2022 Full Year Results

RNS Number : 2201R

Serco Group PLC

28 February 2023

2022 full year results

28 February 2023

Resilient operational and financial performance against a backdrop of profound global challenges in 2022 with revenue ex-Covid and currency up 11%; Guidance for 2023 maintained, as are medium term growth targets.

Year ended 31 December	2022	2021	Change at reported currency	Change at constant currency
Revenue⁽¹⁾	£4,534.0m	£4,424.6m	2%	(1%)
Underlying Trading Profit (UTP)⁽²⁾	£237.0m	£228.9m	4%	(3%)
Reported Operating Profit⁽²⁾	£217.2m	£216.2m	0%
Underlying Earnings Per Share (EPS), diluted⁽³⁾	13.92p	12.56p	11%
Reported EPS (i.e. after exceptional items), diluted	12.79p	24.43p	(48%)
Dividend Per Share (recommended)	2.86p	2.41p	19%
Free Cash Flow⁽⁴⁾	£159.1m	£189.5m	(16%)
Adjusted Net Debt⁽⁵⁾	£203.9m	£178.0m	15%
Reported Net Debt⁽⁶⁾	£649.9m	£608.3m	7%

Highlights

·	Revenue: grew by 2% to £4.5bn, despite Covid-related revenues reducing by £480m. Revenue excluding Covid and currency grew by 11%.
·	Underlying Trading Profit: increased by 4% to £237m, a margin of 5.2%. Performance of international portfolio strong; three-quarters of Group UTP derived from outside the UK ⁽⁷⁾ .
·	Underlying Earnings Per Share : increased by 11%.
·	Reported Earnings Per Share: prior year included recognition of £145m UK deferred tax asset.
·	Free Cash Flow : above prior guidance at £159m, Underlying Trading Profit cash conversion of 97%.
·	Adjusted Net Debt : increased by only £26m, after £120m returned to shareholders through dividends and share buyback, and acquisition funding of £26m; covenant leverage at the year-end of 0.8x EBITDA, similar to prior year.
·	Order intake: at £4.2bn, book to bill of 93%. New business pipeline of £8.4bn strong and slightly up on H1.
·	Order book: grew by 8% to £14.8bn.
·	Dividend Per Share: recommended final dividend per share of 1.92p, +19% year on year.
·	New £90m share buyback in 2023: continuing to return capital to shareholders as a result of strong trading and cash conversion consistent with our capital allocation priorities.
·	Unchanged revenue and profit guidance for 2023: Underlying Trading Profit expected to be similar to 2022 at around £235m ⁽⁸⁾ .
·	Strategy remains unchanged : execution focused on three value drivers; customers, colleagues and capabilities, to support growth across all our divisions.
·	Medium-term outlook: short-term growth profile influenced by Covid-related work dropping out and the impact of rebidding two of our largest contracts; medium-term growth targets unchanged at 4-6% revenue growth a year on average.

Mark Irwin, Serco Group Chief Executive, said:

I am immensely proud of the achievements of all my Serco colleagues around the world during 2022 in another year of profound global challenges as we faced war in Europe; inflation at levels not seen for a generation; labour shortages; the lingering effects of Covid, and the manifestation of climate change bringing risk to lives and livelihoods.

Against this very difficult backdrop Serco has delivered another year of strong operational and financial performance, growing revenues and profits despite Covid work coming to an end. Between 2019 - the last year without any Covid-related work - and 2022, we have increased revenue by 40% and almost doubled Underlying Trading Profit from £120m to £237m. As well as a strong and consistent financial performance, we move out of the Covid period, with a business that has stronger customer relationships, improved geographic diversity, more resilience, and greater opportunities focused on impacting a better future for people, place, and planet.

Order intake in the year of £4.2bn represented a book-to-bill ratio of 93%. Given the long-term nature of our order book we look at book-to-bill on an average basis, which over the last five years, has averaged 112%. The strength of our international portfolio is highlighted by our North American business which achieved a book to bill of 157% in the year. This included very strong new award and rebid rates in our Maritime Engineering Technology & Sustainment (METS) business unit which is predominantly composed of the NSBU business we acquired in 2019. Our order book remains robust at £14.8bn which excludes the £1.5bn of order book in Vivo, our joint venture with Equans. Our qualified pipeline of new business stands at £8.4bn, a healthy level.

In response to the surge in inflation during 2022, we increased colleagues' pay faster than we had expected to at the beginning of the year, and we also distributed an additional £9m in one-off payments to colleagues around the world outside management grades, recognising the pressure many people, particularly our frontline colleagues, are under at this time. This followed a previously announced colleague payment of £6m made in February and a broader portfolio of support through our Employee Assistance Program, Financial Wellbeing Hub, hardship grants from the Serco People Fund and Serco MyBenefits program which offers savings at more than 1,000 retailers.

Our commitment to the safety and wellbeing of colleagues remains foremost in our efforts to protect and deepen the relationship between Serco and the people whose dedication and commitment stand behind our success. Physical safety measures and mental wellbeing initiatives have been under constant review to take on new learnings and adapt to operating environment changes. We have maintained high levels of employee engagement and strengthening our employee value proposition has enabled a reduction in vacancies despite tight global labour markets.

Our results for 2022 continue a track record of strong performance over recent years which has enabled us to deliver on all the pillars of our capital allocation strategy: investing in the business to support growth and efficiency; growing returns to shareholders by increasing dividends and executing share buybacks; making value-adding acquisitions.

The business has repeatedly shown that when work draws to a close on any particular contract - such as Covid work or AWE - the agility and scale of our B2G platform and strong customer relationships mean we can replace this with new work or growth from the existing portfolio. The anticipated changes in our contract portfolio will require us to continue doing this as Covid-related work completely drops out and we see the impact of rebidding two of our largest contracts where profitability is likely to be lower at the beginning of any new service period. We have now secured the CMS rebid and continue our preparation for the Australian immigration services procurement which is expected in 2023. Although the Group's growth profile will be affected in the near term as these factors work their way through, we expect the rest of the business to continue to grow, and we have the prospective pipeline to be able to replace over time any reduction in contribution from contract portfolio changes.

Our expectation remains, as we set out at our Capital Markets Day in December 2021 and our full year results in February 2022, that the business will grow revenues at an average of 4-6% a year over the medium term as governments, more than ever, look to the innovation, efficiency and skilled operational management that partnership with Serco can bring to their most pressing challenges. In this regard, our strategic framework remains unchanged but with a clear execution focus on three key value drivers: growing market share through deeper relationships with customers and a more ambitious and rigorous targeting of the post-pandemic government services market; growing the value of work to increase the enablement, retention and advocacy of colleagues; and growing our margins by more actively embracing technology to deliver productivity through process automation and workforce augmentation.

Looking forward we cannot predict the precise nature of the changes which lie ahead for citizens, communities and the governments that serve them, but we don't expect they will lack challenge or complexity. We therefore believe the need to partner with our customers and others to deliver a positive impact has never been clearer, or the opportunity to grow more compelling.

As we move to the next stage of our mission to partner with governments to impact a better future, we remain grateful to our customers for their trust, to our colleagues for their dedication and commitment, and to our shareholders for their confidence and support.

Guidance for 2023

Our guidance for 2023 is unchanged from our pre-close trading statement on 15 December 2022, other than net debt, which reflects the better-than-expected cash performance in 2022 and the new £90m share buyback. We expect the known headwinds from Covid and some other contracts ending to be compensated by increased contribution from newer contracts ramping up and improvement across the portfolio. We enter 2023 with good visibility of the value enhancing levers to strengthen our B2G platform and a strong pipeline of new business opportunities to deliver our medium-term growth targets.

Guidance	2022	2023
	Actual	Initial guidance December 22	New guidance
Revenue	£4.5bn	At least £4.6bn	At least £4.6bn
Organic sales growth	(4%)	~0%	~0%
Underlying Trading Profit	£237m	~£235m	~£235m
Net finance costs	£20m	£25m	£25m
Underlying effective tax rate	22%	25%	25%
Free Cash Flow	£159m	~£120m	~£120m
Adjusted Net Debt	£204m	~£130m	~£200m

NB: The guidance uses an average GBP:USD exchange rate of 1.23 in 2023 and GBP:AUD of 1.76, which is based on currency rates as 31 January 2023. New Net Debt guidance includes the £90m share buyback programme that we expect to complete in 2023. We expect a weighted average number of shares in 2023 of 1,132m for basic EPS and 1,153m for diluted EPS, which assumes the share buyback is completed evenly across the remainder of 2023 at a share price of £1.49 (the closing price on 27 February).

For further information please contact Serco:

Paul Checketts, Head of Investor Relations, tel: +44 (0) 7718 195 074 or email: paul.checketts@serco.com

Marcus De Ville, Head of Media Relations; tel +44 (0) 7738 898 550 or email: marcus.deville@serco.com

Presentation:

A presentation for institutional investors and analysts will be held at H/Advisors Maitland, 3 Pancras Square, London, N1C 4AG today starting at 10.30am. The presentation will be webcast live at https://edge.media-server.com/mmc/p/t8uy3r7q and subsequently available on demand. A dial-in facility is available on https://register.vevent.com/register/BI69a35ee07d674607ab782e273fd88145 .

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 2022 into sterling at the average exchange rates for the prior year. Change excluding Covid is calculated by removing Covid-related revenue from the prior and current years.

(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 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 £m	2022	2021
Underlying Trading Profit	237.0	228.9
Include: non-underlying items
OCP charges and releases	0.2	1.3
Other Contract & Balance Sheet Review adjustments and one-time items	4.0	3.2
Trading Profit	241.2	233.4
Amortisation of intangibles arising on acquisition	(21.6)	(16.0)
Operating Profit before exceptional items	219.6	217.4
Operating exceptional items	(2.4)	(1.2)
Reported Operating Profit	217.2	216.2

(3) Underlying EPS is derived from 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 is used by Serco as an additional non-IFRS Alternative Performance Measure (APM). 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 recognised under IFRS16.

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

As at 31 December £m	2022	2021
Adjusted Net Debt	203.9	178.0
Include: all lease liabilities	446.0	430.3
Reported Net Debt	649.9	608.3

(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 2022 was £281.6m.

(8) Our outlook for 2023 is based upon currency rates as 31 January 2022. The rates used, along with their estimated impact on revenue and UTP are:

Year ended 31 December	2023 outlook	2022 actual	2021 actual
Average FX rates:
US Dollar	1.23	1.24	1.38
Australian Dollar	1.76	1.78	1.83
Euro	1.14	1.18	1.16

Year-on-year impact:
Revenue	~£30m	£175m	(£73m)
UTP	~£2m	£14m	(£7m)

Reconciliations and further detail of financial performance are included in the Finance Review on pages 18-30. 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 31-70.

Chief Executive's Review

Summary of financial performance

Revenue, Underlying Trading Profit and Underlying Earnings Per Share

Revenue increased by 2%, or £109m, to £4,534m (2021: £4,425m), despite the £480m year-on-year reduction as Covid-19 work came to an end. Much of this 11% drag was offset by growth in other areas such as case management and immigration services. Organic revenue growth in the rest of the business offset the Covid-19 drag by 7% and consequently the overall organic revenue decline was held to 4% (£183m). This decline was more than offset by acquisitions, which contributed 3% (£117m) and favourable currency movements that added 4% (£175m).

Underlying Trading Profit (UTP) increased by 4%, or £8m, to £237m (2022: £229m). On a constant currency basis, excluding the £14m benefit from favourable currency movements, UTP decreased by 3%. Reduced Covid-related work and the ending of our AWE contract in June 2021 together reduced profit by around £65m, or nearly 30% of prior year UTP. Underlining the resilience of our business, these impacts were offset by strength in our case management work in North America, increased demand for immigration services, and the positive effect of new work secured in 2021 such as the DWP Restart Programme and the Defence Infrastructure Organisation (VIVO JV) contracts. The Americas, Asia Pacific and Middle East regions all improved their Underlying Trading Profit margins, which offset the impact of lower margins in the UK & Europe division, helping our UTP margin remain stable at 5.2%.

Year ended 31 December 2022 £m	Americas	UK&E	AsPac	Middle East	Corporate costs	Total
Revenue	1,269.8	2,100.2	954.6	209.4	-	4,534.0
Change	+13%	(1%)	+5%	(21%)		+2.5%
Change at constant currency	+2%	(2%)	+2%	(28%)		(1.5%)
Organic change at constant currency	(1%)	(5%)	+0%	(28%)		(4.4%)

Underlying Trading Profit	136.6	72.1	56.9	16.0	(44.6)	237.0
Margin	10.8%	3.4%	6.0%	7.6%	(1.0%)	5.2%
Change	+16%	(25%)	+11%	+17%	(11%)	+3.5%

Onerous contract provision charges & releases	0.1	0.1	-	-	-	0.2
Other one-time items	-	4.0	-	-	-	4.0
Trading Profit/(Loss)	136.7	76.2	56.9	16.0	(44.6)	241.2
Amortisation of intangibles arising on acquisition	(16.5)	(1.5)	(3.6)	-	-	(21.6)
Operating profit/(loss) before exceptionals	120.2	74.7	53.3	16.0	(44.6)	219.6

Diluted Underlying Earnings Per Share increased by 11% to 13.92p (2021: 12.56p). The percentage improvement was higher than the increase in UTP due to reduced net finance costs, a 2% decrease in the effective tax rate, which benefitted from a reduction in provisions following a review of tax positions, and a 2% reduction in the weighted average number of shares because of our share buyback.

The Revenue and Underlying Trading Profit performances are discussed in more detail in the Divisional Reviews, starting on page 13.

Cash flow and Net Debt

Free Cash Flow at £159m was lower than the prior year (2021: £190m), but still represented a 97% Underlying Trading Profit conversion. The prior year conversion was 112% and included the benefit of a working capital inflow of £25m, helped by the successful collection of some older receivables on our Dubai Metro contract and short payment terms on our Covid-related work. Average working capital days remained at appropriate levels for a government contractor with debtor days of 22 (2021: 19 days) and creditor days of 21 (2021: 23 days). Of all UK supplier invoices, 87% were paid in under 30 days (2021: 89%) and 95% were paid in under 60 days (2021: 95%). No working capital financing facilities were utilised in this or the prior year.

Adjusted Net Debt increased by £26m to £204m at 31 December (31 December 2021: £178m). Excluding a £25m adverse impact from foreign exchange movements, Adjusted Net Debt was flat, while Free Cash Flow was spent largely on the share buyback programme (£91m), dividend payments (£30m) and acquisitions (£26m).

The period end Adjusted Net Debt compares to a daily average of £231m (2021: £216m) and a peak of £377m (2021: £346m). While we typically see a range across the year due to the timing of working capital flows, dividends, share buyback activity, acquisition spend and currency fluctuations, it was pleasing to have similar year-end and average debt levels.

Our measure of Adjusted Net Debt excludes lease liabilities, which aligns closely with the covenants on our financing facilities. Lease liabilities totalled £446m at the year-end (2021: £430m), the majority being leases on housing for asylum seekers under the AASC contract. The terms of these leases do not extend beyond the expected life of the contract we have with the customer.

At the closing balance sheet date, our leverage for debt covenant purposes was 0.8x EBITDA (2021: 0.7x). 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.

Return on Invested Capital

Underlying Return on Invested Capital, which is calculated pre-tax, remained high at 20.6% (2021: 23.7%). The reduction versus 2021 reflected the prior year benefitting from a relatively limited increase in the invested capital base. This was due to strong collections of some older receivables, low working capital requirements of the Covid-19 related work and because the goodwill related to the acquisitions of Facilities First and WBB was in the closing balance sheet but not the opening position.

Capital allocation and returns to shareholders

We aim to have a strong balance sheet with our target financial leverage of 1x to 2x net debt to EBITDA, and, consistent with this, the Board's capital allocation priorities are to:

·	Invest in the business to support organic growth.
·	Increase ordinary dividends so shareholders are rewarded with a growing and sustainable income stream.
·	Selectively invest in strategic acquisitions that add capability, scale or access to new markets and have attractive returns.
·	Return any surplus cash to shareholders through share buybacks.

We continued to deliver our capital allocation policy in 2022:

·	Invest to support organic growth : we have continued to invest in our colleagues, infrastructure and capabilities. Increased investment has been put into business development, which has supported our healthy pipeline of new opportunities. We continue to invest in our IT systems and cyber security, and we are further developing our enterprise workforce solutions. We increased colleagues' pay faster than we had expected to at the beginning of the year, made additional one-off payments and a broader portfolio of support. We also restarted our Oxford Management Training programme, which was suspended during Covid, and we have developed and launched our Women in Leadership programme in partnership with Said Business School.
·	Increase ordinary dividends : the Board is recommending a final dividend of 1.92p per share. Following the interim dividend of 0.94p, this results in a full year dividend of 2.86p, an increase of 19% compared to 2021, as we continue on our path to reduce dividend cover progressively towards 3x over the coming years.
·	Invest in acquisitions : we completed the acquisition of ORS, a specialist provider of immigration services to public sector customers in Switzerland, Germany, Austria and Italy, and we also acquired Sapienza, a European provider of software services to the space sector. We continue to assess other opportunities aligned to our strategy.
·	Return surplus cash to shareholders : in 2022 we completed a £90m share buyback and the Board has agreed that it intends to buy back a further £90m of its shares during 2023.

Contract awards, order book, rebids and pipeline

Contract awards

Order intake in 2022 was £4.2bn, a book-to-bill rate of 93%. Order intake in the government services sector is lumpy by its nature and after an extremely strong 2021, book-to-bill dropped to slightly below 100% in 2022. North America had the strongest book-to-bill at 157%, with robust new order intake in Defence and Citizen Services as well as a strong rebid performance in Defence. Over the five-year period, our aggregate global book-to-bill ratio has been around 112%. There were around 60 contract awards worth more than £10m each and 3 with a total contract value of more than £200m. Around £2.0bn, nearly half, of the order intake came from the Americas, £1.9bn, or approximately 45%, from the UK & Europe, with the remainder in Asia Pacific and the Middle East.

Approximately half of the order intake was constituted by the value of new business and half was rebids and extensions of existing work. The win rate by value for new work was around 25% while the win rate by value for retaining existing work was approximately 60% in the year.

Our North American defence business won the Ship Acquisition Programme / Project Management (SHAPM) contract from the US Navy, which we expect to be worth £280m over five years and a £60m, 2.5-year contract for design, prototype construction and demonstration of a next generation large, unmanned ship as part of the No Manning Required Ship (NOMARS) programme. We were also successful in the rebid of our US Navy SEA21 contract. The new contract is expected to be worth around £330m over five years and will see us provide technical services related to international fleet support, surface ship modernisation, surface ship in-service readiness and surface training systems. In Canada, we were selected by the Government of Ontario as part of the province's Employment Services Transformation (EST) program. The programme aims to assist job seekers develop their skills and match them to employment opportunities that result in meaningful long-term careers, and is expected to be worth around £110m over five years. In the UK, the largest single new business award was our contract to manage the new HMP Fosse Way prison on behalf of the Ministry of Justice, which we expect to generate revenue of more than £400m over its life. Also, in our Justice and Immigration sector, significant increases in the numbers of service-users led to us securing additional immigration work that is expected to be worth an estimated £500m over two years. VIVO Defence Services, our joint venture with Equans, followed on from its success in 2021 by securing contracts from the UK Defence Infrastructure Organisation (DIO) to deliver asset and facilities management services to the United States Visiting Forces (USVF). These have an estimated value to Serco of around £60m over the initial three-year period. Also in the UK, we successfully rebid our contract to provide facilities management services at Norfolk and Norwich University Hospital, with an estimated value of £130m over five years.

