Final Results

RNS Number : 1310E

Serco Group PLC

26 February 2020

2019 full year results

26 February 2020

Serco Group plc

LEI: 549300PT2CIHYN5GWJ21

Year ended 31 December	2019	2018	Change at reported currency	Change at constant currency
Revenue⁽¹⁾	£3,248.4m	£2,836.8m	+15%	+13%
Underlying Trading Profit (UTP)⁽²⁾	£120.2m	£93.1m	+29%	+25%
Reported Operating Profit (ie after exceptional items)⁽²⁾	£102.5m	£80.5m	+27%	+22%
Underlying Earnings Per Share (EPS), diluted⁽³⁾	6.16p	5.21p	+18%	+15%
Reported EPS (ie after exceptional items), diluted	4.21p	5.99p
Dividend Per Share (recommended re-instated)	1.0p	n/a
Free Cash Flow⁽⁴⁾	£62.0m	£16.3m
Adjusted Net Debt⁽⁵⁾	£214.5m	£173.2m
Reported Net Debt⁽⁶⁾	£584.4m	£188.0m

Rupert Soames, Serco Group Chief Executive, said: "The results for 2019 represent the first year of revenue growth since 2013 and the second successive year of growth in profits, and we expect continued strong progress in 2020. 15% revenue growth of which 8% was organic, 29% underlying profit growth and £5.4bn of order intake compares favourably with a market growing at 2-3%. Free Cash Flow has increased significantly, and our leverage ratio is at the lower end of our target range. All this indicates that we have finally achieved escape velocity, leaving behind the gravitational pull of past mis-steps, and gives the Board confidence to recommend paying a dividend for the first time since 2014, which is an important milestone. We are immensely grateful to our committed and hardworking colleagues, our patient shareholders and our supportive customers who have helped us reach this point.

"The benefits of having a broad international presence, with over 60% of our revenues and 50% of our employees outside the UK, are once again evident. We have delivered double-digit organic revenue growth in both our North America and Asia Pacific Divisions, and demonstrated the ability to execute strategically important acquisitions such as NSBU in markets with premium rates of growth. But 2019 is also notable as being the first time since 2013 that revenues have grown in the UK.

"Perhaps the most significant aspect of 2019, however, was the record £5.4bn of order intake, representing 170% of annual revenues, and which resulted in our order book increasing to £14.1bn, an increase of around 40% over the last three years. This is the third successive year our order intake has exceeded our revenues, and underlines the confidence governments have in Serco's ability to deliver critical, sensitive and complex public services."

Highlights

· Revenue⁽¹⁾ of £3.2bn increased by 14.5%, comprising 8.2% organic growth, 4.8% contribution from acquisitions and 1.5% currency benefit. Very strong constant currency growth in Americas (+35%, of which +19% was organic) and Asia Pacific (+16%). UK & Europe (+5%) grew revenues for the first time since 2013; Middle East (-2%) did well in a difficult market.

· Underlying Trading Profit⁽²⁾ of £120.2m increased by £27.1m or 29% (25% at constant currency); the NSBU acquisition contributed £8.6m of the increase. The Group's Underlying Trading Profit margin increased by 40 basis points to 3.7%.

· Reported Operating Profit increased by £22.0m, £5.1m less than the increase in UTP as a result of the net impact of various non-trading items including £22.9m related to the conclusion of the SFO investigation and £9.6m related to the commercial settlement received from the MoD as a result of the Defence Fire and Rescue Project tender. Exceptional items included in Reported Operating Profit, at £23.4m, were £8.5m lower than the prior year.

· Onerous Contract Provisions (OCPs) have run off broadly as we expected, with the remaining liability now just £17m. We estimate the total value of OCPs will have been within 2% of the original £447m as at December 2014.

· Underlying EPS of 6.16p increased by 18%, reflecting the growth in Underlying Trading Profit, together with the benefit of the tax rate reducing from 26% to 25%, but with this partially offset by the increase in the number of shares following the Equity Placing in May 2019 to fund the Naval Systems Business Unit (NSBU) acquisition. Reported EPS in the prior year benefited from a number of non-underlying tax credits totalling £11.8m which did not recur in 2019.

· Free Cash Flow⁽⁴⁾ improved sharply to £62m (2018: £16.3m), due to the increase in underlying profits, neutral working capital movement and lower cash outflows on the residual OCP portfolio. The number of supplier invoices in the UK paid within 30 days increased to 86% (2018: 85%).

· Adjusted Net Debt⁽⁵⁾ at £215m increased over the year by £41m, as the £62m of positive Free Cash Flow was offset by the £55m of acquisition consideration not covered by the Equity Placing relating to the NSBU acquisition; in addition there was a £49m outflow related to exceptional items (2018: £19m).

· Leverage for covenant purposes was 1.17x; underlying leverage was 1.31x. Daily Average Adjusted Net Debt was broadly unchanged at £231m (2018: £219m).

· Acquisition of NSBU, a leading provider of ship and submarine design and engineering services to the US Navy that adds materially to the scale and capability of Serco's defence business, completed in August 2019. Integration progressing smoothly and the business has traded to plan. The acquisitions completed in 2018 of BTP Systems (deepening our satellite and radar capabilities) and of six Carillion health facilities management contracts (adding significant scale to our UK Health business) have performed in line with our expectations.

· Order intake was very strong at a record £5.4bn, representing around 170% of revenues; the three largest awards were for asylum accommodation and support services in the UK valued at £1.9bn, Prisoner Escort and Custody Services also in the UK valued at £0.8bn, and defence healthcare provision in Australia valued at £0.6bn; over 40% of the order intake comprised new business, and the balance was existing work being rebid or extended.

· Order book increased by £2.1bn to £14.1bn, predominately reflecting the strong order intake. Since the start of 2017 the value of our order book has increased by around 40%.

· The Pipeline of larger new bid opportunities closed 2019 at £4.9bn; it was £5.3bn at the start of the year, but reduced to £3.2bn at the half-year stage, reflecting in large part the very strong result of contract awards, followed by good progress in replenishing the pipeline during the second half of 2019.

· Revenue guidance for 2020 is £3.4-3.5bn, representing total growth of 6-8%, which assumes organic growth of around 4%, an acquisition contribution of 5-6% from the annualisation of NSBU, and a currency headwind (based upon recent rates⁽⁸⁾) of 2-3%. Underlying Trading Profit is expected to grow by about 20% to around £145m. This guidance is unchanged from that given at the Closed Period trading update issued on 12 December 2019⁽⁷⁾.

· The Board recommends restarting dividends, last paid to Serco shareholders in 2014, with a payment of 1.0p in respect of the 2019 financial year. Assuming this payment and an interim dividend for 2020 in line with our approach, Adjusted Net Debt guidance at the end of 2020 is approximately £200m, with leverage expected to be towards the lower end of our normal target range of 1-2x.

For further information please contact Serco:

Stuart Ford, Head of Investor Relations T +44 (0) 7738 894 788

Marcus De Ville, Head of Media Relations T +44 (0) 7738 898 550

Presentation:

A presentation for institutional investors and analysts will be held today at JPMorgan, 60 Victoria Embankment, London EC4Y 0JP, starting at 9.00am. The presentation will be webcast live on www.serco.com and subsequently available on demand. A dial-in facility is also available on +44 (0) 207 192 8000 (USA: +1 631 510 7495) with participant pin code 5370067.

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 2019 into Sterling at the average exchange rates for the prior year.

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

Year ended 31 December £m	2019	2018
Underlying Trading Profit	120.2	93.1
Include: non-underlying items
Contract & Balance Sheet Review adjustments and one-time items	3.6	23.6
Settlement received re DFRP tender	9.6	-
Trading Profit	133.4	116.7
Amortisation of intangibles arising on acquisition	(7.5)	(4.3)
Operating Profit before exceptional items	125.9	112.4
Operating exceptional items	(23.4)	(31.9)
Reported Operating Profit (after exceptional items)	102.5	80.5

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

(4) Free Cash Flow is the net cash flow from operating activities before exceptional items as shown on the face of the Group's Consolidated Cash Flow Statement, adding dividends we receive from joint ventures and associates, and deducting net interest and net capital expenditure on tangible and intangible asset purchases. The results for the year ended 31 December 2018 have been restated to include within Free Cash Flow the capital repayment of finance lease liabilities of £8.7m (2019 includes an equivalent £5.9m accounted for in accordance with IFRS16); as this was previously included beneath Free Cash Flow, there is no impact on net cash flow.

(5) Adjusted Net Debt has been introduced by Serco as an additional non-IFRS Alternative Performance Measure (APM) used by the Group. This measure more closely aligns with the covenant measure for the Group's financing facilities than Reported Net Debt because it excludes all lease liabilities including those newly recognised under IFRS16. The results for the year ended 31 December 2018 have been restated to exclude from Adjusted Net Debt £14.8m of obligations under finance leases accounted for in accordance with the previous standard for leases, IAS17 (2019 excludes an equivalent £8.9m accounted for in accordance with IFRS16).

