Annual Financial Report
Serco Group plc 2012 Annual Report and Accounts
The following documents have today been posted or otherwise made available to shareholders:
1. 2012 Annual Report and Accounts
2. Notice of 2013 Annual General Meeting
3. Form of Proxy for the 2013 Annual General Meeting
In accordance with Listing Rule 9.6.1 a copy of each of these documents has been uploaded to the National Storage Mechanism and will be available for viewing shortly. The documents are also available on the Company's website at www.serco.com.
Compliance with Disclosure and Transparency Rule 6.3.5 ("DTR 6.3.5") - Extracts from the 2012 Annual Report and Accounts
The information below, which is extracted from the 2012 Annual Report and Accounts, is included solely for the purpose of complying with DTR 6.3.5. It should be read in conjunction with the Company's Full year results announcement issued on 5 March 2013 (available at www.serco.com/investors). Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2012 Annual Report and Accounts. All page numbers and cross-references in the extracted information below refer to page numbers in the 2012 Annual Report and Accounts.
For further information please contact Serco:
T +44 (0) 1256 745 900
Stuart Ford, Head of Investor Relations
Marcus De Ville, Head of Media Relations
Directors' responsibilities
Alastair Lyons CBE - Chairman
Christopher Hyman CBE - Chief Executive
Andrew Jenner - Finance Director
Malcolm Wyman - Non-Executive Director
Ralph D Crosby Jr - Non-Executive Director
David Richardson - Non-Executive Director
Angie Risley - Non-Executive Director
We confirm that to the best of our knowledge:
1. The financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
2. The management report, which is incorporated into the Directors' Report, includes a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
Principal risks and uncertainties
Serco has a well-established and embedded system of internal control, including financial, operational and compliance controls and risk management, designed to safeguard shareholders' investments, our assets and our reputation.
The Board has overall responsibility for our internal control system and for reviewing its effectiveness, and has delegated to management the implementation of policies on risk and control.
Risk management is fundamental to how we manage the business; it informs decision making and aligns to the organisation's strategic objectives. We have developed robust systems and processes to identify and manage the key risks facing each of our businesses and the Group as a whole, and all parts of the business have appropriate risk and crisis management plans that meet defined policy standards.
Whilst Divisional Boards review quarterly the risks they face, the Group Risk Management and Safety Committee (GRMSC), a formal committee of the Executive Committee, meets quarterly to provide governance and oversight of risk across the Group. The Board receives a quarterly report on the GRMSC's assessment of the principal risks facing the Group and the action being taken by management to mitigate risks that are outside of the Group's risk appetite.
Our risk management policies, systems and processes conform to the requirements of the Combined Code and form part of the Serco Management System (SMS).
Such systems and processes, however, can only be designed to mitigate, rather than eliminate the risk of failure to achieve business objectives, and can only provide reasonable and not absolute assurance, against misstatement or loss. The Board confirms that this process has been in place for the year under review and up to the date of approval of the annual report and accounts.
Our approach to risk within the Serco Management System
The SMS sets out policy standards, systems and processes that identify, review and report risks at all levels of our business, and in the Group as a whole, that impact upon strategic objectives, with the aim of safeguarding our shareholders' investments, our assets and our reputation. At each level within our business, risk management processes reflect the nature of the activities being undertaken and the business and operational risks inherent in them, and therefore the level of control considered necessary to protect our interests and those of our stakeholders.
These controls and processes fall into four main areas: Identification, Assessment, Planning and Control and Monitoring, so that we:
· Identify business objectives that reflect the interests of all stakeholders and the risks associated with the achievement of these objectives
· Regularly assess our exposure to risk, including through the regular measurement of key risk indicators
· Control and reduce risk as far as reasonably practicable or achievable through cost-effective risk treatment options, and
· Identify new risks as they arise and remove those risks that are no longer relevant.