Bids for new work that were unsuccessful in the period included a contract to deliver vehicle licensing and registration for the State of Victoria transport department, services as part of the redevelopment of Frankston Hospital, also in Victoria, and the contract to provide estate management and other services to the Ministry of Defence's Training Estate. In addition, we withdrew from the competition to build three new Fleet Solid Support ships for the Royal Navy. Rebids in the UK that were unsuccessful included Lowdham Grange prison, some work for the Department of Work and Pensions, and two environmental services contracts. Included in the above numbers is the announcement from UK MoD on February 15 2023 on the outcome of the Skynet 6 procurement, where the Athena consortium, of which Serco was a member, was unsuccessful.

Order book

The order book increased by 8% from £13.7bn at the start of the year to £14.8bn at the end of December. 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 £1.9bn (2021: £1.2bn) higher if option periods in our US business, which typically tend to be exercised, were included. If joint venture work was included this would add a further £2.0bn (2021: £2.2bn) to our order book.

Rebids

In our portfolio of existing work, we have around 70 contracts with annual revenue of £5m or more where an extension or rebid will be required before the end of 2025, with an aggregate annual revenue of £1.5bn. Contracts which will either need to be rebid or extended in 2023 have an annual contract value of around £0.7bn, which includes our Immigration Services in Australia, scheduled to end in December 2023. As announced on 23 February 2023, we have successfully rebid Centers for Medicare & Medicaid Services in the US with an estimated value of $690m over a 4 year and 7 month term comprising a one-year base period and four option periods. The annual value of rebids reduces to approximately £0.5bn in 2024 and £0.3bn in 2025.

New business 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 £8.4bn at the end of 2022, a reduction, as expected, from the record £9.9bn level at the end of 2021 but still more than 30% higher than the £6.4bn at the end of 2020. It is pleasing to see the pipeline at such a healthy level given 2021 was a strong year for wins and with several large bids having exited the pipeline in 2022. The pipeline now consists of over 40 bids with an ACV averaging more than £30m and an average contract length of around six years. The pipeline of opportunities for new business that have an estimated ACV of less than £10m has continued to increase, now totalling £2.5bn. This is around 20% higher than the £2.0bn at the end of 2021 and around 45% more than at the end of 2020.

Acquisitions

We continue to view acquisitions as an important part of our strategic toolkit, which, if deployed correctly, can add significant value to the business. They should therefore supplement and be capable of delivering new opportunities for organic growth. Generally speaking, we regard acquisitions as higher risk than organic growth, so any potential opportunities have to meet our stringent criteria of being both financially and strategically compelling. We judge potential acquisitions against three criteria: do they add new, or strengthen existing, capability? Do they add scale which we can use to increase 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, the execution of all acquisitions is centrally managed by Group and follow the same rigorous process. Equal focus and discipline is applied to post-acquisition value drivers such as effective integration and value realisation from synergy and growth.

We made two acquisitions in 2022:

·	In July we acquired Sapienza, a leading European provider of services in the space sector, for €1m (£1m). The acquisition expands our offering and capabilities in the fast-growing space market, supporting the Group's growth strategy of becoming a leading provider of complex managed services for the space sector.
·	In September we acquired ORS, a specialist provider of immigration services to public sector customers in Switzerland, Germany, Austria and Italy, for CHF40m (£36m). The business adds scale to our European operations and access to new immigration markets, already one of our core sectors, and one in which we expect to see growth in the coming years.

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

Strategy

I have been a member of the Serco Executive Committee since 2014 and part of the team that developed the Group's strategy, which was communicated to investors at a Capital Markets Day in December 2021.

I remain confident our strategy provides the best pathway to value creation for our customers, our colleagues and our shareholders, and our performance framework to grow revenue faster than the market, profit faster than revenue and convert that profit into cash serves as measure for that. Our focus therefore in the coming years is the execution of our strategy to achieve our goal of 4-6% growth at increased margins over the medium term and to make a positive difference to people, place, and planet to impact a better future.

Specifically, we see the following key factors supporting our growth:

·	Large attractive market. The market for private sector delivery of government services is large and growing. Partnering with the private sector to deliver impact allows governments flexibility in the design of solutions, the efficient delivery of services and measurement of impact for citizen, community and country. While noting the market remains fragmented, and despite being a leading international provider of services to government, our market share is estimated to be between 1 and 3% offering significant opportunity for organic growth.
·	Four Forces intensifying. For some time, we have described how demographic and societal trends, as well as rising expectations of service quality from citizens drive increased challenges for governments. At the same time, record levels of national debt, and resistance to tax increases compounds those challenges. Furthermore, the impacts of what we call the Four Forces have become more intense because of the longer-term consequences of the Covid-19 pandemic and inflation levels not seen for decades. Geopolitical uncertainty has shifted to tangible international instability. Structural challenges in the labour market pose capacity and economic challenges for governments in similar ways as they do to the broader economy. As governments confront these complex, compounding and ever-changing issues, we believe partnership with the private sector can bring new ideas and skills governments don't always have, while delivering flexibility and value for money.
·	B2G focus. Since 2014, Serco has been a focused Business-to-Government (B2G) service provider. It provides the company with competitive differentiation and opportunities for growth. Serco offers capacity, capability and agility that augments rather than replaces public sector effort. We will continue to develop our customer base by building on the credibility we have earned as a service provider to expand participation across the value chain from advisory to operations, from designing services to delivering impact.
·	Geographic and sectoral diversity. We gain growth opportunities, scale, expertise, and diversification by operating across five sectors and four geographies. Our existing footprint covers around 65% of worldwide outsourced government services spend. All our regions add something different to the Group and have an important role in our future. We will actively manage our portfolio to ensure we benefit from scale, maintain competitive advantage, and avoid fragmentation.
·	B2G platform. Over recent years we have developed a B2G operating model that allows us to deliver a wide range of bespoke government contracts. It enables us to respond quickly to changing government needs wherever they may be and provide high quality, customer-centric solutions. Supporting this is a well-invested range of services and capabilities that are shared across the Group. In our 2021 Capital Markets Day, we identified areas where we can improve our B2G platform. Our immediate focus is on execution of the areas where improvements will deliver the greatest impact.
·	Culture. Part of the corporate renewal programme that occurred after 2014 was to assess and reorientate the culture and ethical framework at Serco. Today Serco is a place where our shared values of Trust, Care, Innovation and Pride are lived, and where people are proud to work. We place huge importance on how we enable our people to make a positive difference to society at the same time as having robust controls, risk management processes and governance, and being transparent and open in dealings with our customers, suppliers, colleagues, and investors. These foundations are now part of our corporate DNA and on which we will continue to build Serco's future.
·	Potential for growth. It is clear to us that we have significant opportunities to grow share of the existing market, and that the manifestation of Four Forces in the context of profound changes that are likely to accelerate from structural labour market challenges and development and convergence of technology, provide fertile ground to achieve our growth objectives. We are therefore confident that the case for our international B2G strategy holds strong, and our focus on effective execution of that strategy offers the best way to realise value for our shareholders.

Three key value drivers

We embark on the next stage of Serco's development from an enviable position; our foundations are strong and the strategy is working as demonstrated by the high growth delivered over recent years. Following my appointment as CEO, I have the responsibility to lead the evolution of the existing strategy to meet our medium-term goals, and the opportunity to create value by driving execution in areas where we can have the highest impact. These adaptations will be thoughtful, disciplined and enacted systematically. We want to invigorate the organisation to enable us to not only take, but also make opportunities to grow. In the coming period, we will execute on three value drivers in particular: Customers, Colleagues and Capabilities.

Customers

We have worked hard in recent years to earn credibility and our customer relationships are now strong. We will work even harder in the period ahead to elevate our relationships with customers and be forensic in our understanding of the existing market, while remaining agile and flexible to respond to new and emerging opportunities. The unprecedented scale and complexity of challenges seen across the world in recent years has intensified the need for governments to balance cost with quality, resilience, delivery, security, and sustainability. Over the coming years we aim to elevate customer relationships so that we can broaden our participation across their value chain from solution discovery to service delivery. In our chosen markets, we already have the broadest touchpoints with government among their strategic suppliers. We will build stronger partnerships by giving them long-term, cross-department, non-institutionalised and pragmatic perspectives and create mutual value by co-creating solutions to address their challenges drawn from Serco's experience and capability around the world.

Our mission is to impact a better future; we can best do that by evolving from outsourcer to Impact Partner to the world's leading governments.

Colleagues

Our commitment to the safety and wellbeing of colleagues remains foremost in our efforts to protect and deepen the relationship between Serco and the people whose dedication and commitment stand behind our success. We will evolve colleague support which extends across physical and mental wellness to financial wellbeing. Our Speak Up, Employee Assistance Program, MyBenefits and Serco People Fund have served us well in recent years and we will look to continue the programs while responding pragmatically to economic, social and environmental factors.

We respect the choice everyone has in relation to where they work. We will therefore continue to develop our employee value proposition by building on the purpose-driven and values led foundations we have, to grow the value of the work we ask people to do. Renewed emphasis on work process re-engineering with a technology-first approach will reduce or eliminate tasks that are manual, inefficient or can be standardised to support productivity and create capacity to continuously make our business better. Extending high levels of engagement to high levels of enablement will allow our colleagues to bring their commitment to bear in areas of highest social and economic value for our customers. By growing the value of work to deepen the relationship between the company and our colleagues, we hope that they will not only choose to stay but will become advocates for Serco impacting a better future.

We will support this by re-energising but not changing or compromising our values of Innovation, Trust, Care and Pride:

·	Innovation. Colleagues who embrace our spirit of innovation will be recognised, empowered, and rewarded by extending our current performance framework beyond operational outcomes to include the measurable value they deliver from innovation.
·	Trust. Our teams will be empowered with the information, support systems, and agency to make us a better business and to better partner with our customers to deliver positive impact.
·	Care. Our mantra of everyone matters, everyone belongs harnesses the true power and value of diversity. Further, colleagues will be supported to explore Serco's wider opportunity landscape and identify learning opportunities that enable their development, while also powering public service for public good.
·	Pride. We will invite our colleagues to be our advocates into new customer engagements, where they will help to spread our purpose-driven culture to citizens, with communities and across countries.

Capabilities

We are going to put significantly more emphasis on technology-enablement and continuous learning across the work we do, across the solutions we offer our customers, across our Group.

The acceleration in the development and convergence of technology is expected to profoundly change the way in which we work in coming years. It will likely fundamentally influence the way we define work itself. We have invested in building robust IT infrastructure and cyber capability in recent years. We will continue to protect those core elements of our technology platform while accelerating our capability to fully exploit the functionality of platforms we have already invested in and raising our ambition to harness new and emerging technology to help everyone in the business work safer, be more productive and grow value.

Scaling artificial intelligence (AI) has potential competitive advantage and recent developments that have seen AI not only read and write but also understand information will likely make AI a key agenda item for both government and industry in the coming years. Our focus for technology-enablement will not be the glamour of AI but understanding in a very practical sense how we can extract value by applying it to decision making and operations, and then to evolve structure and culture around the optimisation it may offer.

In the coming years, we will proactively partner with both start-up and established technology businesses, as well as academic and research institutions to create a broader capability ecosystem from which to deliver future growth.

Market outlook

In 2021 we conducted a detailed market review, which included using two independent research firms to estimate the size and growth rates of our markets. We estimated then 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, for example, 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. We estimated that the market will grow at around 2-3% per year in the medium term. Rather than concentrate on the specific numbers, which are likely to have a margin for error, the key conclusions from our work were:

·	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 is currently small, and although it is larger in some specific segments, the opportunity to grow within the market is significant.
·	The market itself is likely to continue to grow and, given our small market share, there is opportunity for us to grow faster than the market.

Since we did this market review, the direct impacts of the Covid pandemic have receded, but new challenges have arisen for all governments, including inflation and labour shortages. In markets where labour is in high demand, and governments have been challenged with the affordability of matching wage adjustments to inflation, it becomes increasingly hard then to recruit and retain the people needed to deliver public services. While inflation may subside, it will likely take government years to make good on real wages to their employees due to historical pay conditions potentially lagging the market, compounded by the recent significant cost of living increases. And it is hard to see how labour shortages and the demographics of ageing working populations will not continue to make it extremely hard for governments to recruit and retain people. We see these factors - inflation and labour shortage - persisting for some years and putting a premium on agility, mobilisation at scale, high productivity, and effective management.

While technological evolution has been ever present in the design and delivery of services for decades, we believe rapid acceleration in the development and convergence of technology will usher in generational change in coming years. Most governments enter this new era with technology debt and a history of challenges with digital transformation. The opportunity for Serco to pair our operator-led responses with the agility and breadth of a technology partner ecosystem offers a credible alternative to the emerging needs of citizens and government.

We believe that the 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 agility of a partnership ecosystem. We are tempted to think that labour cost and shortages may in time become a potent additional factor to drive growth in our markets. And how technology debt may manifest in the difference between what was promised and what is actually delivered in relation to digital transformation of government services may very well become a further force for growth in the model in coming years.

Guidance for 2023

Our initial outlook for 2023 anticipates revenue will increase slightly and UTP will be similar to 2022. We expect some known headwinds to be compensated for by increased contribution from newer contracts ramping up and improvement across the existing portfolio. We have entered 2023 with a strong pipeline of new business opportunities.

Revenue: the outturn for revenue will be affected by inflation-related adjustments on contracts which given macro-economic volatility, is hard to predict at this point. However, we have planned on the basis that revenue in 2023 will be at least £4.6bn, which would be around 2% higher than the £4.5bn in 2022 on a reported basis and stable organically. We expect the impact of Covid work and other contracts ending or reducing in size, to be offset by growth in other parts of the business.

Underlying Trading Profit: UTP is expected to be around £235m, similar to 2022. The year will benefit from the annualization of new contracts from 2022, continued ramp up of the VIVO and Restart contracts, efficiency improvements across the existing portfolio and the exit from our loss-making Barts Health FM contract. These should offset the drag from Covid work, known contract losses, the initial impact of our successful CMS rebid, and at least £8m of mobilisation costs in the first year of our contract to run HMP Fosse Way, a new prison in the UK. The inflation protection in many of our contracts means we would not expect a material impact from inflation on UTP.

Net finance costs and tax: Net finance costs are expected to be around £25m. This is higher than 2022 due to higher lease-related interest, the currency impact on our dollar-denominated debt and higher interest rates on the portion of our debt that is floating. The underlying effective tax rate is expected to be 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 be around £120m in the year. This is lower than 2022, reflecting the timing of new contracts, but is consistent with our ongoing expectation of converting at least 80% of profit into cash. We expect Adjusted Net Debt to end the year at around £200m.

Returns to shareholders: While it is anticipated earnings will be broadly stable in 2023, we intend to 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. In addition, due to continued strong cash generation and with covenant leverage in December 2022 of 0.8x EBITDA, below the bottom end of our target leverage of 1-2x net debt to EBITDA, we plan to buy back shares up to a value £90m in 2023. At a share price of £1.49 (the closing price on 27 February), the buyback would reduce the share count by around 5%.

Summary and concluding thoughts

At our Capital Markets Day in December 2021, and subsequently at our full year results in February 2022, we set out our expectations for the medium-term growth of the business. These were from a baseline of guidance for 2022 of revenues between £4.1-4.2bn and Underlying Trading Profit of £195m. Our targets were for revenues to grow at an average of 4-6% per year, and for margins to grow to be in the 5-6% range. Our outlook for 2023 has to be seen in the context of having done very much better already: revenues in 2022 were 9% above the baseline, UTP was 22% higher and margin was 5.2%.

Our results further build on Serco's track record of delivering better outcomes for citizens, customers, colleagues and shareholders. It gives confidence that our strategy of being a focused provider of services to governments, operating through our Serco Management Framework, and using our B2G platform to win and deliver business, continues to create value. At a time when governments will look to partnerships to solve their most pressing problems our international platform differentiates us from our competitors and gives us agility, reach, breadth, efficiency, and resilience.

We believe these foundations will continue to serve us well over the coming years. In the immediate period ahead, we will place renewed focus on growing our market share, growing the value of colleagues' work, and growing our margins consistent with our goals of revenues growing faster than the market, profits growing faster than revenues, and shareholder returns growing faster than profits to achieve our medium-term goals.

Importantly we will do this by staying true to our values, assuring robust governance practices and embedding our commitment to protect our people and our planet in everything we do, in our mission to impact a better future.

Mark Irwin

Group Chief Executive

Serco - and proud of it.

Divisional Reviews

Serco's operations are reported as four regional divisions: the Americas; UK & Europe (UK&E); 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 2022 £m	Americas	UK&E	AsPac	Middle East	Corporate costs	Total
Revenue	1,269.8	2,100.2	954.6	209.4	-	4,534.0
Change	+13%	(1%)	+5%	(21%)		+2.5%
Change at constant currency	+2%	(2%)	+2%	(28%)		(1.5%)
Organic change at constant currency	(1%)	(5%)	+0%	(28%)		(4.4%)

UTP	136.6	72.1	56.9	16.0	(44.6)	237.0
Margin	10.8%	3.4%	6.0%	7.6%	(1.0%)	5.2%
Change	+16%	(25%)	+11%	+17%	(11%)	+3.5%

Onerous contract provision charges & releases	0.1	0.1	-	-	-	0.2
Other one-time items	-	4.0	-	-	-	4.0
Trading Profit/(Loss)	136.7	76.2	56.9	16.0	(44.6)	241.2
Amortisation of intangibles arising on acquisition	(16.5)	(1.5)	(3.6)	-	-	(21.6)
Operating profit/(loss) before exceptionals	120.2	74.7	53.3	16.0	(44.6)	219.6

Year ended 31 December 2021 £m	Americas	UK&E	AsPac	Middle East	Corporate costs	Total
Revenue	1,120.0	2,131.6	908.4	264.6	-	4,424.6

UTP	117.8	96.0	51.3	13.7	(49.9)	228.9
Margin	10.5%	4.5%	5.6%	5.2%	(1.1%)	5.2%

Onerous contract provision charges & releases	-	1.3	-	-	-	1.3
Other one-time items	-	2.5	0.7	-	-	3.2
Trading Profit/(Loss)	117.8	99.8	52.0	13.7	(49.9)	233.4
Amortisation of intangibles arising on acquisition	(11.7)	(0.8)	(3.5)	-	-	(16.0)
Operating profit/(loss) before exceptionals	106.1	99.0	48.5	13.7	(49.9)	217.4

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 18-30. 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 31-70. 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.

Americas (28% of revenue, 49% of Underlying Trading Profit⁽⁷⁾)

Year ended 31 December £m	2022	2021	Growth
Revenue	1,269.8	1,120.0	13%
Organic change	(1%)	2%
Acquisitions	3%	10%
Currency	11%	(7%)
Underlying Trading Profit	136.6	117.8	16%
Organic change	6%	14%
Acquisitions	(0%)	11%
Currency	11%	(8%)
Margin	10.8%	10.5%	24bps

Revenue grew by 13% to £1,270m (2021: £1,120m), with an organic decline of 1% more than offset by an acquisition contribution of 3% and an 11% favourable 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 2021 and contributed an additional £32m 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 saw a 4% decline in revenue because of reduced volumes on the CANES Navy fleet IT modernisation programme and the dampening effect on growth from the delays in the award of new contracts seen through 2021 and early 2022. Citizen Services saw modest growth supported by slightly higher demand for our case management services and recovery in driver examination activities, which had been negatively impacted by Covid-19.

Underlying Trading Profit increased by 16% to £137m (2021: £118m). Excluding the favourable currency movement of £13m, UTP growth at constant currency was 5%. Margins increased from 10.5% to 10.8%, due primarily to better profitability in Defence, despite lower revenues.