(6) Reported Net Debt includes all lease liabilities, including those newly recognised under IFRS16. In accordance with the Group adopting the modified retrospective transition approach for IFRS16, comparative information such as net debt and other financial performance measures are not restated for the effect of this new accounting standard; instead, the cumulative effect of initially applying IFRS16 is reflected as an adjustment to opening equity at the date of initial application, which for Serco is 1 January 2019. A reconciliation of Adjusted Net Debt to Reported Net Debt is as follows:

As at £m	31 Dec 2019	31 Dec 2018
Adjusted Net Debt	214.5	173.2
Include: all lease liabilities accounted for in accordance with IFRS16	369.9	n/a
Include: lease liabilities accounted for in accordance with IAS17	n/a	14.8
Reported Net Debt	584.4	188.0

(7) Our outlook for 2020 is summarised as follows:

2020 outlook	Latest view	As at 12 December 2019
Revenue	£3.4-3.5bn	£3.4-3.5bn
UTP	~£145m	~£145m
Closing Adjusted Net Debt	~£200m	~£200m

(8) Our outlook for 2020 is based upon currency rates as at 31 January 2020. The rates used, along with their estimated impact on revenue and UTP are as follows:

Year ended 31 December	2020 outlook	2019 actual	2018 actual
Average FX rates:
US Dollar	1.31	1.28	1.34
Australian Dollar	1.95	1.83	1.78
Euro	1.19	1.14	1.13

Year-on-year impact:
Revenue	(£80-90m)	+£42m	(£65m)
UTP	~(£5m)	+£3.7m	(£4.0m)

Reconciliations and further detail of financial performance are included in the Finance Review on pages 22-38. 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 39-71. Further details regarding the impact of the adoption of IFRS16 are included in note 1 to the condensed consolidated financial statements.

Chief Executive's Review

Summary of financial performance

Revenue and Trading Profit

Reported Revenue increased 14.5% to £3,248m (2018: £2,837m); in accordance with IFRS this measure excludes Serco's share of revenue from joint ventures and associates of £395m (2018: £375m). Net currency movements increased revenue by £42m or 1.5%, whilst the net revenue contribution from acquisitions added £140m or 4.8% which splits approximately 1% from the Carillion health facilities management contracts that transferred to Serco between June and August last year and 4% from Naval Systems Business Unit (NSBU) which completed at the start of August 2019. At constant currency, the organic revenue growth was therefore £230m or 8.2%, accelerating from 4% in the first half of the year to 12% in the second half. The very strong growth rate in the second half included the start of the two particularly large contract awards (the AASC asylum accommodation and support contract in the UK, and the AHSC defence garrison healthcare services contract in Australia) and better-than-expected short-term volume related work, notably from our customers on US defence frameworks, the US Federal Emergency Management Agency (FEMA) contract, as well as certain Citizen Services operations in Australia. This has resulted in particularly strong organic growth in each of our Americas and AsPac Divisions, and, after several years of organic decline in the UK & Europe Division, we saw encouraging organic growth in the second half of 2019.

Underlying Trading Profit (UTP) increased by £27.1m or 29% to £120.2m (2018: £93.1m); excluding the £3.7m favourable impact of currency and the £1.2m increase from the adoption of IFRS16, the increase in UTP was £22.2m or 24%. Profit growth was driven by the Americas Division in the first half by the CMS contract, which experienced an unusually high volume of fixed-price variable work in the first few months of the year, and in the second half of the year from the NSBU acquisition. Profits in the UK benefited from the Carillion health facilities management acquisition; successful mobilisation of the AASC contract saw mobilisation costs, expensed largely in the first half of the year, being offset by its move into profitability in the second half. Profits also increased in the AsPac Division, again driven by its particularly strong organic growth performance, whilst profits fell in the Middle East Division, which largely reflects the significant reduction in the defence logistics MELABS contract as described a year earlier. The Group's Underlying Trading Profit margin was 3.7%, an increase of 40 basis points.

Trading Profit was £133.4m (2018: £116.7m), £13.2m higher than UTP, which reflects a net £3.6m credit in Contract & Balance Sheet Review and one-time items (2018: net credit of £23.6m), and £9.6m of the commercial settlement received by Serco regarding the Defence Fire and Rescue Project (DFRP) tender. As with prior years, both Trading Profit and Underlying Trading Profit benefited from losses on previously-identified onerous contracts being neutralised by the utilisation of Onerous Contract Provisions (OCPs); the £40.9m utilised on losses in 2019 (excluding IFRS16-related accelerated utilisation) was in line with expectations and lower than the prior year utilisation of £51.8m; we expect utilisation to drop further in 2020. The closing balance of OCPs now stands at £17m, compared to £82m at the start of the year and the initial charge of £447m taken at the end of 2014; we estimate the total value of OCPs will have been within 2% of that original estimate.

Reported Operating Profit and Exceptional Costs

Reported Operating Profit of £102.5m (2018: £80.5m) was £30.9m lower than Trading Profit as a result of, first, £7.5m (2018: £4.3m) of amortisation of intangibles arising on acquisition, and second, operating exceptional costs of £23.4m (2018: £31.9m). The latter includes the £22.9m for the fine and costs regarding the conclusion of the SFO investigation, restructuring programme costs of £12.8m (2018: £32.3m) related to the final steps in the implementation of the Transformation stage of our strategy, and a £19.3m non-cash release of a provision that had been originally charged in 2014 in relation to commercial disputes. After exceptional net finance costs of £nil (2018: £7.5m net credit) and an exceptional tax charge of £2.7m (2018: credit of £2.1m), total net exceptional costs were £26.1m (2018: £22.3m).

Financing and pensions

Pre-exceptional net finance costs were £21.8m (2018: £13.9m), with the increase driven by £6.9m (2018: £0.6m) of the interest component of leases as required under IFRS16, and £3.0m of non-cash credits no longer earned following the repayment of the Intelenet loan note in October 2018. On a daily average basis, Adjusted Net Debt was broadly unchanged at £231m (2018: £219m). Cash net interest paid was £22.2m (2018: £18.1m).

Serco's pension schemes are in a strong funding position, resulting in a balance sheet accounting surplus, before tax, of £54m (31 December 2018: £71m) on scheme gross assets and gross liabilities each of approximately £1.4bn. The opening net asset position led to a net credit within net finance costs of £2.1m (2018: £0.8m). For the Group's main scheme, the Serco Pension and Life Assurance Scheme (SPLAS), the purchase of a bulk annuity from an insurer, has the effect of fully removing longevity, investment and accounting risks for around half of all scheme members; the gross liability remains recognised on our balance sheet, but there is an equal and opposite insurance asset reflecting the perfect hedge established by the annuity.

Tax

The underlying effective tax cost was £24.4m (2018: £20.6m), representing an underlying effective rate of 25% (2018: 26%) based upon £98.4m (2018: £79.2m) of Underlying Trading Profit less net finance costs. The rate is higher than the UK statutory rate of corporation tax as there was no deferred tax credit taken against UK losses incurred in the year, and because it reflects the tax charges at locally prevailing rates in the international Divisions which tend to be higher than the UK's rate; these two factors are partially offset by the proportion of Serco's profit before tax generated by consolidating our share of joint venture and associate earnings which have already been taxed. The rate in 2019 is lower than the prior year reflecting the improvement in, and changing mix of, the Group's profitability; we expect the rate to continue at around 25%, which reflects our updated expectations for the proportions of profits coming from our UK and international operations, and the anticipated tax rates in each jurisdiction.

Tax on non-underlying items was a net charge of £3.0m (2018: credit of £11.8m), which includes an additional £0.8m (2018: £2.9m) of deferred tax asset in relation to UK losses to reflect the improved forecast of UK taxable income; the prior year credit related predominantly to deferred tax movements associated with changes in the valuation of the Group's defined benefit pension schemes. Total pre-exceptional tax costs were £27.4m (2018: £8.8m). Tax on exceptional items was £2.7m (2018: tax credit of £2.1m). The total tax charge was therefore £30.1m (2018: £6.7m) and net cash tax paid was £31.2m (2018: £10.6m), which includes the effect of tax paid in 2019 on non-underlying items that were credits in the prior year, as well as the timing of tax payments on account.

Reported result for the year

The reported result for 2019, as presented at the bottom of the Group's Consolidated Income Statement on page 39, is a profit of £50.6m (2018: £67.4m). This comprises Reported Operating Profit of £102.5m (2018: £80.5m), Reported Profit Before Tax of £80.7m (2018: £74.1m) and Tax of £30.1m (2018: £6.7m). The reported tax charge increased by £23.4m in 2019 as a result of increases in tax on non-underlying and exceptional items of £19.6m in addition to the £3.8m increase in tax on underlying profit.

Earnings Per Share (EPS)

Diluted Underlying EPS, which reflects the Underlying Trading Profit measure after deducting pre-exceptional net finance costs and related tax effects, increased by 18% to 6.16p (2018: 5.21p). The improvement reflects the 29% increase in Underlying Trading Profit and the lower tax rate, partially offset by the increase in net finance costs; EPS growth was tempered by the 6% increase in the weighted average number of shares in issue, after the dilutive effect of share options, to 1,199.0m (2018: 1,125.4m), with the increase largely as a result of the approximate seven-month effect of the additional Placing shares from 28 May 2019. Diluted Reported EPS, which includes the impact of the other non-underlying items and exceptional costs, was 4.21p (2018: 5.99p).