Risk identification
In identifying the potential risks associated with the achievement of our business objectives, we consider both external factors arising from the environment within which we operate, and internal risks arising from the nature of our business, its controls and processes, and our management decisions.
Once identified, we document risks in Risk Registers which are maintained at a contract, programme, Business Unit, Divisional and Group level. These Risk Registers change as new risks emerge and existing risks diminish, so that the registers reflect the current threats to the relevant strategic objectives. We review the Group and Divisional Risk Registers at least quarterly and more frequently as required. The GRMSC reviews the Group Risk Register quarterly ahead of formal review by the Board.
Risk assessment
We assess the potential effect of each identified risk on the achievement of our business objectives and wider stakeholder interests. To do so, we use a risk scoring system based on our assessment of the probability of a risk materialising and the impact if it does. This is assessed from three perspectives:
· The risk's significance to the achievement of our business objectives
· The risk's significance to society, including its impact on public safety and the environment, and
· Our ability to influence, control and mitigate the risk.
Analysis of our key risks allows us to assess the impact of disruption to our business objectives, the probability of this occurring and highlight critical areas that require management attention.
Risk planning and control
We assign each identified and assessed risk to a risk owner who is responsible for controlling, managing, and developing a robust and effective plan to reduce or mitigate the risk. Risk owners are required to report to the GRMSC or, as appropriate, the Board on specific risks. Either may ask for additional information or request an audit to provide additional assurance.
Risk reduction involves taking early management action to remove or reduce identified risks before they can affect the bid, programme, project or contract. We consider options to eliminate, reduce or control the risks as part of the risk identification and analysis process.
Risk mitigation involves us identifying appropriate measures, including contingency plans, to reduce the severity of the impact of the risks, should they occur. This includes developing crisis management plans in response to risks whose potential impact warrants a specific management process.
The SMS requires every contract to develop a risk management plan reflecting assessed risks and supported by appropriate measures and contingency plans to mitigate the impact of the risks.
Risk monitoring
Changes in our external environment, internal structures and management decisions may all affect the nature and extent of the risks to which the Group is exposed.
Our risk monitoring process therefore regularly monitors changes to our business and the external environment, to ensure that we have sight of and respond appropriately to reduce the impact of emerging risks.
Managing and mitigating risk
Our risk management process enables us to understand our operational risk profile. Operational risk can never be eliminated; risks are necessary to achieve targeted benefits (risk management informs decisions). However, while risk is necessary, we minimise the probability and impact of threats through the consistent implementation of the SMS, ensuring that appropriate infrastructure, controls, systems, staff and processes are in place.
Some of our key management and control techniques defined in the SMS are set out below:
· Our operating processes fully reflect the principles of clear delegation of authority and segregation of duties
· Our GRMSC meets quarterly to ensure that risks, internal control and business assurance are effectively managed and reviewed
· Comprehensive business review processes ensure we meet customer expectations, regulatory requirements and performance criteria, including operational effectiveness, investment returns, cash flow requirements and profitability
· We monitor and regularly review key performance indicators. These include analysis of business performance and variances from plan, occupational health and safety incidents, and error and exception reporting
· Selective recruitment, succession planning and other human resource policies and practices ensure that staff skills are aligned with Serco's current and future needs
· We maintain insurance policies against losses arising from circumstances such as damage or destruction of physical assets, theft, legal liability for third-party loss and professional advice. We review the adequacy of our insurance cover at regular intervals
· Our Investment and Ethics Committee meets regularly to ensure appropriate governance and the management of risk associated with larger or higher risk bids, acquisitions, disposals and areas of significant capital expenditure
· We apply robust project management and change implementation disciplines to all major projects including new contract transitions, acquisitions, new technology applications, change programmes and other major initiatives
· The Directors' Report describes our approach to health, safety and environmental protection. Qualified and experienced staff in each business unit provide advice and support on health, safety and environmental issues and undertake regular audits
· We have safety specialists in our aviation, rail, defence, nuclear and marine businesses that report to the Board, and maintain and further develop the very high standards expected in these industries
· The Chief Information Officer is responsible for ensuring that systems and processes are in place to ensure the confidentiality, integrity and availability of sensitive information and the associated information systems that support our business activities
· Our Investment and Ethics Committee has responsibility for the review of ethical issues that may arise from our current and future activities
· The Company Secretary manages a confidential reporting service, to which staff can report illegal, dangerous, dishonest or unethical activities. This process was enhanced and re-launched at the end of 2010
· We have crisis and business continuity plans in place to manage crisis events, both within Divisions and the Group
· All Divisional CEOs are required to self certify their Division's compliance to the SMS at half and end of year points, and
· As mandated by the SMS, throughout the business lifecycle of all our bids and contracts independent reviews (such as Black Hats and Gate Reviews) are required to provide a minimum standard of assurance and governance across the business.