Order intake was strong at £2.0bn, nearly half of the total for the Group and a book-to-bill ratio of around 1.6x. Of this, new business wins were around £950m, more than double the level in 2021. Wins included important programmes such as the Ship Acquisition Programme / Project Management (SHAPM) contract from the US Navy, under which we will deliver design, acquisition and programme management to the US Navy's submarine build and sustainment programmes; we expect this contract to be worth £280m over five years. We also won a £130m five-year contract to deliver full acquisition lifecycle support for the F-35 Joint Strike Fighter program and a £60m, 2.5-year contract from the Defense Advanced Research Projects Agency (DARPA) for detail design, prototype construction and demonstration of a large and highly sophisticated unmanned ship as part of the No Manning Required Ship (NOMARS) programme. In Canada we were selected by the Government of Ontario to support part of their Employment Services Transformation program, which will help unemployed people back into work. We estimate this contract will be worth around £110m over five years. It was an active period for rebids and extensions, and we were pleased to achieve a win rate of 90% on these, the top end of our usual 80-90% range. This included the rebid of our US Navy SEA21 contract, which is expected to be worth around £330m over five years and will see us provide technical services related to international fleet support, surface ship modernisation, surface ship in-service readiness, surface training systems and inactive ships.

Order intake was particularly strong in our Maritime Engineering, Technology and Sustainment (METS) business unit, which is predominantly composed of the NSBU business we acquired in 2019. Book-to-bill in the unit was more than 400%, with high win rates in both rebids and new work. After a period of slower growth as the NSBU business was integrated, the combination of Serco and NSBU skills is proving powerful and demonstrating how acquisitions can enhance our growth potential.

In February 2023, we were awarded a contract by the US Department of Health and Human Services, Centers for Medicare & Medicaid Services (CMS) to continue to support eligibility determinations for citizens purchasing health insurance through the Federal Health Insurance Exchanges. The 4 year and 7-month contract has a one-year base period and four option periods, and is due to start on 1 July 2023. The estimated total value to Serco, subject to workload volumes, is approximately $690 million if all option periods are exercised.

The pipeline of major new bid opportunities due for decision within the next 24 months in the Americas increased from £2.2bn at the end of 2021 to £2.5bn at the end of 2022. It is pleasing to see the pipeline replenish so well given 2022 was a strong year for wins. North America represents approximately 30% of the total Group pipeline. Defence makes up the vast majority of the Americas pipeline, with a broad spread of types of work, while Transport represents the remainder.

UK & Europe (46% of revenue, 26% of Underlying Trading Profit⁽⁷⁾)

Year ended 31 December £m	2022	2021	Growth
Revenue	2,100.2	2,131.6	(1%)
Organic change	(5%)	20%
Acquisitions	3%	0%
Currency	0%	0%
Underlying Trading Profit	72.1	96.0	(25%)
Organic change	(27%)	68%
Acquisitions	2%	1%
Currency	(0%)	(1%)
Margin	3.4%	4.5%	(107bps)

Revenue declined by 1% to £2,100m (2021: £2,132m), with a 5% organic contraction being partially offset by a 3% contribution from the acquisitions we made in Europe during the year. The lower revenue was due to our Covid-19 services coming to an end part way through the year. In total this was a drag on revenue of around £480m, or 22%, with the net reduction being significantly less as we saw growth in other Citizen Services work, Justice & Immigration, Transport and Defence. We experienced particularly strong demand for immigration services and, from a revenue perspective, our contract to provide accommodation for asylum seekers is now the largest in the Group.

Underlying Trading Profit decreased by 25% to £72m (2021: £96m), representing a margin of 3.4% (2021: 4.5%). The step down in profit was due to lower levels of Covid-19 work and the full year impact of the end of our Atomic Weapons Establishment contract in June 2021, which together were a drag of around £65m, or two-thirds of prior year profit, as well as broader market related challenges such as higher utility costs in our asylum seeker accommodation and driver shortages impacting our prisoner escorting work. Much of the profit reduction from these factors was offset by the growth described above in other Citizen Services work, Justice & Immigration, Transport and Defence. The margin reduced by around 107bp compared to 2021 as a result of the lower Covid work volumes, although it was around 20bp higher in 2022 than in 2020. Overall, we consider this was a good outcome in a year with such significant headwinds.

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 3.2% (2021: 4.2%). The joint venture and associate profit contribution increased to £12m (2021: £9m), as the ramp up of our new VIVO work and improved performance on Merseyrail more than offset the impact from the cessation of our Atomic Weapons Establishment contract at the end of June 2021.

Order intake was around £1.9bn, a book-to-bill ratio of 0.9x and around 45% of the total intake for the Group. New wins were approximately 65% of the order intake. Agreements signed included a contract with the UK Ministry of Justice to run HMP Fosse Way, a new prison in the UK. The new contract has an estimated value of more than £400m over the initial ten-year term. Also in the Justice & Immigration sector, significant increases in the numbers of service-users led to us securing additional immigration work that is expected to be worth an estimated £500m over two years. VIVO Defence Services, our joint venture with Equans, continued its success of 2021, being awarded four of the five contracts being tendered to deliver asset and facilities management services to the Defence Infrastructure Organisation (DIO) at the UK military establishments that host US Visiting Forces. We estimate the work will have a value of around £60m over the initial three-year period. We also successfully rebid our agreement to provide facilities management services at Norfolk and Norwich University Hospital, with an estimated value of £130m over five years.

The pipeline of new opportunities in the UK & Europe remains healthy at £3.7bn (2021: £4.2bn), with significant new opportunities across Defence, Justice & Immigration, Citizen Services and Health.

Asia Pacific (21% of revenue, 20% of Underlying Trading Profit⁽⁷⁾)

Year ended 31 December £m	2022	2021	Growth
Revenue	954.6	908.4	5%
Organic change	0%	8%
Acquisitions	2%	15%
Currency	3%	3%
Underlying Trading Profit	56.9	51.3	11%
Organic change	13%	34%
Acquisitions	(6%)	20%
Currency	4%	3%
Margin	6.0%	5.6%	31bps

Revenue increased by 5% to £955m (2021: £908m). The business was stable organically, while acquisitions added 2% and favourable currency moves a further 3%. Organically, increased demand for our immigration services was offset by a reduction in Citizen Services, Health, as some services at Fiona Stanley Hospital were taken back in-house in the second half of 2021, and Defence.

Underlying Trading Profit increased by 11% to £57m (2021: £51m), representing a margin of 6.0% (2021: 5.6%). On a constant currency basis, UTP increased by 7%. The biggest driver of the increase was our immigration services work. Our Justice operations also delivered improved profit, while Defence and Citizen Services saw lower profitability in the year, with labour market disruption making it difficult to recruit enough people to meet customer headcount targets.

Despite an active period of bidding in the year, order intake was just £0.3bn, 6% of the Group total, as we were unsuccessful in bids to run driver licensing and vehicle registration at the transport department in Victoria, and facilities management at Frankston Hospital. We did however have a success rate approaching 100% on retaining existing work, including our contract to provide contact centre services to the Australian Tax Office.

Our pipeline for new business reduced from £2.5bn to £1.4bn in the year, due to the lost bids mentioned above. Defence makes up the bulk of the pipeline with opportunities also in the Justice & Immigration and Citizen Services sectors.

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

Year ended 31 December £m	2022	2021	Growth
Revenue	209.4	264.6	(21%)
Organic change	(28%)	(13%)
Acquisitions	0%	0%
Currency	8%	(5%)
Underlying Trading Profit	16.0	13.7	17%
Organic change	8%	1%
Acquisitions	0%	0%
Currency	9%	(2%)
Margin	7.6%	5.2%	246bps

Revenue fell by 21% to £209m (2021: £265m). An organic reduction of 28% was modestly offset by favourable currency moves adding 8% to revenues. The exit in September 2021 from our contracts to operate the Dubai Metro and Tram reduced revenue for the division by around £90m, outweighing growth in other parts of the Transport sector including Dubai Airport and air traffic control services in the region.

Despite the sharp revenue contraction, Underlying Trading Profit increased to £16m (2021: £14m). The low margin nature of the Dubai Metro contract meant the impact on UTP of the contract ending was significantly less than on revenue. The favourable profit outcome was driven by a strong performance in the Transport sector as well as good cost control in the areas where we experienced subdued demand. Commercial discussions related to a debtor in the region are progressing positively. Margins increased from 5.2% to 7.6% as a result of the changed mix of work and good cost control.

Order intake was around £0.1bn, or 3% of the total for the Group, of which approximately 30% was new business. New business included a £10m, five-year contract to provide a facilities management managing agent service to Riyadh International Airport. We successfully rebid our contract to provide air traffic control services to Dubai Air Navigation Services (dans), the organisation responsible for Air Traffic Management at airports in Dubai and the Northern Emirates.

Our pipeline of major new bid opportunities in the Middle East includes significant opportunities in Citizen Services and potential work in the Transport and Defence 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 reduced by £5.3m to £44.6m (2021: £49.9m). The lower level resulted primarily from the contribution made to the Serco People Fund in 2021 not repeating.

Dividend calendar, if approved at the AGM

Ex-dividend date 11 May 2023

Record date 12 May 2023

Final dividend payable 9 June 2023

LEI code: 549300PT2CIHYN5GWJ21

Finance Review

For the year ended 31 December 2022	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	4,534.0	-	4,534.0	-	4,534.0	-	4,534.0
Cost of sales	(4,044.7)	4.2	(4,040.5)	-	(4,040.5)	-	(4,040.5)
Gross profit	489.3	4.2	493.5	-	493.5	-	493.5
Administrative expenses	(264.3)	-	(264.3)	-	(264.3)	-	(264.3)
Exceptional operating items	-	-	-	-	-	(2.4)	(2.4)
Other expenses	-	-	-	(21.6)	(21.6)	-	(21.6)
Share of profits in joint ventures and associates, net of interest and tax	12.0	-	12.0	-	12.0	-	12.0
Profit before interest and tax	237.0	4.2	241.2	(21.6)	219.6	(2.4)	217.2
Margin	5.2%		5.3%		4.8%		4.8%
Net finance costs	(20.4)	-	(20.4)	-	(20.4)	-	(20.4)
Profit before tax	216.6	4.2	220.8	(21.6)	199.2	(2.4)	196.8
Tax charge	(47.9)	-	(47.9)	5.8	(42.1)	0.3	(41.8)
Effective tax rate	22.1%		21.7%		21.1%		21.2%
Profit for the period	168.7	4.2	172.9	(15.8)	157.1	(2.1)	155.0
Minority interest	(0.4)	-	(0.4)	-	(0.4)	-	(0.4)
Earnings per share (EPS) - basic (pence)	14.18		14.54		13.21		13.03
Earnings per share (EPS) - diluted (pence)	13.92		14.27		12.97		12.79

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)
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 (EPS) - basic (pence)	12.78		25.93		24.97		24.86
Earnings per share (EPS) - diluted (pence)	12.56		25.48		24.54		24.43

Alternative Performance Measures (APMs) and other related definitions

Overview

APMs used by the Group are outlined below along with a definition, reconciliation from each non-IFRS APM to its IFRS equivalent and an explanation of 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 the Group's 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 profit or cost 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 Condensed Consolidated Financial Statements and their accompanying notes, should be referred to in order to fully appreciate all the factors that affect the business. Management strongly encourages 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 2021.

Alternative revenue measures

For the year ended 31 December	2022 £m	2021 £m
Reported revenue at constant currency¹	4,358.8	4,424.6
Foreign exchange differences	175.2	-
Reported revenue at reported currency	4,534.0	4,424.6

1 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 ended 31 December 2022 into Sterling at the average exchange rates for the year ended 31 December 2021.

For the year ended 31 December	2022 Organic Revenue¹ £m	2021 Organic Revenue¹ £m	2022 Revenue plus share of joint ventures and associates² £m	2021 Revenue plus share of joint ventures and associates² £m
Alternative revenue measure at constant currency	4,025.7	4,208.8	4,596.7	4,663.0
Foreign exchange differences	153.4	-	175.2	-
Alternative revenue measure at reported currency	4,179.1	4,208.8	4,771.9	4,663.0
Impact of relevant acquisitions or disposals	354.9	215.8	-	-
Share of joint venture and associates	-	-	(237.9)	(238.4)
Reported revenue at reported currency	4,534.0	4,424.6	4,534.0	4,424.6

1 In order to provide a comparable movement which removes 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 five acquisitions excluded for the calculation of Organic Revenue in the year to 31 December 2022 being the acquisitions of Facilities First Australia Holdings Pty Ltd, Whitney, Bradley & Brown, Inc, Mercurius Finance S.A, OXZ Holdings AG and Sapienza Consulting Holdings BV. The acquisitions of the OXZ Holdings AG completed on 1 September 2022 and Sapienza Consulting Holdings BV 12 July 2022, respectively. The acquisitions of Facilities First Australia Holdings Pty Ltd, Whitney, Bradley & Brown, Inc and Mercurius Finance S.A were completed during 2021.

2 The alternative measure includes the share of revenue from 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.

Alternative profit measures

For the year ended 31 December	2022 £m	2021 £m
Underlying trading profit at constant currency¹	222.6	228.9
Foreign exchange differences	14.4	-
Underlying trading profit at reported currency²	237.0	228.9
Non-underlying items (excluding exceptional items):
OCP charges and releases³	0.2	1.3
Other Contract and Balance Sheet Review adjustments and one-time items⁴	4.0	3.2
Trading profit⁵	241.2	233.4
Amortisation and impairment of intangibles arising on acquisition⁶	(21.6)	(16.0)
Operating profit before exceptional items	219.6	217.4
Operating exceptional items⁷	(2.4)	(1.2)
Reported operating profit	217.2	216.2

1. In order to provide a comparable movement on the previous period's results, reported Underlying Trading Profit (UTP) is recalculated by translating non-Sterling values for the year ended 31 December 2022 into Sterling at the average exchange rates for the year ended 31 December 2021.

2. The Group uses an alternative measure, UTP, 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 period.

3. Charges and releases on all Onerous Contract Provisions (OCPs) that arose during the 2014 Contract and Balance Sheet Review are excluded from UTP in the current and prior periods. 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.

4. Revisions to accounting estimates and judgements which arose during the 2014 Contract and Balance Sheet Review and other one-time items are separately reported where the impact of an individual item is material. The item recorded in the current year relates to the reversal of an impairment in respect of assets which is no longer required due to contractual changes which the Group has agreed with its customer.

5. The Group uses Trading Profit as an alternative measure to Operating Profit, as shown in the Group's Condensed Consolidated Income Statement on page 31. Trading profit is derived by making the two adjustments outlined below in footnote 6 and 7.

6. 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.

7. Exceptional items, being those considered material and outside of the normal operating practice of the Group to be suitable for separate presentation and detailed explanation. Where items are not material, their inclusion as exceptional items is to ensure they are treated consistently with prior periods.

Alternative tax measures

For the year ended 31 December	2022 £	2021 £	2022 %	2021 %
Underlying tax charge¹	47.9	48.6	22.1	23.7
Non-underlying items (excluding exceptional items)	-	(156.2)	(0.4)	(75.1)
Amortisation and impairment of intangibles arising on acquisition	(5.8)	(4.3)	(0.6)	(6.5)
Operating exceptional items	(0.3)	0.2	0.1	(0.2)
Reported tax charge/(credit)	41.8	(111.7)	21.2	(58.1)

1. Underlying tax and the corresponding underlying tax rate are used because they remove the impact of typically non-recurring, or out of period, items. This gives better clarity of the tax associated with the Group's underlying financial performance. The underlying tax rate enables comparison to the previous period's results.

Alternative Earnings per share (EPS) measures

For the year ended 31 December	2022 basic pence	2021 basic pence	2022 diluted pence	2021 diluted pence
Underlying EPS¹	14.18	12.78	13.92	12.56
Net impact of non-underlying operating items, non-underlying tax and amortisation and impairment of intangibles arising on acquisition	(0.97)	12.19	(0.95)	11.98
EPS before exceptional items²	13.21	24.97	12.97	24.54
Impact of exceptional items	(0.18)	(0.11)	(0.18)	(0.11)
Reported EPS	13.03	24.86	12.79	24.43

1 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 1 8.

2 EPS, as shown on the Group's Condensed Consolidated Income Statement on page 31, includes exceptional items charged or credited to the Income Statement. EPS before exceptional items aids consistency with historical operating performance.

Alternative cash flow and net debt measures

Free cash flow (FCF)

For the year ended 31 December	2022 £m	2021 £m
Free cash flow¹	159.1	189.5
Exclude dividends from joint ventures and associates	(9.1)	(13.5)
Exclude net interest paid	22.5	24.3
Exclude capitalised finance costs paid	2.6	0.6
Exclude capital element of lease repayments	120.5	111.3
Exclude proceeds received from exercise of share options	(0.1)	(0.2)
Exclude purchase of own shares to satisfy share awards	15.9	20.3
Exclude purchase of intangible and tangible assets net of proceeds from disposal	18.7	25.1
Cash flow from operating activities before exceptional items	330.1	357.4
Exceptional operating cash flows	(2.9)	(7.5)
Cash flow from operating activities	327.2	349.9

1 We present an alternative measure for cash flow to reflect net cash inflow from operating activities before exceptional items, which is the measure shown on the Condensed Consolidated Cash Flow Statement on page 35. This IFRS measure is adjusted to include dividends we receive from joint ventures and associates, net interest paid, the capital element of lease payments, cash flows on the purchase of own shares to satisfy share awards and net capital expenditure on tangible and intangible asset purchases.

UTP cash conversion

For the year ended 31 December	2022 £m	2021 £m
Free cash flow¹	159.1	189.5
Add back:
Tax paid	44.2	42.1
Non-cash R&D expenditure	0.4	-
Net interest paid	22.5	24.3
Capitalised finance costs paid	2.6	0.6
Trading cash flow	228.8	256.5
Underlying trading profit	237.0	228.9
Underlying trading profit cash conversion¹	97%	112% %

1 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.

Net debt and Adjusted net debt

As at 31 December	2022 £m	2021 £m
Cash and cash equivalents	57.2	198.4
Loans payable	(262.9)	(377.0)
Lease liabilities	(446.0)	(430.3)
Derivatives relating to Net debt	1.8	0.6
Net debt¹	(649.9)	(608.3)
Add back: Lease liabilities	446.0	430.3
Adjusted net debt²	(203.9)	(178.0)

1 We present an alternative measure to bring together the various funding sources that are included on the Group's Condensed Consolidated Balance Sheet on page 34 and 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.

2 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.

Pre-tax Return on invested capital (ROIC)

	2022 £m	2021 £m
ROIC excluding right of use assets
Non-current assets
Goodwill	945.0	852.7
Other intangible assets - owned	158.0	144.0
Property, plant and equipment - owned	48.1	55.5
Interest in joint ventures and associates	23.3	17.6
Loans to joint ventures	10.0	-
Contract assets, trade and other receivables	16.1	16.2
Current assets
Inventory	22.4	19.6
Contract assets, trade and other receivables	719.6	624.7
Total invested capital assets	1,942.5	1,730.3
Current liabilities
Contract liabilities, trade and other payables	(683.3)	(587.3)
Non-current liabilities
Contract liabilities, trade and other payables	(42.8)	(55.9)
Total invested capital liabilities	(726.1)	(643.2)
Invested capital¹	1,216.4	1,087.1
Two-point average of opening and closing Invested capital	1,151.8	967.0
Trading profit, 12 months ended	241.2	233.4
ROIC%²	20.9%	24.1%
Underlying trading profit, 12 months ended	237.0	228.9
Underlying ROIC%²	20.6%	23.7%

1 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 where termination options exist and commitments for expenditure are in future years.

2 ROIC is a measure to assess the efficiency of the resources used by the Group and is a metric used to determine the performance and remuneration of the Executive Directors. ROIC is calculated based on UTP and Trading Profit, using the Income Statement for the period and a two-point average of the opening and closing Balance Sheets.