Cash Flow and Net Debt

Free Cash Flow improved to £62.0m (2018: £16.3m), which included the effect of the increase in underlying profits as described above as well as receipt of the £9.6m DFRP settlement. The cash outflows related to loss-making contracts subject to OCPs (principally the Caledonian Sleeper, COMPASS and PECS) reduced, reflected in the lower rate of provision utilisation of £40.9m (2018: £51.8m). Working capital movements were also broadly neutral, with a net outflow of just £0.1m compared to an outflow of £21.6m in the prior year. The Group did not utilise any working capital financing facilities in 2019 or the prior year, and has no such facilities in place. Average working capital days for the year were broadly unchanged; we are proud to say that 86% of UK supplier invoices were paid in under 30 days, up from 85% in 2018, and 96% were paid in under 60 days. Of other movements within Free Cash Flow to note, cash tax paid was higher but capital expenditure was lower, both of which include some timing effects.

Adjusted Net Debt at 31 December 2019 increased to £214.5m (31 December 2018: £173.2m); our key measure of Adjusted Net Debt excludes all lease liabilities, which now total £370m including those newly recognised under IFRS16, and the Adjusted measure more closely aligns with that for covenant purposes of our financing facilities. The increase of £41.3m includes the Free Cash inflow of £62m, offset principally by three sources of outflow: first, the £55m net outflow for acquisitions (2018: £31.3m), driven by the consideration payment of £184m for NSBU and the £139m of Equity Placing proceeds; second, £22.9m relating to the conclusion of the SFO investigation; and thirdly an outflow of £26.3m related to other exceptional items (2018: £19.2m). The closing Adjusted Net Debt of £214.5m compares to a broadly unchanged daily average of £231m (2018: £219m) and a peak net debt of £357m (2018: £292m), with this increase reflecting the timing of the payment of exceptional costs and acquisition consideration.

Reported Net Debt was £584m (2018: £188m), which includes the £370m (2018: £15m) related to leases. The increase in leases was largely related to the mobilisation of the 10-year AASC contract in 2019.

At the closing balance sheet date, our leverage for debt covenant purposes was 1.17x EBITDA (2018: 1.06x). This compares with the covenant requirement to be less than 3.5x. Our underlying net debt leverage, which excludes non-underlying items within covenant EBITDA such as the DFRP settlement and OCP releases, was 1.31x (2018: 1.23x), which is in the lower half of our normal target range of 1-2x underlying net debt to EBITDA.

The Revenue and Trading Profit performances are described further in the Divisional Reviews. More detailed analysis of earnings, cash flow, financing and related matters are described further in the Finance Review.

Dividend recommendation

When dividend payments were suspended in 2014, the Board committed to resuming dividend payments to Serco's shareholders as soon as it judged it prudent to do so. 2019 has been a year of very strong operational and financial performance. It is also the last year of significant outflows of cash related to OCPs and restructuring exceptional costs. Our expectations for 2020 are for further good progress in increasing underlying earnings and reducing financial leverage.

The Board is therefore recommending the payment of a final dividend in respect of the 2019 financial year. Our intention going forward is to weight dividend payments roughly one-third : two-thirds between interim and final payments. The Board considers it appropriate to reintroduce the dividend payments at a level of underlying EPS cover initially of around four times, equivalent to a payout ratio of approximately 25%. The Board is therefore recommending the payment of a final dividend in respect of the 2019 financial year of 1.0p. The dividend, subject to shareholder approval at the Annual General Meeting on 14 May 2020, would be paid on 5 June 2020.

A combination of this final dividend in respect of the 2019 financial year, together with an interim dividend in respect of 2020 aligned to the recommended dividend and outlook as described, would result in a cash outflow for dividend payments to shareholders of around £20m in 2020. This has been taken account of in our guidance for 2020 Adjusted Net Debt and leverage.

The Board will keep the dividend, including the payout ratio, under regular consideration as we continue to implement the growth stage of our strategy. This will consider views of the Group's underlying earnings, cash flows and financial leverage, together with the prevailing market outlook. The Board is mindful of the requirement to maintain an appropriate level of dividend cover, the potential alternative uses of capital to generate incremental value for shareholders, and the desire to maintain financial flexibility and a strong balance sheet that is considered appropriate for Serco's ability to deliver sustainable value for all of the Group's stakeholders.

Contract awards, order book, rebids and Pipeline

Contract awards

2019 was a record year for order intake, with almost all regions performing very strongly. At £5.4bn, order intake represented a book-to-bill ratio (the relationship between orders received and revenue recognised) of around 170%, and 2019 was the third year in succession that the book-to-bill ratio exceeded 100%, which helped to drive our order book to record levels. There were over 50 contract awards worth more than £10m each, but there were four particularly large awards which accounted for approaching two-thirds of the intake for the year.

In the UK, we won our largest ever contract, being an estimated £1.9bn over 10 years for AASC (providing asylum accommodation and support services). As previously set out, the AASC contracts are particularly significant, as they replace the COMPASS contracts which had been incurring losses (offset in the P&L by the utilisation of the OCP) of around £15-20m on average per year for the last five years. Under the new AASC contracts, we did not retain the Scotland & Northern Ireland region, but gained the much larger Midlands & East of England region, whilst retaining our other previous COMPASS region of the North West; as a consequence, we are now the largest provider of asylum seeker accommodation in the UK. Given our past experience, we also bid the regions at prices which we believe should allow us to make a fair return. The Group's second largest contract award for the year was also in the UK, where the UK Ministry of Justice (MoJ) selected Serco to continue operating the Prisoner Escort & Custody Services (PECS) in a contract valued at £0.8bn over 10 years. Similar to COMPASS/AASC, this is a successful rebid of a contract previously incurring losses that were being offset by an OCP, and also similar to AASC in that Serco was selected to provide these sensitive and demanding services over a significantly increased geographical area.

The next two largest contract awards were in Australia. Serco won a new AU$1.01bn (around £560m) contract over an initial six-year term to provide health services personnel to the Australian Defence Force at garrisons across the country, working as a sub-contractor to BUPA. We also secured a two-year extension for immigration services with an estimated value of £0.4bn.

We have not included within our order intake the contract to continue operating the Northern Isles Ferry Services, which was announced by the customer in September 2019 and has an estimated total contract value of £450m, as we have not yet signed the contract due to a procurement challenge by the unsuccessful bidder. In early February 2020 the Scottish Government announced that all barriers to the award of the contract had been resolved, and that signing the definitive contract is anticipated to occur in the coming months.

Other notable contract awards included, in the UK & Europe Division: rebid and expansion of our work on the Skills Support for the Workforce Programme; a new environmental services contract with the Royal Borough of Windsor and Maidenhead, together with numerous other contract extensions for similar services; extending defence support contracts for the UK MOD and the US Air Forces in Europe; and securing our contact centre operations for Companies House and our support services to the European Organisation for Nuclear Research (CERN).

Americas had a strong year of order intake, including: a new win for field office services to the US Pension Benefit Guaranty Corporation worth up to $200m; extending work we perform for the Federal Retirement Thrift Investment Board (FRTIB); support to transitioning military service members valued at $95m; an $82m award for NexGen IT solutions US Air Force Civil Engineering; increased task orders on ship and shore modernisation and hardware frameworks totalling over $250m as well as those for our support services to the Federal Emergency Management Agency (FEMA) totalling over $100m; and the acquired businesses of NSBU and BTP Systems also achieved pleasing contract awards as referred to in the Acquisitions section below.

In AsPac, a new AU$115m contract to operate the Adelaide Remand Centre on behalf of the South Australia Department for Correctional Services was won, we extended our contract for South Queensland Correctional Centre and successfully rebid our contract for traffic camera services in the State of Victoria. In the Middle East, we signed the contract extension to continue operating the Dubai Metro, as well as extensions for air traffic control services in Dubai and Iraq, several facilities management awards in Abu Dhabi, and a new contract for public infrastructure advisory services for Mashroat in Saudi Arabia.

Of the total order intake, over 40% comprised new business, with the balance represented by the value of rebids and extensions of existing work. Reflecting the scale of the AASC and PECS awards, around 55% of order intake came from the UK, with the remaining 45% from customers of our Americas, AsPac, Middle East and continental European businesses.

Bids for new work that were unsuccessful in the year included the defence deployable health opportunity in Australia, the Eastern Harbour Crossing and the Tsing Ma Control Area transport operations in Hong Kong, and environmental services and health facilities management tenders in the UK and AsPac. Of existing work, the largest loss was for the Scotland & Northern Ireland region of the COMPASS contract, however this was more than offset by winning the new larger region of the Midlands & East of England, whilst keeping our existing North West of England region. The next largest rebid loss was that for transport management of the Tsing Sha Control Area in Hong Kong which had annual revenue of around £20m, equivalent to around 0.6% of the Group overall; as this was an onerous contract it does not impact UTP. The next two largest rebid losses each had annual revenue of £10-15m, which were the Cleveland Clinic healthcare facilities management contract in Abu Dhabi and traffic management services to the US state of Georgia Department of Transportation.

