as described in the tax charge section below, an alternative measure of EPS is presented. This aids consistency with historical results and enables performance to be evaluated before the unusual or one-time effects described above. The full reconciliation between statutory EPS and Underlying EPS is provided in the summary income statements on page 18.

EPS before exceptional items

EPS, as shown on the Group's Consolidated Income Statement on page 33, includes exceptional items charged or credited to the income statement in the year. EPS before exceptional items aids consistency with historical operating performance.

Alternative cash flow and Net Debt measures

Free Cash Flow (FCF)

We present an alternative measure for cash flow to reflect cash flow from operating activities before exceptional items, which is the measure shown on the Consolidated Cash Flow Statement on page 37. This IFRS measure is adjusted to include dividends we receive from joint ventures and associates and exclude net interest paid, the capital element of lease payments and net capital expenditure on tangible and intangible asset purchases.

For the year ended 31 December	2021 £m	2020 £m
Free Cash Flow	189.5	134.9
Exclude dividends from joint ventures and associates	(13.5)	(19.8)
Exclude net interest paid	24.3	24.6
Exclude capitalised finance costs paid	0.6	0.9
Exclude capital element of lease repayments	111.3	100.8
Exclude proceeds received from exercise of share options	(0.2)	(0.1)
Exclude purchase of own shares to satisfy share awards	20.3	-
Exclude purchase of intangible and tangible assets net of proceeds from disposal	25.1	29.2
Cash flow from operating activities before exceptional items	357.4	270.5
Exceptional operating cash flows	(7.5)	(2.0)
Cash flow from operating activities	349.9	268.5

UTP cash conversion

FCF as defined above, includes interest and tax cash flows. In order to calculate an appropriate cash conversion metric equivalent to UTP, Trading Cash Flow is derived from FCF by excluding tax and interest items. UTP cash conversion therefore provides a measure of the efficiency of the business in terms of converting profit into cash before taking account of the impact of interest, tax and exceptional items.

For the year ended 31 December	2021 £m	2020 £m
Free Cash Flow	189.5	134.9
Add back:
Tax paid	42.1	35.9
Non-cash R&D expenditure	-	0.1
Net interest paid	24.3	24.6
Capitalised finance costs paid	0.6	0.9
Trading Cash Flow	256.5	196.4
Underlying Trading Profit	228.9	163.1
Underlying Trading Profit cash conversion	112%	120%

Net Debt and Adjusted Net Debt

We present an alternative measure to bring together the various funding sources that are included on the Group's Consolidated Balance Sheet on page 36 and in the accompanying notes. Net Debt is a measure to reflect the net indebtedness of the Group and includes all cash and cash equivalents and any debt or debt-like items, including any derivatives entered into in order to manage risk exposures on these items. Net Debt includes all lease liabilities, whilst Adjusted Net Debt is derived from Net Debt by excluding liabilities associated with leases.

The Adjusted Net Debt measure was introduced because it more closely aligns to the Consolidated Total Net Borrowings measure used for the Group's debt covenants, which is prepared under accounting standards applicable prior to the adoption of IFRS 16 Leases.  Principally as a result of the Asylum Accommodation and Support Services Contract (AASC), the Group has entered into a significant number of leases which contain a termination option. The use of Adjusted Net Debt removes the volatility that would result from estimations of lease periods and the recognition of liabilities associated with such leases where the Group has the right to cancel the lease and hence the corresponding obligation. Though the intention is not to exercise the options to cancel the leases, it is available, unlike other debt obligations.

For the year ended 31 December	2021 £m	2020 £m
Cash and cash equivalents	198.4	335.7
Loans payable	(377.0)	(388.8)
Lease liabilities	(430.3)	(402.6)
Derivatives relating to Net Debt	0.6	(4.7)
Net Debt	(608.3)	(460.4)
Add back: Lease liabilities	430.3	402.6
Adjusted Net Debt	(178.0)	(57.8)

Pre-tax Return on Invested Capital (ROIC)

ROIC is a measure to assess the efficiency of the resources used by the Group and is one of the metrics used to determine the performance and remuneration of the Executive Directors. ROIC is calculated based on UTP and Trading Profit using the Group's Consolidated Income Statement for the year and a two-point average of the opening and closing balance sheets. The composition of Invested Capital and calculation of ROIC are summarised in the table below.

Invested Capital excludes right of use assets recognised under IFRS 16 Leases.  This is because the Invested Capital of the Group are those items within which resources are, or have been, committed, which is not the case for many leases which would previously have been classified as operating leases under IAS 17 Leases where termination options exist and commitments for expenditure are in future years.

For the year ended 31 December	2021 £m	2020 £m
ROIC excluding right of use assets
Non-current assets
Goodwill	852.7	669.6
Other intangible assets	144.0	80.6
Property, plant and equipment	55.5	54.2
Interest in joint ventures and associates	17.6	19.2
Contract assets, trade and other receivables	16.2	25.3
Current assets
Inventory	19.6	21.4
Contract assets, trade and other receivables	624.7	609.6
Total invested capital assets	1,730.3	1,479.9
Current liabilities
Contract liabilities, trade and other payables	(587.3)	(576.2)
Non-current liabilities
Contract liabilities, trade and other payables	(55.9)	(56.9)
Total invested capital liabilities	(643.2)	(633.1)
Invested Capital	1,087.1	846.8
Two-point average of opening and closing Invested Capital	967.0	855.5
Trading Profit	233.4	175.7
ROIC%	24.1%	20.5%
Underlying Trading Profit	228.9	163.1
Underlying ROIC%	23.7%	19.1%

Overview of financial performance

Revenue

Reported revenue increased by 13.9% in the year to £4,424.6m (2020: £3,884.8m), a 15.8% increase at constant currency. Organic revenue growth at constant currency was 10.1%. This is in line with the trading update issued on 15 November 2021 where revenue was expected to be £4.4bn for the year ended 31 December 2021.

Commentary on the revenue performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews sections.

Trading Profit

Trading Profit for the year was £233.4m (2020: £175.7m).

Commentary on the trading performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews sections.

Underlying Trading Profit

UTP was £228.9m (2020: £163.1m), up 40.3%. At constant currency, UTP was £235.8m, up 44.6%. This is in line with the trading update issued on 15 November 2021 where UTP was expected to be not less than £225m for the year ended 31 December 2021.

Commentary on the underlying performance of the Group is provided in the Chief Executive's Review and the Divisional Reviews sections.

Excluded from UTP were net releases from OCPs of £1.3m (2020: net releases of £5.8m) following the detailed reassessment undertaken as part of the budgeting process. Also excluded from UTP were net releases and additional profits of £3.2m (2020: net releases and additional profits of £6.8m) relating to items identified during the 2014 Contract & Balance Sheet Review and other one-time items.

The tax impact of items in UTP and other non-underlying tax items is discussed in the tax section of this Finance Review.

Joint ventures and associates - share of results

In 2021, the most significant joint ventures and associates in terms of scale of operations were AWE Management Limited (AWEML), prior to the handing back of the AWEML contract on 30 June 2021, and Merseyrail Services Holding Company Limited (Merseyrail), with dividends received of £13.5m (2020: £15.5m) and £nil (2020: £1.5m) respectively. Total revenues generated by these businesses were £638.7m (2020: £1,106.8m) and £161.0m (2020: £150.7m), respectively.

As announced on 2 November 2020, the Ministry of Defence notified the Group that it would be exercising its ability to terminate services provided by the Group through AWEML on 30 June 2021.

As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint venture between Serco Limited and ENGIE SA, has been awarded contracts to provide repairs and maintenance work for Service Family Accommodation (SFA) by the UK Ministry of Defence (MOD) Defence Infrastructure Organisation (DIO). VIVO is not a material joint venture to the Group in 2021.

While the revenues and individual line items are not consolidated in the Group's Consolidated Income Statement, summary financial performance measures for the Group's proportion of the aggregate of all joint ventures and associates are set out below for information purposes.

For the year ended 31 December	2021 £m	2020 £m
Revenue	238.4	365.1
Operating profit	11.5	15.4
Net finance cost	(0.1)	-
Income tax charge	(2.7)	(2.7)
Profit after tax	8.7	12.7
Dividends received from joint ventures and associates	13.5	19.8

The change in revenue and profits on the prior year is primarily due to the exit from the AWEML contract. Merseyrail continued to make losses during 2021, however these have reduced against prior year due to the lifting of Covid-19 measures resulting in increased passenger volumes.

Dividends received have also reduced due to the exit from the AWEML contractas well as the sale of Viapath which contributed £1.0m in dividends during 2020. Northern Rail and Hong Kong Parking also contributed £1.0m and £0.8m respectively in 2020. As Merseyrail recorded a loss in 2021, no dividends were received during the year. Future dividends received from the joint ventures are likely to take into consideration operating performance as a result of the pandemic and a requirement to maintain an appropriate level of cash resources within the entities given the impact of Covid-19, though most notably in respect of the Merseyrail joint venture.

Exceptional items

Exceptional items are items of financial performance that are outside normal operations and are material to the results of the Group either by virtue of size or nature. These require separate disclosure on the face of the income statement to assist in the understanding of the performance of the Group. In 2021, the total exceptional charge for the year net of tax was £1.4m (2020: gain of £12.1m).

The Group completed the acquisition of Facilities First Australia Holdings Pty Limited (FFA) and Whitney, Bradley & Brown, Inc (WBB) in 2021. The combined transaction and implementation costs incurred during the year ended 31 December 2021 of £4.9m have been treated as exceptional costs in line with the Group's accounting policy and the treatment of similar costs during the year ended 31 December 2020.

During 2021, the Group sold an investment recording a profit of £4.2m which was treated as exceptional in line with the Group's accounting policy.

The Group has recorded an additional £0.6m property provision related to the onerous lease of a building to cover the expected loss until March 2025. The building was vacated following the strategy review completed in 2014 and therefore the associated cost treated as exceptional.

Exceptional costs of £1.3m were recorded in 2020 associated with the UK Government review and the programme of Corporate Renewal. No such costs were incurred in the current financial year.

Exceptional tax

Exceptional tax for the period was a tax charge of £0.2m (2020: charge of £0.4m) which arises on exceptional items within operating profit.

The tax charge on exceptional costs has been increased as an element of the exceptional costs associated with the WBB acquisition were not allowable for tax. This is partially offset by previously unrecognised capital losses in Australia that were utilised against the gain arising on the sale of an investment reducing the charge.

Finance costs and investment revenue

Net finance costs were £24.0m (2020: £25.9m) and net interest paid was £24.3m (2020: £24.6m).

Investment revenue of £2.4m (2020: £1.9m) consists primarily of interest accruing on net retirement benefit assets of £1.1m (2020: £1.2m), dividends received of £0.6m (2020: £0.4m) and interest receivable of £0.6m (2020: £0.2m). 

The finance costs of £26.4m (2020: £27.8m) include interest incurred on the US private placement loan notes and the revolving credit facility of £15.6m (2020: £15.3m) and lease interest payable of £7.8m (2020: £9.5m) as well as other financing related costs including the impact of foreign exchange on financing activities.

Tax

Tax charge

Underlying tax

In 2021 we recognised a tax charge of £48.6m on underlying trading profits after net finance costs. The effective tax rate (23.7%) is slightly higher than in 2020 (22.7%). The increase compared with 2020, is primarily due to the recognition of deferred tax assets in the UK as discussed below. This means that utilisation of losses brought forward to offset current year profits does not reduce the tax rate in 2021 as it did in the prior year. Further, there has been a reduction in profits made by our joint ventures and associates whose post tax profits are included in our profit before tax. This is partially offset by a reduction in our expenses not deductible for tax together with the impact of movements in provisions as part of our regular reassessment of tax exposures across the Group.

Pre-exceptional tax

A tax credit of £111.9m (2020: £18.9m charge) on pre-exceptional profits has been recognised which includes an underlying tax charge of £48.6m, the tax impact of amortisation of intangibles arising on acquisition of £4.3m credit and a £156.2m credit on non-underlying items.

Of the £156.2m credit on non-underlying items, £157.2m relates to UK deferred tax. £144.8m of this credit arises from the recognition of deferred tax assets in relation to the Group's UK operations which have not previously been recognised as assets. It is now considered that the UK business has returned to sustainable profitability, and there is sufficient certainty of future taxable profits against which these deductions can be utilised to enable the recognition of an increased deferred tax asset. £10.8m of the UK deferred tax credit relates to the revaluation of the deferred tax asset at 1 January 2021, following the announcement in the UK Budget earlier this year that the tax rate in the UK is to increase in 2023 to 25% and £1.6m of the UK deferred tax credit relates to non-underlying movements in the deferred tax asset where the value of the asset has been impacted by factors outside of current period trading, such as changes in future forecasts. The remaining £1.0m non-underlying tax charge relates to tax on non-underlying income that is taxable.

The tax rate on profits before exceptional items at (57.9)% is lower than the UK standard corporation tax rate of 19.0%. This is mainly due to the impact of non-underlying tax items noted above (reducing rate by 81.3%) together with a reduction in provisions held for uncertain tax positions (reducing rate by 1.4%). As part of our regular reassessment of tax exposures across the Group, we have concluded that certain provisions are no longer likely to lead to an outflow of tax. The impact of this is only partially offset by higher statutory rates of tax being suffered on overseas profits (increasing rate by 5.8%).

Exceptional tax

Analysis of exceptional tax is provided within the exceptional items section above.

Deferred tax assets

At 31 December 2021 there is a net deferred tax asset of £174.0m (2020: £56.3m). This consists of a deferred tax asset of £214.3m (31 December 2020: £83.2m) and a deferred tax liability of £40.3m (31 December 2020: £26.9m).

A £162.8m UK tax asset is recognised on the Group's balance sheet at 31 December 2021 (31 December 2020: £30.6m) on the basis that improved performance in the underlying UK business indicates a sustained return to profitability which would enable accumulated tax losses within the UK to be utilised. The return to profitability is as a result of onerous contracts ending and new profitable long-term contracts being entered into, as well as a significant reduction in exceptional restructuring spend following the strategy review in 2015, which also reduced the level of overhead spend within the UK business.

Taxes paid

Net corporate income tax of £42.1m was paid during the year, relating primarily to our operations in AsPac (£24.4m), North America (£17.6m), Middle East (£1.2m), UK (£0.8m refund) and Europe (£0.3m net refund). The refund in the UK consists of £1.2m which was paid to HMRC net of £2.0m which was received in the period from our joint ventures and associates for 2019 losses sold to them. The refund in Europe relates to various overpayments of tax instalment payments which were refunded during the year.

The amount of tax paid (£42.1m) differs from the tax credit in the period (£111.9m) mainly due to the impact of the additional deferred tax assets recognised during the period. In addition, taxes paid/received from Tax Authorities can arise in later periods to the associated tax charge/credit, and there is a time lag on receipts of cash from joint ventures and associates for losses transferred to them resulting in a net tax inflow.

Total tax contribution

Our tax strategy of paying the appropriate amount of tax as determined by local legislation in the countries in which we operate, means that we pay a variety of taxes across the globe.  We have shown below the cash taxes that we have paid across our regional markets.

In total during 2021, Serco globally contributed £815.2m of tax to government in the jurisdictions in which we operate.

Taxes by category

For the year ended 31 December 2021	Taxes borne £m	Taxes collected £m	Total £m
Corporation tax	44.0	-	44.0
VAT and similar	8.5	246.6	255.1
People taxes	133.7	375.5	509.2
Other taxes	6.8	0.1	6.9
Total	193.0	622.2	815.2

 Taxes by region

For the year ended 31 December 2021	Taxes borne £m	Taxes collected £m	Total £m
UK & Europe	90.0	335.4	425.4
AsPac	49.0	184.7	233.7
Americas	51.3	98.7	150.0
Middle East	2.7	3.4	6.1
Total	193.0	622.2	815.2

Corporation tax, which is the only cost to be separately disclosed in our Consolidated Financial Statements, is only one element of our tax contribution.  For every £1 of corporate tax paid directly by the Group (tax borne), we bear a further £3.39 in other business taxes. The largest proportion of these is in connection with employing our people.

In addition, for every £1 of tax that we bear, we collect £3.22 on behalf of national governments (taxes collected).  This amount is directly impacted by the people that we employ and the sales that we make.

Dividends and share buyback

During the year to 31 December 2021, the Group has paid dividends of £26.5m (2020: £nil) in respect of the final dividend for the year ended 31 December 2020 and the interim dividend in respect of the six months ended 30 June 2021. As noted in the Chief Executive's Review, the Board has decided to declare a final dividend of 1.61p per share in respect of the year ended 31 December 2021 (2020: 1.4p per share).

Following the successful completion of the share buyback programme during 2021, in which 30.7m shares were repurchased at an average price including fees of 1.32p, the Group has announced its intention to commence a further share buyback of up to £90m. Consistent with the Group's capital allocation policy, the objective of the programme is to provide additional returns to shareholders as well as aid the Group in meeting its medium-term leverage targets. The buyback programme is expected to complete within 12 months with the shares either cancelled or held in Treasury.

Share count and EPS

The weighted average number of shares for EPS purposes was 1,222.6m for the year ended 31 December 2021 (2020: 1,229.1m) and diluted weighted average number of shares was 1,244.0m (2020: 1,254.3m).

The number of ordinary shares in issue has reduced during the year ended 31 December 2021 as a result of the Serco Share Repurchase Programme (the Programme). At the end of 2020, the Group announced its intention to repurchase ordinary shares with a value of up to £40m, subject to a maximum of 122,338,063 ordinary shares being purchased, during the period 4 January 2021 to 11 June 2021. Through the Programme, the Group repurchased 30,721,849 ordinary shares for total consideration of £40.7m including fees.

On 28 June 2021, the Group announced that, of the ordinary shares repurchased and held in Treasury, 15,350,000 were transferred to the Employee Share Ownership Trust to be used to satisfy awards granted under the Group's share award schemes. The 15,371,849 ordinary shares remaining in Treasury were cancelled on 28 June 2021.

Basic EPS before exceptional items was 24.97p per share (2020: 9.90p); including the impact of exceptional items, Basic EPS was 24.86p (2020: 10.89p). Basic Underlying EPS was 12.78p per share (2020: 8.61p).

Diluted EPS before exceptional items was 24.54p per share (2020: 9.70p); including the impact of exceptional items, Diluted EPS was 24.43p (2020: 10.67p). Diluted Underlying EPS was 12.56p per share (2020: 8.43p).