Overview of financial performance

Revenue

Reported revenue increased by 2.5% in the year to £4,534.0m (2021: £4,424.6m), a 1.5% decrease at constant currency. Organic revenue decline at constant currency was 4.4%. This is in line with the trading update issued on 15 December 2022 where revenue was expected to be £4.5bn for the year ended 31 December 2022.

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

Underlying Trading Profit (UTP)

UTP increased by 3.5% in the year to £237.0m (2021: £228.9m), a 2.8% decrease at constant currency. This is in line with the trading update issued on 15 December 2022 where UTP was expected to be around £235m for the year ended 31 December 2022.

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

Joint ventures and associates - share of results

In 2022, the most significant joint ventures and associates in terms of scale of operations were Merseyrail Services Holding Company Limited (Merseyrail) and VIVO Defence Services Limited (VIVO), with dividends received of £7.3m and £nil (2021: £nil and £nil), respectively, and total revenues of £185.0m and £327.0m, respectively (2021: £161.0m and £nil).

The split of the share of profits in joint ventures and associates, net of interest and tax for the 2022 was £12.0m (2021: £8.7m), with Merseyrail generating a profit of £5.3m (2021: loss £0.3m), VIVO £6.6m (2021: £nil) and other joint ventures and associates recording a profit of £0.1m (2021: £9.2m).

The 2021 result included AWE Management Limited (AWEML) where services provided by the Group through AWEML ceased on 30 June 2021. AWEML generated a profit of £9.2m in 2021. During 2022 a final dividend of £1.8m (2021: £13.5m) was received from AWEML.

While the revenues and individual line items are not consolidated in the Group Condensed 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	2022 £m	2021 £m
Revenue	237.9	238.4
Operating profit	14.3	11.5
Net finance cost	(0.3)	(0.1)
Income tax charge	(2.0)	(2.7)
Profit after tax	12.0	8.7
Dividends received from joint ventures and associates	9.1	13.5

The change in revenue and profits on the prior year is primarily due to the exit from the AWEML contract. This is offset by Merseyrail generating a profit in 2022 compared to losses in 2021 as a result of Covid-19 impacted passenger volumes. VIVO operations also commenced in 2022 resulting in a profit being generated in the current period.

Dividends received reduced due to the exit from the AWEML contract partially offset by Merseyrail paying a dividend following a return to profitability.

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 2022, the total exceptional charge for the year net of tax was £2.1m (2021: £1.4m).

The exceptional charge relates to the successful acquisitions of OXZ Holdings AG (ORS) in 2022 and Whitney, Bradley & Brown, Inc (WBB) in 2021. The combined transaction and implementation costs incurred during the year ended 31 December 2022 of £2.4m 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 2021.

Exceptional tax for the period was a tax credit of £0.3m (2021: charge £0.2m) which arises on exceptional items within operating profit. The tax credit arises in relation to the costs associated with WBB. Costs associated with the acquisition of ORS did not give rise to a tax credit as they were either treated as capital, and therefore not tax deductible, or augmented non-valued deferred tax.

Finance costs and investment revenue

Net finance costs were £20.4m (2021: £24.0m) and net interest paid was £22.5m (2021: £24.3m).

Investment revenue of £4.7m (2021: £2.4m) consists primarily of interest accruing on net retirement benefit assets of £2.7m (2021: £1.1m), interest receivable of £1.9m (2021: £0.6m) and dividends received of £nil (2021: £0.6m).

The finance costs of £25.1m (2021: £26.4m) include interest incurred on the US private placement loan notes and the revolving credit facility of £15.2m (2021: £15.6m), lease interest payable of £7.9m (2021: £7.8m), and other financing related costs including the impact of foreign exchange on financing activities.

Tax

Underlying tax

In 2022 we recognised a tax charge of £47.9m (2021: £48.6m) on underlying profits after net finance costs. The effective tax rate of 22.1% is slightly lower than in 2021 (23.7%). The decrease compared with 2021 is due to a credit recognised in respect of the prior year on the finalisation of certain matters (reducing the rate by 0.6%), the impact of movements in the Group's provisions as part of Management's regular reassessment of tax exposures across the Group (reducing the rate by 0.5%) and a reduced impact of overseas profits taxed at a higher rate (reducing the rate by 0.4%). Further, the increase in profits generated by the Group's joint ventures, whose post-tax profits are included in the Group's profit before tax, have reduced the rate by 0.2%. This is partially offset by a reduction in the Group's expenses not deductible for tax (0.1%).

The tax rate at 22.1% is slightly higher than the UK standard corporation tax rate of 19%. This is mainly due to the impact of the higher statutory rate of tax on overseas profits (increasing the rate by 5.6%), and the impact of the movement in unprovided overseas deferred tax (increasing the rate by 0.9%). This is partially offset by the reduction in provisions held for uncertain tax positions which reduced the rate by 1.8%. The rate is further reduced by the impact of the profits of our joint ventures and associates whose post-tax profits are included in the Group's profit before tax (reducing the rate by 1.1%) and a prior year tax credit that arises due to differences between estimates made at the previous year end and the final positions for tax (reducing the rate by 0.6%). Other smaller items result in a net increase to the rate of 0.1%.

Pre-exceptional tax

A tax charge of £42.1m (2021: £111.9m credit) on pre-exceptional profits has been recognised which includes an underlying tax charge of £47.9m and a tax credit of £5.8m in respect of the amortisation of intangibles arising on acquisitions. The tax charge of £0.8m in respect of non-underlying items is fully offset by the impact of tax items that are non-underlying themselves, resulting in no tax charge or credit being disclosed. The £0.8m non-underlying tax credit relates to a reassessment of when the deferred tax assets in the UK are expected to be utilised.

Exceptional tax

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

Deferred tax assets

At 31 December 2022 there is a net deferred tax asset of £190.4m (2021: £174.0m). This consists of a deferred tax asset of £244.2m (2021: £214.3m) and a deferred tax liability of £53.8m (2021: £40.3m). A £186.9m UK tax asset has been recognised on the Group's balance sheet at 31 December 2022 (2021: £162.8m) on the basis that the performance in the underlying UK business indicates sustained profitability which will enable the accumulated tax losses within the UK to be utilised. The main driver for the increase in the UK deferred tax asset in the year is the reduction in the deferred tax liability associated with the pension. As the pension surplus has fallen in the year, the associated deferred tax liability has also fallen, hence leading to the net deferred tax asset increasing.

Taxes paid

Net corporate income tax of £44.2m (2021: £42.1m) was paid during the year, relating to our operations in AsPac (£23.0m), North America (£16.1m), UK (£2.6m), Europe (£2.1m) and the Middle East (£0.4m). The payments made in the UK consisted of £2.8m to HMRC, offset by £0.2m received from the Group's joint ventures and associates for losses sold to them.

The amount of tax paid, £44.2m, differs from the tax charge in the period, £41.8m, mainly because taxes paid/received from Tax Authorities can arise in later periods to the associated tax charge/credit. This is particularly the case with regards to movements in deferred tax and provisions for uncertain tax positions.

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. To increase the transparency of our tax profile, we have shown below the cash taxes that we have paid across our regional markets.

In total during 2022, Serco globally contributed £934.5m of tax to government in the jurisdictions in which we operate.

Taxes by category

	Taxes borne £m	Taxes collected £m	Total £m
Total of Corporate Income Tax	44.4	-	44.4
Total of VAT and similar	10.4	276.7	287.1
Total of People Taxes	167.8	419.5	587.3
Total Other Taxes	14.8	0.9	15.7
	237.4	697.1	934.5

Taxes by region

	Taxes borne £m	Taxes collected £m	Total £m
UK & Europe	127.1	365.6	492.7
AsPac	50.0	195.2	245.2
North America	58.9	130.8	189.7
Middle East	1.4	5.5	6.9
	237.4	697.1	934.5

Corporation tax, which is the only cost to be separately disclosed in our 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 £4.53 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 £2.94 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, share buyback and share count

During the year to 31 December 2022, the Group paid dividends of £30.3m (2021: £26.5m) in respect of the final dividend for the year ended 31 December 2021 and the interim dividend for the year ended 31 December 2022. As noted in the Chief Executive's Review, the Board has decided to declare a final dividend of 1.92p per share in respect of the year ended 31 December 2022 (2021: 1.61p per share).

On 24 February 2022, the Group announced its intention to repurchase ordinary shares with a value of up to £90m. On 8 March 2022, the Group confirmed that the repurchase would be split over two tranches, with the first tranche of £40m completed during the period 8 March 2022 to 16 August 2022. The second tranche of £50m was completed during the period 17 August 2022 to 9 December 2022. The total cost including fees was £91.2m and resulted in the repurchase of 55,506,704 shares at an average price of £1.64. These are held within treasury shares at 31 December 2022.

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.

The weighted average number of shares for EPS purposes was 1,192.2m for the year ended 31 December 2022 (2021: 1,222.6m) and diluted weighted average number of shares was 1,214.8m (2021: 1,244.0m). The decrease in the weighted average number of shares is primarily due to the full year impact of the 30,721,849 shares repurchased in 2021 of which 15,371,849 were cancelled and 15,350,000 were transferred to the Employee Share Option Trust to satisfy share awards, and additionally, the impact of the repurchase of 55,506,704 shares during 2022 now held in treasury.

Cash flows and net debt

UTP of £237.0m (2021: £228.9m) converts into a trading cash inflow of £228.8m (2021: £256.5m). The decrease in trading cash inflows is mainly due to a £24.4m outflow of working capital compared to an inflow of £25.2m in 2021. The decrease in working capital is driven by 2021 benefitting from the unwind of working capital in respect of the Dubai Metro contract. The Group saw a marginal increase in the debtor days from 19 days (2021) to 22 days (2022) and a decrease in creditor days from 23 days (2021) to 21 days (2022) during the year, as the Group continues to ensure its suppliers are paid on time.

The table below shows the cash flow from operating activities before exceptional items and Free Cash Flow (FCF) reconciled to movements in Net Debt. FCF for the period was an inflow of £159.1m compared to £189.5m in 2021. The movement compared to 2021 is consistent with the decrease in trading cash flow above.

Adjusted net debt increased by £ 25.9m in the year to 31 December 2022, a reconciliation of which is provided at the bottom of the following table. Average Adjusted net debt as calculated on a daily basis for the year ended 31 December 2022 was £231.0m (2021: £216.1m). Peak Adjusted net debt was £376.8m (2021: £346.3m).

For the year ended 31 December	2022 £m	2021 £m
Operating profit before exceptional items	219.6	217.4
Less: Share of profit from joint ventures and associates	(12.0)	(8.7)
Movement in provisions	4.0	(7.2)
Depreciation, amortisation and impairment of property, plant and equipment and intangible assets	54.7	47.2
Depreciation and impairment of right of use assets	117.5	109.0
Other non-cash movements	15.3	16.6
Operating cash inflow before movements in working capital, exceptional items, and tax	399.1	374.3
Working capital movements	(24.4)	25.2
Tax paid	(44.2)	(42.1)
Non-cash R&D expenditure	(0.4)	-
Cash flow from operating activities before exceptional items	330.1	357.4
Dividends received from joint ventures and associates	9.1	13.5
Interest received	1.9	0.6
Interest paid	(24.4)	(24.9)
Capital element of lease repayments	(120.5)	(111.3)
Capitalised finance costs paid	(2.6)	(0.6)
Purchase of intangible and tangible assets net of proceeds from disposals	(18.7)	(25.1)
Purchase of own shares to satisfy share awards¹	(15.9)	(20.3)
Proceeds received from exercise of share options	0.1	0.2
Free cash flow	159.1	189.5
Net cash outflow on acquisition and disposal of subsidiaries, joint ventures and associates	(19.2)	(234.9)
Net increase in debt items on acquisition and disposal of subsidiaries, joint ventures and associates	(6.5)	(14.3)
Dividends paid to shareholders	(30.3)	(26.5)
Purchase of own shares¹	(91.2)	(20.4)
Movements on other investment balances	1.6	0.6
Loans to joint venture	(10.0)	-
Exceptional sale of other investments	-	13.0
Capitalisation and amortisation of loan costs	1.4	(0.7)
Exceptional items	(2.9)	(7.5)
Cash movements on hedging instruments	(2.7)	(16.6)
Foreign exchange loss on Adjusted net debt	(25.2)	(2.4)
Movement in Adjusted net debt	(25.9)	(120.2)
Opening Adjusted net debt	(178.0)	(57.8)
Closing Adjusted net debt	(203.9)	(178.0)
Lease liabilities	(446.0)	(430.3)
Closing Net debt	(649.9)	(608.3)

1 In 2022 the Employee Share Ownership Trust purchased shares directly of £15.9m to satisfy share awards. This purchase is presented separately from the Group's £91.2m repurchase of own shares on the Condensed Consolidated Cash Flow Statement on page 35. In 2021 the Group repurchased shares at a cost of £40.7m as shown on the Condensed Consolidated Cash Flow Statement on page 35 and subsequently transferred £20.3m to the Employee Share Ownership Trust to satisfy share awards.

Risk management and treasury operations

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.

Liquidity and funding

As at 31 December 2022, the Group had committed funding of £616m (at 31 December 2021: £629m), comprising £266m of US private placement loan notes and a £350m revolving credit facility (RCF) which was undrawn. The US private placement loan notes are repayable in bullet payments between 2023 and 2032. The Group does not engage in any external financing arrangements associated with either receivables or payables.

During the year ended 31 December 2022 total net repayments of debt were £149.3m, which included the repayment of NSBU acquisition loan (£45.0m), WBB 2021 acquisition loan (£75.0m), USPP debt (£22.6m), and ORS bank debt (£6.7m).

On 18 November 2022, the Group refinanced its RCF increasing its standby liquidity from £250m to £350m. The facility is supported by 10 banks and has a five-year tenure, maturing in November 2027. As part of the refinancing, an accordion option has been included, providing a further £100m of funding (uncommitted and therefore not incurring any fees) if required without the need for additional documentation and agreements. This option has not been included in the Group's assessment of available liquidity as approvals are required to access the funding.

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 2022, £266.4m of debt was held at fixed rates and Adjusted Net Debt was £203.9m.

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. The debt covenants exclude the impact of IFRS 16 Leases on the Group's results.

For the year ended 31 December	2022 £m	2021 £m
Operating profit before exceptional items	219.6	217.4
Remove: Amortisation and impairment of intangibles arising on acquisition	21.6	16.0
Trading profit	241.2	233.4
Exclude: Share of joint venture post-tax profits	(12.0)	(8.7)
Include: Dividends from joint ventures	9.1	13.5
Add back: Net non-exceptional (releases)/charges to OCPs	(1.0)	1.3
Add back: Net covenant OCP utilisation	(1.3)	(0.6)
Add back: Depreciation, amortisation and impairment of owned property, plant and equipment and non-acquisition intangible assets	33.1	31.2
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	4.8	5.0
Add back: Foreign exchange on investing and financing arrangements	0.4	(0.6)
Add back: Share based payment expense	15.6	15.8
Other covenant adjustments to EBITDA	(1.0)	6.3
Covenant EBITDA	288.9	296.6
Net finance costs	20.4	24.0
Exclude: Net interest receivable on retirement benefit obligations	2.7	1.1
Exclude: Movement in discount on other debtors	0.1	0.1
Exclude: Other dividends received	-	0.6
Exclude: Foreign exchange on investing and financing arrangements	0.4	(0.6)
Other covenant adjustments to net finance costs resulting from IFRS 16 Leases	(7.5)	(7.3)
Covenant net finance costs	16.1	17.9
Adjusted net debt	203.9	178.0
Obligations under finance leases - in accordance with IAS17 Leases	21.8	26.5
Recourse net debt	225.7	204.5
Exclude: Disposal vendor loan note, encumbered cash and other adjustments	6.9	2.9
Covenant adjustment for average FX rates	(8.2)	(5.7)
CTNB	224.4	201.7
CTNB/covenant EBITDA (not to exceed 3.5x)	0.78x	0.68x
Covenant EBITDA/covenant net finance costs (at least 3.0x)	17.9x	16.6x

Acquisitions

On 12 July 2022, the Group acquired 100% of the issued share capital of Sapienza Consulting Holdings BV (Sapienza), a provider of consulting, talent acquisition and digital solutions to European space and defence institutions for consideration of €3.3m (£2.8m) in cash, subject to standard working capital and completion adjustments. The acquired net assets included €1.9m (£1.6m) of cash resulting in a net cash outflow on acquisition of €1.4m (£1.2m). The operating results, assets and liabilities have been recognised effective 12 July 2022.

Sapienza contributed £6.5m of revenue and £0.3m 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 2022.

On 1 September 2022, the Group acquired 100% of the issued share capital of OXZ Holdings AG (ORS), a specialist provider of immigration services to public sector customers in Switzerland, Germany, Austria and Italy for consideration of CHF19.2m (£16.9m) subject to standard working capital and completion adjustments. CHF12.8m (£11.2m) is contingent consideration and the remaining CHF6.4m (£5.7m) was paid in cash. At the same time, the Group transferred CHF19.2m (£16.9m) to acquire shareholder loans of ORS and the acquired net assets included CHF5.2m (£4.6m) of cash resulting in a net cash outflow on acquisition of CHF20.4m (£18.0m). Including the balance of contingent consideration payable the total expected cash outflow for the acquisition, net of cash acquired, is CHF33.2m (£29.2m). Post completion there was a further cash outflow of CHF7.3m (£6.7m) to settle the bank loan acquired. The acquisition included net pension obligation of CHF5.7m (£5.0m). The operating results, assets and liabilities have been recognised effective 1 September 2022.

ORS contributed £62.4m of revenue and £1.6m 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 2022.

Net assets

At 31 December 2022, the Condensed Consolidated Balance Sheet shown on page 34 had net assets of £1,029.7m, a movement of £21.3m from the closing net asset position of £1,008.4m as at 31 December 2021.

Key movements since 31 December 2021 on the Condensed Consolidated Balance Sheet shown on page 34 include:

·	Net retirement benefit assets reduced by £97.4m primarily in respect of SPLAS; further details are provided in the pension section below.
·	The Group generated Free Cash Flow of £159.1m, made payments in respect of acquisitions of £25.7m and undertook dividend payments and share buybacks of £121.5m. The net repayment of loans was £149.3m which resulted in an overall decrease in cash and cash equivalents by £141.2m.
·	Net bank, bond borrowings and other loans have decreased by £114.1m in the year. This movement is driven by the repayment of acquisition loans of £126.7m and USPP loans of £22.6m and movements in capitalised finance costs of £1.4m, offset by the acquisition of ORS's £6.5m bank loan, and foreign exchange in respect of the USPP loans of £29.9m and ORS loan of £0.2m.
·	The increase in contract assets, trade receivables and other assets have largely offset increases in contract liabilities, trade payables and other liabilities and are as a result of normal working capital movements.

Pensions

During the year there has been a high degree of volatility in the pensions market. Discount rates and short-term inflation rates have been rising since 31 December 2021 which has resulted in the weighted average durations used for pension schemes decreasing. Concerns over high global inflation, recession, disruption to supply chains due to the war in Ukraine and rising interest rates, compounded by the market volatility in September 2022 due to political events resulted in a sharp rise in bond yields and a subsequent reduction in the value of Liability Driven Investments (LDI), which triggered collateral calls. The Group made a short-term temporary loan of £60m to the Serco Pension and Life Assurance Scheme (SPLAS) on 28 September 2022 while the scheme liquidated assets to meet these collateral calls, in order to ensure that the LDI hedge was maintained; this loan was repaid on 3 October 2022.