The win rate by value for new work, which has been 20-25% for the last four years, increased to around 40% particularly as a result of the value of the new AASC Midlands & East of England region and the new Australia defence health contract. The win rate by value for securing existing work was around 65%, which is lower than the 75-90% trend in recent years, but which is reflective of losing the existing Scotland COMPASS region; if the Scotland COMPASS region were excluded, the win rate by value for existing work would have been over 90%. Win rates by volume were over 50% for new bids and over 90% for rebids and extensions.

2019's £5.4bn of order intake was an exceptional performance. However, in our business, order intake is lumpy, and we expect in 2020 that order intake will be significantly lower than that which we saw in 2019.

Order book

Driven by the very strong order intake, the Group's order book closed the year at an estimated £14.1bn, up by £2.1bn versus the £12.0bn at the start of 2019. The order book takes into account any required changes in assumptions for existing contracts including currency movements, as well as the addition through the acquisition of NSBU which has visibility of around $700m of future revenue but only $200m is taken into the order book as the balance is unexercised options. This order book definition is therefore aligned with the IFRS15 disclosures of the future revenue expected to be recognised from the remaining performance obligations on existing contractual arrangements. It is worth noting that as it excludes unsigned extension periods; the £14.1bn would be £15.3bn if option periods in our US business were included; as option periods have always tended to be exercised in our US business, we do include these in our assessment of order intake, but in accordance with IFRS15 we do not include them in the order book until they are exercised. Furthermore, the order book definition excludes our share of expected revenue from contractual arrangements of our joint ventures and associates which would add a further £1.5bn if included within our order book, driven by the current pricing period of the AWE operations and the Merseyrail franchise.

There is £2.6bn of revenue already secured in the order book for 2020, equivalent to around 75% visibility of our £3.4-3.5bn revenue guidance; the 'gap' in visibility is typically closed by our US business receiving the exercise of contract option periods and through short-term task order work on framework contracts, together with the necessary securing of contract extensions or rebids across the rest of the Group.

Rebids

As we look ahead the customary three years through to the end of 2022, across the Group there are over 70 contracts in our order book with annual revenue of over £5m where an extension or rebid will be required, representing current annual revenue of around £1.5bn in aggregate or over 40% of the Group's 2020 revenue guidance. The proportion of revenue that requires securing at some point over the next three years is normal given our average contract length of around seven years (or approximately ten years on average on a revenue-weighted basis, as larger contracts typically have longer terms); at the start of 2018 the three-year forward rebid value was £1.4bn and at the start of 2019 it was £1.2bn. Contracts that could potentially end at some point before the end of 2020 have aggregate annual revenue of around £300m, though none individually exceed £50m. In 2021, the aggregate annual value of contracts due for extension or recompete is currently around £800m, with this including our operations for the Dubai Metro and Fiona Stanley Hospital in Australia, each of which account approximately for 3% of Group revenue. In 2022, the aggregate annual revenue due for extension or recompete at some point in that year is around £400m; this includes the Australian immigration services contract due to end in December 2021 unless the option for a further extension is exercised or a rebid is won, and which currently accounts for over 5% of Group revenue.

Pipeline

As we have previously described, Serco's measure of Pipeline is probably more narrowly defined than is common in our industry; it was originally designed as an indicator of future growth and focuses on bids for new business only. As a consequence, on average over the last five years, less than half of our achieved order intake has come from the Pipeline. It measures only opportunities for new business that have an estimated Annual Contract Value (ACV) greater than £10m, and which we expect to bid and to be awarded within a rolling 24-month timeframe; we cap the Total Contract Value (TCV) of individual opportunities at £1bn, to attenuate 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 individual task orders into account. It is thus a relatively small proportion of the total universe of opportunities, many of which either have annual revenues less than £10m, or are likely to be decided beyond the next 24 months, or are rebids and extensions.

On this definition our Pipeline stood at £4.9bn at the close of 2019. At the beginning of 2019 it was £5.3bn, however, as we noted at the time of reporting the results for the 2018 financial year back in February 2019, we had already won in the first month of the year the two largest opportunities in this Pipeline which reduced it by £1.7bn. Other wins, losses and a small number of removals due to opportunities no longer meeting our definition reduced the Pipeline further, such that it stood at £3.2bn at the half-year stage. With a number of opportunities maturing to the stage where they meet our Pipeline definition, together with our ongoing Business Development progress to reload the Pipeline with new opportunities, we therefore saw the Pipeline increase in the second half of the year. The closing position consisted of around 30 bids that have an ACV averaging approximately £30m and a contract length averaging around six years. The UK & Europe and Americas Divisions each represent around 40% of the Group's pipeline, with the AsPac and Middle East Divisions the balance.

As we have noted before, in the services industry in which Serco operates, pipelines are often lumpy, as individual opportunities can be very large, and when they come in and out of the Pipeline they can have a material effect on reported values. Whilst the second half of 2019 did produce an expected increase in the Pipeline, and market conditions may over time become more favourable, it does not particularly support that Pipeline progress is either 'straight line' nor strongly predictive of future revenues.

Going forward, Serco will change its Pipeline definition to no longer exclude opportunities for new business that have an estimated ACV smaller than £10m. At around £1.6bn, smaller opportunities in aggregate are a significant component of the Pipeline and potential growth, and likely to be increasingly so given the use of task orders under framework contracts; the Pipeline on this basis therefore increases from £4.9bn to approximately £6.5bn.

Operational progress, transformation, innovation and people

We have an ambition to be the best-managed business in our sector. Achieving this will require investment in people, processes and systems. Each are described below.

People

Serco is a business that provides people-enabled public services. In nearly all our contracts, what government customers are buying is the service and expertise of people who are knowledgeable, disciplined, reliable, committed to delivering public services, appropriately paid and well led and managed. It therefore is central to our ability to deliver effectively to our customers that our colleagues within the business feel engaged.

Since 2011, Serco has carried out an employee survey every year, to which a large majority of the eligible workforce respond - around 27,000 people in 2019. The survey has about 50 questions covering everything from attitudes to health and safety, relationships with peers, respect for diversity and many other dimensions. We also test an "engagement score" which is a standard method of allowing companies to measure and benchmark from year to year what in olden times would have been called "morale". The progression of these scores in the run-up to the disastrous years of 2013 and 2014, and our subsequent recovery, tell the tale of Serco's turnaround as eloquently as any financial metrics:

	2011	2012	2013	April 2014*	Oct 2014*	2015	2016	2017	2018**	2019
Leaders	65	56	51	38	51	55	72	71	69	77
Managers	54	51	49	n/a	58	59	62	65	70	73
All employees	45	45	42	42	51	53	54	56	67	71

* in 2014 two surveys were done.

** in 2018, the methodology for calculating employee engagement changed, aligned to the new specialist third party provider of the survey. As reported at the time, it is not possible to adjust historic data to restate to the new methodology, but analysis performed by the new provider in 2018 indicated that the engagement level for that year was broadly stable on the previous year's score.

Two things shine out from these numbers: in 2011 and 2012, there was a huge difference in the experience as an employee of Serco to the experience of the 300 or so leaders. And in 2018 and 2019, not only are the scores much higher, they are much more tightly grouped, which says that the morale of the workforce is similar to that of managers and leaders. It is a good thing, and actually quite rare, to find such close correlation between leaders' and employees' morale in companies in our industry and with our scale.

One other fact worth mentioning: in 2019 we opened up the questionnaire to allow free-text answers to questions, with specific opportunities to make comments to the Board. To our amazement, the 27,000 respondents made some 50,000 individual comments, and ever since we have been trying to work out how we can digest that much feedback. Our solution has been to pick at random 500 of them - the good the bad and the ugly - and publish them. If anyone has any doubt as to the fact that Serco colleagues are a feisty, fearless and passionate lot who care deeply about their work delivering public services and about Serco, we need look no further than those comments.

Three other data points are worth mentioning as regards people: in 2019, we estimate that over 500,000 people applied to work for Serco, so it appears that our ambition to make Serco an employer of choice seems to be working. And in the last three years, from a senior management cohort of around 350, the rate of annual voluntary turnover has been around 3%. Finally, in 2019, we launched our first graduate recruitment scheme in the UK; bearing in mind that Serco's reputation, particularly in the UK, was so badly damaged a few years ago, it was gratifying to see that around 1,000 graduates applied, over 400 sat the aptitude tests, 45 attended a selection day, and we hired 14.

We continue to make significant investment in training. At a Group Level, we have continued to run our highly successful Serco Senior Management Programme. This course, exclusive to Serco, and designed and delivered by us and Saïd Business School, Oxford, has been an outstanding success, and so far some 11 courses, embracing 330 senior managers, have been run. In 2019, we added a specific Contract Managers' course, which also runs at Oxford. Within the businesses, Operational Excellence practices continue to be embedded across the business, with 2 Master Black Belts, 9 Black Belts and 154 Green Belts now supporting the 3,471 Yellow Belts that have been trained over the last four years. And in addition, our Divisional Chief Executives are encouraged to develop their own regional courses, and we have a plethora of different local courses available to management.