Cash flows

UTP of £228.9m (2020: £163.1m) converts into a trading cash inflow of £256.5m (2020: £196.4m). The improvement in 2021 trading cash flows reflects the increase in profitability from revenue and profit growth offset by £20.3m spent on the repurchase of the Group's own shares to satisfy share awards. The Group has delivered a working capital inflow which is better than expected as the working capital position on the Dubai Metro contract has unwound following its exit during the year. There also continues to be a focus on collections across the Group.

The table below shows the operating profit and Free Cash Flow (FCF) reconciled to movements in Adjusted Net Debt. FCF for the year was an inflow of £189.5m compared to £134.9 in 2020. The improvement in FCF is largely as a result of improved trading cash inflows, as discussed above.

Adjusted Net Debt has increased by of £120.2m in 2021, a reconciliation of which is provided at the bottom of the following table. The increase is due to £189.5m of free cash flow generated, offset by £234.9m of cash outflow related to acquisitions, £14.3m used to settle historic intercompany positions at Facilities First Australia Holdings Limited Pty, £26.5m of dividend payments and £20.4m of cash paid out as part of the Serco Share Repurchase Programme.

For the year ended 31 December	2021 £m	2020 £m
Operating profit	216.2	179.2
Remove exceptional items	1.2	(12.5)
Operating profit before exceptional items	217.4	166.7
Less: share of profit from joint ventures and associates	(8.7)	(12.7)
Movement in provisions	(7.2)	16.2
Depreciation, amortisation and impairment of property, plant and equipment and intangible assets	47.2	39.2
Depreciation and impairment of right of use assets	109.0	93.9
Other non-cash movements	16.6	8.5
Operating cash inflow before movements in working capital, exceptional items and tax	374.3	311.8
Working capital movements	25.2	(5.3)
Tax paid	(42.1)	(35.9)
Non-cash R&D expenditure	-	(0.1)
Cash flow from operating activities before exceptional items	357.4	270.5
Dividends from joint ventures and associates	13.5	19.8
Interest received	0.6	0.3
Interest paid	(24.9)	(24.9)
Capital element of lease repayments	(111.3)	(100.8)
Capitalised finance costs paid	(0.6)	(0.9)
Purchase of intangible and tangible assets net of proceeds from disposals	(25.1)	(29.2)
Purchase of own shares to satisfy share awards	(20.3)	-
Proceeds received from exercise of share options	0.2	0.1
Free Cash Flow	189.5	134.9
Net cash (outflow)/inflow on acquisition and disposal of subsidiaries, joint ventures and associates	(234.9)	6.1
Net increase in debt items on acquisition and disposal of subsidiaries, joint ventures and associates	(14.3)	-
Dividends paid to shareholders	(26.5)	-
Purchase of own shares	(20.4)	-
Movements on other investment balances	0.6	0.5
Exceptional sale of other investments	13.0	-
Capitalisation and amortisation of loan costs	(0.7)	-
Exceptional items	(7.5)	(2.0)
Exceptional proceeds from loans receivable	-	1.2
Exceptional distribution from joint venture	-	1.9
Cash movements on hedging instruments	(16.6)	2.4
Foreign exchange (loss)/gain on Adjusted Net Debt	(2.4)	11.7
Movement in Adjusted Net Debt	(120.2)	156.7
Opening Adjusted Net Debt	(57.8)	(214.5)
Closing Adjusted Net Debt	(178.0)	(57.8)
Lease liabilities	(430.3)	(402.6)
Closing Net Debt at 31 December	(608.3)	(460.4)

Net Debt

As at 31 December	2021 £m	2020 £m
Cash and cash equivalents	198.4	335.7
Loans payable	(377.0)	(388.8)
Lease liabilities	(430.3)	(402.6)
Derivatives relating to Net Debt	0.6	(4.7)
Net Debt	(608.3)	(460.4)
Exclude lease liabilities	430.3	402.6
Adjusted Net Debt	(178.0)	(57.8)

Average Adjusted Net Debt as calculated on a daily basis for the year ended 31 December 2021 was £216.1m (2020: £209.2m).  Peak Adjusted Net Debt was £346.3m (2020: £355.7m).

Treasury operations and risk management

The Group's operations expose it to a variety of financial risks that include liquidity, the effects of changes in foreign currency exchange rates, interest rates and credit risk. The Group has a centralised Treasury function whose principal role is to ensure that adequate liquidity is available to meet the Group's funding requirements as they arise and that the financial risk arising from the Group's underlying operations is effectively identified and managed.

Treasury operations are conducted in accordance with policies and procedures approved by the Board and are reviewed annually. Financial instruments are only executed for hedging purposes and speculation is not permitted. A monthly report is provided to senior Management outlining performance against the Treasury Policy and the Treasury function is subject to periodic internal audit review.

Liquidity and funding

As at 31 December 2021, the Group had committed funding of £629m (2020: £642m), comprising £259m of US private placement notes, a £120m term loan facility which was fully drawn and a £250m revolving credit facility (RCF) which was undrawn in its entirety. The Group does not engage in any external financing arrangements associated with either receivables or payables.

The Group's RCF provides £250m of committed funding for five years from the arrangement date in December 2018. The US private placement notes are repayable in bullet payments between 2022 and 2032.

Interest rate risk

Given the nature of the Group's business, we have a preference for fixed rate debt to reduce the volatility of net finance costs. Our Treasury Policy requires us to maintain a minimum proportion of fixed rate debt as a proportion of overall Adjusted Net Debt and for this proportion to increase as the ratio of EBITDA to interest expense falls. As at 31 December 2021, £259.2m of debt was held at fixed rates and Adjusted Net Debt was £178.0m.

Foreign exchange risk

The Group is subject to currency exposure on the translation to Sterling of its net investments in overseas subsidiaries. The Group manages this risk where appropriate, by borrowing in the same currency as those investments. Group borrowings are predominantly denominated in Sterling and US Dollar. The Group manages its currency flows to minimise foreign exchange risk arising on transactions denominated in foreign currencies and uses forward contracts where appropriate to hedge net currency flows.

Credit risk

Cash deposits and in-the-money financial instruments give rise to credit risk on the amounts due from counterparties. The Group manages this risk by adhering to counterparty exposure limits based on external credit ratings of the relevant counterparty.

Debt covenants

The principal financial covenant ratios are consistent across the private placement loan notes and revolving credit facility, with a maximum Consolidated Total Net Borrowings (CTNB) to covenant EBITDA of 3.5 times and minimum covenant EBITDA to net finance costs of 3.0 times, tested semi-annually. A reconciliation of the basis of calculation is set out in the table below.

Following the refinancing in December 2018, the debt covenants were amended to include the impact of IFRS 15 Revenue from Contracts with Customers. The covenants continue to exclude the impact of IFRS 16 Leases on the Group's results.

For the year ended 31 December	2021 £m	2020 £m
Operating profit before exceptional items	217.4	166.7
Remove: Amortisation and impairment of intangibles arising on acquisition	16.0	9.0
Trading Profit	233.4	175.7
Exclude: Share of joint venture post-tax profits	(8.7)	(12.7)
Include: Dividends from joint ventures	13.5	19.8
Add back: Net non-exceptional charges to covenant OCPs	1.3	4.9
Add back: Net covenant OCP utilisation	(0.6)	(0.7)
Add back: Depreciation, amortisation and impairment of property, plant and equipment and non-acquisition intangible assets	31.2	30.2
Add back: Depreciation, amortisation and impairment of property, plant and equipment and non-acquisition intangible assets held under finance leases - in accordance with IAS17 Leases	5.0	4.3
Add back: Foreign exchange credit on investing and financing arrangements	(0.6)	(0.7)
Add back: Share based payment expense	15.8	11.2
Other covenant adjustments to EBITDA	6.3	(7.2)
Covenant EBITDA	296.6	224.8
Net finance costs	24.0	25.9
Exclude: Net interest receivable on retirement benefit obligations	1.1	1.2
Exclude: Movement in discount on other debtors	0.1	0.1
Exclude: Other dividends received	0.6	0.4
Exclude: Foreign exchange on investing and financing arrangements	(0.6)	(0.7)
Add back: Movement in discount on provisions	-	(0.2)
Other covenant adjustments to net finance costs resulting from IFRS 16 Leases	(7.3)	(9.1)
Covenant net finance costs	17.9	17.6
Adjusted Net Debt	178.0	57.8
Obligations under finance leases - in accordance with IAS 17 Leases	26.5	24.1
Recourse Net Debt	204.5	81.9
Exclude: Amortised capitalised finance costs, encumbered cash and other adjustments	2.9	(1.7)
Covenant adjustment for average FX rates	(5.7)	21.3
CTNB	201.7	101.5
CTNB / covenant EBITDA (not to exceed 3.5x)	0.68x	0.45x
Covenant EBITDA / covenant net finance costs (at least 3.0x)	16.6x	12.8x

 

Net assets summary

As at 31 December	2021 £m	2020 £m
Non-current assets
Goodwill	852.7	669.6
Other intangible assets	144.0	80.6
Property, plant and equipment	55.5	54.2
Right of use assets	416.7	387.5
Contract assets, trade receivables and other non-current assets	33.8	44.5
Deferred tax assets	214.3	83.2
Retirement benefit assets	166.2	114.6
Total non-current assets	1,883.2	1,434.2
Current assets
Inventories	19.6	21.4
Contract assets, trade receivables and other current assets	627.3	614.1
Current tax assets	5.5	4.9
Cash and cash equivalents	198.4	335.7
Total current assets	850.8	976.1
Total assets	2,734.0	2,410.3
Current liabilities
Contract liabilities, trade payables and other current liabilities	(589.3)	(585.5)
Current tax liabilities	(17.2)	(21.6)
Provisions	(79.6)	(62.1)
Lease obligations	(126.3)	(109.3)
Loans	(64.9)	(89.7)
Total current liabilities	(877.3)	(868.2)
Non-current liabilities
Contract liabilities, trade payables and other non-current liabilities	(55.9)	(57.0)
Deferred tax liabilities	(40.3)	(26.9)
Provisions	(118.0)	(115.9)
Lease obligations	(304.0)	(293.3)
Loans	(312.1)	(299.1)
Retirement benefit obligations	(18.0)	(34.9)
Total non-current liabilities	(848.3)	(827.1)
Total liabilities	(1,725.6)	(1,695.3)
Net assets	1,008.4	715.0

At 31 December 2021 the Group had net assets of £1,008.4m, a movement of £293.4m from the closing net asset position of £715.0m as at 31 December 2020. The increase in net assets is mainly due to the following movements:

·	An increase in goodwill of £183.1m due to additional goodwill on the acquisitions of Facilities First Australia Holdings Limited Pty (FFA), Whitney, Bradley & Brown, Inc (WBB) and Mercurius Finance S.A. together with an increase due to foreign exchange movements.
·	An increase in other intangible assets of £63.4m due to the combined intangibles recognised on the FFA and WBB acquisitions, offset by amortisation charged in the period.
·	Net deferred taxes have increased by £117.7m owing mainly to the Group's recognition of assets relating to historic losses in the UK.  Recognition has been based on there now being sufficient certainty of future taxable profits against which these deductions can be utilised, following structural change in performance of the UK entities.
·	An increase in the net retirement benefit asset of £68.5m. An increase in risk free rates and a corresponding increase in the discount rate applied to the defined benefit obligation associated with the Group's most significant pension scheme resulted in a decrease in the liabilities of the scheme. The scheme's assets also saw favourable net returns during the year.
·	Cash and cash equivalents have decreased by £137.3m which includes a net exchange loss of £4.8m.  In the year the Group has generated cash inflows of £357.4m from operations before exceptionals. The net spend on tangible and intangible assets was £25.1m and the capital element of lease repayments in the year was £111.3m.  Including associated costs, the spend on shares repurchased during the year totals £40.7m and dividends totalling £26.5m have been paid.  The other significant cash outflow is the spend on acquisitions which, inclusive of costs but net of cash received, totalled £234.9m.

Acquisitions

On 4 January 2021, the Group acquired 100% of the issued share capital of Facilities First Australia Holdings Pty Limited (FFA), for consideration of AU Dollars $52.2m (£29.6m) in cash, subject to standard working capital and completion adjustments. The acquired net assets included AU Dollars $3.6m (£2.1m) of cash resulting in a net cash outflow on acquisition of AU Dollars $48.6m (£27.5m). At the same time, the Group transferred AU Dollars $25.2m (£14.3m) to allow FFA to settle existing debt and debt-like balances. FFA is a specialist provider of cleaning, facility maintenance and management services in Australia. The operating results, assets and liabilities have been recognised effective 4 January 2021.

On 27 April 2021, the Group acquired 100% of the issued share capital of Whitney, Bradley & Brown, Inc (WBB) for US Dollars $300.5m (£211.9m) in cash, subject to standard working capital and completion adjustments. The acquired net assets included US Dollars $7.2m (£5.1m) of cash resulting in a net cash outflow on acquisition of US Dollars $293.3m (£206.8m). The acquisition will increase the scale, breadth and capability of Serco's North American Defence business and will give Serco a strong platform from which to address all major segments of the US Defence services market. The operating results, assets and liabilities have been recognised effective 27 April 2021.

On 30 June 2021, the Group acquired 100% of the issued share capital of Mercurius Finance S.A., the holding company of Clemaco Trading N.V., Clemaco Contracting N.V. and Targets N.V. (together Clemaco), for €7.8m (£6.7m) in cash, subject to standard working capital and completion adjustments. The acquired net assets included €7.1m (£6.1m) of cash resulting in a net cash outflow on acquisition of €0.7m (£0.6m). Clemaco specialises in the support and maintenance of ships for the Belgian Navy, enabling Serco to provide additional value to existing Serco and Clemaco customers and expanding the Group's existing activities with the Belgian Navy. The operating results, assets and liabilities have been recognised effective 30 June 2021.

Pensions

Serco's pension schemes are in a strong funding position and show an accounting surplus before tax of £148.2m (2020: £79.7m) on scheme gross assets of £1.6bn and gross liabilities of £1.5bn. The opening net asset position led to a net credit within net finance costs of £1.1m (2020: £1.2m). For the Group's main scheme, the Serco Pension and Life Assurance Scheme (SPLAS), the purchase of a bulk annuity from an insurer, which covers around half of all scheme members, has the effect of fully removing longevity, investment and accounting risks for those members; the gross liability remains recognised on our balance sheet, but there is an equal and opposite insurance asset reflecting the perfect hedge established by the annuity.

Covid-19

In 2021, the Group continued to support governments in their management of the pandemic through its immigration support, testing and tracing services. Whilst there continues to be some negative impact within the Group's transport, leisure, health and environmental waste sectors, the financial performance within these is improving as the impact of the pandemic reduces, and the restrictions implemented by governments are eased. It remains unknown whether volumes or costs within these sectors will return to pre-pandemic levels, however given the diverse nature of the Group's operations the financial impact is mitigated.

As noted in 2020, the Group returned all Covid-19 financial support offered by governments with the exception of the US tax deferrals which will be repaid in line with regulations given there is no mechanism to repay early; the amount remaining to be repaid is £7.7m.

Claim for losses in respect of the 2013 share price reduction

Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the reduction in Serco's share price in 2013, the Group has continued to assess the merit, likely outcome and potential impact on the Group of any such litigation that either has been or might potentially be brought against the Group. Any outcome is subject to a number of significant uncertainties. The Group does not currently assess the merits as strong, especially given the legal uncertainties in such actions.

Information on other contingent liabilities can be found in Note 19 to the Condensed Consolidated Financial Statements.

 

Condensed Consolidated Financial Statements

Consolidated Income Statement

For the year ended 31 December

	Note	2021 £m	2020 £m
Revenue	6	4,424.6	3,884.8
Cost of sales		(3,956.6)	(3,501.8)
Gross profit		468.0	383.0
Administrative expenses		(243.3)	(220.0)
Exceptional profit on disposal of subsidiaries and operations		-	11.0
Other exceptional operating items	7	(1.2)	1.5
Other expenses - amortisation and impairment of intangibles arising on acquisition		(16.0)	(9.0)
Share of profits in joint ventures and associates, net of interest and tax	4	8.7	12.7
Operating profit		216.2	179.2
Operating profit before exceptional items		217.4	166.7
Investment revenue	8	2.4	1.9
Finance costs	9	(26.4)	(27.8)
Total net finance costs		(24.0)	(25.9)
Profit before tax		192.2	153.3
Profit before tax and exceptional items		193.4	140.8
Tax on profit before exceptional items	10	111.9	(18.9)
Exceptional tax	10	(0.2)	(0.4)
Tax credit/(charge)		111.7	(19.3)
Profit for the year		303.9	134.0
Attributable to:
Equity owners of the Company		303.9	133.8
Non-controlling interest		-	0.2
Earnings per share (EPS)
Basic EPS	12	24.86p	10.89p
Diluted EPS	12	24.43p	10.67p

The accompanying notes form an integral part of the financial statements.

 

Consolidated Statement of Comprehensive Income

For the year ended 31 December

	Note	2021 £m	2020 £m
Profit for the year		303.9	134.0
Other comprehensive income for the year:
Items that will not be reclassified subsequently to profit or loss:
Remeasurements of post-employment benefit obligations*	20	66.8	18.2
Actuarial (loss)/gain on reimbursable rights*	20	(0.5)	3.9
Income tax relating to these items*	10	(21.7)	(5.9)
Share of other comprehensive income in joint ventures and associates	4	3.3	2.7
Items that may be reclassified subsequently to profit or loss:
Net exchange (loss)/gain on translation of foreign operations**		(11.6)	7.9
Fair value gain/(loss) on cash flow hedges during the year**		0.2	(0.2)
Income statement items reclassified		0.1	-
Tax relating to items that may be reclassified**		4.0	-
Total other comprehensive income for the year		40.6	26.6
Total comprehensive income for the year		344.5	160.6
Attributable to:
Equity owners of the Company		344.5	160.4
Non-controlling interest		-	0.2

*  Recorded in retirement benefit obligations reserve in the Consolidated Statement of Changes in Equity.

**  Recorded in hedging and translation reserve in the Consolidated Statement of Changes in Equity.

The accompanying notes form an integral part of the financial statements.