Independent risk function
While line managers are responsible for identifying and managing all risks within their risk appetite and tolerance limits, in line with the policies and standards set within the SMS, the Group Risk and Programmes team (reporting to the Group Director, Risk and Acquisitions) is responsible for the development and implementation of risk management policy, strategy and governance. In addition to this the team manages the Group risk profile and provides risk management oversight, assurance and challenge to the business.
Internal audit
An integral part of risk management is assurance that the controls identified to manage risks are operating and effective. Internal audit is responsible for reviewing the design and operation of risk management processes and controls operated across the Group, providing objective assurance around the effectiveness of the Group's system of internal controls.
The Group Head of Internal Audit is responsible for delivery of the internal audit programme, ensuring that it is risk based and aligned with the overall strategy of the Group. Internal audit is delivered at Group and Divisional levels, using a mix of outsourced and in-house resources, with each Division holding an Audit and Risk Committee which reviews the results of relevant internal audits three times a year. The findings of the overall internal audit programme are reported directly to the Group Audit Committee.
In addition to internal audit, many parts of our business are subject to other reviews of their controls by third parties, including industry regulators, ISO Standards, customers and other external audits. This third-party scrutiny significantly increases the scope of independent assurance conducted across the Group each year.
The Board confirms that the actions it considers necessary are being taken to remedy the failings and weaknesses which it has determined to be significant from its review of the internal controls across the Group. The Board confirms that it has not been advised of material weaknesses in financial reporting as part of the review of the internal control system.
Principal risks
The Group Risk Register identifies the principal risks facing the business as a whole, including those that are managed directly at Group level. They are managed through a formal process.
The Group's key stakeholders include, but are not limited to, shareholders, customers, suppliers, staff, trade unions, government, regulators, banks and insurers. The way we operate as a responsible company recognises the interests of the community in areas such as social, environmental and ethical impact, as described under Corporate Responsibility on pages 66 to 77.
The most significant risks relate to our reputation, and to operational and financial performance, which are all direct threats to the achievement of our strategic objectives. Summarised on the following pages are the key risks we have identified that could have a material impact on our reputation, our operations or our financial performance. A number of our other risks reflect social and ethical issues.
We also have material investments in a number of joint ventures, where we have joint control over management practices. Our representatives within these companies ensure that their processes and procedures for identifying and managing risk are appropriate and that internal controls exist and are regularly monitored.
We keep reputational and emerging risks under active review and inform the Board of changes. Emerging risks cover longer-term risks that could represent a threat to our activities but which are not yet sufficiently defined to be included as active risks.