Serco's pension schemes remain in a strong funding position, and show an accounting surplus, before tax, of £50.8m (31 December 2021: £148.2m) on scheme gross assets of £1.1bn (2021: £1.6bn) and gross liabilities of £1.0bn (2021 £1.5bn). The high degree of volatility as noted above resulted in a reduction in pension scheme assets particularly investments in bonds, LDIs and amounts held by insurance companies. There has been a significant reduction in pensions scheme obligations as discount rates have risen but this has only partially offset the reduction in assets as the liabilities are hedged on an actuarial basis rather than an IAS 19 basis. The decrease in pension scheme obligations was partially offset by experience adjustments on SPLAS which were primarily due to the impact from inflation on the current year allowances for deferred valuations and pension increases.

Based on the 2021 actuarial funding valuation which was finalised in 2022 for SPLAS, the Group has committed to make deficit recovery payments of £6.6m per year from 2022 to 2030.

The opening net asset position led to a net interest income within finance costs of £2.7m (2021: £1.1m).

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.

Nigel Crossley
Group Chief Financial Officer

27 February 2023

Condensed Consolidated Financial Statements

Consolidated Income Statement

For the year ended 31 December 2022

	Note	2022 £m	2021 £m
Revenue	6	4,534.0	4,424.6
Cost of sales		(4,040.5)	(3,956.6)
Gross profit		493.5	468.0
Administrative expenses		(264.3)	(243.3)
Exceptional operating items	7	(2.4)	(1.2)
Other expenses - amortisation and impairment of intangibles arising on acquisition		(21.6)	(16.0)
Share of profits in joint ventures and associates, net of interest and tax	4	12.0	8.7
Operating profit		217.2	216.2
Operating profit before exceptional items		219.6	217.4
Investment revenue	8	4.7	2.4
Finance costs	9	(25.1)	(26.4)
Total net finance costs		(20.4)	(24.0)
Profit before tax		196.8	192.2
Profit before tax and exceptional items		199.2	193.4
Tax on profit before exceptional items	10	(42.1)	111.9
Exceptional tax	7,10	0.3	(0.2)
Tax (charge)/credit		(41.8)	111.7
Profit for the year		155.0	303.9
Attributable to:
Equity owners of the Company		155.4	303.9
Non-controlling interest		(0.4)	-
Earnings per share (EPS)
Basic EPS	12	13.03p	24.86p
Diluted EPS	12	12.79p	24.43p

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

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2022

		Note	2022 £m	2021 £m
Profit for the year			155.0	303.9

Other comprehensive income/(loss) for the year:

Items that will not be reclassified subsequently to profit or loss:
Remeasurements of post-employment benefit obligations¹	20		(93.8)	66.8
Actuarial loss on reimbursable rights¹	20		(12.3)	(0.5)
Income tax relating to components of other comprehensive income/(loss) that will not be reclassified subsequently to profit or loss	10		27.1	(21.7)
Share of other comprehensive income in joint ventures and associates	4		2.9	3.3

Items that may be reclassified subsequently to profit or loss:
Net exchange gain/(loss) on translation of foreign operations²			60.2	(11.6)
Fair value gain on cash flow hedges during the year²			0.6	0.2
Income statement items reclassified			-	0.1
Tax relating to items that may be reclassified²	10		(0.1)	4.0
Total other comprehensive (loss)/income for the year			(15.4)	40.6

Total comprehensive income for the year			139.6	344.5
Attributable to:
Equity owners of the Company			139.8	344.5
Non-controlling interest			(0.2)	-

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

2 Recorded in hedging and translation reserve in the Condensed 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 reserves¹ £m	Total shareholders' equity £m	Non-controlling interest £m

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 1 January 2022	24.4	463.1	542.8	(23.6)	1,006.7	1.7

Total comprehensive income/(loss) for the year	-	-	158.1	(18.3)	139.8	(0.2)

Dividends paid	-	-	(30.3)	-	(30.3)	-

Shares purchased and held in own share reserve	-	-	-	(15.9)	(15.9)	-

Shares purchased and held in Treasury	-	-	-	(91.2)	(91.2)	-

Shares transferred to award holders on exercise of share awards	-	-	-	0.1	0.1	-

Expense in relation to share based payments	-	-	-	15.6	15.6	-

Tax credit on items taken directly to equity	-	-	-	3.4	3.4	-

At 31 December 2022	24.4	463.1	670.6	(129.9)	1,028.2	1.5

1 An analysis of other reserves is presented as part of note 21 Reserves.

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

Consolidated Balance Sheet

	Note	At 31 December 2022 £m	At 31 December 2021 £m
Non-current assets
Goodwill	13	945.0	852.7
Other intangible assets		158.0	144.0
Property, plant and equipment		48.1	55.5
Right of use assets		434.2	416.7
Interests in joint ventures and associates	4	23.3	17.6
Loan to joint ventures	4	10.0	-
Contract assets	14	-	2.6
Trade and other receivables	14	16.1	13.6
Derivative financial instruments		0.3	-
Deferred tax assets	11	244.2	214.3
Retirement benefit assets	20	57.0	166.2
		1,936.2	1,883.2
Current assets
Inventories		22.4	19.6
Contract assets	14	345.0	319.0
Trade and other receivables	14	374.6	305.7
Current tax assets		11.5	5.5
Cash and cash equivalents		57.2	198.4
Derivative financial instruments		3.3	2.6
		814.0	850.8
Total assets		2,750.2	2,734.0
Current liabilities
Contract liabilities	15	(60.5)	(61.3)
Trade and other payables	15	(622.8)	(526.0)
Derivative financial instruments		(1.1)	(2.0)
Current tax liabilities		(16.0)	(17.2)
Provisions	18	(134.9)	(79.6)
Lease obligations	16	(144.4)	(126.3)
Loans		(44.5)	(64.9)
		(1,024.2)	(877.3)
Non-current liabilities
Contract liabilities	15	(36.3)	(48.6)
Trade and other payables	15	(6.5)	(7.3)
Deferred tax liabilities	11	(53.8)	(40.3)
Provisions	18	(73.5)	(118.0)
Lease obligations	16	(301.6)	(304.0)
Loans		(218.4)	(312.1)
Retirement benefit obligations	20	(6.2)	(18.0)
		(696.3)	(848.3)
Total liabilities		(1,720.5)	(1,725.6)
Net assets		1,029.7	1,008.4
Equity
Share capital		24.4	24.4
Share premium account		463.1	463.1
Retained earnings		670.6	542.8
Other reserves	21	(129.9)	(23.6)
Equity attributable to owners of the Company		1,028.2	1,006.7
Non-controlling interest		1.5	1.7
Total equity		1,029.7	1,008.4

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

The financial statements were approved by the Board of Directors on 27 February 2023 and signed on its behalf by:

Mark Irwin Nigel Crossley
Group Chief Executive Officer Group Chief Financial Officer

Consolidated Cash Flow Statement

For the year ended 31 December 2022

	Note	2022 m	2021 £m
Net cash inflow from operating activities before exceptional items		330.1	357.4
Exceptional items		(2.9)	(7.5)
Net cash inflow from operating activities	23	327.2	349.9
Investing activities
Interest received		1.9	0.6
Dividends received from joint ventures and associates		9.1	13.5
Other dividends received		-	0.6
Loan to pension scheme relating to collateral calls	20	(60.0)	-
Repayment from pension scheme of loan relating to collateral calls	20	60.0	-
Loan to joint venture	4	(10.0)	-
Purchase of other intangible assets		(7.0)	(8.2)
Purchase of property, plant and equipment		(12.4)	(23.9)
Proceeds from disposal of property, plant and equipment		0.7	7.0
Acquisition of subsidiaries, net of cash acquired	5	(19.2)	(234.9)
Other investing activities		1.6	-
Exceptional sale of other investments		-	13.0
Net cash outflow from investing activities		(35.3)	(232.3)
Financing activities
Interest paid		(24.4)	(24.9)
Capitalised finance costs paid		(2.6)	(0.6)
Advances of loans	17	205.0	110.0
Repayments of loans	17	(354.3)	(139.7)
Capital element of lease repayments	17	(120.5)	(111.3)
Cash movements on hedging instruments		(2.7)	(16.6)
Dividends paid to shareholders		(30.3)	(26.5)
Purchase of own shares by the Employee Share Ownership Trust		(15.9)	-
Own shares repurchased		(91.2)	(40.7)
Proceeds received from exercise of share options		0.1	0.2
Net cash outflow from financing activities		(436.8)	(250.1)
Net decrease in cash and cash equivalents		(144.9)	(132.5)
Cash and cash equivalents at beginning of year		198.4	335.7
Net exchange gain/(loss)	17	3.7	(4.8)
Cash and cash equivalents at end of year		57.2	198.4

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 2023 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 2022, 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 2022, the Group's principal debt facilities comprised a £350m revolving credit facility (of which £nil was drawn) and £266m of US private placement notes, giving £616m of committed credit facilities and committed headroom of £402m. The principal financial covenant ratios are consistent across the private placement loan notes and revolving credit facility and are outlined on page 28. As at 31 December 2022, 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 0.78x.

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 which 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.

Owing to the unprecedented levels of inflation driven by geopolitical factors, the Directors have considered the Group's resilience to rising costs. Due to the nature of the Group's operations, almost all of the revenue base has some form of inflationary protection, whether it be through contractual indexation mechanisms, cost plus billing, or being short term in nature. Though the timing of such protections becoming effective may, in the short term, differ from the impact of cost pressures, it is expected that the current inflation levels will not have a material impact 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 bids and extensions, 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 assumes that the US private placement loan of £45m due to mature during the assessment period is repaid and no additional refinancing occurs. On this basis the Group can afford to be unsuccessful on 80% of its bids and extensions and suffer a reduction in profit margin of 80 basis points below the Group's forecast, while still retaining 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 and extensions 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 by volume over the last two years, therefore a reduction of 80% or more to the budgeted bid and extensions 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 80bps versus the Group's budget is not considered plausible within the assessment period combined with an 80% reduction in bid and extensions rates.

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.

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 Condensed 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 a 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 Management has assessed do not require a provision as at 31 December 2022.

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; and
	the ability of suppliers to deliver their contractual obligations on time and on budget.

In the current year, there has been an overall net release of new and existing OCPs within Trading Profit of £1.2m. 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, while 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 2022, the provision recognised in respect of this portfolio of contracts is £8.1m (2021: £9.7m).

Onerous contract provisions totalling £3.5m 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 £8.1m in respect of the portfolio risk associated with operating a large number of long-term contracts, giving a total onerous contract provision of £11.6m (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 does not believe that disclosing a potential range of outcomes on a consolidated basis would provide meaningful information to a reader of the financial statements.

While 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 for the Group is the recoverability of goodwill. At each reporting period an assessment is performed in order to determine whether there are any indicators of impairment, 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 asset (or cash generating unit (CGU) to which the asset relates). The value in use calculation involves an estimation of future cash flows and also the selection of appropriate discount rates and terminal growth rates, all 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. Known and anticipated impacts of inflation have been included in Management's forecasts underpinning the cash flows used in assessing the value in use of assets.

Discount rates and terminal growth rates are calculated with reference to the specific risks associated with the assets and are based on advice provided by external experts. The 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 the Group. During 2022, there has been a significant increase in market interest rates in response to rising global inflation. As such there has been a corresponding rise in risk-free rates impacting discount rates. For the purpose of impairment testing in accordance with IAS 36 Impairment of Assets, the Group estimates pre-tax discount rates based on the post-tax weighted average cost of capital which is used for internal purposes.

Despite the significant rise in discount rates, which is the primary driver for the material reduction in headroom, there continues to be headroom across all CGUs, as detailed in note 13. Sufficient headroom remains even when reasonably possible changes to discount rates and terminal growth rates occur. However, an impairment in the CGU with the lowest headroom as a proportion of its value in use occurs when combining these changes with no growth in the outer period of 2025 to 2027 as detailed in note 13. 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 (SPLAS) and the shared cost section of the Railways Pension 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 assets held by insurance companies including the annuity policies in SPLAS are valued at the equal and opposite of the defined benefit obligations that they insure.

The SPLAS pension scheme invests into private debt funds which do not have an observable market price and are remeasured to fair value at each reporting date. The valuation methodology relied upon the Net Asset Value provided by the fund administrator at 30 September adjusted for actual cash flows in the period to 31 December. The Group has undertaken a risk assessment to assess whether this industry standard valuation methodology remains the Group's best estimate at 31 December 2022 following the significant market volatility experienced in the third quarter of the year. The Group has concluded that although there is heightened estimation uncertainty, this methodology provides the most accurate valuation and estimate for Management.

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 the deferred tax asset that should be recognised, based upon the likely timing, geography and level of future taxable profits. Since a significant portion of the deducible temporary differences relate to historic tax losses, there has been historic evidence that future taxable profits may not be available.

A £186.9m UK tax asset is recognised on the Group's balance sheet at 31 December 2022 (2021 £162.8m) on the basis that structural changes in the underlying UK business indicate a sustained return to profitability which will enable future tax deductions within the UK to be utilised. The return to profitability is as a result of onerous contracts ending, being replaced by profitable long-term contracts 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.

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. Management considers 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 Management consider to be outside of normal operations and are material to the results of the Group by virtue of their size or nature, and are 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 during the year.

Climate risk

Risks arising from climate change may have future adverse effects on the Group's business activities. These risks include:

·	major physical risks such as extreme weather events, impacting assets, operations and employee wellbeing;
·	major transitional risks including policy and legal changes such as increasing reporting and contractual requirements and increasing carbon taxes and levies;
·	technology risks including costs to transition to lower emission options; and
·	reputational risks such as investor and stakeholder concerns on not transitioning quickly enough to Net Zero.

As an outsourcing organisation operating across multiple sectors and geographies, the ways in which climate change may impact the Group's and its customers' assets (where the Group delivers the majority of its services), supply chains and operations is diverse.

In preparing the Group financial statements Management has considered the impact of climate-related matters but have not identified significant risks induced by climate changes that could negatively and materially affect the Group's financial statements. In arriving at this conclusion, Management has considered the areas of the Group's financial statements where climate-related matters could reasonably impact measurement and disclosure including key estimates and judgements.

When undertaking the Goodwill impairment review, the Group's latest approved forecast is used to estimate the value in use of its CGUs. Climate assumptions are built into the contract level budgets to the extent that contractual commitments exist. However, Management's current assessment shows that there are no such material contractual obligations. In addition, Group-wide strategic commitments, such as those made as part of the Net Zero targets and planning, are not material in the short term for inclusion in the Group's forecast. The forecast is underpinned by a number of assumptions, and it represents the Group's best estimate of future business performance. Management cannot reliably predict how climate changes will impact the forecast particularly in areas such as carbon levies and the cost of insurance. As such, Management has presented sensitivity analysis to demonstrate the Group's ability to withstand changes to the forecast before recording an impairment (see note 13). The forecast used in the goodwill impairment review is also used in the assessment of deferred tax assets and the Group's ability to continue as a going concern.

The Group also continuously reviews the property, plant and equipment under its control to identify opportunities to reduce its carbon impact. Primarily there has been a transition to electric and hybrid vehicles, both in the company car fleet as well as vehicles required to operate contracts. For example, electric light commercial vehicles are beginning to replace the diesel fleet in certain geographies. The transition is currently being undertaken where assets are identified as nearing the end of their useful economic life (UEL) and therefore there has been no revision to the UEL related to motor vehicles.

Other areas considered include retirement benefit obligations, namely the valuation of assets, share based payments linked to ESG targets and those critical accounting judgements and sources of estimation uncertainty not noted above.

Management continuously assesses the impact of climate-related matters. Assumptions will likely change in the future in response to the Group's understanding of risks and opportunities maturing, forthcoming environmental regulations, climate change impacts, new commitments taken and increasing customer Net Zero requirements. These changes, if not anticipated and continually assessed, could have an impact on the Group's future cash flows, financial performance, and financial position.

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 2022 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 reports 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.

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 £1,716.9m (2021: £1,814.4m) for the UK Government within the UK & Europe segment; £1,109.6m (2021: £993.0m) for the US Government within the Americas segment; and £880.5m (2021: £836.4m) 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 2022	UK&E m	Americas £m	AsPac m	Middle East £m	Corporate £m	Total £m
Revenue	2,100.2	1,269.8	954.6	209.4	-	4,534.0
Result
Trading profit/(loss)¹	76.2	136.7	56.9	16.0	(44.6)	241.2
Amortisation and impairment of intangibles arising on acquisition	(1.5)	(16.5)	(3.6)	-	-	(21.6)
Exceptional operating items²	(1.2)	(1.2)	-	-	-	(2.4)
Operating profit/(loss)	73.5	119.0	53.3	16.0	(44.6)	217.2
Finance cost						(20.4)
Profit before tax						196.8
Tax charge						(42.1)
Tax credit on exceptional items						0.3
Profit for the year						155.0
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax	12.0	-	-	-	-	12.0
Total depreciation and impairment of property, plant and equipment and right of use assets	(86.4)	(26.7)	(12.6)	(1.9)	(12.9)	(140.5)
Amortisation and impairment of other intangible assets	(1.3)	(1.0)	(2.1)	(0.1)	(5.6)	(10.1)

1 Trading Profit/(Loss) is defined as Operating Profit/(Loss) before exceptional items and amortisation and impairment of intangible assets arising on acquisition.

2 Included within exceptional operating items are total acquisition related costs of £2.4m.

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) ¹	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)
Exceptional operating items²	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
Finance cost						(24.0)
Profit before tax						192.2
Tax credit						111.9
Tax on exceptional items						(0.2)
Profit for the year						303.9
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax	8.7	-	-	-	-	8.7
Total depreciation and impairment of property, plant, and equipment and right of use assets	(77.9)	(23.4)	(12.5)	(5.2)	(9.9)	(128.9)
Amortisation of other intangible assets	(1.2)	(0.5)	(2.9)	(0.1)	(6.6)	(11.3)

1 Trading Profit/(Loss) is defined as Operating Profit/(Loss) before exceptional items and amortisation and impairment of intangible assets arising on acquisition.

2 Included within exceptional operating items are total acquisition related costs of £4.9m.

As at 31 December 2022	UK&E m	Americas £m	AsPac £m	Middle East £m	Corporate £m	Total £m
Segment assets
Interests in joint ventures and associates	22.9	-	-	0.4	-	23.3
Other segment assets¹	960.8	948.0	309.6	68.7	123.3	2,410.4
Total segment assets	983.7	948.0	309.6	69.1	123.3	2,433.7
Unallocated assets²						316.5
Consolidated total assets						2,750.2
Segment liabilities
Segment liabilities ¹	(720.2)	(178.3)	(248.1)	(61.1)	(179.0)	(1,386.7)
Unallocated liabilities²						(333.8)
Consolidated total liabilities						(1,720.5)
Supplementary information
Additions to non-current assets³	173.7	14.5	7.4	3.0	12.1	210.7
Segment non-current assets	701.1	718.6	177.1	14.1	80.8	1,691.7
Unallocated non-current assets						244.5

1 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.

2 Unallocated assets and liabilities include deferred tax, cash and cash equivalents, derivative financial instruments and loans.

3 Additions to non-current assets reflects additions and amounts arising on acquisition for goodwill, other intangible assets, property plant & equipment and right of use assets

Year ended 31 December 2021	UK&E m	Americas £m	AsPac m	Middle East £m	Corporate £m	Total £m
Segment assets
Interests in joint ventures and associates	17.1	-	0.1	0.4	-	17.6
Other segment assets¹	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 assets²						420.8
Consolidated total assets						2,734.0
Segment liabilities
Segment liabilities ¹	(641.2)	(187.7)	(224.7)	(53.2)	(182.3)	(1,289.1)
Unallocated liabilities²						(436.5)
Consolidated total liabilities						(1,725.6)
Supplementary information
Additions to non-current assets³	146.3	227.4	64.6	0.3	20.5	459.1
Segment non-current assets	570.1	700.8	179.0	11.7	207.3	1,668.9
Unallocated non-current assets						214.3

1 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.