 

Consolidated Statement of Changes in Equity

	Share capital £m	Share premium account £m	Retained earnings £m	Other reserves* £m	Total shareholders' equity £m	Non-controlling interest £m
At 1 January 2020	24.5	462.9	165.9	(111.9)	541.4	1.5
Total comprehensive income for the year	-	-	136.5	23.9	160.4	0.2
Issue of share capital	0.2	0.2	-	(0.2)	0.2	-
Shares transferred to award holders on exercise of share awards	-	-	-	0.1	0.1	-
Expense in relation to share based payments	-	-	-	11.2	11.2	-
At 1 January 2021	24.7	463.1	302.4	(76.9)	713.3	1.7
Total comprehensive income for the year	-	-	307.3	37.2	344.5	-
Income statement items reclassified	-	-	-	0.1	0.1	-
Dividends paid	-	-	(26.5)	-	(26.5)	-
Shares purchased and held in Treasury	-	-	-	(40.7)	(40.7)	-
Cancellation of shares held in Treasury	(0.3)	-	(20.4)	20.7	-	-
Shares transferred from Treasury to own shares reserves	-	-	(20.0)	20.0	-	-
Shares transferred to award holders on exercise of share awards	-	-	-	0.2	0.2	-
Expense in relation to share based payments	-	-	-	15.8	15.8	-
At 31 December 2021	24.4	463.1	542.8	(23.6)	1,006.7	1.7

*  An analysis of other reserves is presented as part of note 21 Other reserves.

The accompanying notes form an integral part of the financial statements.

 

Consolidated Balance Sheet

	Note	At 31 December 2021 £m	At 31 December 2020 £m
Non-current assets
Goodwill	13	852.7	669.6
Other intangible assets		144.0	80.6
Property, plant and equipment		55.5	54.2
Right of use assets		416.7	387.5
Interests in joint ventures and associates	4	17.6	19.2
Contract assets	14	2.6	-
Trade and other receivables	14	13.6	25.3
Deferred tax assets	11	214.3	83.2
Retirement benefit assets	20	166.2	114.6
		1,883.2	1,434.2
Current assets
Inventories		19.6	21.4
Contract assets	14	319.0	296.1
Trade and other receivables	14	305.7	313.5
Current tax assets		5.5	4.9
Cash and cash equivalents		198.4	335.7
Derivative financial instruments		2.6	4.5
		850.8	976.1
Total assets		2,734.0	2,410.3
Current liabilities
Contract liabilities	15	(61.3)	(42.3)
Trade and other payables	15	(526.0)	(533.9)
Derivative financial instruments		(2.0)	(9.3)
Current tax liabilities		(17.2)	(21.6)
Provisions	18	(79.6)	(62.1)
Lease obligations	16	(126.3)	(109.3)
Loans		(64.9)	(89.7)
		(877.3)	(868.2)
Non-current liabilities
Contract liabilities	15	(48.6)	(47.5)
Trade and other payables	15	(7.3)	(9.4)
Derivative financial instruments		-	(0.1)
Deferred tax liabilities	11	(40.3)	(26.9)
Provisions	18	(118.0)	(115.9)
Lease obligations	16	(304.0)	(293.3)
Loans		(312.1)	(299.1)
Retirement benefit obligations	20	(18.0)	(34.9)
		(848.3)	(827.1)
Total liabilities		(1,725.6)	(1,695.3)
Net assets		1,008.4	715.0
Equity
Share capital		24.4	24.7
Share premium account		463.1	463.1
Retained earnings		542.8	302.4
Other reserves	21	(23.6)	(76.9)
Equity attributable to owners of the Company		1,006.7	713.3
Non-controlling interest		1.7	1.7
Total equity		1,008.4	715.0

The accompanying notes form an integral part of the financial statements.

The financial statements were approved by the Board of Directors on 23 February 2022 and signed on its behalf by:

Rupert Soames  Nigel Crossley
Group Chief Executive Officer  Group Chief Financial Officer
 

Consolidated Cash Flow Statement

For the year ended 31 December

	Note	2021  m	2020 £m
Net cash inflow from operating activities before exceptional items		357.4	270.5
Exceptional items		(7.5)	(2.0)
Net cash inflow from operating activities	23	349.9	268.5
Investing activities
Interest received		0.6	0.3
Decrease in other investments		-	0.1
Exceptional sale of other investments		13.0	-
Dividends received from joint ventures and associates		13.5	19.8
Exceptional distribution from joint ventures		-	1.9
Other dividends received		0.6	0.4
Proceeds from disposal of property, plant and equipment		7.0	20.9
Net cash inflow on disposal of subsidiaries and operations		-	11.0
Acquisition of subsidiaries, net of cash acquired	5	(234.9)	(4.9)
Proceeds from loans receivable		-	1.2
Purchase of other intangible assets		(8.2)	(8.3)
Purchase of property, plant and equipment		(23.9)	(41.8)
Net cash (outflow)/inflow from investing activities		(232.3)	0.6
Financing activities
Interest paid		(24.9)	(24.9)
Capitalised finance costs paid		(0.6)	(0.9)
Advances of loans		110.0	447.9
Repayments of loans		(139.7)	(348.5)
Capital element of lease repayments		(111.3)	(100.8)
Cash movements on hedging instruments		(16.6)	2.4
Dividends paid to shareholders		(26.5)	-
Own shares repurchased		(40.7)	-
Proceeds received from exercise of share options		0.2	0.1
Net cash outflow from financing activities		(250.1)	(24.7)
Net (decrease)/increase in cash and cash equivalents		(132.5)	244.4
Cash and cash equivalents at beginning of year		335.7	89.5
Net exchange (loss)/gain		(4.8)	1.8
Cash and cash equivalents at end of year		198.4	335.7

The accompanying notes form an integral part of the financial statements.

 

Notes to the Condensed Consolidated Financial Statements

1. General information, going concern and changes in accounting standards

The basis of preparation in this preliminary announcement is set out below.

The financial information in this announcement does not constitute the Group's or the Company's statutory accounts as defined in section 434 of the Companies Act 2006 for the years ended 31 December 2021 or 2020 but is derived from those accounts. Statutory accounts for 2020 have been delivered to the registrar of companies, and those for 2021 will be delivered in due course. The auditor has reported on those accounts; their reports were (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The preliminary announcement has been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 (Adopted IFRS) and are prepared in accordance with UK-adopted International Accounting Standards. Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRS, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full Group and parent company only financial statements that comply with IFRS and FRS101 respectively, in March 2022 and this includes the Group's and parent company's accounting policies.

The financial statements have been prepared on the historical cost basis, except for the revaluation of financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. The following principal accounting policies adopted have been applied consistently in the current and preceding financial year except as stated below.

Going concern

In assessing the basis of preparation of the financial statements for the year ended 31 December 2021, the Directors have considered the principles of the Financial Reporting Council's 'Guidance on Risk Management, Internal Control and Related Financial and Business Reporting, 2014', particularly in assessing the applicability of the going concern basis, the review period and disclosures. The period of assessment is considered to be at least 12 months from the date of approval of these financial statements.

At 31 December 2021, the Group's principal debt facilities comprised a £250m revolving credit facility (of which £nil was drawn), acquisition term loan facilities totalling £120m (of which £120m was drawn) and £259m of US private placement notes, giving £629m of committed credit facilities and committed headroom of £444m. As at 31 December 2021, the Group's primary restricting covenant, its leverage ratio, is below the covenant of 3.5x and is below the Group's target range of 1x-2x at 0.68.

The Directors have undertaken a rigorous assessment of going concern and liquidity, taking into account financial forecasts, as well as the potential impact of key uncertainties and sensitivities on the Group's future performance. In making this assessment the Directors have considered the Group's existing debt levels, the committed funding and liquidity positions under its debt covenants, its ability to generate cash from trading activities and its working capital requirements. The Directors have also identified a series of mitigating actions that could be used to preserve cash in the business should the need arise.

The basis of the assessment continues to be the Board-approved budget. The budget is prepared annually for the next two-year period and is based on a bottom-up approach to all of the Group's existing contracts, potential new contracts and administrative functions. As part of the budgeting process covering 2022 and 2023, consideration was given to the known impacts of Covid-19, though most of the Group's contracts deliver critical services to governments and the delivery requirements of these have not been materially impacted. Where situations have evolved, these have been reflected in the Group's most recent forecasts and thus are included within the assessment process outlined below.

The Directors have considered the ongoing impact of Covid-19 on the Group's operations. The key impacts which the Group has felt are lower passenger volumes on the Group's train operating contracts, lower volumes within its air traffic control business in the Middle East, higher costs within the Health portfolio and lower usage of the Group's UK leisure centres. The Group has continued to trade profitably during the pandemic, and even at the various peaks globally, the potentially adverse impact of the pandemic was mitigated through the Group's involvement in Covid-related responses. As a result, the Directors no longer consider going concern to be a critical accounting judgement as was previously disclosed in the financial statements for the year ended 31 December 2020.

Due to the limited adverse impacts of Covid-19 on the Group's profitability, the Directors believe that appropriate sensitivities in assessing the Group's ability to continue as a going concern are to model reductions in the Group's win rates for new business and rebids, and reductions in profit margins. Due to the diversity in the Group's operations, the Directors believe that a reverse stress test of these sensitivities to assess the headroom available under the Group's debt covenants and available liquidity provides meaningful analysis of the Group's ability to continue as a going concern. Based on the headroom available, the Directors are then able to assess whether the reductions required to breach the Group's financial covenants, or exhaust available liquidity, are plausible.

This reverse stress test shows that, even after assuming that the US private placement loans of $28.4m due to mature before 30 June 2023 and the £45m acquisition term loan facility used to fund the acquisition of NSBU are repaid, and that no additional refinancing occurs, the Group can afford to be unsuccessful on 60% of its target new business and rebid wins, combined with a profit margin 60 basis points below the Group's forecast, and still retain sufficient liquidity to meet all liabilities as they fall due and remain compliant with the Group's financial covenants.

In respect of win rates, rebids have a more significant impact on the Group's revenue than new business wins during the assessment period. The Group has won more than 85% of its rebids and available contract extensions over the last two years, therefore a reduction of 60% or more to the budgeted win rates and rebid rates is not considered plausible. The Group does not generally bid for contracts at margins below its target range.

In respect to margin reduction, due to the diversified nature of the Group's portfolio of long-term contracts and the fact that the Group has met or exceeded its full-year guidance for the last five years, a reduction in margin of 60bps versus the Group's budget is not considered plausible within the assessment period combined with a 60% reduction in win rates for new business and rebids.

Consequently, the Directors are confident that the Group and Company will have sufficient funds to continue to meet its liabilities as they fall due for at least 12 months from the date of approval of the financial statements and therefore have prepared the financial statements on a going concern basis.

Adoption of new and revised standards

There have been no new accounting standards implemented by the Group during the year and no revisions to accounting standards have had a material impact on the Group's Financial Statements.

Changes in accounting policies

The Group, following a review of its accounting policies, has updated its accounting policy for modifications to contracts with customers which do not result in the provision of distinct goods or services.  Previously, it was stated that if the pricing in the new contract was not commensurate with the stand-alone selling prices for the goods or services and the new goods and services were not distinct from those in the original contract, that any historic adjustments would be recognised through opening retained earnings. This is not the case, and the Group would recognise any adjustments as an adjustment to revenue in the period of the modification. No such modifications have occurred either during the year ended 31 December 2021 or 31 December 2020.

2. Critical accounting judgements and key sources of estimation uncertainty

In the process of applying the Group's accounting policies, which are described in note 2 to the Group's Consolidated Financial Statements, Management has made the following judgements that have the most significant effect on the amounts recognised in the Consolidated Financial Statements. As described below, many of these areas of judgement also involve a high level of estimation uncertainty.

Key sources of estimation uncertainty

Provisions for onerous contracts

Determining the carrying value of onerous contract provisions requires assumptions and complex judgements to be made about the future performance of the Group's contracts. The level of uncertainty in the estimates made, either in determining whether a provision is required, or in the calculation of a provision booked, is linked to the complexity of the underlying contract and the form of service delivery. Due to the level of uncertainty and combination of variables associated with those estimates, there is a significant risk that there could be material adjustment to the carrying amounts of onerous contract provisions within the next financial reporting period. This includes the potential recognition of onerous contract provisions for contracts which the Directors have assessed do not require a provision as at 31 December 2021.

Major sources of uncertainty which could result in a material adjustment within the next financial year, are:

·	The ability of the Company to maintain or improve operational performance to ensure costs or performance related penalties are in line with expected levels;
·	Volume driven revenue and costs being within the expected ranges;
·	The outcome of open claims made by or against a customer regarding contractual performance or contractual negotiations taking place where there is expected to be a positive outcome from the Group's perspective;
·	The ability of suppliers to deliver their contractual obligations on time and on budget; and
·	The potential impact of any longer term impacts of Covid-19 on contract performance such as the performance and usage of leisure centres or passenger volumes in the UK and the risk that this may be impacted by any future wave of the virus which requires a subsequent lock down period, or as-yet unknown shifts in customer behaviours, in the absence of any customer support.

In the current year, an amount of £1.3m was released from historic provisions. The net charge on new and existing OCPs within Underlying Trading Profit was £1.3m. All of these revisions have resulted from triggering events in the current year, either through changes in contractual positions or changes in circumstances which could not have been reasonably foreseen at the previous balance sheet date. To mitigate the level of uncertainty in making these estimates, Management regularly compares actual performance of the contracts against previous forecasts and considers whether there have been any changes to significant judgements.

The future range of possible outcomes in respect of those assumptions and significant judgements made to determine the carrying value of onerous contracts could result in either a material increase or decrease in the value of onerous contract provisions in the next financial year.  The extent to which actual results differ from estimates made at the reporting date depends on the combined outcome and timing of a large number of variables associated with performance across multiple contracts.

The individual provisions are discounted where the impact is assessed to be significant.  When used, discount rates are calculated based on the estimated risk-free rate of interest for the region in which the provision is located and matched against the ageing profile of the provision.

The Group undertakes a robust assessment at each reporting date to determine whether any individual customer contracts, which the Group has entered into, are onerous and require a provision to be recognised in accordance with IAS 37 Provisions, Contingent Liabilities & Contingent Assets. The Group operates a large number of long-term contracts at different phases of their contract life cycle. Within the Group's portfolio, there are a small number of contracts where the balance of risks and opportunities indicates that they might be onerous if transformation initiatives or contract changes are not successful. The Group has concluded that these contracts do not require an onerous contract provision on an individual basis. Following the individual contract reviews, the Group has also undertaken a top-down assessment which assumes that, whilst the contracts may not be onerous on an individual basis, as a portfolio there is a risk that at least some of the transformation programmes or customer negotiations required to avoid a contract loss, will not be fully successful, and it is more likely than not that one or more of these contracts will be onerous. Therefore, in considering the Group's overall onerous contract provision, the Group has made a best estimate of the provision required to take into consideration this portfolio risk. As a result, the risk of OCPs and the monitoring of individual contracts for indicators remains a critical estimate for the Group. As at 31 December 2021, the provision recognised in respect of this portfolio of contracts is £9.7m (2020: £8.5m).

Onerous contract provisions totalling £4.5m are estimated for individual contracts, based on the specific characteristics of the contract including possible contract variations, estimates of transaction price such as variable revenues and forecast costs to fulfil those contracts. As noted above, the Group also holds a balance of £9.7m in respect of the portfolio risk associated with operating a large number of long-term contracts, giving a total onerous contract provision of £14.2m (see note 18). Management has considered the nature of the estimate for onerous contract provisions and concluded that it is reasonably possible that outcomes within the next financial year may be different from Management's assumptions and could, in aggregate, require a material adjustment to the onerous contract provision. However, due to the estimation uncertainty across numerous contracts each with different characteristics, it is not practical to provide a quantitative analysis of the aggregated judgements that are applied, and Management do not believe that disclosing a potential range of outcomes on a consolidated basis would provide meaningful information to a reader of the financial statements.

Whilst the focus of the judgement is to determine whether the Group is required to record an onerous contract provision, management also inherently assess whether any assets dedicated to the contract are required to be impaired where contracts are forecast to make sustainable losses in the future. In accordance with IAS 37, the Group will impair assets dedicated to the contract before the recognition of an onerous contract provision.

Impairment of goodwill

A key area of focus in recent years has been in the impairment testing of goodwill, though no impairment indicators were noted in the year ended 31 December 2021.  At each reporting period an assessment is performed in order to determine whether there are any such indicators, which involves considering the performance of our business and any significant changes to the markets in which we operate.

Determining whether goodwill requires an actual impairment involves an estimation of the expected value in use of the cash generating unit (CGU). The value in use calculation involves an estimation of future cash flows and also the selection of appropriate discount rates, both of which involve considerable judgement. The future cash flows are derived from latest approved forecasts, with the key assumptions being revenue growth, margins and cash conversion rates. As was the case at the end of 2020, the budgeting process is required to estimate the ongoing impact of Covid-19, and whilst this remains a source of uncertainty, the Group's understanding of the potential impacts continues to improve. As a result of known and anticipated impacts of Covid-19 being included in Management's forecasts, no additional specific adjustments have been made to the cash flows used in assessing the value in use of assets.

Discount rates are calculated with reference to the specific risks associated with the assets and are based on advice provided by external experts. Our calculation of discount rates is performed based on a risk free rate of interest appropriate to the geographic location of the cash flows related to the CGU being tested, which is subsequently adjusted to factor in local market risks and risks specific to Serco. For the purpose of impairment testing in accordance with IAS36 Impairment of Assets, Management estimates pre-tax discount rates based on the post-tax weighted average cost of capital which is used for internal purposes.

There continues to be significant headroom across all CGUs and as detailed in note 13, sufficient headroom remains even when reasonably possible changes to discount rates occur. However, a high degree of judgement remains in estimating future cash flows, particularly those relating to the terminal year of the value in use calculation.

Retirement benefit obligations

Identifying whether the Group has a retirement benefit obligation as a result of contractual arrangements entered into requires a level of judgement, largely driven by the legal position held between the Group, the customer and the relevant pension scheme. The Group's retirement benefit obligations are covered in note 20.

The calculation of retirement benefit obligations is dependent on material key assumptions including discount rates, mortality rates, inflation rates and future contribution rates.

In accounting for the defined benefit schemes, the Group has applied the principle that the asset recognised for the Serco Pension and Life Assurance Scheme is equal to the full surplus that will ultimately be available to the Group as a future refund.

No pension assets are invested in the Group's own financial instruments or property.

Pension annuity assets are remeasured to fair value at each reporting date based on the share of the defined benefit obligation covered by the insurance contract.