Group risks and mitigating actions overview
Market risks
Risk | Significant change in political environment (e.g. government policies, expenditure levels and budgetary constraints)
|
Impact |
Mitigation |
|
|
As a major proportion of Serco's customers are governments and governmental agencies, a substantial part of the business is dependent on government policies, budget priorities and regulatory or political constraints. In particular those regarding maintaining and improving public infrastructure, which could have a significant impact on the size, scope, timing and duration of contracts and orders under them and therefore on the level of business that we may win. As such, these businesses are susceptible to changes in government, government policy, budget allocations and the political environment, primarily in the UK, Australia and the US. Any reduction in such government expenditure and funding could result in a suspension, cancellation, termination or non-renewal of contracts. Revenues may also be adversely affected by changes to the UK government's, US government's or Australian government's policy in respect of outsourcing.
|
· Reduction in market opportunities · Changes to terms of existing or new contracts · Failure to meet growth or profit expectations
|
· Business strategy · Diverse business across geographies and markets · Dedicated teams regularly monitor the political landscape and government activities, reporting on government policy changes and the political environments where we are operating. We continue to develop expertise and capability in new markets and geographies |
Risk HTMLPIPESYMBOL Failure to win a strategic or significant bid or rebid
|
Description |
Impact |
Mitigation |
|
Failure to win material bids or renew material contracts could restrict growth opportunities for the future or have an adverse impact on Serco's business, financial condition and results of operations. Further, a significant number of Serco's contracts with the UK government, the US government and other public sector customers, including renewals and extensions of previous contracts, |
· Reduction in market opportunities · Changes to terms of existing or new contracts · Failure to meet growth or profit expectations |
· Business strategy · Diverse business across geographies and markets · Dedicated teams regularly monitor the political landscape and government activities, reporting on government policy changes and the political environments where we are operating. We continue to develop expertise and capability in new markets and geographies |
Operational risks
Risk HTMLPIPESYMBOL Any harm to the Group's reputation could adversely impact business
|
Description |
Impact |
Mitigation |
|
The Group is dependent on maintaining its reputation in each jurisdiction in which it operates in order to maintain and grow its business. It is exposed to the risk |
· Failure to meet growth or profit expectations · Significant financial loss or cost overrun · Loss of contract revenue related to operations and service charges · Could impact share price · Inability to attract the human and financial capital necessary to grow or expand into new markets · Damage to reputation resulting in loss of existing or new business · Impact on strategic objectives |
· Governance structure managed through Investment and Ethics Committee, Programme and Project Boards, and Divisional · An effective risk, issues and controls structure identifies potential reputational impacts allowing effective management and oversight · Customer engagement and employee engagement strategies · Relationship management |
Risk HTMLPIPESYMBOL Failure of significant programmes, including operating within agreed fixed costs
|
Description |
Impact |
Mitigation |
|
Serco has a number of complex programmes which it is contracted to deliver for the customer. These are often let on a fixed price basis irrespective of the actual costs incurred, and therefore if costs exceed the contract ceiling the Group may not be able to obtain full reimbursement. Further, some programmes require delivery in accordance with specified milestones on agreed dates. Significant adverse financial consequences can be imposed where milestones are not met or a programme is not delivered on time. The length and complexity of such programmes mean that management estimates can be particularly difficult to make and could turn out to be inaccurate. |
· Failure to meet growth or profit expectations · Significant financial loss or cost overrun · Loss of contract revenue related to operations and service charges · Damage to client relations and wider reputation resulting in loss of existing or new business · Impact on strategic objectives |
· Robust bidding and contract review process including financial, technical and commercial reviews · Governance structure managed through Investment and Ethics Committee, Programme and Project Boards, and Divisional · Robust cost accounting · Business strategy and targets · Regular review and monitoring of Risk Registers · Gate reviews and formal sign-off process · Quality management systems |
Operational risks (continued)
Risk HTMLPIPESYMBOL Major accident or incident
|
Description |
Impact |
Mitigation |
|