2 Unallocated assets and liabilities include deferred tax, cash and cash equivalents, derivative financial instruments and loans.

3 Additions to non-current assets reflects additions and amounts arising on acquisition for goodwill, other intangible assets, property plant & equipment and right of use assets

4. Joint ventures and associates

The principal joint ventures Merseyrail Services Holding Company Limited (MSHCL) and Vivo Defence Services Limited (VIVO) were the only equity accounted entities which were material to the Group during the year. Dividends of £7.3m (2021: £nil) and £nil (2021: £n il ), respectively, were received from these companies in the year. The increased dividends received in respect of MSHCL were due to returning passenger volumes following reduced travel during the Covid-19 pandemic.

The 2021 result included AWE Management Limited (AWEML). As announced on 2 November 2020, the Ministry of Defence notified the Group that it would be exercising its option to terminate services provided by the Group through AWEML on 30 June 2021. During 2022 a final dividend of £1.8m (2021: £13.5m) was received from AWEML. Following the termination of services provided by the Group through AWEML, it is no longer considered a principal associate and is therefore classified within the Group portion of other joint ventures and associates in the table below for 2022.

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

31 December 2022

Summarised financial information	MSHCL (100% of results) m	VIVO (100% of results) £m	Group portion of material joint ventures and associates¹ £m	Group portion of other joint ventures and associates¹ £m	Total £m
Revenue	185.0	327.0	236.8	1.1	237.9
Operating profit/(loss)	12.0	17.6	14.4	(0.1)	14.3
Net (finance costs)/investment revenue	(0.4)	(0.6)	(0.4)	0.1	(0.3)
Income tax (charge)/credit	(1.0)	(3.2)	(2.1)	0.1	(2.0)
Profit from operations	10.6	13.8	11.9	0.1	12.0
Other comprehensive income	5.8	-	2.9	-	2.9
Total comprehensive income	16.4	13.8	14.8	0.1	14.9
Non-current assets	36.1	5.9	21.0	0.3	21.3
Current assets	51.2	129.9	90.5	1.5	92.0
Current liabilities	(29.6)	(91.7)	(60.6)	(0.8)	(61.4)
Non-current liabilities	(26.5)	(31.1)	(28.6)	-	(28.6)
Net assets	31.2	13.0	22.3	1.0	23.3
Proportion of Group ownership	50.0%	50.0%
Carrying amount of investment	15.6	6.5	22.3	1.0	23.3

1 For MSHCL, these are the total results of the entity multiplied by the proportion of Group ownership. For VIVO, although the equity ownership is 50%, the share of profits from contracts operated by VIVO is either 25% or 50%. Therefore the Group portion of material joint ventures will not represent exactly 50% of their income and net assets.

	MSHCL (100% of results) m	VIVO (100% of results) £m	Group portion of material joint ventures and associates¹ £m	Group portion of other joint venture arrangements and associates¹ £m	Total £m
Cash and cash equivalents	33.2	18.0	25.6	0.6	26.2
Current financial liabilities excluding trade and other payables and provisions	(7.1)	(3.2)	(5.1)	(0.3)	(5.4)
Non-current financial liabilities excluding intercompany loans, trade and other payables and provisions	(25.8)	(13.6)	(18.4)	-	(18.4)
Non-current joint venture loans liability	-	(20.0)	(10.0)	-	(10.0)
Depreciation and amortisation	(5.0)	(1.3)	(3.2)	(0.1)	(3.3)
Interest income	0.1	-	0.1	-	0.1
Interest expense	(0.4)	(0.2)	(0.3)	(0.1)	(0.4)

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 £90.0m (2021: £21.1m) which include £5.1m of lease obligations (2021: £3.9m) and £10.0m in joint venture loan liabilities (2021: £nil). 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.

VIVO's funding requirement is agreed by both shareholders and based on the strategic business plan. At 31 December 2022 the funding provided was £10m from each shareholder. In the future, distributions of net profits will be returned to the Group once VIVO has sufficient reserves.

31 December 2021

Summarised financial information	AWEML (100% of results) m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates¹ £m	Group portion of other joint venture arrangements and associates¹ £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 costs	-	(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

1 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 associates¹ £m	Group portion of other joint venture arrangements and associates¹ £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)

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

5. Acquisitions

On 1 September 2022, the Group acquired 100% of the issued share capital of OXZ Holdings AG (ORS), a specialist provider of immigration services to public sector customers in Switzerland, Germany, Austria and Italy, for consideration of CHF19.2m (£16.9m) subject to standard working capital and completion adjustments. CHF6.4m (£5.7m) was paid in cash and the remaining CHF12.8m (£11.2m) is contingent consideration. At the same time, the Group transferred CHF19.2m (£16.9m) to acquire shareholder loans of ORS. The acquired net assets included CHF5.2m (£4.6m) of cash resulting in a net cash outflow on acquisition of CHF20.4m (£18.0m). Including the balance of contingent consideration payable the total expected cash outflow for the acquisition, net of cash acquired, is CHF33.2m (£29.2m). Post completion there was a further cash outflow of CHF7.4m (£6.7m) to settle the bank loan acquired. The acquisition included net pension obligation of CHF5.7m (£5.0m). The operating results, assets and liabilities have been recognised effective 1 September 2022.

Based on estimates made of the full-year impact of the acquisition of Sapienza and ORS, had the acquisitions taken place on 1 January 2022, Group revenue and operating profit before exceptional items for the period would have increased by approximately £94.3m and £4.5m respectively, taking total Group revenue to £4,628.3m and total Group operating profit before exceptional items to £224.1m.

The provisional fair values of the two acquisitions undertaken during the year and the update to provisional fair values of the prior year acquisition of Whitney, Bradley & Brown, Inc. are summarised below:

	Update to provisional fair values WBB¹ £m	Provisional fair values Sapienza £m	Provisional fair values ORS £m	Total £m
Goodwill²	1.5	2.1	17.3	20.9
Other intangible assets	(0.7)	1.2	25.9	26.4
Property, plant and equipment	-	-	1.1	1.1
Right of use assets	-	0.4	12.7	13.1
Retirement benefit assets	-	-	46.7	46.7
Inventories	-	-	0.6	0.6
Deferred tax asset	-	-	0.1	0.1
Trade and other receivables	(0.3)	2.7	50.3	52.7
Cash and cash equivalents	-	1.6	4.6	6.2
Trade and other payables	-	(4.6)	(48.6)	(53.2)
Provisions	(0.4)	-	-	(0.4)
Retirement benefit obligations	-	-	(51.7)	(51.7)
Bank loans	-	-	(6.5)	(6.5)
Other loans	-	-	(16.9)	(16.9)
Corporation tax liabilities	-	-	(0.7)	(0.7)
Deferred tax liabilities	(0.1)	(0.2)	(5.3)	(5.6)
Lease obligations	-	(0.4)	(12.7)	(13.1)
Acquisition date fair value of consideration transferred	-	2.8	16.9	19.7
Satisfied by:
Cash consideration	-	2.8	5.7	8.5
Contingent consideration	-	-	11.2	11.2
Total consideration	-	2.8	16.9	19.7

1 WBB goodwill increased by £1.5m following the completion of the fair value assessment of the acquisition during the measurement period.

2 No goodwill is deductible for tax purposes.

The fair values for Sapienza and ORS are prepared on a provisional basis in accordance with IFRS 3. During the measurement period, expected to be 12 months from acquisition date, the Group may amend the fair value. The following items reflect the key consideration in measuring the fair value:

	Goodwill on the acquisitions of Sapienza and ORS represents the premium associated with expanding the Group's capabilities in the relevant sectors and geographical locations in which the acquired companies operate.
·	The acquisition related intangibles represent the fair value of customer relationships which have been valued using our best estimate of forecast cash flows discounted to present value and, in the case of ORS, certain software-related assets and the brand names associated with them.
·	The retirement benefit assets and obligations were measured in accordance with IAS 19 at the acquisition date.
·	Deferred tax assets and liabilities are measured based on the provisional fair values at the acquisition date.
·	The best estimate at acquisition date of trade and other receivables are the gross contractual amounts as there are no cash flows that are not expected to be collected.

Contingent consideration recognised on acquisition of ORS was CHF12.8m (£11.2m) and reflects the fair value of the earn-out and overperformance payments based on a range of targets for the full year 2022 EBITDA. The maximum earn-out and overperformance payments are CHF10.0m and CHF4.0m respectively. The contingent consideration is expected to be settled in April 2023.

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	8.5
Cash acquired on acquisition of businesses	(6.2)
Cash to acquire existing debt balances	16.9
Net cash outflow in relation to acquisitions	19.2
Exceptional acquisition related costs	2.4
Net cash impact in the year on acquisitions	21.6

Costs associated with the acquisitions of ORS and the prior year acquisition of Whitney, Bradley & Brown, Inc. are shown as exceptional costs in the Condensed Consolidated Income Statement. The total transaction and implementation costs recognised in exceptional items for the year ended 31 December 2022 was £2.4m. There were no material costs associated with the acquisition of Sapienza 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 2022	UK&E m	Americas £m	AsPac m	Middle East £m	Total £m
Key sectors
Defence	315.8	863.0	147.9	30.5	1,357.2
Justice & Immigration	798.9	-	412.9	-	1,211.8
Transport	173.9	95.9	9.8	70.0	349.6
Health & Other Facilities Management	264.4	-	225.3	103.0	592.7
Citizen Services	547.2	310.9	158.7	5.9	1,022.7
	2,100.2	1,269.8	954.6	209.4	4,534.0
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous periods	5.8	-	0.8	-	6.6
Revenue recognised at a point in time	21.9	-	5.5	-	27.4
Products and services transferred over time	2,072.5	1,269.8	948.3	209.4	4,500.0
	2,100.2	1,269.8	954.6	209.4	4,534.0

Year ended 31 December 2021 (restated¹)	UK&E m	Americas £m	AsPac m	Middle East £m	Total £m
Key sectors
Defence	280.6	764.6	145.6	31.4	1,222.2
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	971.9	275.5	161.0	3.2	1,411.6
	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

1 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 is 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 remains confident that a significant reduction will not occur.

As part of the considerations around variable revenue, Management considers the impact that factors such as contractual performance, anticipated demand and pricing (including indexation) may have on future revenue recognised. Management also considers 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 significant adjustments were identified in relation to the future revenue forecasts of existing contracts.

	UK&E m	Americas¹ £m	AsPac m	Middle East £m	Total £m
Within 1 year (2023)	1,878.2	780.0	832.5	165.0	3,655.7
Between 2 - 5 years (2024 - 2027)	5,207.8	256.9	1,209.5	144.1	6,818.3
5 years and beyond (2028+)	2,740.0	135.7	1,339.6	118.4	4,333.7
	9,826.0	1,172.6	3,381.6	427.5	14,807.7

1 Due to the nature contracting environment in the Americas division the transaction price allocated to remaining performance obligations is primarily within 1 year and the future years are therefore inherently lower than other segments.

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	2022 £m	2021 £m
Restructuring costs	-	0.1
Increase in onerous lease provision	-	(0.6)
Costs associated with successful acquisitions	(2.4)	(4.9)
Profit on sale of investments	-	4.2
Exceptional operating items	(2.4)	(1.2)
Exceptional tax	0.3	(0.2)
Total exceptional operating items net of tax	(2.1)	(1.4)

The exceptional charge in 2022 relates to the successful acquisitions of OXZ Holdings AG (ORS) in 2022 and Whitney, Bradley & Brown, Inc (WBB) in 2021. The combined transaction and implementation costs incurred during the year ended 31 December 2022 of £2.4m 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 2021.

Exceptional tax

Exceptional tax for the year was a credit of £0.3m (2021: £0.2m charge) which arises on exceptional items within operating profit.

The tax credit on exceptional items arises in relation to acquisition and integration costs incurred overseas on the WBB acquisition. Costs associated with the ORS Group acquisition did not give rise to a tax credit as they were either treated as capital, and therefore not tax deductible, or augmented non-valued deferred tax.

8. Investment revenue

Year ended 31 December	2022 m	2021 £m
Interest receivable on other loans and deposits	1.9	0.6
Net interest receivable on retirement benefit obligations (note 20)	2.7	1.1
Other dividends received	-	0.6
Movement in discount on other debtors	0.1	0.1
	4.7	2.4

9. Finance costs

Year ended 31 December	2022 m	2021 £m
Interest payable on lease liabilities	7.9	7.8
Interest payable on other loans	15.2	15.6
Facility fees and other charges	2.4	2.4
	25.5	25.8
Foreign exchange on financing activities	(0.4)	0.6
	25.1	26.4

10. Tax

10 (a) Income tax recognised in the income statement

Year ended 31 December	Before exceptional items 2022 m	Exceptional items 2022 £m	Total 2022 £m	Before exceptional items 2021 m	Exceptional items 2021 £m	Total 2021 £m
Current income tax
Current income tax charge/(credit)	38.0	(0.3)	37.7	34.6	0.8	35.4
Adjustments in respect of prior years	3.5	-	3.5	1.3	-	1.3
Deferred tax
Current year charge/(credit)	5.5	-	5.5	(146.5)	(0.6)	(147.1)
Adjustments in respect of prior years	(4.9)	-	(4.9)	(1.3)	-	(1.3)
	42.1	(0.3)	41.8	(111.9)	0.2	(111.7)

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

Year ended 31 December	Before exceptional items 2022 £m	Exceptional items 2022 £m	Total 2022 £m	Before exceptional items 2021 £m	Exceptional items 2021 £m	Total 2021 £m
Profit before tax	199.2	(2.4)	196.8	193.4	(1.2)	192.2
Tax calculated at a rate of 19.00% (2021: 19.00%)	37.8	(0.5)	37.3	36.7	(0.2)	36.5
Expenses not deductible for tax purposes¹	2.0	0.2	2.2	1.8	0.6	2.4
UK unprovided deferred tax²	0.3	-	0.3	-	-	-
Other unprovided deferred tax	2.5	0.1	2.6	2.2	-	2.2
Effect of the use of unrecognised tax losses	(1.1)	-	(1.1)	(0.4)	(0.3)	(0.7)
Additional recognition of UK deferred tax asset³	-	-	-	(146.4)	-	(146.4)
Impact of changes in statutory tax rates on current income tax	(0.8)	-	(0.8)	-	-	-
Overseas rate differences	10.5	(0.1)	10.4	11.2	0.1	11.3
Other non-taxable income	(5.5)	-	(5.5)	(4.6)	-	(4.6)
Adjustments in respect of prior years⁴	(1.4)	-	(1.4)	-	-	-
R&D expenditure credit (RDEC)	0.1	-	0.1	-	-	-
Impact of revaluing brought forward UK provided deferred tax from 19% to 25%	-	-	-	(10.8)	-	(10.8)
Adjustments in respect of equity accounted investments	(2.3)	-	(2.3)	(1.6)	-	(1.6)
Tax charge/(credit)	42.1	(0.3)	41.8	(111.9)	0.2	(111.7)

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

2 Arises due to timing differences between when an amount is recognised in the income statement and when the amount is subject to UK tax.

3 In the prior 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 the prior year giving a net adjustment of £146.4m.

4 Included within adjustments in respect of prior years for the year ended 31 December 2022, is a credit of £0.9m in relation to the finalisation of the prior year position on share based payments and a credit of £0.7m reflecting the utilisation of the R&D expenditure credit, previously written off to deferred tax, against the 2021 current tax liability.

The corporate income tax expense for the year is based on the UK statutory rate of corporation tax for the period of 19.00% (2021: 19.00%). Taxation for other jurisdictions is calculated at the rates prevailing in the respective jurisdictions.

10 (b) Income tax recognised in the SOCI

Year ended 31 December	2022 £m	2021 £m
Current tax
Taken to retirement benefit obligations reserve	2.0	0.8
Deferred tax
Relating to cash flow hedges	(0.1)	-
Relating to net investment hedge	-	4.0
Taken to retirement benefit obligations reserve	25.1	(22.5)
	27.0	(17.7)

10 (c) Tax on items taken directly to equity

Year ended 31 December	2022 £m	2021 £m
Current tax
Recorded in share based payment reserve	2.2	(0.7)
Deferred tax
Recorded in share based payment reserve	1.2	0.7
	3.4	-

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)/liabilities during the year was as follows:

	2022 £m	2021 £m
At 1 January - asset	(174.0)	(56.3)
Income statement charge/(credit)	0.6	(148.4)
R&D expenditure credit transferred to current tax	0.7	-
Items recognised in equity and in other comprehensive income	(26.2)	17.8
Arising on acquisition	5.5	9.9
Exchange differences	3.0	3.0
At 31 December - asset	(190.4)	(174.0)

The movement in deferred tax (assets)/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	Derivative financial instruments m	Tax losses £m	Other temporary differences £m	Total £m
At 1 January 2022	19.9	(34.5)	36.2	(0.8)	-	(166.0)	(28.8)	(174.0)
Charged/(credited) to income statement (note 10a)	1.7	(0.5)	0.2	0.1	-	0.8	(1.7)	0.6
R&D expenditure credit transferred to current tax	-	-	-	-	-	-	0.7	0.7
Arising on acquisition of a subsidiary	5.5	-	0.1	-	-	(0.1)	-	5.5
Items recognised in equity and in other comprehensive income (notes 10b and 10c)	-	(1.2)	(25.1)	-	0.1	-	-	(26.2)
Exchange differences	5.7	(1.8)	(0.2)	(0.1)	-	(0.3)	(0.3)	3.0
At 31 December 2022	32.8	(38.0)	11.2	(0.8)	0.1	(165.6)	(30.1)	(190.4)

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

The movement in deferred tax (assets)/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 2021	25.5	(24.7)	14.8	(0.5)	(31.1)	(40.3)	(56.3)
Credited 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 (notes 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)

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:

	2022 £m	2021 £m
Deferred tax liabilities	53.8	40.3
Deferred tax assets	(244.2)	(214.3)
	(190.4)	(174.0)

As at the balance sheet date, the UK has a potential deferred tax asset of £253.6m (2021: £234.3m) available for offset against future profits. A UK deferred tax asset has currently been recognised of £186.9m (2021: £162.8m). Recognition has been based on the improved performance in the underlying UK business indicating a sustained return to profitability which will 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. No deferred tax asset has been recognised in respect of the remaining asset (net £66.7m) 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 2022 has been calculated reflecting the increased rate of 25% where the balance is expected to be realised after April 2023.

Outside of the UK, there is a further £39.5m (2021: £37.5m) of deferred tax assets which have not been recognised. 38.8m (2021: £37.0m) of this relates to revenue losses where current forecasts do not support recognition.

On 9 December 2022 the Ministry of Finance in UAE published tax law under which certain Serco operations in UAE will pay tax from January 2024. We are continuing to work with local advisers to ascertain the implications on filing requirements and tax payment, but our current expectation is that the introduction of this new tax will not have a material impact on our Group tax liability.

In October 2021 over 130 countries in the Organisation for Economic Cooperation and Development (OECD) jointly released a framework to introduce a global minimum tax rate of 15% in order to address concerns about uneven profit distributions and tax contributions of large multinationals. In June 2022 the UK government published draft legislation to bring this framework into UK law from January 2024. Management is closely monitoring the progress of this legislation, but initial work undertaken to date suggests that the introduction of this minimum tax will also not have a material impact on the Group tax liability.