Critical accounting judgements

Deferred tax

Deferred tax assets are recognised on tax deductible temporary differences to the extent that it is probable that taxable profit will be available against which they can be utilised. Significant Management judgement is required to determine the amount of deferred tax assets that should be recognised, based upon the likely timing, geography and the level of future taxable profits. Since a significant portion of the deductible temporary differences relate to historic tax losses, there has been historic evidence that future taxable profits may not be available.

A £162.8m UK tax asset is recognised on the Group's balance sheet at 31 December 2021 (31 December 2020: £30.6m) on the basis that structural changes in the underlying UK business indicate a sustained return to profitability which would enable future tax deductions within the UK to be utilised. The return to profitability is as a result of onerous contracts ending and new profitable long-term contracts being entered into as well as a significant reduction in exceptional restructuring spend following the strategy review in 2015, which also reduced the level of overhead spend within the UK business. A UK deferred tax asset of £186.2m was initially recognised during the year with this balance subsequently being revalued by £1.6m and £25.0m being used to offset profits and reserves movements arising in the year to 31 December 2021.

Further details on deferred taxes are disclosed in note 11.

Use of Alternative Performance Measures: Operating profit before exceptional items

IAS 1 Presentation of Financial Statements requires material items to be disclosed separately in a way that enables users to assess the quality of a company's profitability. In practice, these are commonly referred to as 'exceptional' items, but this is not a concept defined by IFRS and therefore there is a level of judgement involved in arriving at an Alternative Performance Measure which excludes such exceptional items. We consider items which are material and outside of the normal operating practice of the Company to be suitable for separate presentation. There is a level of judgement required in determining which items are exceptional on a consistent basis and require separate disclosure. Further details can be seen in note 7.

The segmental analysis in note 3 includes the additional performance measure of Trading Profit on operations which is reconciled to reported operating profit in that note. The Group uses Trading Profit as an alternative measure to reported operating profit by making several adjustments. Firstly, Trading Profit excludes exceptional items, being those we consider material and outside of the normal operating practice of the Company to be suitable for separate presentation and detailed explanation. Secondly, amortisation and impairment of intangibles arising on acquisitions are excluded, because these charges are based on judgements about the value and economic life of assets that, in the case of items such as customer relationships, would not be capitalised in normal operating practice. The Group's Chief Operating Decision Maker (CODM) reviews the segmental analysis for operations.

Claim for losses in respect of the 2013 share price reduction

Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the reduction in Serco's share price in 2013, the Group has continued to assess the merit, likely outcome and potential impact on the Group of any such litigation that either has been or might potentially be brought against the Group. Any outcome is subject to a number of significant uncertainties. The Group does not currently assess the merits as strong, especially given the legal uncertainties in such actions.

3. Segmental information

The Group's operating segments reflecting the information reported to the Board in 2021 under IFRS 8 Operating Segments are as set out below.

Reportable operating segments	Sectors
UK & Europe	Services for sectors including Citizen Services, Defence, Health & Other Facilities Management, Justice & Immigration and Transport delivered to UK Government, UK devolved authorities and other public sector customers in the UK and Europe
Americas	Services for sectors including Citizen Services, Defence and Transport delivered to US federal and civilian agencies, selected state and municipal governments and the Canadian Government
AsPac	Services for sectors including Citizen Services, Defence, Health & Other Facilities Management, Justice & Immigration and Transport in the Asia Pacific region including Australia, New Zealand and Hong Kong
Middle East	Services for sectors including Citizen Services, Defence, Health & Other Facilities Management and Transport in the Middle East region
Corporate	Central and head office costs

Each reportable operating segment is focused on a narrow group of customers in a specific geographic region and is run by a local Management team which report directly to the Group's Chief Operating Decision Maker (CODM) on a regular basis. As a result of this focus, the sectors in each region have similar economic characteristics and are aggregated at the reportable operating segment level in these financial statements.

The accounting policies of the reportable operating segments are the same as the Group's accounting policies described in note 2 to the Group's Consolidated Financial Statements.

Information about major customers

The Group has three major governmental customers which each represent more than 5% of Group revenues in the current year. The customers' revenues were £1,814.4m (2020: £1,517.0m) for the UK Government within the UK & Europe segment, £993.0m (2020: £913.1m) for the US Government within the Americas segment and £836.4m (2020: £703.8m) for the Australian Government within the AsPac segment. These customers do not act in a unified way in making purchase decisions, and in general, the Group engages directly with the various departments of these customers in respect of the services it provides.

Segmental information

Segmental revenue is analysed on an external basis. Inter-segment revenue is not presented as it is not significant in the context of revenue as a whole. Net finance costs are not presented for each reportable operating segment as they are reviewed on a consolidated basis by the CODM.

Specific corporate expenses are allocated to the corresponding segments. Segment assets comprise goodwill, other intangible assets, property, plant and equipment including right of use assets, inventories, trade and other receivables (excluding corporation tax recoverable) and any retirement benefit asset. Segment liabilities comprise trade and other payables, lease liabilities, provisions and retirement benefit obligations.

The following is an analysis of the Group's revenue, results, assets and liabilities by reportable operating segment:

Year ended 31 December 2021	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m	Total £m
Revenue	2,131.6	1,120.0	908.4	264.6	-	4,424.6
Result
Trading Profit/(Loss) from operations*	99.8	117.8	52.0	13.7	(49.9)	233.4
Amortisation and impairment of intangibles arising on acquisition	(0.8)	(11.7)	(3.5)	-	-	(16.0)
Operating profit/(loss) before exceptional items	99.0	106.1	48.5	13.7	(49.9)	217.4
Other exceptional operating items**	0.4	(4.1)	3.4	-	(0.9)	(1.2)
Operating profit/(loss)	99.4	102.0	51.9	13.7	(50.8)	216.2
Investment revenue						2.4
Finance costs						(26.4)
Profit before tax						192.2
Tax credit						111.9
Tax on exceptional items						(0.2)
Profit for the year						303.9

*  Trading Profit/(Loss) is defined as operating profit/(loss) before exceptional items and amortisation and impairment of intangible assets arising on acquisition.

**  Exceptional restructuring costs incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business. Included within Other exceptional operating items are total acquisition related costs of £4.9m. 

Year ended 31 December 2021	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m	Total £m
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax	8.7	-	-	-	-	8.7
Depreciation of plant, property and equipment and right of use assets	(77.6)	(23.4)	(12.5)	(5.2)	(9.9)	(128.6)
Impairment of plant, property and equipment and right of use assets	(0.3)	-	-	-	-	(0.3)
Total depreciation and impairment of plant, property and equipment and right of use assets	(77.9)	(23.4)	(12.5)	(5.2)	(9.9)	(128.9)
Amortisation of intangible assets arising on acquisition	(0.8)	(11.7)	(3.5)	-	-	(16.0)
Amortisation of other intangible assets	(1.2)	(0.5)	(2.9)	(0.1)	(6.6)	(11.3)
Total amortisation and impairment of intangible assets	(2.0)	(12.2)	(6.4)	(0.1)	(6.6)	(27.3)
Segment assets
Interests in joint ventures and associates	17.1	-	0.1	0.4	-	17.6
Other segment assets***	782.5	911.6	313.2	60.8	227.5	2,295.6
Total segment assets	799.6	911.6	313.3	61.2	227.5	2,313.2
Unallocated assets						420.8
Consolidated total assets						2,734.0
Segment liabilities
Segment liabilities***	(641.2)	(187.7)	(224.7)	(53.2)	(182.3)	(1,289.1)
Unallocated liabilities						(436.5)
Consolidated total liabilities						(1,725.6)

*** The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group, including defined benefit pension schemes and corporate intangible assets.

The depreciation charge in the UK&E segment has increased to £77.6m (2020: £61.6m) due to additional property leases together with the timing of renewals on existing leases on the Asylum Accommodation and Support Services Contract (AASC).

 

Year ended 31 December 2020	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m	Total £m
Revenue	1,777.4	1,064.3	718.9	324.2	-	3,884.8
Result
Trading Profit/(Loss) from operations*	69.6	100.8	32.6	13.9	(41.2)	175.7
Amortisation and impairment of intangibles arising on acquisition	(2.0)	(7.0)	-	-	-	(9.0)
Operating profit/(loss) before exceptional items	67.6	93.8	32.6	13.9	(41.2)	166.7
Exceptional profit on disposal of subsidiaries and operations	11.0	-	-	-	-	11.0
Other exceptional operating items**	1.0	1.4	(0.8)	-	(0.1)	1.5
Operating profit/(loss)	79.6	95.2	31.8	13.9	(41.3)	179.2
Investment revenue						1.9
Finance costs						(27.8)
Profit before tax						153.3
Tax charge						(18.9)
Tax on exceptional items						(0.4)
Profit for the year						134.0

*  Trading Profit/(Loss) is defined as operating profit/(loss) before exceptional items and amortisation and impairment of intangible assets arising on acquisition.

**  Exceptional restructuring costs incurred by the Corporate segment are not allocated to other segments.  Such items may represent costs that will benefit the wider business. Included within Other exceptional operating items are total acquisition related costs of £2.4m. 

Year ended 31 December 2020	UK&E  m	Americas £m	AsPac  m	Middle East £m	Corporate £m	Total £m
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax	12.7	-	-	-	-	12.7
Depreciation of plant, property and equipment and right of use assets	(61.6)	(22.5)	(9.6)	(7.6)	(8.1)	(109.4)
Impairment of plant, property and equipment and right of use assets	(0.7)	-	-	-	-	(0.7)
Total depreciation and impairment of plant, property and equipment and right of use assets	(62.3)	(22.5)	(9.6)	(7.6)	(8.1)	(110.1)
Amortisation of intangible assets arising on acquisition	(2.0)	(7.0)	-	-	-	(9.0)
Amortisation of other intangible assets	(0.7)	(0.6)	(3.0)	(0.4)	(9.3)	(14.0)
Total amortisation and impairment of intangible assets	(2.7)	(7.6)	(3.0)	(0.4)	(9.3)	(23.0)
Segment assets
Interests in joint ventures and associates	18.7	-	0.1	0.4	-	19.2
Other segment assets***	750.9	675.3	274.4	87.9	174.3	1,962.8
Total segment assets	769.6	675.3	274.5	88.3	174.3	1,982.0
Unallocated assets						428.3
Consolidated total assets						2,410.3
Segment liabilities
Segment liabilities***	(626.6)	(185.0)	(200.0)	(66.7)	(170.3)	(1,248.6)
Unallocated liabilities						(446.7)
Consolidated total liabilities						(1,695.3)

*** The Corporate segment assets and liabilities include balance sheet items which provide benefit to the wider Group, including defined benefit pension schemes and corporate intangible assets.

4. Joint ventures and associates

AWE Management Limited (AWEML) and Merseyrail Services Holding Company Limited (MSHCL) were the only equity accounted entities which were material to the Group during the year or prior year. Dividends of £13.5m (2020: £15.5m) and £nil (2020: £1.5m), respectively were received from these companies in the year.  The low level of dividends received in respect of MSHCL were due to lower passenger volumes which were negatively impacted by Covid-19.

As announced on 2 November 2020, the Ministry of Defence notified the Group that it would be exercising its ability to terminate services provided by the Group through AWEML on 30 June 2021.

As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint venture between Serco Limited and ENGIE SA, has been awarded contracts to provide repairs and maintenance work for Service Family Accommodation (SFA) by the UK Ministry of Defence (MOD) Defence Infrastructure Organisation (DIO). VIVO is not a material joint venture to the Group in 2021.

Summarised financial information of AWEML and MSHCL, and an aggregation of the other equity accounted entities in which the Group has an interest in is as follows:

31 December 2021

Summarised financial information	AWEML (100% of results)  m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates* £m	Group portion of other joint venture arrangements and associates* £m	Total £m
Revenue	638.7	161.0	237.0	1.4	238.4
Operating profit/(loss)	49.6	(0.8)	11.8	(0.3)	11.5
Net finance cost	-	(0.1)	(0.1)	-	(0.1)
Income tax (charge)/credit	(12.0)	0.3	(2.8)	0.1	(2.7)
Profit/(loss) from operations	37.6	(0.6)	8.9	(0.2)	8.7
Other comprehensive income	-	6.6	3.3	-	3.3
Total comprehensive income/(expense)	37.6	6.0	12.2	(0.2)	12.0
Non-current assets	-	13.9	7.0	0.2	7.2
Current assets	8.5	43.4	23.8	7.7	31.5
Current liabilities	(1.7)	(23.6)	(12.2)	(3.9)	(16.1)
Non-current liabilities	-	(4.0)	(2.0)	(3.0)	(5.0)
Net assets	6.8	29.7	16.6	1.0	17.6
Proportion of Group ownership	24.5%	50.0%	-	-	-
Carrying amount of investment	1.7	14.9	16.6	1.0	17.6

*  Total results of the entity multiplied by the respective proportion of Group ownership.

	AWEML (100% of results)  m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates* £m	Group portion of other joint venture arrangements and associates* £m	Total £m
Cash and cash equivalents	8.5	28.9	16.5	4.7	21.2
Current financial liabilities excluding trade and other payables and provisions	(0.3)	(5.3)	(2.7)	-	(2.7)
Non-current financial liabilities excluding trade and other payables and provisions	-	(2.9)	(1.5)	-	(1.5)
Depreciation and amortisation	-	(5.8)	(2.9)	-	(2.9)
Interest income	-	-	-	-	-
Interest expense	-	(0.2)	(0.1)	-	(0.1)

*  Total results of the entity multiplied by the respective proportion of Group ownership.

The Group's share of liabilities within joint ventures and associates is £21.1m (2020: £224.5m).  In 2020, £163.1m relates to a defined benefit pension obligation against which Serco is fully indemnified. As a result of the Ministry of Defence's termination of the Management & Operations contract with AWEML, the gross obligation no longer exists. The remaining liabilities include £3.9m of lease obligations (2020: £6.2m) and the balance is trade and other payables which arise as part of the day-to-day operations carried out by those entities. Other than liabilities associated with leases, the Group has no material exposure to third party debt or other financing arrangements within any of its joint ventures and associates.

Certain employees of the group headed by MSHCL are members of a sponsored defined benefit pension scheme. Given the significance of the scheme to understanding the position of the entities, the following key disclosures are made:

Main assumptions: 2021		MSHCL
Rate of salary increases (%)		3.25%
Inflation assumption (CPI %) - pre-retirement		2.35%
Inflation assumption (CPI %) - post-retirement		2.85%
Discount rate (%)		1.80%
Post-retirement mortality:		Nil
Current male industrial pensioners at 65 (years)		N/A
Future male industrial pensioners at 65 (years)		N/A

Retirement benefit funding position (100% of results)		£m
Present value of scheme liabilities		(468.4)
Fair value of scheme assets		280.9
Net amount recognised		(187.5)
Members' share of deficit		75.0
Franchise adjustment*		112.5
Net retirement benefit obligation		-

*   The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.

The deficit reflected in the financial statements of MSHCL covers only that portion of the deficit that is expected to be funded over the term of the franchise arrangement the entity operates under. In addition, the defined benefit position reflects an adjustment in respect of funding required to be provided by employees.

31 December 2020

Summarised financial information	AWEML (100% of results)  m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates* £m	Group portion of other joint venture arrangements and associates* £m	Total £m
Revenue	1,106.8	150.7	346.5	18.6	365.1
Operating profit/(loss)	75.0	(5.7)	15.5	(0.1)	15.4
Net investment revenue/(finance cost)	0.3	(0.1)	-	-	-
Income tax (charge)/credit	(14.0)	1.5	(2.7)	-	(2.7)
Profit/(loss) from operations	61.3	(4.3)	12.8	(0.1)	12.7
Other comprehensive income	-	5.3	2.7	-	2.7
Total comprehensive income/(expense)	61.3	1.0	15.5	(0.1)	15.4
Non-current assets	668.1	19.1	173.3	0.1	173.4
Current assets	191.4	43.2	68.5	1.8	70.3
Current liabilities	(169.2)	(29.6)	(56.3)	(0.8)	(57.1)
Non-current liabilities	(665.9)	(8.5)	(167.4)	-	(167.4)
Net assets	24.4	24.2	18.1	1.1	19.2
Proportion of Group ownership	24.5%	50.0%	-	-	-
Carrying amount of investment	6.0	12.1	18.1	1.1	19.2

*  Total results of the entity multiplied by the respective proportion of Group ownership.

	AWEML (100% of results)  m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates* £m	Group portion of other joint venture arrangements and associates* £m	Total £m
Cash and cash equivalents	119.8	22.5	40.6	0.8	41.4
Current financial liabilities excluding trade and other payables and provisions	(0.6)	(5.5)	(2.9)	0.1	(2.8)
Non-current financial liabilities excluding trade and other payables and provisions	-	(7.7)	(3.8)	-	(3.8)
Depreciation and amortisation	-	(6.1)	(3.1)	(0.4)	(3.5)
Interest income	0.3	0.1	0.1	-	0.1
Interest expense	-	(0.2)	(0.1)	-	(0.1)

*  Total results of the entity multiplied by the respective proportion of Group ownership. 

Key disclosures with respect of the defined benefit pension schemes of material joint ventures and associates: 

Main assumptions: 2020	AWEML	MSHCL
Rate of salary increases (%)	1.9%	2.8%
Inflation assumption (CPI %)	1.9%	1.9%
Discount rate (%)	1.5%	2.4%
Post-retirement mortality:
Current male industrial pensioners at 65 (years)	23.0	N/A
Future male industrial pensioners at 65 (years)	25.1	N/A

Retirement benefit funding position (100% of results)	£m	£m
Present value of scheme liabilities	(2,597.7)	(450.5)
Fair value of scheme assets	1,931.8	233.8
Net amount recognised	(665.9)	(216.7)
Members' share of deficit	-	86.7
Franchise adjustment*	-	130.0
Related asset, right to reimbursement	665.9	-
Net retirement benefit obligation	-	-

*   The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.

5. Acquisitions

On 4 January 2021, the Group acquired 100% of the issued share capital of Facilities First Australia Holdings Pty Limited (FFA), for consideration of AU Dollars $52.2m (£29.6m) in cash, subject to standard working capital and completion adjustments. The acquired net assets included AU Dollars $3.6m (£2.1m) of cash resulting in a net cash outflow on acquisition of AU Dollars $48.6m (£27.5m). At the same time, the Group transferred AU Dollars $25.2m (£14.3m) to allow FFA to settle existing debt and debt-like balances. FFA is a specialist provider of cleaning, facility maintenance and management services in Australia. The operating results, assets and liabilities have been recognised effective 4 January 2021.