Systems and processes

However well trained the people, they need the tools to do the job, and these are in part processes, and in part systems. Significant progress has been achieved on our core IT systems; in 2018, we migrated our SAP system into the cloud, thereby avoiding the multi-million pound investment we would have had to have made in upgrading our IBM servers, and allowing us to vacate our largest server farm. In 2019, we followed this up by upgrading our SAP versions from the heavily customised 2009 release to the latest version. Few companies can claim to have their core ERP system both cloud-based and on current release. We also did extensive and complex work migrating a large number of specialist applications to the cloud, which has allowed us to close the second of our two large server centres in the UK in December. We will also be upgrading our core US ERP system to latest version in 2020.

Many contracts are supported by IT systems we have developed. In the US, we have used sophisticated Robotic Process Automation and Artificial Intelligence tools to transform the speed and efficiency of key processes on our CMS contract, which has allowed us to handle large variations in volumes of work without hiring and firing people. In the UK, using the latest workflow tools we have completely re-written the systems used to manage the AASC and PECS contracts. Similarly, in Australia, we have created a highly efficient set of systems which have allowed us to recruit and manage over 1,000 healthcare professionals to serve the Australian Defence Force; we have also developed and launched a combined online and call centre application which allows citizens to report non-urgent issues to the Victoria Police. So far, we have taken over 500,000 calls to this service.

A key priority for the Company is to improve the productivity and efficiency of our workforce, and to streamline processes such as payroll and absence management. Whilst this sounds straightforward, in a company employing over 50,000 people, many on terms and conditions inherited from previous employers, it has proved to be a major task, on which we have so far spent not far short of £10m. However, we are now rolling out workforce management systems, and have around 13,000 users on various levels of system, ranging from simple clock-in-clock-out time management, to full rostering, absence management and workforce planning.

In the critical area of cyber security we continue to invest, and regularly achieve the accreditations and standards demanded by our various government clients of their contractors. Our hopes that we would be able to reduce our IT costs as we shed old server farms and systems have been largely set to nought by the inexorable increase in investment we need to make on protecting our IT systems and data from those who would do us and our customers harm.

A major challenge for the IT team was the integration of around 1,000 NSBU employees onto our systems. Both Serco North America and NSBU work on highly classified contracts, and managing the task of migration whilst maintaining the appropriate security was complex. Rather than try and merge the two environments, we have given all NSBU employees new laptops which meet our security requirements and "lifted and shifted" all the NSBU data onto our proven Serco secure network.

The basic operational transformation of Serco is now largely complete in terms of HR, IT, Procurement and Finance. But much work still remains to bring systems and processes from "acceptable" up to "best-in-class" in our industry, and we intend to continue to invest, with the priority in 2020 being the creation of a new front-end to our HR systems outside North America ("Project Goldfinch") and beginning to use the analytics available in our workforce management systems to improve efficiency and productivity and create sustainable competitive advantage. A business which employs over 50,000 people, receives over 500,000 job applications and recruits over 15,000 new hires a year has the scale to be efficient.

Innovation does not only come from IT. The new Clarence prison in New South Wales, which opens in mid-2020, is a minor miracle of innovation and stands in sharp contrast to prisons built 20 years ago, let alone 100 years ago. Advances in materials - specifically strengthened glass, have allowed us to create a prison where there is barely a steel bar to be seen. Cells are airy and light, with large windows, likewise visiting areas; prisoners will have their own tablets which allow them to communicate with family, read books and watch films. And yet security is world class. Our new Caledonian Sleeper trains, running between Scotland and London, have replaced notoriously shabby 40-year old rolling stock, and have double beds and ensuite showers and toilets. Our Northlink ferries have introduced disabled changing and toilet facilities that transform the experience of disabled people who travel between the mainland and the Northern Isles. In Australia, we have developed an "e-order" mobile trolley system for ordering and tracking clinical pathology tests in Fiona Stanley Hospital, which other hospitals are considering adopting.

The Serco Institute

In 2019, we relaunched Serco Institute. Originally active in the early days of outsourcing as a way to encourage thinking and research about the delivery of government services, it had a reputation for providing interesting and challenging articles for those interested in public service delivery. After 2011 it was left to wither, and has been dormant for several years. However, at a time when the idea that private companies can deliver public services is being widely questioned, when citizens' expectations of public services continue to increase and evolve, and where over-aggressive risk-transfer has led in the UK to huge damage to the UK Government's supply chain, we feel that there is need for a forum in which ideas about the delivery of public services can be expressed.

We have brought together people to discuss ways of capturing social value in government contracts; we have commissioned independent research from Capital Economics on the economics of outsourcing, as well as work in conjunction with Kings College on the Whole Force approach for the British military; we have commissioned research on why rates of violence are so much lower in Australian prisons than UK prisons. The Serco Institute works to help governments understand what works in service delivery; what sets it apart from other think tanks is the international dimension, access to colleagues' deep operational expertise, and the live public service environment we have to conduct studies and run trials.

It is early days, but we believe that the Serco Institute can make a meaningful contribution to understanding what works, and why, in policy delivery, and disseminating knowledge of innovations in public services.

Acquisitions

Acquisitions can have an important role in sustainable value creation by bringing new capabilities and skills to our customers, enhancing returns for our shareholders and improving opportunities for the employees and business partners of Serco. Generally speaking, we regard acquisitions as higher risk than organic growth, so any candidates have to meet our stringent criteria of being both strategically and financially compelling. In 2019 we undertook a major acquisition (described below) in the form of NSBU, having made two much smaller 'bolt on' acquisitions of BTP Systems and the Carillion health facilities management contracts in 2018.

In May 2019, Serco announced that it had entered into a definitive Asset Purchase Agreement to acquire for $225m the Naval Systems Business Unit and a small number of related contracting entities (collectively, 'NSBU'), from Alion Science & Technology Corporation. NSBU is a leading provider of naval design, systems engineering, as well as production and lifecycle support services to the US Navy, US Army and Royal Canadian Navy. In the 12 months to September 2018 NSBU had revenues of $336m, which compares with Serco's North American Defence revenues in 2018 of $453m.

The acquisition marked an important step for Serco, materially adding to the scale and capability of our US defence business, and in particular to the maritime support segment. Prior to the acquisition, Serco employed some 6,000 people in North America, of whom 2,300 worked in defence, and Serco has been providing services to the US Navy for nearly 30 years. NSBU, which employs around 1,000 people, has brought world-class ship and submarine design, systems, and engineering services, production support and in-service sustainment capabilities, which are highly complementary to Serco's existing skills in ship modernisation, hardware integration and naval logistics.

As well as broadening capabilities, the acquisition increases significantly the scale of our international Defence businesses. Serco Group's revenue mix from Defence has increased from 30% in 2018 to around 35% of 2019 revenues on a pro forma basis, which is equivalent to approximately $1.7bn (£1.3bn), while the Americas Division as a proportion of the Group has increased from 20% in 2018 to around 29% on a pro forma basis, equivalent to approximately $1.4bn (£1.1bn).

The combined business is a top tier supplier of services to the US Navy, and increases our exposure to US Navy fleet expansion, which is one of the fastest-growing areas of public procurement. The US Navy has announced plans to increase the fleet from 280 to 355 ships by 2034, and we see a long-term and growing demand for the capabilities that the combination of Serco and NSBU will be able to provide.

The acquisition was financed through a combination of a new £45m debt facility together with an Equity Placing for cash of 10% of existing share capital that raised gross proceeds of around £140m on the day that the transaction was announced. As stated at the time of the acquisition, in 2020, NSBU is expected to contribute revenue of approximately $370m (£285m), EBITDA of $28m (£21m) and Underlying Trading Profit of $27m (£20m), resulting in transaction multiples of 0.6x, 8.1x and 8.3x, respectively. This includes the benefit of sharing Serco's fixed overheads across a wider revenue base in North America, which we expect to be worth $3-4m of UTP in the first year.

Serco received all necessary regulatory approvals, including customary Hart-Scott-Rodino ('HSR') and Committee on Foreign Investments into the United States ('CFIUS'), and completed the transaction at the start of August 2019. The integration has progressed well and the business has traded to plan. This has included good progress on contract awards such as the $162m contract to continue the support to the US Navy's Amphibious Warfare Program Office (PMS 377) and the $43m five-year contract to deliver design and engineering services for the US Navy's next generation of unmanned and small surface combatant vessels.

The businesses acquired in 2018 have also performed well in 2019, their first full year under Serco ownership. BTP Systems deepens the Group's satellite and radar capabilities, and it too has achieved good progress on contract awards such as successfully rebidding and expanding its largest operation with the $49m five-year contract for system engineering technical services on the Submarine High Data Rate (SubHDR) program. The acquisition of the six Carillion health facilities management contracts added significant scale to our UK health business, and has contributed to improved profit performance of the UK business in 2019.