Losses of £1.6m (2021: £1.3m) expire within 5 years, losses of £4.1m (2021: £0.1m) expire within 6-10 years, losses of £11.8m (2021: £nil) expire within 20 years and losses of £1,072.6m (2021 £1,077.4m) 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	2022 millions	2021 millions
Weighted average number of ordinary shares for the purpose of basic EPS	1,192.2	1,222.6
Effect of dilutive potential ordinary shares: Shares under award	22.6	21.4
Weighted average number of ordinary shares for the purpose of diluted EPS	1,214.8	1,244.0

Earnings per share

Basic EPS	Earnings 2022 £m	Per share amount 2022 pence	Earnings 2021 £m	Per share amount 2021 pence
Earnings for the purpose of basic EPS	155.4	13.03	303.9	24.86
Effect of dilutive potential ordinary shares	-	(0.24)	-	(0.43)
Diluted EPS	155.4	12.79	303.9	24.43

Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS	155.4	13.03	303.9	24.86
Add back exceptional items	2.4	0.21	1.2	0.10
Add back tax on exceptional items	(0.3)	(0.03)	0.2	0.01
Earnings excluding exceptional items for the purpose of basic EPS	157.5	13.21	305.3	24.97
Effect of dilutive potential ordinary shares	-	(0.24)	-	(0.43)
Excluding exceptional items, diluted	157.5	12.97	305.3	24.54

13. Goodwill

	Cost £m	Accumulated impairment losses m	Carrying amount £m
At 1 January 2021	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
Acquisitions	20.9	-	20.9
Exchange differences	97.8	(26.4)	71.4
At 31 December 2022	1,298.9	(353.9)	945.0

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

	Goodwill balance 1 January 2022 £m	Acquisitions £m	Exchange differences 2022 m	Goodwill balance 31 December 2022 £m	Headroom on impairment analysis 2022 £m	Headroom on impairment analysis 2021 £m
UK & Europe	183.6	19.4	0.8	203.8	811.1	728.0
Americas	527.8	1.5	62.9	592.2	360.9	415.8
AsPac	131.3	-	6.5	137.8	281.0	380.6
Middle East	10.0	-	1.2	11.2	119.5	103.6
	852.7	20.9	71.4	945.0	1,572.5	1,628.0

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. Overall, in all CGUs, there is sufficient headroom available. This is largely consistent with 2021 overall with reductions in Americas and ASPAC, primarily driven by the increase in discount rates as a result of volatility in the spot rates of corporate bonds impacting risk-free rates.

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

	Discount rate 2022 %	Discount rate 2021 %	Terminal growth rates 2022 %	Terminal growth rates 2021 %
UK & Europe	10.3	9.3	2.0	2.0
Americas	12.1	10.9	2.3	2.4
AsPac	13.4	11.0	2.2	2.2
Middle East	13.5	12.1	1.2	1.3

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 2022 have increased compared with 2021. The change can be attributed to the increased geopolitical risks, macroeconomic conditions, such as sharp short-term inflation increases compared to prior expectations and significant market movements. Historically Management has built an additional level of prudence into the equity risk premium (ERP). During 2020 when significant equity risk had already been factored in by markets due to the pandemic, Management concluded that increasing the equity risk rate was over-prudent. The Group departed from this policy for a year, but Management considered it appropriate to reinstate it for 2021. During 2022, significant equity risk has again been factored in by the markets, and hence Management has followed the same approach as 2020.

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 2021.

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.

Sensitivity analysis

Sensitivity analysis has been performed, applying a 1% movement in discount rates and a 1% movement in terminal growth rates which are considered to be reasonably possible. Both individually and combined, the impact of these changes in key assumptions does not lead to an impairment in any CGU.

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 has applied a no growth model to cash flows outside of the 2-year budget period. No impairment results from this scenario, however, when combined with an additional 1% increase in discount rates and a 1% reduction in terminal growth rates, an impairment occurs in the CGU with the lowest headroom as a proportion of its value in use. Management do not consider the combined scenario to be reasonably possible.

Management has also considered the sensitivity of cash flows in the terminal year for all CGUs and has determined that a reduction in cash flows of up to 10% in the final year of the plan is reasonably possible. No impairment results from this scenario even when combined with an additional 1% increase in discount rates and a 1% reduction in terminal growth rates though this is not deemed reasonably possible. Cash flows in the terminal year would need to reduce by 85% in the Middle East (£17.4m), 58% in AsPac (£29.0m), 50% in the Americas (£35.2m) and 64% in UK and Europe (£81.1m), before an impairment would need to be recognised.

Within the forecast cash flows for the AsPac CGU, there are large opportunities which would have a binary outcome. While the loss of these would result in an impairment of the goodwill, there is no indication at present given the opportunities available within the region that an impairment is required. Should the scale of any Division in the Group decline to a level which does not make it economically viable, it is likely that the Group would review the overhead and support structures in place to ensure they are appropriate for the scale of business and opportunities available.

Despite the volatility in discount rates experienced during 2022, Management has not revised the range of possible outcomes in its sensitivity analysis. In arriving at this conclusion, Management has considered the macroeconomic environment and consulted with its external advisors. It is deemed that the rate of change in interest rates experienced in 2022 is not expected to continue and therefore the sensitivities above are considered appropriate.

14. Contract assets, trade and other receivables

Contract assets: Non-current

2022

2021

£m

Accrued income

2.6

Contract assets: Current	2022 m	2021 £m
Accrued income and other unbilled receivables	334.4	306.5
Capitalised bid costs	2.3	2.4
Capitalised mobilisation and phase-in costs	7.3	9.8
Other contract assets	1.0	0.3
	345.0	319.0

The Group's Condensed 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 upfront investments 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.

Movements in the period were as follows:

Capitalised other contract assets, bid and phase-in costs	2022 m	2021 £m
At 1 January	12.5		18.1
Additions	0.8		0.3
Amortisation	(3.1)		(4.0)
Written off	-		(1.5)
Exchange differences	0.4		(0.4)
At 31 December	10.6		12.5

Total trade and other receivables held by the Group at 31 December 2022 amount to £390.7 m (2021: £ 321.9 m).

Trade and other receivables: Non-current	2022 m	2021 £m
Prepayments	1.3	0.4
Other receivables	14.8	13.2
	16.1	13.6

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

Trade and other receivables: Current	2022 m	2021 £m
Trade receivables	266.8	234.4
Prepayments	63.8	42.9
Amounts owed by joint ventures and associates	3.1	1.7
Other receivables	40.9	26.7
	374.6	305.7

Other receivables include purchase of own shares by the Employee Share Ownership Trust and advanced deposits to suppliers.

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 22 days (2021: 19 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, £55.8m is due from agencies of the UK Government, the Group's largest customer (2021: £68.0m); £65.5m from the Australian Government (2021: £54.7m); £33.1m from the US Government (2021: £37.9m); and £18.3m from the Government of the United Arab Emirates (2021: £23.8m). There are no other customers who represent more than 5% of the total balance of trade receivables. 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 £3.3m as of 31 December 2022 (2021: £4.4m).

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 amount of ECL recognised at 31 December 2022 was £nil (2021: £nil).

Ageing of trade receivables	2022 m	2021 £m
Not due	202.1	191.3
Overdue by less than 30 days	31.8	25.1
Overdue by between 30 and 60 days	6.2	8.2
Overdue by more than 60 days	30.0	14.2
Allowance for doubtful debts	(3.3)	(4.4)
	266.8	234.4

Of the total overdue trade receivable balance, 63% (2021: 92%) 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	2022 m	2021 £m
At 1 January	4.4	7.0
Arising on acquisition	1.3	1.6
Net charges and releases to income statement	(0.4)	0.4
Utilised	(2.3)	(4.7)
Exchange differences	0.3	0.1
At 31 December	3.3	4.4

Included in the current other receivables balance is a further £1.5m (2021: £0.8m) due from agencies of the UK Government.

15. Contract liabilities, trade and other payables

Contract liabilities: Current

2022

£m

2021

£m

Deferred income

60.5

61.3

Contract liabilities: Non-current

2022

£m

2021

£ m

Deferred income

36.3

48.6

The allocation of deferred income between current and non-current is presented on the basis that the current portion will unwind in the following 12 months through revenue. There were no material items in the current portion of deferred income in 2021 which did not unwind during the year.

Total trade and other payables held by the Group at 31 December 2022 amount to £629.3m (2021: £ 533.3m).

Trade and other payables: Current	2022 £m	2021 £m
Trade payables	108.3	89.2
Contingent consideration payable	11.2	-
Other payables	166.2	123.7
Accruals	337.1	313.1
	622.8	526.0

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 21 days (2021 : 23 days).

Trade and other payables: Non-current

2022

£m

2021

£m

Other payables

6.5

7.3

16. Leases

Management estimates 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 2022 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 12 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 £128.4m (2021: £119.1m). This is presented in the Condensed Consolidated Cash Flow Statement as £120.5m (2021: £111.3m) relating to the principal element of the lease liability payments, with the remaining balance of £7.9m (2021: £7.8m) presented within interest paid.

Amounts payable under leases	Minimum lease payments 2022 £m	Minimum lease payments 2021 £m
Within one year	150.6	131.0
Between one and five years	263.2	263.9
After five years	51.5	53.6
	465.3	448.5
Less: future finance charges	(19.3)	(18.2)
Present value of lease obligations	446.0	430.3
Less: amount due for settlement within one year (shown within current liabilities)	(144.4)	(126.3)
Amount due for settlement after one year	301.6	304.0

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

	Note	2022 m	Restated¹ 2021 £m
Additions to right of use assets		129.8	154.6
Depreciation charge on right of use assets		(119.3)	(109.0)
Net release of impairment on right of use assets		1.8	-
Net disposals of right of use assets		(14.0)	(26.2)
Net reclassifications from right of use assets		(0.1)	(0.2)
Net exchange differences on right of use assets		6.2	0.1
Carrying amount of right of use assets		434.2	416.7
Current lease liabilities		144.4	126.3
Non-current lease liabilities		301.6	304.0
Capital element of lease repayments		(120.5)	(111.3)
Interest expense on lease liabilities	9	(7.9)	(7.8)
Profit on early termination of leases		0.2	0.6
Expenses relating to short-term or low-value leases		(4.2)	(2.8)

1 Additions and disposals have been restated to be consistent with the treatment adopted in 2022. The adjustment ensures that changes in lease terms, which are agreed before the end of the original lease, are treated as a lease modification and not the termination and commencement of a new lease. This change has no impact on the net book value, cash flow or profit previously reported.

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 2022 £m	Cash flow £m	Acquisitions¹ £m	Exchange differences £m	Non-cash Movements² £m	At 31 December 2022 m
Loans payable	(377.0)	149.3	(6.5)	(30.1)	1.4	(262.9)
Lease obligations	(430.3)	120.5	(13.1)	(8.0)	(115.1)	(446.0)
Liabilities arising from financing activities	(807.3)	269.8	(19.6)	(38.1)	(113.7)	(708.9)
Cash and cash equivalents	198.4	(151.1)	6.2	3.7	-	57.2
Derivatives relating to Net Debt	0.6	-	-	1.2	-	1.8
Net Debt	(608.3)	118.7	(13.4)	(33.2)	(113.7)	(649.9)

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

2 Non-cash movements on loans payable relate to movement in capitalised finance costs in the year. For lease obligations 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 2021 £m		Cash flow £m	Acquisitions¹ £m			Exchange differences £m	Non-cash Movements² £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)

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

2 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	Claims m	Other m	Total £m
At 1 January 2022	73.8	19.3	14.2	20.1	70.2	197.6
Arising on acquisition	-	-	-	-	0.4	0.4
Reclassified between categories	-	(1.1)	-	-	1.1	-
Transferred from working capital	-	0.8	-	-	0.6	1.4
Charged to income statement	13.5	3.0	2.6	8.8	7.7	35.6
Released to income statement	(3.2)	(0.8)	(3.8)	-	(3.9)	(11.7)
Utilised during the year	(6.2)	(1.9)	(1.4)	(4.7)	(6.2)	(20.4)
Exchange differences	4.6	0.3	-	-	0.6	5.5
At 31 December 2022	82.5	19.6	11.6	24.2	70.5	208.4
Analysed as:
Current	48.3	6.4	9.8	4.9	65.5	134.9
Non-current	34.2	13.2	1.8	19.3	5.0	73.5
	82.5	19.6	11.6	24.2	70.5	208.4

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 uncertain.

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 to be unprofitable 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.

Claims provisions relate 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. While 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.

Included within other provisions is:

£42.7m 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 12 months, or over a longer period.

£27.8m 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.

Individual provisions are only discounted where the impact is assessed to be significant. Currently, the effect of discounting is not 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 (2021: £5.7m). The actual commitment outstanding at 31 December 2022 was £5.7m (2021: £5.7m).

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 2022 was £222.7m (2021: £263.8m).

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. Management is 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

20 (a) Defined benefit schemes

i) Characteristics and risks

The Group contributes to defined benefit schemes for qualifying employees of its subsidiaries. The schemes in which the Group participates are categorised as follows:

Non-contract specific schemes

These schemes do not relate to any specific contract and represent 98% (2021: 98%) of scheme assets and 98% (2021: 97%) of scheme liabilities. They consist of six pre-funded defined benefit schemes and an unfunded defined benefit scheme.

The two UK funded schemes are Serco Pension and Life Assurance Scheme (SPLAS) and a non-contract specific section of the Railways Pension Scheme (RPS). The funding policy for the UK pre-funded schemes is to contribute amounts which will achieve 100% funding on a projected salary basis based on regular actuarial valuations.

There are three non-UK schemes based in Switzerland and are available for the employees of OXZ Holdings AG and its subsidiaries which are part of a collective foundation. The occupational benefits fund commission defines the contributions which are shared equally between the employer and the employees.

The Group also makes contributions to the Public Sector Superannuation Scheme in Australia.

The unfunded scheme is a German scheme and any liabilities arising are recognised in full, with the liabilities in relation to the unfunded scheme amounting to £0.2m (2021: £0.3m).

Contract specific schemes

These schemes represent 2% (2021: 2%) of scheme assets and 2% (2021: 3%) of scheme liabilities. They consist of two pre-funded defined benefit schemes in the UK.

Under contractual arrangements the Group sponsors a section of the RPS, an industry-wide defined benefit scheme, paying contributions in accordance with a Schedule of Contributions. There is no residual liability to fund any deficit at the end of the franchise period and any costs are shared 60% by the employer and 40% by the members.

The Group also makes contributions under Admitted Body status for one section of the Local Government Pension Scheme for the period to the end of the relevant customer contract. The Group is required to pay regular contributions as decided by the respective scheme actuary and as detailed in each scheme's schedule of contributions. In addition, the Group may be required to pay some or all of any deficit (as determined by the respective scheme actuary) that is remaining at the end of the contract.

In respect of Local Government Pension Schemes, as there is a residual liability, the Group recognises a sufficient level of provision in these financial statements based on the IAS 19 Employee Benefits valuation at the reporting date and contractual obligations.

Joint venture scheme

Under contractual arrangements, the Group's joint venture Merseyrail Services Holding Company Limited (MSHCL) sponsors a section of the RPS, an industry-wide defined benefit scheme, paying contributions in accordance with a Schedule of Contributions. There is no residual liability to fund any deficit at the end of the franchise period and there is no pension obligation on the balance sheet of the Group or MSHCL. The costs associated with the scheme are included in profit from operations for MSCHL shown in note 4 and reflected in the share of profits in joint ventures in the income statement and therefore the disclosure in this note do not include MSHCL.

Scheme funding

The normal contributions expected to be paid during the financial year for all schemes ending 31 December 2023 are £8.9m (2022: £6.8m)

The assets of funded schemes are held independently of the Group's assets in separate trustee administered schemes. The trustees of each pension scheme are required by law to act in the interest of the scheme and of all relevant stakeholders in the scheme. The trustees of the pension schemes are responsible for the investment policy with regard to the assets of the scheme. The Group's schemes are valued by independent actuaries annually using the projected unit credit actuarial cost method for accounting purposes. This reflects service rendered by employees to the date of valuation and incorporates actuarial assumptions including discount rates to determine the present value of benefits, inflation assumptions, projected rates of salary growth and life expectancy of pension plan members. Discount rates are based on the market yields of high-quality corporate bonds in the country concerned. Pension assets and liabilities in the different defined benefit schemes are not offset.

The schemes typically expose the Group to risks that impact the financial performance and position of the Group and may affect the amount and timing of future cash flows. The key risks are set out below:

·	Investment risk. The schemes hold assets with which to discharge the future liabilities of these schemes. Any decline in the value of these investments directly impacts on the ability of the schemes to meet its commitments and could require the Group to fund this shortfall in future years. SPLAS's investment strategy aims to reduce volatility risk by better matching assets to liabilities and is based on the actuarial funding basis. 48% of the scheme's assets are annuity policies, which result in an insurer funding the future benefit payments to the relevant members and therefore eliminate the risk of changes in the future value of the benefits to the scheme. The investment strategy outside of the annuity has a benchmark allocation of 45% Liability Driven Investments (LDIs), 40% Buy and Maintain Credit and 15% Private Debt. The main asset classes that make up the LDI investments are gilts and corporate bonds with inflation and interest swap overlays and are therefore linked to the key drivers of the scheme's liabilities.
·	Interest risk. The present values of the defined benefit schemes' liabilities are calculated using a discount rate determined by reference to high-quality corporate bond yields and therefore a decrease in the bond interest rate will increase the schemes' liabilities. This will be partially offset by an increase in the return of the schemes' debt investments.
·	Longevity risk. The present values of the defined benefit schemes' liabilities are calculated by reference to the best estimate of the mortality of the schemes' participants, both during and after their employment. An increase in the life expectancy of the schemes' participants will increase the schemes' liabilities.
·	Inflation risk. The present values of the defined benefit schemes' liabilities are calculated to include the effect of inflation on future purchasing power based on estimations around inflation rates. An increase in expected future inflation rates will increase the schemes' liabilities.
·	Salary risk. The present values of the defined benefit schemes' liabilities are calculated by reference to the future salaries of the schemes' participants, as such, an increase in the salary of the schemes' participants will increase the schemes' liabilities.

Serco Pension and Life Assurance Scheme (SPLAS)

The largest non-contract specific schemes is SPLAS. The most recent full actuarial valuation of this scheme was undertaken as at 5 April 2021 and completed in May 2022. The actuarially assessed deficit for funding purposes was £70.0m. The increase to the actuarially assessed deficit for funding purposes was as a result of the RPI reform announced by the UK government to take effect from 2030.

Pension obligations are valued separately for accounting and funding purposes and there is often a material difference between these valuations. As at 31 December 2022, the estimated actuarial deficit on a funding basis for SPLAS was £27m (2021: £42m) whereas the accounting valuation resulted in an asset of £47.5m (2021: £166.2m). 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 2022, with 44.3% of pensionable salaries for active employees due to be paid in regular contributions from 1 June 2022. The schedule of contributions also determined that additional shortfall contributions were required and the Group has committed to make deficit recovery payments by 31 March of £6.6m per year from 2022 to 2030. An annual assessment of the shortfall is performed and if the scheme is determined to be in a surplus position the shortfall contributions due by 31 March are deferred to the following year. If the shortfall calculated in the annual assessment is less that than the cumulative shortfall due to date the contribution is capped at the shortfall calculation and any excess is carried forward to the next year.

ii) Events in the year

During the year there has been a high degree of volatility in the pensions market. Discount rates and short-term inflation rates have been rising since 31 December 2021 which has resulted in the weighted average durations used for valuing pension schemes decreasing. Concerns over high global inflation, recession, disruption to supply chains due to the war in Ukraine and rising interest rates, compounded by the market volatility in September 2022 due to political events resulted in a sharp rise in bond yields and a subsequent reduction in the value of LDIs, which triggered collateral calls. The Group made a short-term temporary loan of £60m to SPLAS on 28 September 2022 while the scheme liquidated assets to meet these collateral calls, in order to ensure that the LDI hedge was maintained; this loan was repaid on 3 October 2022.

The private debt investments are less volatile to the market conditions and therefore the allocation of investments was outside the scheme's benchmark at 31 December 2022, with 46% LDIs, 24% Buy and Maintain Credit and 30% Private Debt. The Trustees of SPLAS have been working closely with the Group and investment consultants to ensure the investment objectives of the scheme are maintained.