FFA contributed AU Dollars $206.8m (£112.8m) of revenue and AU Dollars $5.7m (£3.1m) of operating profit before exceptional items, including an appropriate allocation of charges for shared support services and fully allocated overheads, to the Group's results during the year to 31 December 2021.

On 27 April 2021, the Group acquired 100% of the issued share capital of Whitney, Bradley & Brown, Inc (WBB) for US Dollars $300.5m (£211.9m) in cash, subject to standard working capital and completion adjustments. The acquired net assets included US Dollars $7.2m (£5.1m) of cash resulting in a net cash outflow on acquisition of US Dollars $293.3m (£206.8m). The acquisition will increase the scale, breadth and capability of Serco's North American Defence business and will give Serco a strong platform from which to address all major segments of the US Defence services market. The operating results, assets and liabilities have been recognised effective 27 April 2021.

WBB contributed US Dollars $135.8m (£98.5m) of revenue and US Dollars $7.5m (£5.5m) of operating profit before exceptional items, including an appropriate allocation of charges for shared support services and fully allocated overheads, to the Group's results during the year to 31 December 2021.

On 30 June 2021, the Group acquired 100% of the issued share capital of Mercurius Finance S.A., the holding company of Clemaco Trading N.V., Clemaco Contracting N.V. and Targets N.V. (together Clemaco), for €7.8m (£6.7m) in cash, subject to standard working capital and completion adjustments. The acquired net assets included €7.1m (£6.1m) of cash resulting in a net cash outflow on acquisition of €0.7m (£0.6m). Clemaco specialises in the support and maintenance of ships for the Belgian Navy, enabling Serco to provide additional value to existing Serco and Clemaco customers and expanding the Group's existing activities with the Belgian Navy. The operating results, assets and liabilities have been recognised effective 30 June 2021.

Clemaco contributed €5.4m (£4.6m) of revenue and €0.2m (£0.2m) of operating profit before exceptional items, including an appropriate allocation of charges for shared support services and fully allocated overheads, to the Group's results during the year to 31 December 2021.

Based on estimates made of the full-year impact of the acquisition of WBB and Clemaco, had the acquisitions taken place on 1 January 2021, Group revenue and operating profit before exceptional items for the period would have increased by approximately £58.9m and £4.6m respectively, taking total Group revenue to £4,483.5m and total Group operating profit before exceptional items to £222.0m. Due to the date of acquisition of FFA, the annualised impact is not considered to be materially different to the results already included in the financial statements.

	Provisional fair values
	FFA £m	WBB £m	Clemaco £m	Total £m
Goodwill	29.7	148.6	0.5	178.8
Other intangible assets	19.8	62.4	-	82.2
Property, plant and equipment	1.6	2.0	0.1	3.7
Right of use assets	2.3	7.6	-	9.9
Retirement benefit assets	1.3	-	-	1.3
Inventories	0.1	-	-	0.1
Trade and other receivables	14.9	22.5	1.3	38.7
Cash and cash equivalents	2.1	5.1	6.1	13.3
Corporation tax assets	-	0.1	0.1	0.2
Trade and other payables	(19.2)	(15.3)	(1.4)	(35.9)
Provisions	(1.7)	(1.0)	-	(2.7)
Retirement benefit obligations	(2.7)	-	-	(2.7)
Loans	(14.3)	-	-	(14.3)
Corporation tax liabilities	(0.7)	-	-	(0.7)
Deferred tax liabilities	(1.3)	(8.6)	-	(9.9)
Lease obligations	(2.3)	(11.5)	-	(13.8)
Acquisition date fair value of consideration transferred	29.6	211.9	6.7	248.2
Satisfied by:
Cash	29.6	211.9	6.7	248.2
Total consideration	29.6	211.9	6.7	248.2

Goodwill on the acquisitions of FFA and WBB represents the premium associated with expanding the Group's capabilities in the relevant sectors and geographical locations in which the acquired companies operate. For FFA, this represents scale within facilities management in Australia, whilst for WBB it relates to the increased presence in the US defence market as well as considerable expertise in complementary areas. No tax deductions related to the goodwill arising on either transaction are available. The acquisition related intangibles represent customer relationships which have been valued using our best estimate of forecast cash flows discounted to present value and, in the case of WBB, certain software related assets and the brand names associated with them.

The total impact of acquisitions to the Group's cash flow position in the period was as follows:

	£m
Cash consideration in respect of current period acquisitions:
FFA	27.5
WBB	206.8
Clemaco	0.6
Net cash outflow in relation to acquisitions	234.9
Exceptional acquisition related costs	(4.9)
Net cash impact in the year on acquisitions	230.0

Costs associated with the acquisitions of both FFA and WBB are shown as exceptional costs in the Consolidated Income Statement. The total acquisition related costs recognised in exceptional items for the year ended 31 December 2021 was £4.9m. There were no material costs associated with the acquisition of Clemaco during the year.

6. Revenue from contracts with customers

Revenue

Information regarding the Group's major customers and a segmental analysis of revenue is provided in note 3.

An analysis of the Group's revenue from its key market sectors, together with the timing of revenue recognition across the Group's revenue from contracts with customers, is as follows:

Year ended 31 December 2021	UK&E  m	Americas £m	AsPac  m	Middle East £m	Total £m
Key sectors
Defence	262.2	764.6	145.6	31.4	1,203.8
Justice & Immigration	468.9	-	374.2	-	843.1
Transport	149.3	79.9	7.3	135.6	372.1
Health & Other Facilities Management	260.9	-	220.3	94.4	575.6
Citizen Services	990.3	275.5	161.0	3.2	1,430.0
	2,131.6	1,120.0	908.4	264.6	4,424.6
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous periods	2.5	-	6.6	-	9.1
Revenue recognised at a point in time	17.3	-	8.4	-	25.7
Products and services transferred over time	2,111.8	1,120.0	893.4	264.6	4,389.8
	2,131.6	1,120.0	908.4	264.6	4,424.6

Yar ended 31 December 2020 (restated*)	UK&E  m	Americas £m	AsPac  m	Middle East £m	Total £m
Key sectors
Defence	243.7	725.2	133.3	27.0	1,129.2
Justice & Immigration	393.7	-	328.1	-	721.8
Transport	143.3	84.7	7.7	194.2	429.9
Health & Facilities Management	247.8	-	110.0	102.8	460.6
Citizen Services	748.9	254.4	139.8	0.2	1,143.3
	1,777.4	1,064.3	718.9	324.2	3,884.8
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous periods	1.1	-	(0.8)	-	0.3
Revenue recognised at a point in time	14.2	-	0.8	-	15.0
Products and services transferred over time	1,762.1	1,064.3	718.9	324.2	3,869.5
	1,777.4	1,064.3	718.9	324.2	3,884.8

*  The prior period balances have been restated to ensure consistent application of the sector definitions used for the current period. This follows a review in 2021 of the Group's sector definitions to align with the strategic objectives of the Group. The change has no impact to the income statement or the balance sheet of the Group.

Transaction price allocated to remaining performance obligations

The following table shows the transaction price allocated to remaining performance obligations. This represents revenue expected to be recognised in subsequent periods arising on existing contractual arrangements.

In assessing the future transaction price, the judgements of most relevance are the future term over which the transaction price is calculated and the estimation of variable revenue to be included.

Where a contract with a customer includes, within the term of the committed contract, provisions for price-rebasing or a provision for market testing, revenue beyond these is included to the extent that there are no indicators which suggest that the contract will not continue past this point and it is highly probable that a significant reduction will not occur. Where there is a requirement for the Group, or a customer, to enter into to a new contract, rather than continuing an existing contract, such an extension is not included for the purposes of calculating future transaction price.

Additionally, the Group has a small subset of contracts that contain a termination for convenience clause, for example due to national security considerations which are assumed by the Group not to be without cause. These contracts are considered to run for the full intended term for the purpose of calculating the transaction price allocated to remaining performance obligations, other than instances where the Group believes that termination will occur before the original contract end date.

Under the terms of certain contracts which the Group has with its customers, the Group's compensation for providing those services is based on volumes or other drivers of variable activity, such as additional activities awarded under existing contracts. These volumes are not guaranteed, however based on historic volumes and the nature of the contracts in operation, such as the provision of asylum seeker accommodation or passenger transport, Management are able to prepare a sufficiently reliable estimate of the minimum level of variable revenue that is likely to be earned. As a result, variable revenue is included only to the level at which Management remain confident that a significant reduction will not occur.

As part of the considerations around variable revenue, Management consider the impact that factors such as contractual performance, anticipated demand and pricing (including indexation) may have on future revenue recognised. Management also consider whether there are possible impacts from climate change and other environmental related risks, with certain sectors considered to be more at risk than others, however no adjustment was identified in relation to existing contracts' future revenue forecasts.

	UK&E  m	Americas £m	AsPac  m	Middle East £m	Total £m
Within 1 year (2022)	1,580.1	597.3	803.1	135.4	3,115.9
Between 2 - 5 years (2023 - 2026)	3,666.7	195.4	1,524.5	193.9	5,580.5
5 years and beyond (2027+)	3,340.1	118.4	1,456.6	118.4	5,033.5
	8,586.9	911.1	3,784.2	447.7	13,729.9

7. Exceptional items

Exceptional items are items of financial performance that are outside normal operations and are material to the results of the Group either by virtue of size or nature. As such, the items set out below require separate disclosure on the face of the income statement to assist in the understanding of the performance of the Group.

For the year ended 31 December	2021 £m	2020 £m
Exceptional items arising
Exceptional profit on disposal of subsidiaries and operations	-	11.0
Other exceptional operating items
Restructuring costs	0.1	0.1
Costs associated with UK Government review	-	(1.3)
Increase in onerous lease provision	(0.6)	-
Movement in other provisions and other items	-	2.6
Reversal of impairment in interest in joint venture and related loan balances	-	2.5
Costs associated with successful acquisition	(4.9)	(2.4)
Profit on sale of investments	4.2	-
Other exceptional operating items	(1.2)	1.5
Exceptional operating items	(1.2)	12.5
Exceptional tax	(0.2)	(0.4)
Total exceptional operating items net of tax	(1.4)	12.1

Other exceptional operating items

The Group completed the acquisition of Facilities First Australia Holdings Pty Limited (FFA) and Whitney, Bradley & Brown, Inc (WBB) in 2021. The combined transaction and implementation costs incurred during the year ended 31 December 2021 of £4.9m have been treated as exceptional costs in line with the Group's accounting policy and the treatment of similar costs during the year ended 31 December 2020.

During 2021, the Group sold an investment recording a profit of £4.2m which was treated as exceptional in line with the Group's accounting policy.

The Group has recorded an additional £0.6m property provision related to the onerous lease of a building to cover the expected loss until March 2025. The building was vacated following the strategy review completed in 2014 and therefore the associated cost is treated as exceptional.

Exceptional costs of £1.3m were recorded in 2020 associated with the UK Government review and the programme of Corporate Renewal. No such costs were incurred in the current financial year.

Exceptional tax

Exceptional tax for the year was a charge of £0.2m (2020: £0.4m charge) which arises on exceptional items within operating profit. 

The tax charge on exceptional costs has been increased as an element of the exceptional costs associated with the WBB acquisition were not allowable for tax. This is partially offset by previously unrecognised capital losses in Australia that were utilised against the gain arising from the sale of an investment reducing the charge.

8. Investment revenue

Year ended 31 December	2021  m	2020 £m
Interest receivable on other loans and deposits	0.6	0.2
Net interest receivable on retirement benefit obligations (note 20)	1.1	1.2
Other dividends received	0.6	0.4
Movement in discount on other debtors	0.1	0.1
	2.4	1.9

9. Finance costs

Year ended 31 December	2021  m	2020 £m
Interest payable on lease liabilities	7.8	9.5
Interest payable on other loans	15.6	15.3
Facility fees and other charges	2.4	2.1
Movement in discount on provisions	-	0.2
	25.8	27.1
Foreign exchange on financing activities	0.6	0.7
	26.4	27.8

10. Tax

10 (a) Income tax recognised in the income statement

Year ended 31 December	Before exceptional items  2021  m	Exceptional items  2021 £m	Total 2021 £m	Before exceptional items  2020  m	Exceptional items  2020 £m	Total 2020 £m
Current income tax
Current income tax charge	34.6	0.8	35.4	41.8	0.4	42.2
Adjustments in respect of prior years	1.3	-	1.3	(1.3)	-	(1.3)
Deferred tax
Current year credit	(146.5)	(0.6)	(147.1)	(23.5)	-	(23.5)
Adjustments in respect of prior years	(1.3)	-	(1.3)	1.9	-	1.9
	(111.9)	0.2	(111.7)	18.9	0.4	19.3

 

The tax expense for the year can be reconciled to the profit in the Consolidated Income Statement as follows:

Year ended 31 December	Before exceptional items 2021 £m	Exceptional items 2021 £m	Total 2021 £m	Before exceptional items 2020 £m	Exceptional items 2020 £m	Total 2020 £m
Profit before tax	193.4	(1.2)	192.2	140.8	12.5	153.3
Tax calculated at a rate of 19.00% (2020: 19.00%)	36.7	(0.2)	36.5	26.7	2.4	29.1
Expenses not deductible for tax purposes*	1.8	0.6	2.4	6.5	(0.2)	6.3
UK unprovided deferred tax**	-	-	-	(4.2)	(1.9)	(6.1)
Other unprovided deferred tax	2.2	-	2.2	2.5	-	2.5
Effect of the use of unrecognised tax losses	(0.4)	(0.3)	(0.7)	(1.1)	-	(1.1)
Additional recognition of UK deferred tax asset***	(146.4)	-	(146.4)	(9.5)	-	(9.5)
Overseas rate differences	11.2	0.1	11.3	7.2	0.1	7.3
Other non-taxable income	(4.6)	-	(4.6)	(1.4)	-	(1.4)
Adjustments in respect of prior years****	-	-	-	0.6	-	0.6
Adjustments in respect of deferred tax on pensions	-	-	-	(5.9)	-	(5.9)
Impact of revaluing brought forward UK provided deferred tax from 19% to 25%	(10.8)	-	(10.8)	-	-	-
Adjustments in respect of equity accounted investments	(1.6)	-	(1.6)	(2.5)	-	(2.5)
Tax (credit)/charge	(111.9)	0.2	(111.7)	18.9	0.4	19.3

*  Relates to costs that are not allowable for tax deduction under local tax law. 

**  Arises due to timing differences between when an amount is recognised in the income statement and when the amount is subject to UK tax. This is nil in the current year due to the recognition of previously unrecognised UK deferred tax assets as referred to below.

*** In the current year, the Group brought onto the balance sheet a previously unrecognised UK deferred tax asset of £144.8m at 1 January 2021. This asset was revalued during year giving a net adjustment of £146.4m.

**** Included within adjustments in respect of prior years for the year ended 31 December 2020, is a charge of £4.9m being an immaterial adjustment related to the deferred tax impact of the derecognition of balance sheet liabilities recognised in retained earnings on implementation of IFRS 16 Leases in 2019.

The income tax charge for the year is based on the UK statutory rate of corporation tax for the period of 19.00% (2020: 19.00%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

Management are closely monitoring the Organisation for Economic Co-operation and Development's Pillar II solution with regards to global minimum corporate tax for multinational enterprises, which is expected to be enacted in 2022 with application from 1 January 2023. The accounting implications under IAS12 will be determined when the relevant legislation is available.

10 (b) Income tax recognised in the SOCI

Year ended 31 December	2021 £m	2020 £m
Current tax
Taken to retirement benefit obligations reserves	0.8	-
Deferred tax
Relating to net investment hedge	4.0	-
Taken to retirement benefit obligations reserve	(22.5)	(5.9)
	(17.7)	(5.9)

10 (c) Tax on items taken directly to equity

Year ended 31 December	2021 £m	2020 £m
Current tax
Recorded in share based payment reserve	(0.7)	-
Deferred tax
Recorded in share based payment reserve	0.7	-
	-	-

11. Deferred tax

Deferred income taxes are calculated in full on temporary differences under the liability method using local substantively enacted tax rates.

The movement in net deferred tax assets during the year was as follows:

	2021 £m	2020  £m
At 1 January - asset	(56.3)	(37.2)
Income statement credit*	(148.4)	(21.6)
Items recognised in equity and in other comprehensive income	17.8	5.9
Arising on acquisition	9.9	-
Exchange differences	3.0	(3.4)
At 31 December - asset	(174.0)	(56.3)

*  Included within the income statement credit for the year ended 31 December 2020, is a charge of £4.9m being an immaterial adjustment related to the deferred tax impact of the derecognition of balance sheet liabilities recognised in retained earnings on implementation of IFRS 16 Leases in 2019.

The movement in deferred tax assets and liabilities during the year was as follows:

	Temporary differences on assets/intangibles  m	Share based payment and employee benefits £m	Retirement benefit schemes £m	Onerous contract provisions  m	Tax losses £m	Other temporary differences £m	Total £m
At 1 January 2021	25.5	(24.7)	14.8	(0.5)	(31.1)	(40.3)	(56.3)
(Credited)/charged to income statement (note 10a)	(11.7)	(7.6)	(0.8)	(0.3)	(127.3)	(0.7)	(148.4)
Arising on acquisition of a subsidiary	5.6	(2.4)	(0.4)	-	(3.3)	10.4	9.9
Items recognised in equity and in other comprehensive income (note 10b and 10c)	-	(0.7)	22.5	-	(4.0)	-	17.8
Exchange differences	0.5	0.9	0.1	-	(0.3)	1.8	3.0
At 31 December 2021	19.9	(34.5)	36.2	(0.8)	(166.0)	(28.8)	(174.0)

Other temporary differences include amounts such as provisions and accruals which, under certain tax laws, are only allowable when expended.

Of the amount credited to the income statement, £nil has been taken to costs of sales in respect of the R&D Expenditure Credit.

As it is now considered that the UK business has returned to sustainable profitability, tax losses of £662m have been valued on the balance sheet at 31 December 2021.