Electronic Monitoring investigations

In 2013, the UK Serious Fraud Office (SFO) opened an investigation following allegations of overcharging on our Electronic Monitoring (EM) contracts for the UK Ministry of Justice (MoJ). The investigations related to these allegations were finally concluded with the announcement on 3 July 2019 that one of Serco's UK subsidiaries, Serco Geografix Ltd (SGL), had reached an agreement to a Deferred Prosecution Agreement (DPA); the agreement received final judicial approval the following day. The DPA related to three offences of fraud and two of false accounting committed between 2010 and 2013 associated with the reporting to the UK Ministry of Justice (MoJ) of the levels of profitability of Serco's EM contract. Investigations into allegations of wrongful billing which were the subject - understandably - of significant public and Parliamentary ire in 2013 were concluded without any criminal charges against Serco. An investigation by the Financial Reporting Council into misconduct by the Group's auditors at the time concluded with sanctions and penalties imposed against Deloitte and two of its audit engagement partners. Nothing in these matters impacts the previously reported statutory accounts of Serco Group.

The DPA concludes the SFO's investigation into Serco companies. As noted in the summary of financial performance above, and in note 7 to the financial statements on pages 56-57 regarding exceptional items, a £22.9m charge was taken to reflect the payment of the £19.2m fine together with £3.7m related to the SFO's investigation costs. The fine reflected a discount of 50% as a result of Serco's self-reporting and significant and substantial cooperation with the investigation. The SFO determined that no further damages or disgorgement of profit was payable to the MoJ because Serco had already fully compensated the Department in December 2013.

As noted in the announcements made in July, the SFO recognised the significant steps Serco has taken to reform itself, including the thorough implementation under independent supervision of a comprehensive Corporate Renewal Programme approved by the UK Government. This programme included over 80 actions and initiatives, and included rewriting our system of management control, as well as strengthening our bidding, contract management, internal audit and management assurance processes. Nobody who sat on the Board of Serco Group, or who was part of the Executive Management Team at the time these offences were committed, works for Serco today.

Whilst all financial liability is considered to now have been extinguished following the SFO's long and very detailed investigation into Serco companies, as well as the internal and customer-led investigations and reviews which preceded and ran in parallel with the SFO, Serco has subsequently received a claim seeking damages for alleged losses following the reduction in Serco's share price in 2013. This claim will be energetically and robustly resisted. As referred to in our contingent liabilities note on page 64, the merit, likely outcome and potential impact on the Group of any such claim is subject to a number of significant uncertainties.

Market outlook

Our approach to strategy planning is to conduct annual planning exercises, updating five-year forward plans, using internal resources. Every 4-5 years we conduct a root-and-branch review, with external help, of our markets. The last such review was in 2018, and in our 2018 results announcement, we set out our views on our markets. Other than a new and much stronger Government in the UK, and certainty that the UK will leave the EU, nothing has happened to change our previous assessment. In summary:

· We still believe that the Four Forces (relentlessly increasing demand for public services; expectations of higher service quality; structural fiscal deficits; electoral resistance to tax increases) will continue to encourage governments to seek innovative ways to deliver more services, of higher quality, and at lower cost (what we call 'More and Better for Less').

· In 2018 we estimated that the weighted average rate of growth across all our geographies and sectors was running at 2-3%, which was lower than the 5%+ seen several years earlier and which we think the market could revert to in the longer term; the reduction was in large part because of the conditions in the UK, which represents around 40% of our revenues. A year passing has not changed our view on market growth.

· The UK Government has been commissioning very little which is new in the world of public service outsourcing, as it deals with other priorities such as Brexit. New contracts have tended to be rebids of existing work, and whilst this may have increased Government spend, this will be because previous contracts were loss-making and on re-bid the Government is having to spend more; this represents an adjustment to the market value, not volume growth. Examples of such "value resets" would be the AASC and PECS tenders, which Serco won at increased value compared to the previous generation of contracts following years of losses. There have been some new opportunities in UK Central Government - notably new MOD programmes around training and fire services, the new prisons build programme and electronic monitoring for immigration applications - but they have been few and far between.

· In terms of life post-Brexit, the determination of the UK Government to "take back control" from the EU and to have its own standards and regulation is in effect insourcing regulation on a national scale. The UK will have to invest in rebuilding the regulatory capability that for the last 40 years has been outsourced to the EU. Supporting Government in this work may produce opportunities for companies like Serco in the longer term. The Government is also determined to simplify procurement regulations, which may make bidding a little less expensive and long-winded, and the new Playbook for outsourcing is a genuine attempt by Government to procure services contracts in a more effective and balanced way. Our direct exposure to Brexit is small as Serco neither exports nor imports to any significant degree; our business in continental Europe is conducted through long-established local subsidiaries, and we employ relatively few continental European citizens in the UK.

· Elsewhere, US defence spending, and particularly Navy procurement, is very robust, and the Department of Defense is busy trying to work out how they will fulfil the requirement, mandated by Congress with bi-partisan support, to increase the Navy from around 280 ships to 355. The startling increase in the valuations accorded to our quoted peers in the US in the last 12 months suggests that there is confidence that demand will remain strong; our view is that the rate of growth in US defence spending will likely slow, but that there is plenty of work to bid for, and the main constraint for us is availability of labour. If finding welders in the US is difficult at a time of 3.5% unemployment, finding welders with the security clearances required to work on sensitive defence contracts is doubly so.

· Australia remains a diverse market in that different states elect governments who have sharply different views about the private provision of public services. But overall, the competition amongst different administrations in the Commonwealth to provide improved services provides a healthy back-drop to the market, and the Federal Government remains a major purchaser of public services in defence and immigration.

· We are continuing to search for opportunities to grow our position in Europe; we have energetic and effective management who have won us our first European defence contracts, and we are hopeful we can grow our position.

· In Serco Middle East, we also have new management who are bringing new dynamism and ambition to the business. We have just signed a large and significant new contract with Dubai airport; our contract in Saudi Arabia with the Government to provide a framework and processes and procedures for asset and facility management across the whole of Government is of great significance to our position in that market. Whilst the Middle East will always be a volatile and difficult market, we believe that it will continue to grow.

· Although we have not yet seen any material impact on our business, we are closely monitoring the developing situation relating to the Coronavirus (COVID-19). As a major employer and provider of essential frontline services, the health and safety of our colleagues and service users is paramount, and supporting our government customers, frequently in very challenging situations, is at the heart of what Serco does. There is limited necessity for travel of our employees, and, given the nature of our services, we consider any supply chain risk to be small at the current time. We will continue to evaluate this situation and provide any update to our stakeholders at the appropriate time.

Guidance for 2020

At our Closed Period trading update on 12 December 2019, we provided our initial outlook for 2020 and remarked that we anticipated continued progress and further strong growth in line with analyst consensus expectations, taking into account the previously announced PECS transition costs and recent currency movements at that time. No element of guidance has changed since that date, except for more recent currency rates and to take into account the impact of the resumption of dividend payments to Serco's shareholders announced with our 2019 results.

Revenue in 2020 is expected to be £3.4-3.5bn, which would represent total growth of 6-8%. This assumes organic growth of around 4%. Within this, the performance of the Americas Division is more susceptible to the volumes of task order work, such as in our Ship & Shore modernisation operations and the FEMA contract, which have been particularly strong in 2019, and this creates a tough comparative for 2020. The acquisition of NSBU is expected to add to revenue growth by about 5-6%, representing the seven months through to the anniversary of completion of the transaction in August. If recent currency rates were to prevail throughout 2020, there would be a currency headwind across the Group of estimated at £80-90m or 2-3% of revenues.

Underlying Trading Profit is expected to be around £145m, which would represent growth of about 20%, and includes an assumed currency headwind of approximately £5m. 2020 will benefit from the full-year contribution of the AASC and AHSC contracts, as well as the annualisation of the NSBU acquisition. The transition of the recently awarded PECS contract is expected to cost around £4m in 2020, as set out in our announcement of 30 October, and, as previously indicated, we expect a significant reduction in contribution from the US CMS contract.

Net Finance Costs, as previously indicated, are expected to increase by approximately £5m, which includes the full-year impact of new property leases related to the AASC contract. The underlying effective tax rate is expected to continue at around 25%, which reflects the higher proportion of our pre-tax profits now coming from our international operations, particularly the US. The weighted average number of shares for diluted EPS purposes, fully annualising for the Equity Placing conducted in May 2019, is expected to be approximately 1,250m.

A broadly similar level of Free Cash Flow is anticipated in 2020, and closing Adjusted Net Debt is expected to reduce to approximately £200m, resulting in leverage towards the lower end of our normal target range of 1-2x; this guidance now includes an assumed outflow of around £20m to take account of the assumption for the resumption of dividend payments if approved by Serco's shareholders as described above.

Our outlook for 2020 is based upon recent currency rates. The rates used, along with their estimated impact on revenue and UTP, are shown in the table on page 3.