It is possible that a major catastrophic event, such as a major train derailment or air traffic accident, could occur at one of the projects in relation to which Serco has provided professional design, construction, engineering or support services. Such a catastrophic event could result in the personal injury or death of one or more employees of the Group, employees of other subcontractors working |
· Deaths or serious injuries to employees or third parties · Major environmental damage · Severe financial impact (fine by regulators, suspension of operating licence, compensation, clean up, etc.) · Loss of business (disqualification from future tenders, contract termination, etc.) · Contract and business external accreditations withdrawn · Significant media attention and future scrutiny · Criminal and civil action against the Group or individuals |
· Robust management systems subject to external and regulatory scrutiny and oversight · System certification and regulatory approval · Formal oversight through GRMSC, Health, Safety and Environment Oversight Group, Divisional and internal boards · Crisis management and business continuity plans in place · Insurance · A clear and comprehensive HSSE Strategy including annual and long term objectives, regularly reported and governed, drives a proactive safety management culture across the business · Formal assurance structure operating within defined competencies · Staff induction and training · Effective Quality Management Systems embedded within the business |
Operational risks (continued)
Risk HTMLPIPESYMBOL Major information security loss or breach
|
Description |
Impact |
Mitigation |
|
Serco must comply with restrictions on the handling of sensitive information (including personal and customer) and provide for secure transmission of such information. This is a heightened risk, particularly with respect to government contracts, due to the sensitive and confidential nature of government data. Despite controls to ensure the confidentiality of such information, Serco may breach restrictions or be subject to cyber attacks (e.g. from computer programs or hacktivist groups) that may attempt to penetrate its network security and misappropriate confidential information. |
· Loss of service to our customers · Damage to reputation resulting in loss of existing or new business (disqualification from future tenders, contract termination, etc.) · Impact on strategic objectives · Costly to rectify and potential for dilution of shareholder returns · Criminal and civil action · Contract and business external accreditations withdrawn · Significant media attention and future scrutiny |
· Security and information systems policies, systems and embedded governance structure · Think Privacy campaign to raise staff awareness, provide training, promote incident reporting and strengthen control processes · Cyber Security Contract Risk Assessments · Cyber Resilience of Enterprise Applications · User Management, Multifactor Authentication, User Awareness · Regular risk reviews · ISO 27000 certification |
Risk HTMLPIPESYMBOL Major IT failure or prolonged loss of critical IT systems
|
Description |
Impact |
Mitigation |
|
The IT Strategy is focused on standardising common processes, establishing common business systems and enabling ways of working by providing and embedding tools that support what we do. Within this the Group has defined enterprise applications. These are key information technology-based business systems within Serco. They include SAP for Finance, Procurement and Human Resources, Payroll, Risk Management, Safety Assurance, email, intranet and Nimbus Control for Process Excellence systems. Therefore failings in the systems have the potential to seriously impact the management of the business. |
· Damage to reputation resulting in loss of existing or new business · Impact on strategic objectives · Inability to meet contract requirements or perform core business processes · Cost incurred to rectify and potential for dilution of shareholder returns · Significant media attention and future scrutiny |
· Information systems policy, systems and embedded governance structure · Data recovery capability · Design out single points of failure · Server and system performance monitoring and reporting · Capacity management · Data back-up and business continuity plans in place |
Governance risks
Risk HTMLPIPESYMBOL Significant incident of bribery or corrupt practice
|
Description |
Impact |
Mitigation |
|
Serco operates in international markets which brings with it inherent risks including bribery and corruption, particularly in certain developing nations. Serco operates in a number of countries which are recognised as having a higher bribery and corruption risk. Increasing legislation significantly increases the consequences of bribes and other corrupt practices. |
· Legal action and fines against the Group · Debarment from tender lists · Damage to reputation resulting in loss of existing or new business · Significant media attention and future scrutiny |
· Policies and systems · Code of Conduct · Ethics Committee · Speak Up process · Ethics and compliance programme and training · Risk assessment · Third-party contracts |
People risks
Risk HTMLPIPESYMBOL Failure to build depth & capability of leaders 'Fit for Future'