The movement in deferred tax assets and liabilities during the previous year was as follows:

	Temporary differences on assets/intangibles  m	Share based payment and employee benefits £m	Retirement benefit schemes £m	Onerous contract provisions  m	Tax losses £m	Other temporary differences £m	Total £m
At 1 January 2020	24.4	(15.6)	6.8	(1.9)	(21.0)	(29.9)	(37.2)
Charged/(credited) to income statement (note 10a)*	2.8	(6.2)	-	1.3	(10.1)	(9.4)	(21.6)
Items recognised in equity and in other comprehensive income (note 10b and 10c)	-	-	5.9	-	-	-	5.9
Reclassification	-	(2.0)	2.0	-	-	-	-
Exchange differences	(1.7)	(0.9)	0.1	0.1	-	(1.0)	(3.4)
At 31 December 2020	25.5	(24.7)	14.8	(0.5)	(31.1)	(40.3)	(56.3)

*  Included within other temporary differences is a charge of £4.9m being an immaterial adjustment in the year ended 31 December 2020 related to the deferred tax impact of the derecognition of balance sheet liabilities recognised in retained earnings on implementation of IFRS 16 Leases in 2019.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following analysis shows the deferred tax balances (after offset) for financial reporting purposes:

	2021 £m	2020 £m
Deferred tax liabilities	40.3	26.9
Deferred tax assets	(214.3)	(83.2)
	(174.0)	(56.3)

As at the balance sheet date, the UK has a potential deferred tax asset of £234.3m (2020: £189.9m) available for offset against future profits.  A deferred tax asset has currently been recognised of £162.8m (2020: £30.6m).  Recognition has been based on there being sufficient certainty of future taxable profits against which these deductions can be utilised.  No deferred tax asset has been recognised in respect of the remaining asset (net £71.5m) as they are more restricted in their use either due to their nature, such as capital losses, or the period and entity in which they arose, as revenue losses made before April 2017 are more restricted in their use.  On 24 May 2021 legislation which increases the UK tax rate from 19% to 25% from April 2023 was substantively enacted.  These measures increase the Group's future current tax charge accordingly. The deferred tax balance at 31 December 2021 has been calculated reflecting the increased rate of 25% where the balance is expected to be realised after April 2023. 

Losses of £1.3m (2020: £0.1m) expire within 5 years, losses of £0.1m (2020: £0.5m) expire within 6-10 years, losses of £nil (2020: £0.7m) expire within 20 years and losses of £1,077.4m (2020: £1,052.3m) may be carried forward indefinitely.

12. Earnings per share

Basic and diluted earnings per ordinary share (EPS) have been calculated in accordance with IAS 33 Earnings per Share.

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

Number of shares	2021 millions	2020 millions
Weighted average number of ordinary shares for the purpose of basic EPS	1,222.6	1,229.1
Effect of dilutive potential ordinary shares: Shares under award	21.4	25.2
Weighted average number of ordinary shares for the purpose of diluted EPS	1,244.0	1,254.3

Earnings per share

Basic EPS	Earnings 2021 £m	Per share amount 2021 pence	Earnings 2020 £m	Per share amount 2020 pence
Earnings for the purpose of basic EPS	303.9	24.86	133.8	10.89
Effect of dilutive potential ordinary shares	-	(0.43)	-	(0.22)
Diluted EPS	303.9	24.43	133.8	10.67
Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS	303.9	24.86	133.8	10.89
Add back exceptional items	1.2	0.10	(12.5)	(1.02)
Add back tax on exceptional items	0.2	0.01	0.4	0.03
Earnings excluding exceptional items for the purpose of basic EPS	305.3	24.97	121.7	9.90
Effect of dilutive potential ordinary shares	-	(0.43)	-	(0.20)
Excluding exceptional items, diluted	305.3	24.54	121.7	9.70

13. Goodwill

					Cost £m		Accumulated impairment losses  m		Carrying amount £m
At 1 January 2020					1,006.0		(331.8)		674.2
Exchange differences					(11.6)		7.0		(4.6)
At 31 December 2020					994.4		(324.8)		669.6
Acquisitions					178.8		-		178.8
Exchange differences					7.0		(2.7)		4.3
At 31 December 2021					1,180.2		(327.5)		852.7
	Goodwill balance 1 January 2021 £m	Acquisitions £m	Exchange differences 2021  m	Goodwill balance 31 December 2021 £m		Headroom on impairment analysis 2021  m		Headroom on impairment analysis 2020 £m
UK & Europe	184.4	0.5	(1.3)	183.6		728.0		688.5
Americas	366.7	148.6	12.5	527.8		415.8		658.3
AsPac	108.6	29.7	(7.0)	131.3		380.6		328.0
Middle East	9.9	-	0.1	10.0		103.6		103.2
	669.6	178.8	4.3	852.7		1,628.0		1,778.0

Movements in the balance since the prior year end can be seen as follows:

Included above is the detail of the headroom on the cash generating units (CGUs) existing at the year end, which reflects where future discounted cash flows are greater than the underlying assets and includes all relevant cash flows, including where provisions have been made for future costs and losses. Headroom overall has decreased compared to 2020 driven primarily by the movement in cash flows in the Americas CGU compounded by an increase in discount and terminal growth rates. The UK & Europe and AsPac CGUs have both seen increases in headroom as improvements to future cash flows have outweighed the impact of discount rates.

The key quantifiable assumptions applied in the impairment review are set out below:

	Discount rate 2021 %	Discount rate 2020*  %	Terminal growth rates 2021 %	Terminal growth  rates 2020 %
UK & Europe	9.3	8.6	2.0	1.9
Americas	10.9	10.7	2.4	2.5
AsPac	11.0	10.1	2.2	2.2
Middle East	12.1	12.1	1.3	1.6

*  The financial statements for the year ended December 2020 disclosed different discount rates to those used in the underlying impairment analysis. These have therefore been restated, but this has no impact on the conclusions regarding impairment.

Discount rate

Pre-tax discount rates derived from the Group's post-tax weighted average cost of capital have been used in discounting the projected cash flows. These rates are reviewed annually with external advisers and are adjusted for risks specific to the market in which the CGU operates.

Discount rates used in 2021 have increased compared with 2020 with the exception of the Middle East where the rate has remained flat. The change can be attributed to an increase in the equity risk premium (ERP) applied by management following a return to the same margin of ERP over the base model as was used until the end of 2019. In 2020, this margin was removed owing to the range of discount rates amongst the Group's peers narrowing, however a return to a wider spread of discount rates, as the pandemic eases, has allowed a return to the previous approach.

Terminal growth rates

The calculations include a terminal value based on the projections for the fifth year of the short-term plan, with a growth rate assumption applied which extrapolates the business into perpetuity. The terminal growth rates are based on long-term inflation rates of the geographic market in which the CGUs operate and therefore do not exceed the average long-term growth rates forecast for the individual markets. These are provided by external sources and have not materially changed as compared with 2020.

Short-term growth rates

The annual impairment test is performed immediately prior to the year end, based initially on five-year cash flow forecasts approved by Management. Short-term revenue growth rates used in each CGU five-year plan are based on internal data regarding our current contracted position, the pipeline of opportunities and forecast growth for the relevant market.

Short-term profitability and cash conversion is based on our historic experiences and a level of judgement is applied to expected changes in both. Where businesses have been poor performers in recent history, turnaround has only been assumed where a detailed and achievable plan is in place and all forecasts include cash flows relating to contracts where onerous contract provisions have been made.

As explained in note 6, Management considers certain sectors in which the Group operates to be more exposed to environmental risks than others. For example, changes in consumer attitudes to aviation or the use of private vehicles, may have an impact on the Group's Transport contracts. Currently, no adjustment to existing contracts is required, although Management will continue to monitor the potential impact of environmental risks and will include these in future analysis as required.

Sensitivity analysis

Sensitivity analysis has been performed for each key assumption; a 1% movement in discount rates and a 1% movement in terminal growth rates are considered to be reasonably possible, as has a degree of estimation uncertainty in the cash flows associated with each CGU of up to 10% in the final year of the plan. Performing a sensitivity analysis on short-term growth rates is not a numerical exercise, as growth rates are based on known opportunities and the likelihood of those opportunities being won and turned into resulting cash flows. However, in order to model a sensitivity scenario that reflects the judgement associated with short-term growth rates, Management have applied a no growth model to cash flows outside of the 2-year budget period. No impairment results from these changes, even when combined with the additional 1% increase in discount rates and 1% reduction in terminal growth rates.

Management has also considered the sensitivity of cash flows in the terminal year for the CGUs with the lowest headroom. Terminal year cash flows would need to reduce by 56% (£12.9m) and 41% (£27.5m) in the Middle East and AsPac, respectively, before an impairment would need to be recognised.

14. Contract assets, trade and other receivables

Contract asset: Non-current	2021  m	2020 £m
Accrued income	2.6	-

Contract assets: Current	2021  m	2020 £m
Accrued income and other unbilled receivables	306.5	278.0
Capitalised bid costs	2.4	2.8
Capitalised mobilisation and phase in costs	9.8	15.3
Other contract assets	0.3	-
	319.0	296.1

An Expected Credit Loss (ECL) is recognised against contract assets only when it is considered to be material and there is evidence that the credit worthiness of a counterparty may render balances irrecoverable.

The Group's Consolidated Balance Sheet includes capitalised bid and phase in costs that are realised as a part of the normal operating cycle of the Group. These assets represent up-front investment in contracts which are recoverable and expected to provide benefits over the life of those contracts. Bid costs are capitalised only when they relate directly to a contract and are incremental to securing the contract. Any costs which would have been incurred whether or not the contract is actually won are not considered to be capitalised bid costs. 

Contract costs can only be capitalised when the expenditure meets all three criteria identified in note 2 to the Group's Consolidated Financial Statements.

Movements in the period were as follows:

Capitalised other contract assets, bid and phase in costs	2021  m	2020 £m
At 1 January	18.1	23.0
Additions	0.3	1.3
Amortisation	(4.0)	(6.8)
Written off	(1.5)	-
Exchange differences	(0.4)	0.6
At 31 December	12.5	18.1

Total trade and other receivables held by the Group at 31 December 2021 amount to £321.9m (2020: £338.8m).

Trade and other receivables: Non-current	2021  m	2020 £m
Trade receivables	-	3.1
Other investments	-	9.4
Prepayments	0.4	1.7
Other receivables	13.2	11.1
	13.6	25.3

Other non-current receivables include long-term employee compensation plans, advances and other non-trade receivables.

Trade and other receivables: Current	2021  m	2020 £m
Trade receivables	234.4	244.3
Prepayments	42.9	45.5
Amounts owed by joint ventures and associates	1.7	0.2
Other receivables	26.7	23.5
	305.7	313.5

Other receivables include amounts due from third parties, advances paid to suppliers and other non-trade receivables.

The management of trade receivables is the responsibility of the reportable operating segments, although they report to the Group on a monthly basis on debtor days, debtor ageing and significant outstanding debts. The average credit period taken by customers is 19 days (2020: 23 days) and no interest was charged on overdue amounts in the current or prior reporting period.

Each customer has an external credit score which determines the level of credit provided. However, the majority of our customers have a sovereign credit rating as a result of being government organisations. Of the trade receivables balance at the end of the year, £68.0m is due from agencies of the UK Government, the Group's largest customer, £54.7m from the Australian Government, £37.9m from the US Government and £23.8m from the Government of the United Arab Emirates. There are no other customers who represent more than 5% of the total balance of trade receivables. Of the trade receivables balance at the end of 2020, £63.5m was due from agencies of the UK Government, £57.1m from the Australian Government, £27.8m from the US Government and £42.7m from the Government of the United Arab Emirates. The maximum potential exposure to credit risk in relation to trade receivables at the reporting date is equal to their carrying value. The Group does not hold any collateral as security.

The Group does not have any material impairments associated with expected credit losses due to the sovereign credit rating of most customers. Further specific impairments to trade receivables are based on estimated irrecoverable amounts and provisions on outstanding balances greater than a year old unless there is firm evidence that the balance is recoverable. The total amount of these impairments for the Group was £4.4m as of 31 December 2021 (2020: £7.0m).

Ageing of trade receivables	2021  m	2020 £m
Not due	191.3	175.5
Overdue by less than 30 days	25.1	49.1
Overdue by between 30 and 60 days	8.2	5.5
Overdue by more than 60 days	14.2	21.2
Allowance for doubtful debts	(4.4)	(7.0)
	234.4	244.3

Of the total overdue trade receivable balance, 92% (2020: 73%) relates to the Group's four major governmental customers (being the governments of the UK, US, Australia and the United Arab Emirates).

Movements on the Group allowance for doubtful debts	2021  m	2020 £m
At 1 January	7.0	5.5
Arising on acquisition	1.6	-
Net charges and releases to income statement	0.4	1.9
Utilised	(4.7)	(0.2)
Exchange differences	0.1	(0.2)
At 31 December	4.4	7.0

Included in the current other receivables balance is a further £0.8m (2020: £0.2m) due from agencies of the UK Government.

15. Contract liabilities, trade and other payables

Contract liabilities: Current	2021  m	2020  £m
Deferred income	61.3	42.3

Contract liabilities: Non-current	2021  m	2020  £m
Deferred income	48.6	47.5

The allocation of deferred income between current and non-current is presented on the basis that the current portion will unwind in the following twelve months through revenue.  There were no material items in the current portion of deferred income in 2020 which did not unwind during the year.

Total trade and other payables held by the Group at 31 December 2021 amount to £533.3m (2020: £543.3m).

Trade and other payables: Current	2021  m	2020 £m
Trade payables	89.2	99.6
Other payables	123.7	134.5
Accruals	313.1	299.8
	526.0	533.9

Other payables include sales and other direct taxes, payroll taxes, salaries and other non-trade payables.

The average credit period taken for trade purchases is 23 days (2020: 25 days).

Trade and other payables: Non-current	2021  m	2020 £m
Other payables	7.3	9.4

16. Leases

The Directors estimate that the fair value of the Group's lease obligations approximates their carrying amount. The Group uses leases in the delivery of its contractual obligations and the services required to support the delivery of those contracts, including administrative functions. There are no material future cash outflows relating to leases in place as at 31 December 2021 that are not reflected in the minimum lease payments disclosed below and the Group does not have any leases to which it is contracted but which are not yet reflected in the minimum lease payments. Additionally, the Group does not have any leases where payments are variable. The Group has a significant number of leases which include either termination or extension options, or both. Included in amounts payable under leases below are only those amounts which reflect Management's view of the reasonably certain lease term in line with current operational requirements.

No lease liability is recognised in respect of leases which have a lease term of less than twelve months in duration at the point of entering into the lease, or where the purchase price of the underlying right of use asset is less than £5,000.

The total cash outflow for leases, excluding short-term leases and low-value leases, in the year was £119.1m (2020: £110.3m). This is presented in the Consolidated Cash Flow Statement as £111.3m (2020: £100.8m) relating to the principal element of the lease liability payments, with the remaining balance of £7.8m (2020: £9.5m) presented within interest paid.

Amounts payable under leases	Minimum lease payments 2021 £m	Minimum lease payments  2020 £m
Within one year	131.0	115.3
Between one and five years	263.9	228.9
After five years	53.6	90.5
	448.5	434.7
Less: future finance charges	(18.2)	(32.1)
Present value of lease obligations	430.3	402.6
Less: amount due for settlement within one year (shown within current liabilities)	(126.3)	(109.3)
Amount due for settlement after one year	304.0	293.3

The following amounts are included in the Group's Consolidated Financial Statements in respect of its leases:

	Note	2021  m	2020 £m
Additions to right of use assets (including transitional adjustments)		201.0	159.1
Depreciation charge on right of use assets (including transitional adjustments)		(109.0)	(93.5)
Impairment of right of use assets		-	(0.4)
Net disposals of right of use assets		(72.6)	(20.7)
Net reclassifications from right of use assets		(0.2)	(2.0)
Net exchange differences on right of use assets		0.1	(0.3)
Carrying amount of right of use assets		416.7	387.5
Current lease liabilities		126.3	109.3
Non-current lease liabilities		304.0	293.3
Capital element of lease repayments		(111.3)	(100.8)
Interest expense on lease liabilities	9	(7.8)	(9.5)
Profit on early termination of leases		0.6	2.9
Expenses relating to short-term or low-value leases		(2.8)	(5.6)

17. Analysis of Net Debt

The analysis below provides a reconciliation between the opening and closing positions in the balance sheet for liabilities arising from financing activities together with movements in derivatives relating to the items included in Net Debt.  There were no changes in fair value noted in either the current or prior year.

	At 1 January 2021 £m	Cash flow £m	Acquisitions*	Exchange differences £m	Non-cash movements** £m	At 31 December 2021  m
Loans payable	(388.8)	29.7	(14.3)	(2.9)	(0.7)	(377.0)
Lease obligations	(402.6)	111.3	(13.8)	(0.5)	(124.7)	(430.3)
Liabilities arising from financing activities	(791.4)	141.0	(28.1)	(3.4)	(125.4)	(807.3)
Cash and cash equivalents	335.7	(145.8)	13.3	(4.8)	-	198.4
Derivatives relating to Net Debt	(4.7)	-	-	5.3	-	0.6
Net Debt	(460.4)	(4.8)	(14.8)	(2.9)	(125.4)	(608.3)

*  Acquisitions represent the net cash/(debt) acquired on acquisition.

** Non-cash movements relate to the net impact of entering into new leases and exiting certain leases before the end of the lease term without payment of a cash termination cost.

	At 1 January 2020 £m	Cash flow £m	Exchange differences £m	Non-cash movements* £m	At 31 December 2020  m
Loans payable	(305.0)	(99.4)	15.6	-	(388.8)
Lease obligations	(369.9)	100.8	0.9	(134.4)	(402.6)
Liabilities arising from financing activities	(674.9)	1.4	16.5	(134.4)	(791.4)
Cash and cash equivalents	89.5	244.4	1.8	-	335.7
Derivatives relating to Net Debt	1.0	-	(5.7)	-	(4.7)
Net Debt	(584.4)	245.8	12.6	(134.4)	(460.4)

*  Non-cash movements relate to the net impact of entering into new leases and exiting certain leases before the end of the lease term without payment of a cash termination cost.