Serco gives unusually detailed forward guidance across a large number of key metrics, giving numbers rather than opaque words, so that investors and other stakeholders have a clear idea of what we think will happen at a given point of time. The disadvantage of this approach is that it is almost inevitable that events will prove us wrong on one or more metrics. We believe however that transparency and clarity is helpful, albeit that, as we always point out, our profits can be affected by small percentage changes in revenues and costs, as well as currency rates.

Summary and concluding thoughts

If 2018 marked an inflection point, where we moved into growth after five years of declining trading profit, 2019 can perhaps be described as the year we achieved escape velocity, being the point at which we were able to leave behind the gravitational drag of previous missteps, and become a "normal" company again. By "normal", we mean a company with growing revenues, profits and cash flows; producing good returns on capital; winning profitable business; executing well; valued by its customers; being a place people want to work; and a company which has enough confidence in its future to pay shareholder dividends. From fighting for survival, we can now spend more time plotting how to find new sources of growth; new ways to build sustainable competitive advantage; new ways to deliver public services. We also perhaps have a bit more space to think about how to adapt to a world where a company's approach to Environmental, Social and Governance (ESG) issues has become so much more important to many stakeholders than they were even twelve months ago.

Our position on ESG issues has, for many years, been a strong one, and is at the very heart of what we do: Serco has a clear social Purpose - "to be a trusted partner of governments, delivering superb public services, that transform outcomes and make a positive difference for our fellow citizens". Our Values of Trust, Pride, Innovation and Care are embedded deeply in our culture. We have a good track record of delivering high quality services to often vulnerable individuals on behalf of governments. We have strong governance and invest heavily in it as well as in the skills of our people. For the last five years, we have worked hard to make Serco a business which is both profitable and sustainable.

Notwithstanding this strong position, the fact is that some of the work governments are expected to do is controversial, and doubly so when they ask private companies to carry this work out on their behalf. Be it running prisons, or supporting immigration policy, or helping to deliver strategic nuclear deterrence the work we do is seen by some as wrong, either because people object in principle to private companies delivering public services, or because people object to the nature of the work government asks us to do. Furthermore, as a provider of public services, and paid for by taxpayers' money, we are regularly (and rightly) challenged to justify either the quality of service we deliver and / or the value for money we provide to the taxpayer.

In short, what we see as a strong Purpose - delivering social value by supporting governments in providing essential services to protect and support their citizens - others see as its antithesis. This presents a complex and confusing picture to investors and ESG analysts who are having to consider these matters ever more carefully, and part of our job is to help them make informed judgements. It is our responsibility to ensure that Serco continues to behave in a sensible, thoughtful, transparent and responsible way towards all its stakeholders, whilst making a positive difference to the lives of people who access or pay for public services.

Returning to the operational management of the business, one of the lessons of the last five years is that providing services to governments is not easy. By their nature, margins in the sector are slim, and risks are high; the relationship between risk and reward is asymmetrical. Being successful requires constant diligence, strong execution, an understanding that no deal is better than a bad deal, and a willingness to say no. On the other hand, unlike many other sectors, we can wake up each morning without the fear that our customers may not be able to pay their bills, or that demand for our services might evaporate, or that our services might be disintermediated by a start-up. And running these businesses does not require large amounts of capital, so slim margins can still deliver attractive returns.

The election of a Government in the UK - our largest market - with a large majority and a determination to deliver renewal, re-order and change is a good thing for our market as the more governments want to do, and the more they care about value for money, the more they need a strong private sector to help them. The UK Government will need to resolve how it wants to finance new infrastructure and other initiatives (PFI being, unjustly in our view, the scoundrel du jour) and how to balance expenditure on new assets with maintaining existing assets. In the NHS alone, there is a backlog of £6.5bn on maintenance, as funds are diverted from capital and maintenance budgets to day-to-day service delivery. But those who provide public services, be they civil servants or suppliers, tend to thrive when governments know what they want and have the determination to get it.

2020 will be a busy year for Serco: there are some very large contracts such as PECS, Clarence Correctional Centre and Dubai Airport Services which need to be transitioned; we will also be handing over the world's most advanced icebreaker vessel to the Australian Government. We need to rebuild our pipeline, denuded (the right way) by three years of strong order intake. And we need to continue to invest in making our internal systems and processes sing for their supper.

And we intend to stick with the strategy we developed in 2014, and which has so far served us well:

What we do: we are an international business providing people-enabled services, supported by best-in-class systems and processes, to governments.

How we do it: we use a management framework, as set out below.

Our Values: Trust, Care, Innovation, Pride

Our Purpose: to be a trusted partner of governments, delivering superb public services, that transform outcomes and make a positive difference for our fellow citizens.

Our Organising Principles: loose-tight, disciplined entrepreneurialism

Our Method: being the best-managed business in the sector.

Our Deliverables: high and rising employee engagement, margins of ~5%, growing revenues at ~5%.

We intend to continue working hard to deliver this strategy.

Rupert Soames

Group Chief Executive

Serco - and proud of it.

Divisional Reviews

Serco's operations are reported as four regional Divisions: UK & Europe (UK&E); the Americas; the Asia Pacific region (AsPac); and the Middle East. Reflecting statutory reporting requirements, Serco's share of revenue from its joint ventures and associates is not included in revenue, while Serco's share of joint ventures and associates' profit after interest and tax is included in Underlying Trading Profit (UTP). As previously disclosed and for consistency with guidance, Serco's Underlying Trading Profit measure excludes Contract & Balance Sheet Review adjustments (principally OCP releases or charges).

Year ended 31 December 2019 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	1,361.7	915.7	621.4	349.6	-	3,248.4
Change	+5%	+42%	+13%	+2%		+15%
Change at constant currency	+5%	+35%	+16%	(2%)		+13%
Organic change at constant currency	+2%	+19%	+16%	(2%)		+8%

UTP excluding the effect of IFRS16 adoption	40.6	79.2	31.1	13.6	(45.5)	119.0
Change	+4%	+73%	+16%	(37%)	+13%	+28%
Change at constant currency	+4%	+64%	+19%	(39%)	+13%	+24%

Margin excluding the effect of IFRS16	3.0%	8.6%	5.0%	3.9%	n/a	3.7%
Change	0bps	+150bps	+10bps	(240bps)		+40bps

Effect of IFRS16 adoption on UTP	(2.2)	2.9	0.2	0.3	-	1.2
UTP	38.4	82.1	31.3	13.9	(45.5)	120.2
Margin	2.8%	9.0%	5.0%	4.0%	n/a	3.7%

Contract & Balance Sheet Review adjustments	0.3	9.5	-	-	(6.2)	3.6
Other one-time items - DFRP settlement	9.6	-	-	-	-	9.6
Trading Profit/(Loss)	48.3	91.6	31.3	13.9	(51.7)	133.4
Amortisation of intangibles arising on acquisition	(1.2)	(6.2)	(0.1)	-	-	(7.5)
Operating profit/(loss) before exceptionals	47.1	85.4	31.2	13.9	(51.7)	125.9

Year ended 31 December 2018 £m	UK&E	Americas	AsPac	Middle East	Corporate costs	Total
Revenue	1,300.7	645.6	548.2	342.3	-	2,836.8

UTP	39.2	45.7	26.8	21.5	(40.1)	93.1
Margin	3.0%	7.1%	4.9%	6.3%	n/a	3.3%

Contract & Balance Sheet Review adjustments	12.4	(2.5)	13.7	-	-	23.6
Trading Profit/(Loss)	51.6	43.2	40.5	21.5	(40.1)	116.7
Amortisation of intangibles arising on acquisition	(0.5)	(3.2)	(0.6)	-	-	(4.3)
Operating profit/(loss) before exceptionals	51.1	40.0	39.9	21.5	(40.1)	112.4

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 22-38. 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 39-71. Included in the accompanying notes are the Group's policies on recognising revenue across the various revenue streams associated with the diverse range of goods and services discussed within the Divisional Reviews. The various revenue recognition policies are applied to each individual circumstance as relevant, taking into account the nature of the Group's obligations under the contract with the customer and the method of delivering value to the customer in line with the terms of the contract.

UK & Europe

Serco's UK & Europe Division supports public service delivery across all five of the Group's chosen sectors: our Justice & Immigration business provides a wide range of services to support the safeguarding of society, the reduction of reoffending, and the effective management of the UK's immigration system, and includes prison management as well as the provision of housing and welfare services for asylum seekers; in Defence, we are trusted to deliver critical support services and operate highly sensitive facilities of national strategic importance; we operate complex public Transport systems and services; our Health business provides primarily non-clinical support services to hospitals; and our Citizen Services business provides environmental and leisure services, as well as a wide range of other front, middle and back-office services to support public sector customers in the UK and international organisations across Europe, including the European Patent Organisation and the European Space Agency. On a Reported Revenue basis, Serco's operations in the UK represent approximately 39% of the Group's reported revenue, and those across the rest of Europe approximately 3%.