|
Description |
Impact |
Mitigation |
|
The success of the Group depends on the efforts, abilities, experience and expertise of the senior management teams and on recruiting, retaining, motivating, effectively communicating with and developing highly skilled and competent people at all levels of the organisation. There can be intense competition for personnel from other companies and organisations and there may at any time be shortages in the availability of appropriately skilled people at all levels within Serco. Further, the Group cannot guarantee the retention of such key executives and technical personnel. The failure of the Group to retain and / or recruit additional or substitute senior managers and / or other key employees could have a material adverse effect on its business. |
· Risk of not achieving level · Increased cost in recruitment activity and time taken to fill roles · Instability and loss of business continuity · Dilution of brand and values · Reduced employee engagement through loss of compelling leadership · Strengthen competitors (loss of leaders to them) |
· People policies and systems, strategy and targets supported · Succession planning · Leadership model · Annual external (independent) remuneration review · Job structure and grading system · Talent database and leadership development programme · Employment engagement strategy, including annual staff survey |
Finance risks
Risk HTMLPIPESYMBOL The impairment of goodwill could adversely impact reported results
|
Description |
Impact |
Mitigation |
|
Goodwill accounts for just over one-third of Serco Group's recorded total assets as at 31 December 2012. Serco evaluates goodwill for impairment annually or more frequently when evidence of potential impairment exists. Any decrease in expected cash flows or deterioration in market conditions could require Serco to record impairment charges that could have a material impact on the financial position and results of operations. |
· Inability to meet profit expectations · Breach of financial covenants · Damage to reputation and shareholder confidence · Impact on strategic objectives |
· Internal board and governance structure · Strategic plans · Business plans · Business Lifecycle Governance process · Financial review and reporting |
Risk HTMLPIPESYMBOL Negative fluctuations in foreign currency exchange rates that are not effectively hedged
|
Description |
Impact |
Mitigation |
|
The international nature of Serco's business means it is exposed to fluctuations in foreign currency exchange rates in relation to various currencies, primarily the US Dollar, the Australian Dollar and the Euro, arising from the translation of earnings. In addition, some of Serco's bank debt is denominated in currencies other than pound Sterling. |
· Material effect on the Group's future results of operations and financial position |
· The Group hedges short-term transaction risks that are material in value · Management of translational risk by the part currency matching of borrowings with the net assets of overseas subsidiaries |
Risk HTMLPIPESYMBOL Negative fluctuations in interest rates
|
Description |
Impact |
Mitigation |
|
Historically, Serco has financed its operations partly through draw down of funding facilities. Adverse movements in interest rates could therefore impact profitability and net assets. |
· Inability to meet profit expectations and associated impact on net assets · Impact on competitiveness |
· Fixed rate debt instruments and interest rate derivatives that swap floating for fixed rates |
35. Related party transactions
Transactions between the Company and its wholly owned subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the Group and its joint venture undertakings are disclosed below, with the relevant proportion being eliminated on consolidation.
Trading transactions
During the year, Group companies entered into the following material transactions with joint ventures:
2012 2011
£m £m
Royalties and management fees receivable 2.3 1.5
Dividends receivable 80.6 64.3
82.9 65.8
The following receivable balances relating to joint ventures were included in the consolidated balance sheet:
2012 2011
£m £m
Current:
Loans 1.0 0.5
2012 2011
£m £m
Non-current:
Loans 2.6 3.2
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. Interest arising on loans is based on LIBOR, or its equivalent, with an appropriate margin. No guarantee has been given or received. No provisions are required for doubtful debts in respect of the amounts owed by the joint ventures.
Remuneration of key management personnel
The Directors of Serco Group plc had no material transactions with the Group during the year other than service contracts and Directors' liability insurance.
The remuneration of the key management personnel of the Group is set out below in aggregate for each of the categories specified in IAS 24 Related Party Disclosures:
2012 2011
£m £m
Short-term employee benefits 9.4 8.9
Post-employment benefits 0.4 0.6
Share-based payment expense 1.8 2.8
11.6 12.3
The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee (2012: 17 individuals, 2011: 18 individuals).
This information is provided by RNS
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