18. Provisions

	Employee related £m	Property  m	Contract £m	Other  m	Total £m
At 1 January 2021	83.2	15.7	14.5	64.6	178.0
Arising on acquisition	1.7	0.9	-	0.1	2.7
Transferred from working capital	2.1	-	-	23.2	25.3
Charged to income statement - exceptional	-	0.6	-	-	0.6
Charged to income statement - other	18.3	4.4	2.1	14.8	39.6
Released to income statement - exceptional	(0.1)	-	-	(0.3)	(0.4)
Released to income statement - other	(6.2)	(4.2)	(2.1)	(8.5)	(21.0)
Included in the valuation of right of use asset	-	3.1	-	-	3.1
Utilised during the year	(22.6)	(1.0)	(0.3)	(3.6)	(27.5)
Exchange differences	(2.6)	(0.2)	-	-	(2.8)
At 31 December 2021	73.8	19.3	14.2	90.3	197.6
Analysed as:
Current	29.2	5.7	14.0	30.7	79.6
Non-current	44.6	13.6	0.2	59.6	118.0
	73.8	19.3	14.2	90.3	197.6

Employee related provisions include amounts for long-term service awards and terminal gratuity liabilities which have been accrued and are based on contractual entitlement, together with an estimate of the probabilities that employees will stay until rewards fall due and receive all relevant amounts. There are also amounts included in relation to restructuring. The provisions will be utilised over various periods driven by local legal or regulatory requirements, the timing of which is not certain.

The majority of property provisions relate to leased properties and are associated with the requirement to return properties to either their original condition, or to enact specific improvement activities in advance of exiting the lease. Dilapidations associated with leased properties are held as a provision until such time as they fall due, with the longest running lease ending in January 2037.

A contract provision is recorded when a contract is deemed not be profitable and therefore is considered onerous. The present value of the estimated future cash outflow required to settle the contract obligations as they fall due over the respective contracts has been used in determining the provision. Individual provisions are only discounted where the impact is assessed to be significant. Currently, no contract provisions are discounted. Discount rates are calculated based on the estimate risk-free rate of interest for the region in which the provision is located and matched against the ageing profit of the provision.

Included within other provisions is:

·	£43.0m related to indemnities provided in respect of a historic business transaction. Within this amount, £36.0m is reserved for potential tax liabilities arising within the disposed company when local tax submissions are reviewed by the relevant authorities which represents Management's best estimate of the likely outcome based on past experiences and other known factors. Under the indemnity, £36.0m is the Group's maximum potential exposure to these tax matters. The timing of utilisation is dependent on future events which could occur within the next twelve months, or over a longer period, with the majority expected to be settled by 31 December 2023.
·	£20.1m related to claims made against the Group. These claims are varied in nature, although they typically come from either the Group's service users, claimants for vehicle related incidents or the Group's employees. Whilst there is some level of judgement on the amount to be recorded, in almost all instances the variance to the actual claim paid out will not individually be material, however the timing of when the claims are reported and settled is less certain as a process needs to be followed prior to the amounts being paid. The Group has decided to reclassify these claim liabilities from other payables to other provisions during 2021 as, although the liability is materially accurate, there is sufficient uncertainty associated with the timing of settlement. The claim liabilities reported in other payables in 2020 was £19.8m. The adjustment was made in the current year and no prior year adjustment was considered necessary since it was concluded that the balance sheet reclassification did not constitute a material prior period error that required restatement.
·	£27.2m related to legal and other costs that the Group expects to incur over an extended period, in respect of past events for which a provision has been recorded, none of which are individually material.

19. Contingent liabilities

The Group has guaranteed overdrafts, leases, and bonding facilities of its joint ventures and associates up to a maximum value of £5.7m (2020: £3.8m). The actual commitment outstanding at 31 December 2021 was £5.7m (2020: £3.8m).

The Group has provided certain guarantees and indemnities in respect of performance and other bonds, issued by its banks on its behalf in the ordinary course of business. The total commitment outstanding as at 31 December 2021 was £263.8m (2020: £247.9m).

Following the announcement during 2020 that the Group has received a claim seeking damages for alleged losses as a result of the reduction in Serco's share price in 2013, the Group has continued to assess the merit, likely outcome and potential impact on the Group of any such litigation that either has been or might potentially be brought against the Group. Any outcome is subject to a number of significant uncertainties. The Group does not currently assess the merits as strong, especially given the legal uncertainties in such actions.

The Group is also aware of other claims and potential claims which involve or may involve legal proceedings against the Group although the timing of settlement of these claims remains uncertain. The Directors are of the opinion, having regard to legal advice received and the Group's insurance arrangements, that it is unlikely that these matters will, in aggregate, have a material effect on the Group's financial position.

20. Retirement benefit schemes

Characteristics

The Group contributes to defined benefit schemes for qualifying employees of its subsidiaries in the UK and Europe. The normal contributions expected to be paid during the financial year ending 31 December 2022 are £6.8m (2021: £8.0m).

Among our non-contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The most recent full actuarial valuation of this scheme was undertaken as at 5 April 2018 and completed in June 2019. The actuarially assessed deficit for funding purposes was £26.0m. The exercise to value the scheme as at 5 April 2021 is underway with completion anticipated during the first half of 2022 with an expected increase to the actuarially assessed deficit for funding purposes as a result of the RPI reform. As a scheme well hedged for inflation risk, the expected impact of RPI reform is a £65m increase to liabilities. This will be partially offset by changes to mortality assumptions and the scheme will work with the Trustees during the 2021 valuation process to address the impact on the funding level.

Pension obligations are valued separately for accounting and funding purposes and there is often a material difference between these valuations. As at 31 December 2021, the estimated actuarial surplus of SPLAS was £23m (2020: £20m deficit) based on the actuarial assessment on the funding basis valuation before the impact of RPI reform, whereas the accounting valuation resulted in an asset of £166.2m (2020: £114.6m). The primary reason a difference arises is that pension scheme accounting requires the valuation to be performed on the basis of a best estimate whereas the funding valuation used by the trustees makes more prudent assumptions.

The schedule of contributions for SPLAS was agreed during 2019, with 30.8% of pensionable salaries due to be paid from 1 November 2019, changing to 30.3% from 1 November 2020. The schedule of contributions also determined that additional shortfall contributions were required. A total of £13.2m of these have already been made, with further amounts of £1.7m for the years 2022 to 2028. A change to the schedule of contributions is being finalised with the pension trustees as part of the expected increase to the deficit for funding purposes as noted above.

Events in the year

On 4 January 2021, the Group acquired 100% of the issued share capital of Facilities First Australia Holdings Pty Limited (FFA). Included in the acquisition was a net pension obligation of £1.4m.

On 30 June 2021, the 31 December 2019 formal actuarial valuation report was issued for the RPS. This resulted in a reduction of the pension obligation on the non-contract specific section of the RPS as a result of a change in demographic assumptions.

Values recognised in total comprehensive income in the year

The amounts recognised in the Consolidated Financial Statements for the year are analysed as follows:

Recognised in the income statement	Contract specific 2021 £m	Non-contract specific 2021 £m	Total 2021 £m
Current service cost - employer	1.4	3.7	5.1
Administrative expenses and taxes	0.1	1.4	1.5
Recognised in arriving at operating profit after exceptionals	1.5	5.1	6.6
Interest income on scheme assets - employer	(0.2)	(21.8)	(22.0)
Interest on franchise adjustment	(0.1)	-	(0.1)
Interest cost on scheme liabilities - employer	0.3	20.7	21.0
Finance income	-	(1.1)	(1.1)

Included within the SOCI	Contract specific 2021 £m	Non-contract specific 2021 £m	Total 2021 £m
Actual return on scheme assets	2.6	39.7	42.3
Less: interest income on scheme assets	(0.2)	(21.8)	(22.0)
	2.4	17.9	20.3
Effect of changes in demographic assumptions	(0.1)	3.4	3.3
Effect of changes in financial assumptions	(0.1)	19.9	19.8
Effect of experience adjustments	-	23.4	23.4
Remeasurements	2.2	64.6	66.8
Change in franchise adjustment	0.1	-	0.1
Change in members' share	(0.6)	-	(0.6)
Actuarial profit on reimbursable rights	(0.5)	-	(0.5)
Total pension gain recognised in the SOCI	1.7	64.6	66.3

Recognised in the income statement	Contract specific 2020 £m	Non-contract specific 2020 £m	Total 2020 £m
Current service cost - employer	1.2	3.5	4.7
Administrative expenses and taxes	0.1	1.5	1.6
Recognised in arriving at operating profit after exceptionals	1.3	5.0	6.3
Interest income on scheme assets - employer	(0.2)	(29.1)	(29.3)
Interest cost on scheme liabilities - employer	0.4	27.8	28.2
Interest on franchise adjustment	(0.1)	-	(0.1)
Finance cost/(income)	0.1	(1.3)	(1.2)

Included within the SOCI	Contract specific 2020 £m	Non-contract specific 2020 £m	Total 2020 £m
Actual return on scheme assets	0.1	216.7	216.8
Less: interest income on scheme assets	(0.3)	(29.1)	(29.4)
	(0.2)	187.6	187.4
Effect of changes in demographic assumptions	0.4	-	0.4
Effect of changes in financial assumptions	(3.6)	(170.0)	(173.6)
Effect of experience adjustments	(0.6)	4.6	4.0
Remeasurements	(4.0)	22.2	18.2
Change in franchise adjustment	2.5	-	2.5
Change in members' share	1.3	0.1	1.4
Actuarial profit on reimbursable rights	3.8	0.1	3.9
Total pension (loss)/gain recognised in the SOCI	(0.2)	22.3	22.1

Balance sheet values

The assets and liabilities of the schemes at 31 December are:

Scheme assets at fair value	Contract specific 2021 £m	Non-contract specific 2021 £m	Total 2021 £m
Equities	14.9	40.8	55.7
Bonds except LDIs	3.2	365.0	368.2
Pooled investment funds	-	107.6	107.6
LDIs	-	390.0	390.0
Property	2.0	0.2	2.2
Cash and other	4.9	2.0	6.9
Annuity policies	-	662.3	662.3
Fair value of scheme assets	25.0	1,567.9	1,592.9
Present value of scheme liabilities	(41.7)	(1,417.4)	(1,459.1)
Net amount recognised	(16.7)	150.5	133.8
Franchise adjustment*	8.6	-	8.6
Members' share of deficit	5.8	-	5.8
Net retirement benefit asset	(2.3)	150.5	148.2
Net pension liability	(2.3)	(15.7)	(18.0)
Net pension asset	-	166.2	166.2
Net retirement benefit asset	(2.3)	150.5	148.2
Deferred tax liabilities	-	(36.9)	(36.9)
Net retirement benefit asset (after tax)	(2.3)	113.6	111.3

*   The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.

Scheme assets at fair value	Contract specific 2020 £m	Non-contract specific 2020 £m	Total 2020 £m
Equities	11.3	44.3	55.6
Bonds except LDIs	4.1	363.2	367.3
Pooled investment funds	-	62.8	62.8
LDIs	-	408.3	408.3
Property	1.6	-	1.6
Cash and other	4.1	10.6	14.7
Annuity policies	-	690.2	690.2
Fair value of scheme assets	21.1	1,579.4	1,600.5
Present value of scheme liabilities	(37.0)	(1,497.8)	(1,534.8)
Net amount recognised	(15.9)	81.6	65.7
Franchise adjustment*	8.4	-	8.4
Members' share of deficit	5.6	-	5.6
Net retirement benefit asset	(1.9)	81.6	79.7
Net pension liability	(1.9)	(33.0)	(34.9)
Net pension asset	-	114.6	114.6
Net retirement benefit asset	(1.9)	81.6	79.7
Deferred tax liabilities	-	(15.2)	(15.2)
Net retirement benefit asset (after tax)	(1.9)	66.4	64.5

*   The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period.

The SPLAS Trust Deed gives the Group an unconditional right to a refund of surplus assets, assuming the full settlement of plan liabilities in the event of a plan wind-up. Pension assets are deemed to be recoverable and there are no adjustments in respect of minimum funding requirements as economic benefits are available to the Group either in the form of future refunds or, for plans still open to benefit accrual, in the form of possible reductions in future contributions.

As required by IAS 19 Employee Benefits, the Group has considered the extent to which the pension plan assets should be classified in accordance with the fair value hierarchy of IFRS 13 Fair Value Measurement.

·	Equity and Bonds all virtually have quoted prices in active markets and are classified as level 1.
·	Pooled investment funds are valued at fair value which is typically the Net Asset Value provided by the fund administrator and are classified as level 3.
·	LDIs are valued at fair value which is typically the Net Asset Value provided by the fund administrator and are classified as level 2.
·	Property assets are valued at fair value and are classified as level 3.
·	Annuity policies are valued at fair value based on the share of the defined benefit obligation covered by the insurance contract and can be classified as level 3.

Actuarial assumptions:  SPLAS

The assumptions set out below are for SPLAS, which reflects 91% of total liabilities and 93% of total assets of the defined benefit pension scheme in which the Group participates. The significant actuarial assumptions with regards to the determination of the defined benefit obligation are set out below.

The Group continued to set RPI inflation in line with the market break-even expectations less an inflation risk premium. The inflation risk premium has remained at 0.3% at 31 December 2020 and at 31 December 2021.

The average duration of the benefit obligation at the end of the reporting period is 16.3 years (2020: 17.4 years).

Main assumptions	2021  %	2020  %
Discount rate	1.80	1.40
Rate of salary increases	2.95	2.50
Rate of increase in pensions in payment	2.75 (CPI) and 3.05 (RPI)	2.40 (CPI) and 2.75 (RPI)
Rate of increase in deferred pensions	2.00 (CPI) and 2.90 (RPI)	2.20 (CPI) and 2.80 (RPI)
Inflation assumption - pre-retirement	2.45 (CPI) and 3.35 (RPI)	2.00 (CPI) and 2.90 (RPI)
Inflation assumption - post-retirement	2.75 (CPI) and 3.05 (RPI)	2.40 (CPI) and 2.75 (RPI)

Post retirement mortality*	2021 years	2020 years
Current pensioners at 65 - male	21.7	21.6
Current pensioners at 65 - female	24.3	24.2
Future pensioners at 65 - male	23.9	23.9
Future pensioners at 65 - female	26.4	26.3

*   The mortality assumptions have not been updated to reflect the potential effects of Covid-19 given there remains uncertainty of the Covid-19 impact on long-term mortality rates for pension scheme members.

Sensitivity analysis is provided below, based on reasonably possible changes of the assumptions occurring at the end of the reporting period, assuming all other assumptions are held constant. The sensitivities have been derived in the same manner as the defined benefit obligation as at 31 December 2021 where the defined benefit obligation is estimated using the Projected Unit Credit method. Under this method each participant's benefits are attributed to years of service, taking into consideration future salary increases and the scheme's benefit allocation formula. Thus, the estimated total pension to which each participant is expected to become entitled at retirement is broken down into units, each associated with a year of past or future credited service. The defined benefit obligation as at 31 December 2021 is calculated on the actuarial assumptions agreed as at that date. The sensitivities are calculated by changing each assumption in turn following the methodology above with all other things held constant. The change in the defined benefit obligation from updating the single assumption represents the impact of that assumption on the calculation of the defined benefit obligation.

Increase/(decrease) in defined benefit obligation	2021 £m	2020 £m
Discount rate - 0.5% increase	(119.1)	(125.3)
Discount rate - 0.5% decrease	127.6	142.4
Inflation - 0.5% increase	84.0	103.7
Inflation - 0.5% decrease	(92.6)	(96.6)
Rate of salary increase - 0.5% increase	3.5	3.7
Rate of salary increase - 0.5% decrease	(3.3)	(3.5)
Mortality - one-year age rating	54.0	59.8

Management acknowledges that the method used of presuming that all other assumptions remaining constant has inherent limitation given that it is more likely for a combination of changes but highlights the value of each individual risk and is therefore a suitable basis for providing this analysis.

Assumptions in respect of the expected return on scheme assets are required when calculating the franchise adjustment for the contract-specific plans. These assumptions are based on market expectations of returns over the life of the related obligation. Due consideration has been given to current market conditions as at 31 December 2021 in respect to inflation, interest, bond yields and equity performance when selecting the expected return on assets assumptions.

The expected yield on bond investments with fixed interest rates is derived from their market value. The yield on equity investments contains an additional premium (an 'equity risk premium') to compensate investors for the additional anticipated risks of holding this type of investment, when compared to bond yields. The Group applies an equity risk premium of 4.6% (2020: 4.6%).

The overall expected return on assets is calculated as the weighted average of the expected returns for the principal asset categories held by the scheme.

21. Movements in other reserves

	Retirement benefit obligations reserve £m	Share based payment reserve £m	Own shares reserve £m	Treasury shares £m	Hedging reserve £m	Translation reserve £m	Capital redemption reserve £m	Total other reserves £m
At 1 January 2020	(151.8)	72.2	(4.4)	-	(0.2)	(27.8)	0.1	(111.9)
Total comprehensive income for the year	16.2	-	-	-	(0.2)	7.9	-	23.9
Issue of share capital	-	-	(0.2)	-	-	-	-	(0.2)
Shares transferred to award holders on exercise of share awards	-	(2.4)	2.5	-	-	-	-	0.1
Expense in relation to share based payments	-	11.2	-	-	-	-	-	11.2
At 1 January 2021	(135.6)	81.0	(2.1)	-	(0.4)	(19.9)	0.1	(76.9)
Total comprehensive income for the year	44.6	-	-	-	0.2	(7.6)	-	37.2
Income statement items reclassified	-	-	-	-	0.1	-	-	0.1
Shares purchased and held in Treasury	-	-	-	(40.7)	-	-	-	(40.7)
Cancellation of shares held in Treasury	-	-	-	20.4	-	-	0.3	20.7
Shares transferred from Treasury to own shares reserves	-	-	(0.3)	20.3	-	-	-	20.0
Shares transferred to award holders on exercise of share awards	-	(1.0)	1.2	-	-	-	-	0.2
Expense in relation to share based payments	-	15.8	-	-	-	-	-	15.8
At 31 December 2021	(91.0)	95.8	(1.2)	-	(0.1)	(27.5)	0.4	(23.6)

22. Related party transactions

Transactions between the Company and its wholly owned subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint venture undertakings and associates are disclosed below.

Transactions

During the year, Group companies entered into the following transactions with joint ventures and associates:

	Transactions 2021  m	Current outstanding at 31 December 2021  m	Non-current outstanding at 31 December 2021  m
Sale of goods and services
Joint ventures	1.6	1.7	-
Associates	0.8	-	-
Other
Dividends received - joint ventures	-	-	-
Dividends received - associates	13.5	-	-
Receivable from consortium for tax - joint ventures	0.9	0.2	0.8
Total	16.8	1.9	0.8

Joint venture receivable and loan amounts outstanding have arisen from transactions undertaken during the general course of trading, are unsecured, and will be settled in cash. No guarantees have been given or received.