On 1 September 2022, the Group acquired 100% of the issued share capital of OXZ Holdings AG. Included in the acquisition was a net pension obligation of £5.0m relating to three schemes as noted above.

iii) Values recognised in total comprehensive income in the year

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

Recognised in the income statement	2022 £m	2021 £m
Current service cost - employer	5.9	5.1
Past service cost - employer	0.8	-
Settlement gain recognised	(0.3)	-
Administrative expenses and taxes	2.4	1.5
Recognised in arriving at operating profit after exceptional items	8.8	6.6
Interest income on scheme assets - employer	(28.3)	(22.0)
Interest on franchise adjustment	(0.2)	(0.1)
Interest cost on scheme liabilities - employer	25.8	21.0
Finance income	(2.7)	(1.1)
Total recognised in the income statement	6.1	5.5

Included within the SOCI	2022 £m	2021 £m
Actual return on scheme assets	(539.8)	42.3
Less: interest income on scheme assets	(28.3)	(22.0)
Net return on scheme assets	(568.1)	20.3
Effect of changes in demographic assumptions	21.2	3.3
Effect of changes in financial assumptions	530.3	19.8
Effect of experience adjustments	(77.2)	23.4
Remeasurements	(93.8)	66.8
Change in franchise adjustment	(7.0)	0.1
Change in members' share	(5.3)	(0.6)
Actuarial loss on reimbursable rights	(12.3)	(0.5)
Total recognised in the SOCI	(106.1)	66.3

iv) Balance sheet values

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

	Fair value of scheme assets 2022 £m	Present value of scheme liabilities 2022 £m	Surplus/ (deficit) 2022 £m	Fair value of scheme assets 2021 £m	Present value of scheme liabilities 2021 £m	Surplus/ (deficit) 2021 £m
SPLAS	925.3	(877.8)	47.5	1,489.1	(1,322.9)	166.2
Other Schemes	134.4	(134.1)	0.3	103.8	(136.2)	(32.4)
Total	1,059.7	(1,011.9)	47.8	1,592.9	(1,459.1)	133.8
Franchise adjustment¹			1.8			8.6
Members' share of deficit			1.2			5.8
Net retirement benefit asset (before tax)			50.8			148.2

Net pension asset			57.0			166.2
Net pension liability			(6.2)			(18.0)
Net retirement benefit asset (before tax)			50.8			148.2
Deferred tax			(13.9)			(36.9)
Net retirement benefit asset (after tax)			36.9			111.3

1 The franchise adjustment represents the amount of scheme deficit that is expected to be funded outside the contract period and therefore no additional funding will be required by the Group.

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.

The high degree of volatility as noted above resulted in a reduction in pension scheme assets, particularly investments in bonds, LDIs and amounts held by insurance companies. There has been significant reduction in pensions scheme obligations as discount rates have risen but this has only partially offset the reduction in assets as the liabilities are hedged on an actuarial basis rather than an IAS 19 basis. The decrease in pension scheme obligations was partially offset by experience adjustments on SPLAS which were primarily due to the impact from inflation on the current year allowances for deferred valuations and pension increases.

v) Pension asset values

The schemes asset values at 31 December are:

Scheme assets at fair value	2022 £m	2021 £m
Equities	45.2	55.7
Bonds except LDIs	151.4	368.2
Pooled investment funds	140.0	107.6
LDIs	217.7	390.0
Property	1.3	2.2
Cash and other	13.4	6.9
Amounts held by insurance companies	490.7	662.3
Fair value of scheme assets¹	1,059.7	1,592.9

1. There are no investments in the Group's own transferable financial instruments held as pension assets. No property pension assets are occupied, or other pension assets used by the Group.

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 have quoted prices in active markets and are classified as level 1.
·	Pooled investment funds have no observable market price and the valuation is based on the Net Asset Value provided by the fund administrator at 30 September adjusted for actual cash flows in the period to 31 December. Therefore, these investments are classified as level 3.
·	LDIs are valued at fair value which is typically the Net Asset Value provided by the fund administrator. The LDIs are comprised of a mix of Level 1 and Level 2 instruments, including corporate/government bonds priced at their quoted bid price, derivatives made up of interest rate/inflation swaps and payables in respect of repurchase agreements.
·	Amounts held by insurance companies are valued at the equal and opposite of the defined benefit obligations that they insure and are classified as level 3.

vi) Changes in the fair value of scheme assets and liabilities

The table below shows the movements in fair value of scheme assets and liabilities and shows where they are reflected in the financial statements.

	Fair value of scheme assets £m	Present value of scheme liabilities m	Surplus/ (deficit) £m
At 1 January 2022	1,592.9	(1,459.1)	133.8
Current service cost - employer	-	(5.9)	(5.9)
Past service costs - employer	-	(0.8)	(0.8)
Administration expenses - employer	(2.4)	-	(2.4)
Plan settlement	(8.0)	8.3	0.3
Net interest on scheme assets and liabilities	28.3	(25.8)	2.5
Total recognised in the income statement	17.9	(24.2)	(6.3)
Return of plan assets	(568.1)	-	(568.1)
Effect of changes in demographic assumptions	-	21.2	21.2
Effect of changes in financial assumptions	-	530.3	530.3
Effect of experience adjustments	-	(77.2)	(77.2)
Total recognised in the SOCI	(568.1)	474.3	(93.8)
Contributions by employer	19.9	-	19.9
Total recognised in the cash flow statement	19.9	-	19.9
Contributions by employees	1.7	(1.4)	0.3
Current service cost - employees	-	(0.9)	(0.9)
Net Interest cost - employee	0.1	(0.2)	(0.1)
Change in member share	1.8	(2.5)	(0.7)
Arising on acquisition	46.7	(51.7)	(5.0)
Benefits paid	(52.8)	52.8	-
Foreign exchange	1.4	(1.5)	(0.1)
Other movements	(4.7)	(0.4)	(5.1)
At 31 December 2022	1,059.7	(1,011.9)	47.8

	Fair value of scheme assets £m	Present value of scheme liabilities m	Surplus/ (deficit) £m
At 1 January 2021	1,600.5	(1,534.8)	65.7
Current service cost - employer	-	(5.1)	(5.1)
Administration expenses - employer	(1.5)	-	(1.5)
Net interest on scheme assets and liabilities	22.0	(21.0)	1.0
Total recognised in the income statement	20.5	(26.1)	(5.6)
Return of plan assets	20.3	-	20.3
Effect of changes in demographic assumptions	-	3.3	3.3
Effect of changes in financial assumptions	-	19.8	19.8
Effect of experience adjustments	-	23.4	23.4
Total recognised in the SOCI	20.3	46.5	66.8
Contributions by employer	9.0	-	9.0
Total recognised in the cash flow statement	9.0	-	9.0
Contributions by employees	0.6	(0.4)	0.2
Current service cost - employees	-	(0.9)	(0.9)
Net Interest cost - employee	0.1	(0.1)	-
Change in member share	0.7	(1.4)	(0.7)
Arising on acquisition	1.3	(2.7)	(1.4)
Benefits paid	(59.3)	59.3	-
Foreign exchange	(0.1)	0.1	-
Other movements	(58.1)	56.7	(1.4)
At 31 December 2021	1,592.9	(1,459.1)	133.8

Changes in the franchise adjustment	Total m
At 1 January 2021	8.4
Interest on franchise adjustment - recognised in income statement	0.1
Other changes - recognised in the SOCI	0.1
At 1 January 2022	8.6
Interest on franchise adjustment - recognised in income statement	0.2
Other changes - recognised in the SOCI	(7.0)
At 31 December 2022	1.8

vii) Actuarial assumptions: SPLAS

The assumptions set out below are for SPLAS, which reflects 87% of total liabilities and 87% 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 expectation less an inflation risk premium. The inflation risk premium is 0.3% both at 31 December 2021 and at 31 December 2022.

The average duration of the benefit obligation at the end of the reporting period is 11.5 years (2021: 16.3 years).

Significant actuarial assumptions	2022 %	2021 %
Discount rate	5.00	1.80
Rate of salary increases	2.85	2.95
RPI Inflation	3.15	3.35
CPI Inflation	2.35	2.45

Post-retirement mortality¹	2022 years	2021 years
Current pensioners at 65 - male	21.5	21.7
Current pensioners at 65 - female	24.1	24.3
Future pensioners at 65 - male	23.6	23.9
Future pensioners at 65 - female	26.2	26.4

1 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 for SPLAS 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 2022 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 2022 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. Due to the increased volatility in the pension market the Group has updated its sensitivity disclosure to reflect a 1% change in the relevant assumption compared to a 0.5% change used in previous years. The prior year comparatives have been restated.

Increase/(decrease) in defined benefit obligation of SPLAS	2022 £m	Restated 2021 £m
Discount rate - 1.0% increase	(93.4)	(205.9)
Discount rate - 1.0% decrease	113.8	243.8
Inflation - 1.0% increase	68.0	145.7
Inflation - 1.0% decrease	(68.1)	(157.0)
Rate of salary increase - 1.0% increase	1.6	3.3
Rate of salary increase - 1.0% decrease	(1.5)	(3.3)
Mortality - one-year age rating	25.4	49.7

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.

The increase or decrease in the defined benefit obligation in the sensitivity table above would be offset by the corresponding movement in the scheme's assets. A 1% change in the long - term gilt yields consistent with the discount rates would result in a n approximate offsetting movement of £ 100 m (2021: £180m) in the scheme's LDI investment and a 1% change in long term inflation expectation would result in an approximate offsetting movement of £70m (2021: £140m) in the scheme's LDI Investment.

viii) Actuarial assumptions: Other schemes

The other UK based schemes are valued on a consistent basis to SPLAS with a discount rate ranging from 4.90% to 5.00%, RPI inflation assumptions of 3.10% to 3.15% and CPI inflation assumptions of 2.30% to 2.35%. The non-UK based schemes use a discount rate ranging from 2.40% to 5.45%.

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 2022 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% (2021: 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.

20 (b) Defined contribution schemes

The Group paid employer contributions of £96.7m (2021: £92.1m) into UK defined contribution schemes, foreign defined contribution schemes and foreign state pension schemes.

Serco participated in certain pre-funded defined benefit pension arrangements relating to contracts, including participations in public sector schemes, however, contractual protections are in place allowing actuarial and investment risk to be passed to the end customer via recoveries for contributions paid.

The nature of these arrangements varies from contract to contract but typically allow for the majority of contributions payable to the schemes in excess of an initial rate agreed at the inception to be recovered from the end customer, as well as exit payments payable to the schemes at the cessation of the contract, such that the Group's net exposure to actuarial and investment risk is immaterial. Cash contributions are recognised as pension costs and no asset or liability is shown on the balance sheet

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 2021	(135.6)	81 .0	(2.1)	-	(0.4)	(19.9)	0.1	(76.9)

Total comprehensive income/(loss) 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 1 January 2022	(91.0)	95.8	(1.2)	-	(0.1)	(27.5)	0.4	(23.6)

Total comprehensive (loss)/income for the year	(78.9)	-	-	-	0.4	60.1	0.1	(18.3)

Shares purchased and held in own share reserve	-	-	(15.9)	-	-	-	-	(15.9)

Shares purchased and held in Treasury	-	-	-	(91.2)	-	-	-	(91.2)

Shares transferred to award holders on exercise of share awards	-	(9.3)	9.4	-	-	-	-	0.1

Expense in relation to share based payments	-	15.6	-	-	-	-	-	15.6


Tax credit on items taken directly to equity	-	3.4	-	-	-	-	-	3.4

At 31 December 2022	(169.9)	105.5	(7.7)	(91.2)	0.3	32.6	0.5	(129.9)

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 2022 m	Current outstanding at 31 December 2022 m	Non-current outstanding at 31 December 2022 m
Sale of goods and services
Joint ventures	10.5	3.1	-
Other
Loan to joint venture	10.0	-	10.0
Loan to pension scheme	60.0	-	-
Dividends received - joint ventures	7.3	-	-
Dividends received - associates	1.8	-	-
Receivable from consortium for tax - joint ventures	3.2	0.9	3.2
Total	92.8	4.0	13.2

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. The Group made a short-term temporary loan of £60.0m to Serco Pension and Life Assurance Scheme (SPLAS) in September 2022 in order for the scheme to be able to liquidate assets to meet collateral calls required to ensure that the LDI hedge was maintained; this loan was repaid during the year.

	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
Loan to joint venture	-	-	-
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

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. During 2022 a final dividend of £1.8m (2021: £13.5m) was received from AWEML.

As announced on 24 June 2021, Vivo Defence Services Limited (VIVO), a joint venture between the Group and Equans, 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).

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:

	2022 m	2021 m
Short-term employee benefits	8.6	8.5
Share based payment expense	7.1	5.0
	15.7	13.5

The key Management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee (2022: 17 individuals, 2021: 18 individuals).

Aggregate Directors' remuneration

The total amounts for Directors' remuneration were as follows:

	2022 £m	2021 £m
Salaries, fees, bonuses and benefits in kind	3.4	3.5
Amounts receivable under long-term incentive schemes	3.0	2.8
Gains on exercise of share awards	2.7	3.6
	9.1	9.9

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	2022 Before exceptional items £m	2022 Exceptional items £m	2022 Total m	2021 Before exceptional items £m	2021 Exceptional items £m	2021 Total m
Profit before tax	199.2	(2.4)	196.8	193.4	(1.2)	192.2
Net finance costs	20.4	-	20.4	24.0	-	24.0
Operating profit for the year	219.6	(2.4)	217.2	217.4	(1.2)	216.2
Adjustments for:
Share of profits in joint ventures and associates	(12.0)	-	(12.0)	(8.7)	-	(8.7)
Share based payment expense	15.6	-	15.6	15.8	-	15.8
Impairment of intangible assets	0.1	-	0.1	-	-	-
Amortisation of intangible assets	31.6	-	31.6	27.3	-	27.3
Impairment of property, plant and equipment	2.3	-	2.3	0.3	-	0.3
Net reversal of impairment of right of use assets	(1.8)	-	(1.8)	-	-	-
Depreciation of property, plant and equipment	20.7	-	20.7	19.6	-	19.6
Depreciation of right of use assets	119.3	-	119.3	109.0	-	109.0
Loss on disposal of intangible assets	0.4	-	0.4	1.6	-	1.6
Profit on early termination of leases	(0.2)	-	(0.2)	(0.6)	-	(0.6)
Profit on disposal of property, plant and equipment	(0.5)	-	(0.5)	(0.2)	-	(0.2)
Increase/(decrease) in provisions	4.0	(0.6)	3.4	(7.2)	(1.5)	(8.7)
Total non-cash items	179.5	(0.6)	178.9	156.9	(1.5)	155.4
Operating cash inflow/(outflow) before movements in working capital	399.1	(3.0)	396.1	374.3	(2.7)	371.6
(Increase)/decrease in inventories	(1.5)	-	(1.5)	1.7	-	1.7
Decrease in receivables	1.2	-	1.2	25.4	-	25.4
(Increase)/decrease in payables	(24.1)	0.1	(24.0)	(1.9)	(4.8)	(6.7)
Movements in working capital	(24.4)	0.1	(24.3)	25.2	(4.8)	20.4
Cash generated by operations	374.7	(2.9)	371.8	399.5	(7.5)	392.0
Tax paid	(44.2)	-	(44.2)	(42.1)	-	(42.1)
Non-cash R&D expenditure	(0.4)	-	(0.4)	-	-	-
Net cash inflow/(outflow) from operating activities	330.1	(2.9)	327.2	357.4	(7.5)	349.9

24. Post balance sheet events

Dividends

Subsequent to the year-end, the Board has recommended the payment of a final dividend in respect of the year ended 31 December 2022 of 1.92p. 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 these Condensed Consolidated Financial Statements.

Employee Share Ownership Trust

Subsequent to the year-end, the Group's Employee Share Ownership Trust completed the purchase of 12m shares at the cost of £18.7m. These shares will be held in the own share reserve until they are transferred to award holders on the exercise of share awards.

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 2022

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 2022 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 2022 were approved by the board on 27 February 2023.

Our audit of those financial statements is complete and we signed our auditor's report on 27 February 2023. 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 £9m.

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 £4,534.0m (2021: £4,424.6m), Onerous Contract Provisions of £11.6m (2021: £14.2m) and Contract Assets £345.0m (2021: £319.0m)

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 14 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 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; and
·	The recognition and recoverability assessments of contract related assets.

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.

In the current year, we have identified that a lower level of judgement is required relating to revenue recognition on the portfolio of contracts in the Americas division. As a result of the nature of these contracts, the Americas division is not considered a significant audit risk but remains part of the key audit matter due to the level of resources and efforts of the engagement team required to perform the related audit procedures.

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 and onerous contract provisions 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 whether 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. 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 recognition was appropriately applied in accordance with the Group's accounting policy and relevant accounting standards, for each contract selected for substantive procedures :

·	we agreed a sample of revenue to documents such as invoices or purchase orders, or customer agreements for the work performed, as well as cash receipts;
·	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 all divisions 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 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 contract related assets:

Assessing application

We assessed whether contract related assets had been recognised in accordance with the Group's accounting policy and relevant accounting standards

For onerous and potentially onerous contracts identified through our risk assessment procedures, 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.

We performed an assessment of whether an over/understatement of onerous contract provisions identified through these procedures was material.

Assessing transparency

We also assessed whether the Group's disclosures about the estimates and judgements applied reflect the risks related to the estimation of onerous contracts, and the recognition of revenue and contract assets.

Our findings

We found no material errors in the group's application of its revenue accounting policy (2021: no material errors). We found the resulting estimate of onerous contract provision to be balanced (2021: balanced).

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

Group: £945.0m (2021: £852.7m); parent Company: £2,052.5m (2021: £2,041.7m)

Assessment of risk vs. prior year: Increased

Refer to note 13 Goodwill.

The risk

Goodwill in the group is significant and at risk of irrecoverability due to estimation uncertainty in valuing the recoverable amounts of the Group's cash generating units.

The parent's investment in subsidiary is not at a high risk of significant misstatement or subject to significant judgement. However, due to its materiality in the context of the Parent company financial statements, this is considered to be the Key Audit Matter that had the greatest effect on our overall Parent company audit.

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 as well as determining a terminal growth rate.

This year, 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, Americas CGU and Middle East CGU (2021: AsPAC and Middle East CGUs). As at year end 31 December 2022, the AsPac CGU was estimated to have headroom of £281.0m, the Americas CGU has headroom of £360.9m and Middle East has headroom of £119.5m.

The effect of these matters is that, as part of our risk assessment for audit planning purposes, we determined that the value in use of the relevant CGUs had 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. In conducting our final audit work, we concluded that reasonably possible changes to the value in use of the Americas and Middle East CGUs would not be expected to result in a material impairment. The condensed 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 balances is such that detailed testing is inherently the most effective means of obtaining audit evidence.

Our audit procedures over goodwill and investment in subsidiary included:

Benchmarking assumptions: With the assistance of our valuation specialists, we challenged the implied growth rate and discount rate used in the value in use calculation by comparing the Group's assumptions to externally derived market 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, as well as margin assumptions 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 models.

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.

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, particularly in the ASPAC CGU, reflects the risks inherent in the valuation of goodwill.

Additionally, substantive audit procedures over recoverability of the Parent company's investment in subsidiary included:

Comparing the carrying amount of the investment with the subsidiary's draft balance sheet to identify whether its net assets, being an approximation of the minimum recoverable amount, are in excess of the carrying amount and assessing whether the subsidiary's group 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 company's investment in subsidiary to be balanced (2021: balanced) and the related goodwill sensitivity disclosures to be proportionate (2021: proportionate).

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

27 February 2023

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