	Transactions 2020  m	Current outstanding at 31 December 2020  m	Non-current outstanding at 31 December 2020  m
Sale of goods and services
Joint ventures	0.1	-	-
Associates	2.3	0.2	-
Other
Dividends received - joint ventures	4.3	-	-
Dividends received - associates	15.5	-	-
Receivable from consortium for tax - joint ventures	(0.1)	2.0	0.1
Total	22.1	2.2	0.1

As announced on 2 November 2020, the Ministry of Defence notified the Group that it would be exercising its ability to terminate services provided by the Group through AWE Management Limited (AWEML) on 30 June 2021.

As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint venture between Serco Limited and ENGIE SA, has been awarded contracts to provide repairs and maintenance work for Service Family Accommodation (SFA) by the UK Ministry of Defence (MOD) Defence Infrastructure Organisation (DIO). VIVO is not a material joint venture to the Group in 2021.

Remuneration of key Management personnel

The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts and Directors' liability insurance.

The remuneration of the key Management personnel of the Group is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures:

	2021  m	2020  m
Short-term employee benefits	8.5	9.3
Share based payment expense	5.0	5.4
	13.5	14.7

The key Management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee (2021: 18 individuals, 2020: 18 individuals).

Aggregate Directors' remuneration

The total amounts for Directors' remuneration in accordance with Schedule 5 to the Accounting Regulations were as follows:

	2021  m	2020 £m
Salaries, fees, bonuses and benefits in kind	3.5	3.6
Amounts receivable under long-term incentive schemes	2.8	3.4
Gains on exercise of share awards	3.6	3.6
	9.9	10.6

None of the Directors are members of the Company's defined benefit or money purchase pension schemes.

23. Notes to the Consolidated Cash Flow statement

Year ended 31 December	2021 Before exceptional items £m	2021 Exceptional items £m	2021  Total  m	2020 Before exceptional items £m	2020 Exceptional items £m	2020  Total  m
Profit before tax	193.4	(1.2)	192.2	140.8	12.5	153.3
Net finance costs	24.0	-	24.0	25.9	-	25.9
Operating profit for the year	217.4	(1.2)	216.2	166.7	12.5	179.2
Adjustments for:
Share of profits in joint ventures and associates	(8.7)	-	(8.7)	(12.7)	-	(12.7)
Exceptional distribution from joint venture	-	-	-	-	(1.9)	(1.9)
Share based payment expense	15.8	-	15.8	11.2	-	11.2
Impairment of property, plant and equipment	0.3	-	0.3	0.3	-	0.3
Impairment of right of use assets	-	-	-	0.4	-	0.4
Depreciation of property, plant and equipment	19.6	-	19.6	15.9	-	15.9
Depreciation of right of use assets	109.0	-	109.0	93.5	-	93.5
Amortisation of intangible assets	27.3	-	27.3	23.0	-	23.0
Exceptional profit on disposal of subsidiaries and operations	-	-	-	-	(11.0)	(11.0)
Reversal of impairment on loans to JVs	-	-	-	-	(1.2)	(1.2)
Profit on early termination of leases	(0.6)	-	(0.6)	(2.9)	-	(2.9)
Profit on disposal of property, plant and equipment	(0.2)	-	(0.2)	(0.4)	-	(0.4)
Loss on disposal of intangible assets	1.6	-	1.6	0.6	-	0.6
(Decrease)/increase in provisions	(7.2)	(1.5)	(8.7)	16.2	(4.0)	12.2
Total non-cash items	156.9	(1.5)	155.4	145.1	(18.1)	127.0
Operating cash inflow/(outflow) before movements in working capital	374.3	(2.7)	371.6	311.8	(5.6)	306.2
Decrease/(increase) in inventories	1.7	-	1.7	(2.9)	-	(2.9)
Decrease/(increase) in receivables	25.4	-	25.4	(0.1)	-	(0.1)
(Decrease)/increase in payables	(1.9)	(4.8)	(6.7)	(2.3)	3.6	1.3
Movements in working capital	25.2	(4.8)	20.4	(5.3)	3.6	(1.7)
Cash generated by operations	399.5	(7.5)	392.0	306.5	(2.0)	304.5
Tax paid	(42.1)	-	(42.1)	(35.9)	-	(35.9)
Non-cash R&D expenditure	-	-	-	(0.1)	-	(0.1)
Net cash inflow/(outflow) from operating activities	357.4	(7.5)	349.9	270.5	(2.0)	268.5

 

24. Post balance sheet events

Serco share repurchase programme

Following the successful completion of the share buyback programme during 2021, in which 30.7m shares were repurchased at an average price including fees of 1.32p, the Group has announced its intention to commence a further share buyback of up to £90m. Consistent with the Group's capital allocation policy, the objective of the programme is to provide additional returns to shareholders as well as aid the Group in meeting its medium-term leverage targets. The buyback programme is expected to complete within 12 months with the shares either cancelled or held in Treasury.

Dividends

Subsequent to the year end, the Board has recommended the payment of a final dividend in respect of the year ended 31 December 2021 of 1.61p. The dividend remains subject to shareholder approval at the Annual General Meeting and therefore no amounts have been recognised in respect of a dividend in the Group's Consolidated Financial Statements.

 

REPORT OF KPMG LLP TO SERCO GROUP PLC ("THE COMPANY") IN RELATION TO THE COMPANY'S PRELIMINARY ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2021

The UK Listing Rules require that we, as independent auditor, agree to the publication of the Company's preliminary announcement of results for the year ended 31 December 2021 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 Cash Flow Statement and the Notes to the Condensed Consolidated Financial Statements as well as the Stock Exchange Announcement including the Chief Executive's Review, the Divisional Reviews and the Finance Review. 

At your request we have provided this report to set out the procedures performed by us to agree to the publication, the status of the audit report on the statutory financial statements, and the key audit matters addressed in that audit report in respect of the consolidated financial statements of the group.

Our audit of the statutory financial statements is complete and we have issued an unmodified audit opinion

The annual report and statutory financial statements of Serco Group plc for the year ended 31 December 2021 were approved by the board on 23 February 2022.

Our audit of those financial statements is complete and we signed our auditor's report on 23 February 2022.  Our opinion in that report is not modified and does not include a material uncertainty related to going concern, or emphasis of matter, paragraph.

This report is in addition to, should not be regarded as a substitute for, our auditor's report on the statutory financial statements, which has been released to the Company and will be available when the Company publishes its annual report. 

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the consolidated financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. 

Key audit matters were addressed, and our findings are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.  The overall materiality applied in the audit of the consolidated financial statements as a whole was £7m.

In our auditor's report on the statutory financial statements of the Company, we reported on the key audit matters in respect of the consolidated financial statements of the group described in decreasing order of audit significance below.  No additional work in relation to key audit matters has been undertaken for the purpose of this report.

Revenue and margin recognition

Revenue £4,424.6m (2020: £3,884.8m), Onerous Contract Provisions of £14.2m (2020: £14.5m) and Contract Assets £319.0m (2020: £296.1m)

Assessment of risk vs. prior year: Unchanged

Refer to note 2 Critical accounting judgements and key sources of estimation uncertainty, note 6 Revenue from contracts with customers, note 15 Contract assets, trade and other receivables and note 18 Provisions.

The risk

Accounting application

The many and sometimes unique contractual arrangements that underpin the measurement and recognition of revenue by the group can be complex, particularly in relation to variable revenue, with significant judgement involved in the assessment of current and future financial performance. The key judgements impacting the recognition of revenue and resulting operating profit include:

·	Interpretations of terms and conditions in relation to the required service obligations in accordance with contractual arrangements;
·	The allocation of revenue and costs to performance obligations where multiple deliverables exist;
·	Assessment of stage of completion and cost to complete, where percentage completion accounting is used;
·	Consideration of the Group's performance against contractual obligations and the impact on revenue and costs of delivery;
·	The recognition and recoverability assessments of contract related assets, including those recognised as direct incremental costs prior to service commencement.

Subjective estimate

Judgement is required to determine whether a contract is onerous, based upon the estimated future performance of the contract. Where a contract is determined to be loss-making, an onerous contract provision is required, which requires further judgement in assessing the level of provision, based on estimated variable income and cost to complete, taking into account contractual obligations to the end of the contract, extension periods and customer negotiations.

The effect of these matters is that, as part of our risk assessment, we determined that the onerous contract provision has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount.

Our response

We performed the tests below rather than seeking to rely on any of the group's controls because the contractual arrangements that underpin the measurement and recognition of revenue by the group can be complex, with significant judgement involved in the assessment of current and future financial performance. This meant that detailed testing is inherently the most effective means of obtaining audit evidence. 

Our audit procedures included:

Contracts were selected for substantive audit procedures based on qualitative factors, such as commercial complexity, and quantitative factors, such as financial significance and profitability that we considered to be indicative of risk. Our audit testing for the contracts selected included the following:

Assessing policy application

We inspected customer contracts to assess the method of revenue recognition to determine that it was in accordance with the Group's accounting policy and relevant accounting standards, including the appropriate recognition of revenue as the performance obligation is satisfied on service contracts.

Accounting analysis

We inspected and challenged accounting papers prepared by the Group to explain the positions taken in respect of key contract judgements including contract modifications (such as those arising due to COVID-19). We also challenged whether it is highly probable that the variable revenue recognised will not be reversed in future periods as required by the application of the revenue constraint in accordance with the Group's accounting policy and relevant accounting standards.

Tests of details

To assess whether the revenue constraint was appropriately applied in accordance with the Group's accounting policy and relevant accounting standards;

·	we vouched a sample of revenue to documents such as invoices or purchase orders, or customer agreements for the work performed;
·	we inspected a sample of customer contracts to identify any KPI obligations and assessed the contract's operational performance against those obligations; and
·	we inspected a sample of customer contracts to identify contractual variations and claims and where these arose, obtained evidence of correspondence with customers and third parties.

Site visits

For contracts selected for testing;

·	we attended a selection of monthly Divisional and Business Unit Performance Reviews used to assess business performance in order to inform our assessment of operational and financial performance of the contracts; and
·	we performed a selection of physical and virtual site visits and enquired with contract and Business Unit management teams as to matters related to operational and financial performance in order to assess whether indicators of an onerous contract exist.

For selected contract related assets, representing capitalised bid and phase in costs, our procedures included:

·	Assessing application: We assessed whether contract related assets have been recognised in accordance with the Group's accounting policy and relevant accounting standards.
·	Historical comparisons: We compared forecast contract cash flows and profits with historical actuals and assessed whether the forecasts supported the carrying value of the assets.
·	Independent reperformance: We compared the amortisation period with the duration of the contract and checked that the amortisation had been calculated correctly.

For onerous and potentially onerous contracts identified through application of quantitative selection criteria, our procedures to address the subjective estimate risk included:

Benchmarking assumptions

We compared contract level forecast revenues and costs to the Group's annual budgets and longer-term forecasts approved by the directors. We challenged key assumptions made by the Group in preparing these forecasts, including those in relation to revenue growth and cost reductions, by comparing them to external evidence (for example customer correspondence) where possible, and assessing against business plans.

Our sector experience

We assessed the contractual terms and conditions to identify the key obligations of the contract and compared these with common industry risk factors to inform our challenge of completeness of forecast costs.

Historical comparisons

We compared the contract forecasts to historic and in year performance to assess the historical accuracy of the forecasts.

Tests of details

We compared the allocation of central functional costs to the group's policy and challenged the underlying assumptions using our understanding of the contract operations.

Assessing transparency

We also assessed whether the Group's disclosures about the estimates and judgements applied reflected the risks related to the estimation of onerous contracts.

Our findings

We found no material errors in the group's application of its revenue accounting policy (2020: no material errors). We found the resulting estimate of onerous contract provision to be balanced (2020: balanced).

Recoverability of group goodwill and of parent's investment in subsidiary

Group: £852.7m (2020: £669.6m); parent Company: £2,041.7m (2020: £2,032.7m)

Assessment of risk vs. prior year: Unchanged

Refer to note 13 Goodwill

The risk

Goodwill in the group and the carrying amount of the parent Company's investment in subsidiary are significant and at risk of irrecoverability due to estimation uncertainty in valuing the recoverable amounts of the Group's cash generating units. The estimated recoverable amount of these balances through value in use calculations is subjective due to the inherent uncertainty involved in forecasting and discounting future cash flows.

The CGUs which were most sensitive to a deterioration in the division's cash flow projections or an increase in discount rate were the AsPac CGU and Middle East CGU. As at year end 31 December 2021, the AsPac CGU was estimated to have headroom of £380.6m and Middle East has headroom of £103.6m.

The effect of these matters is that, as part of our risk assessment, we determined that the value in use of CGUs and value in use of investment in subsidiary have a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements

(note 13) disclose the sensitivity for goodwill estimated by the Group.

Our response

We performed the tests below rather than seeking to rely on any of the group's controls because the nature of the balance is such that detailed testing is inherently the most effective means of obtaining audit evidence. 

Our audit procedures included:

Benchmarking assumptions: With the assistance of our valuation specialists, we challenged the growth rate and discount rate used in the value in use calculation by comparing the Group's assumptions to external data. We challenged the implied cumulative annual growth rate within the five year forecasts and assessed this against past performance and the terminal growth rate. We challenged forecast assumptions around new contract wins or extensions, contract attrition, cost reductions as well as cost reductions on existing contracts.

Historical comparisons

We compared current year actual cash flows to historic forecasts to assess the historical accuracy of the forecasts used in the impairment model.

Sensitivity analysis

We tested the sensitivity of impairment calculations to changes in key underlying assumptions, which were the short term cash-flow projections, the discount rate and terminal growth rates. We assessed the impact on headroom with the inclusion of an alpha factor in the discount rate in order to reflect any country specific and forecasting risks we considered might be present in each division. We challenged the projected win probabilities (including contract extensions) on key contracts and sensitised the five year cash flow forecasts by reducing new wins and extensions within the pipeline. We specifically considered the impact of COVID-19 on trading and compared the forecasts against the company's experience to date during the pandemic.

Comparing valuations

We considered whether the forecast cash flow assumptions used in the value in use calculation were consistent with the assumptions used to calculate the expected loss on onerous contract provisions, the recognition of deferred tax assets and the Directors' assessment of going concern and viability.

We compared the results of discounted cash flows against the Group's market capitalisation, after adjusting for its net debt to assess the reasonableness of the value in use calculations.

Assessing transparency

We also assessed whether the Group's disclosure about the sensitivity of outcomes reflects the risks inherent in the valuation of goodwill.

Substantive audit procedures over testing of recoverability of the investment in subsidiary included:

·	Comparing the carrying amount of investment with the subsidiary's financial statements or draft balance sheet to identify whether its net assets, being an approximation of their minimum recoverable amount, are in excess of their carrying amount and assessing whether the subsidiary has historically been profit-making.
·	We compared the carrying amount of the investment to the market capitalisation for the Group (after adjusting for net debt).

Our findings:

We found the Group's assessment that there is no impairment of the carrying amount of Group's goodwill and of parent's investment in subsidiary to be balanced (2020: balanced) and the related sensitivity disclosures to be proportionate (2020: proportionate).

Recognition of Deferred Tax Assets

£214.3m (2020: £83.2m)

Assessment of risk vs. prior year: Unchanged

Refer to note 11 Deferred Tax

The risk

Forecast based assessment

The Group has significant deferred tax assets in respect of tax losses.  There is inherent uncertainty involved in forecasting future taxable profits, which determines the extent to which deferred tax assets are or are not recognised.

The effect of these matters is that, as part of our risk assessment, we determined that the recoverable amount of deferred tax assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount.

Our response

We performed the tests below rather than seeking to rely on any of the group's controls because the nature of the balance is such that detailed testing is inherently the most effective means of obtaining audit evidence. 

Our audit procedures included:

Assessing forecasts

The work on the Group's forecasts as described in the goodwill impairment risk above.

Our tax expertise

Use of our own tax specialists to assist us in assessing the recoverability of the tax losses against the forecast future taxable profits, taking into account the Group's tax position, the timing of forecast taxable profits, and our knowledge and experience of the application of relevant tax legislation.

Assessing transparency

Assessing the adequacy of the Group's disclosures about the sensitivity of the recognition of deferred tax assets to changes in key assumptions reflected in the inherent risk.

Our results 

As a result of our work we found the level of deferred tax assets recognised to be acceptable (2020 result: acceptable).

Procedures performed to agree to the preliminary announcement of annual results

In order to agree to the publication of the preliminary announcement, we conducted procedures having regard to the Financial Reporting Council's Bulletin: The auditors' association with preliminary announcements made in accordance with the requirements of the UK Listing Rules.  Our work included considering whether:

·	the financial information included in the preliminary announcement has been accurately extracted from the audited statutory financial statements, and that it reflects the presentation adopted in the audited statutory financial statements;
·	based on our statutory financial statements audit work, the financial information included in the preliminary announcement is materially misstated;
·	the information included in the preliminary announcement (including the management commentary) is materially consistent with the content of the annual report;
·	based on our statutory financial statements audit work, the assessment of the Company's position and prospects in the preliminary announcement is fair, balanced and understandable; and
·	the preliminary announcement includes the disclosures required under the UK Listing Rules and s435 of the Companies Act 2006.

Directors' responsibilities 

The preliminary announcement is the responsibility of, and has been approved by, the directors.  The directors are responsible for: preparing, presenting and publishing the preliminary announcement in accordance with the Listing Rules of the UK FCA; ensuring that its content is consistent with the information included in the annual report and audited statutory financial statements; and, as required under the UK Corporate Governance Code, for ensuring that the assessment of the Company's position and prospects in the preliminary announcement is fair, balanced and understandable. 

Our responsibility 

Our responsibility under the Listing Rules is to agree to the publication of the preliminary announcement based on our work.  In addition, under the terms of our engagement our responsibility is to report to the Company setting out the procedures performed by us to agree to the publication, the status of the audit report on the statutory financial statements, and the key audit matters addressed in that audit report.

We do not express an audit opinion on the preliminary announcement. 

We are not required to agree to the publication of presentations to analysts or webcasts.

This report is made solely to the Company in accordance with the terms of our engagement.  Our work has been undertaken so that we might state to the Company those matters we have agreed to state to it in this 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 work, for this report, or for the conclusions we have reached. 

This report is not the auditor's report on the Company's statutory financial statements. It relates only to the matters specified and does not extend to the Company's statutory financial statements taken as a whole. 

John Luke

for and on behalf of KPMG LLP

Chartered Accountants 

15 Canada Square

E14 5GL

23 February 2022 


 

 

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