Revenue for 2019 was £1,361.7m (2018: £1,300.7m), an increase of 4.7%. Reported Revenue excludes that from our joint venture and associate holdings which largely comprise the operations of AWE, Merseyrail and Viapath. At constant currency, the growth in Revenue was also 4.7%, or £62m. The net contribution to revenue from the acquisition of the Carillion health facilities management contracts that transferred to Serco between June and August 2018 was £32m, therefore the organic growth was £30m or 2.4%. Within the organic growth, the largest contributor was from the expanded operations of Asylum Accommodation and Support Services Contracts (AASC) which replaced the previous COMPASS contracts in the second half of the year. Other examples of contracts with growth included those for the Skills Support for the Workforce (SSW) Programme and services to the Department for Work & Pensions (DWP), and the start of our new contract for environmental services for Hart District Council and Basingstoke & Deane Borough Council; there was partial offset to this growth from the early exits of the previously onerous contracts for East Kent Hospitals University NHS Foundation Trust and for the Anglia Support Partnership, and lower revenue in our European operations.

Underlying Trading Profit (UTP), excluding the effect of IFRS16 adoption, was £40.6m (2018: £39.2m), representing an implied margin of 3.0% (2018: 3.0%) and growth of 4% at constant currency. Trading Profit includes the profit contribution (from which interest and tax have already been deducted) of joint ventures and associates; if the £395m (2018: £374m) proportional share of revenue from joint ventures and associates was also included and if the £6.4m (2018: £5.7m) share of interest and tax cost was excluded, the overall Divisional margin would have been 2.7% (2018: 2.7%). The joint venture and associate profit contribution was modestly lower at £27.3m (2018: £28.1m), largely as a result of the start of a new three-year pricing period at AWE. On the AASC contracts, the transition costs that were expensed as they were incurred largely in the first half of the year were more than offset with the move to profitability in the second half. There was also improved profit performance in the healthcare business, driven by the Carillion acquisition.

Within UTP there was a reduced rate of OCP utilisation (excluding IFRS16-related accelerated utilisation) of £33m (2018: £47m), which served to offset the Division's loss-making operations, principally the Caledonian Sleeper, COMPASS and Prisoner Escort & Custody Services (PECS) contracts. Excluded from UTP is £9.6m of the commercial settlement received from the Ministry of Defence (MOD) in relation to the Defence Fire and Rescue Project tender, together with Contract & Balance Sheet Review and other one-time items that resulted in a £0.3m net credit (2018: £12.4m net credit) to Trading Profit. Together with the adverse net effect of IFRS16 implementation of £2.2m (2018: n/a), this resulted in Trading Profit of £48.3m (2018: £51.6m).

The UK & Europe Division's order intake was more than £3bn, or over 50% of that for the whole Group. By far the largest element of this was the estimated £1.9bn ten-year value for the AASC contracts. As previously set out, these are very significant for the Division, and indeed for the Group. AASC supersedes the prior COMPASS contracts which incurred losses (offset in the P&L by the utilisation of the OCP) of around £15-20m on average per year for the past five years. Under the new AASC contracts, we did not retain the Scotland & Northern Ireland region, but gained the much larger Midlands & East of England region, whilst retaining our other previous COMPASS region of the North West; as a consequence, we are now the largest provider of asylum seeker accommodation in the UK. Given our past experience, we also bid the regions at prices which we believe should allow us to make a fair return.

The second largest contract award in the year was with the UK Ministry of Justice (MoJ) for PECS, estimated at approximately £800m over the ten-year term which starts on 29 August 2020. Similar to COMPASS/AASC, this is a successful rebid of a contract previously incurring losses that were being offset by an OCP, and also similar to AASC is that Serco was selected to provide these sensitive and demanding services over a significantly increased geographical area. Other contract awards included: significantly expanding on rebid our operations for the SSW programme which provides training and related employment services to Local Enterprise Partnership areas; a new environmental services contract with the Royal Borough of Windsor and Maidenhead, together with extensions for our services to numerous other similar contracts; we have also extended during the year contracts such as for defence support services to the UK MOD and the US Air Forces in Europe (USAFE), contact centre operations for Companies House and our operations at the European Organisation for Nuclear Research (CERN).

We have not included within our order intake the contract to continue operating the Northern Isles Ferry Services, which was announced by the customer in September 2019 and has an estimated total contract value of £450m, as we have not yet signed the contract due to a procurement challenge by the unsuccessful bidder. In early February 2020, the Scottish Government announced that all challenges had been resolved, and that they would be proceeding to sign the contract with Serco in the coming months.

Of existing work where an extension or rebid will be required at some point before the end of 2022, there are around 25 contracts with annual revenue of over £5m within the UK & Europe Division; in aggregate, these represent approximately 25% of the current level of annual revenue for the Division; this excludes the Northern Isles operations, which would represent a further 5%. The largest to further secure in 2021 include our strategic partnership contract supporting Hertfordshire County Council, and in 2022 our UK Navy fleet support contract known as Future Provision of Marine Services (FPMS) and our UK MOD Skynet satellite support operations.

The rebid profile and the new bid Pipeline both reduced with the successful outcome of our bidding for AASC. Opportunities in the new bid Pipeline at the end of 2019 include several defence support opportunities, together with other tenders such as the first of the new build prison manage and operate contracts (HMP Wellingborough), in immigration services and in environmental and other Citizen Services support services. On 20 February 2020, Serco announced that we had signed a new contract to manage the Gatwick Immigration Centres valued at approximately £200m. Following a string of important contract wins, replenishing the UK & Europe pipeline across each of our five sectors of operation remains a key focus of the business in 2020.

Americas

Our Americas Division accounts for 28% of Serco's reported revenue, and provides professional, technology and management services focused on Defence, Transport, and Citizen Services. The US Federal Government, including the military, civilian agencies and the national intelligence community, are our largest customers. We also provide services to the Canadian Government and to some US state and municipal governments.

Revenue for 2019 was £915.7m (2018: £645.6m), an increase of 42% in reported currency. In US dollars, the main currency for operations of the Division, revenue for the year was equivalent to approximately US$1,172m (2018: US$860m). The strengthening of local currency against Sterling increased revenue by £43m or 7%; as the Naval Systems Business Unit (NSBU) acquisition completed at the start of August 2019, it contributed five months of revenue which drove the Divisional growth from acquisitions of 16%; the organic change at constant currency was therefore growth of 19%, or £119m. A key driver of this was a significant increase in task order volumes and related procurement services for our Ship & Shore modernisation and hardware work for the US Navy, with particularly strong demand and new task order wins under the Consolidated Afloat Networks Enterprise Services (CANES) Indefinite Delivery / Indefinite Quantity (ID/IQ) multiple-award contract for various naval vessel classes. There was also increased task orders on the US Federal Emergency Management Agency (FEMA) contract framework, as well as growth from new contract awards started in the year such as support services to the US Pension Benefit Guaranty Corporation (PBGC) and deploying IT solutions for the US Air Force.

Underlying Trading Profit, excluding the effect of IFRS16 adoption, was £79.2m (2018: £45.7m), representing a margin of 8.6% (2018: 7.1%) and growth of 73%; excluding the favourable currency movement of £4.3m, growth at constant currency was 64%. Whilst revenue was broadly flat on our health insurance eligibility support contract for the Center for Medicare & Medicaid Services (CMS), profitability benefited from an unusually high volume of fixed priced variable work, particularly in the first half of the year; as previously described, we do not expect margins to recur at these levels in the future, and profits on this contract are expected to be noticeably lower in 2020. The increase in profits also included the £8.6m contribution from the NSBU acquisition, as well as the benefit from the growth in short-term volume related work on various frameworks and new contracts started in the year.

Within Underlying Trading Profit there was £4m of OCP utilisation required to offset the previously loss-making Ontario Driver Examination Services (DES) contract (2018: n/a); an OCP is no longer required on this contract. Contract & Balance Sheet Review adjustments resulted in a £9.5m net credit (2018: £2.5m net charge) to Trading Profit which, together with the beneficial effect of IFRS16 implementation of £2.9m (2018: n/a), increased to £91.6m (2018: £43.2m).

Americas represented around £1.1bn ($1.4bn) or 20% of the Group's order intake. The largest award for new work was that for field office services to the US PBGC with a first task order valued at $112m over five years and a total potential value of $200m. Other new contracts included career training and counselling services to transitioning military service members valued at $95m over five years, and a five-and-a-half year task order valued at $82m was awarded by the US Air Force to enhance NexGen IT solutions for US Air Force Civil Engineering, which includes deploying TRIRIGA, an integrated workplace management system owned by IBM. Across our Ship & Shore modernisation and hardware services, including the CANES, Naval Electronic Surveillance Systems (NESS) the Global Installation Contract (GIC) ID/IQ frameworks, the cumulative value of IT, engineering, maintenance and sustainment support task orders totalled over $250m. Serco also received 15 task orders for our Public Assistance Technical Assistance Contract for the Federal Emergency Management Agency (FEMA) totalling over $100m.

Within awards that were rebid or extended were those for our support to the Federal Retirement Thrift Investment Board (FRTIB), motorist assistance patrol operations in Louisiana and for our support to psychological health outreach services to the US Navy. Serco also resecured places on the ID/IQ frameworks for both ship and shore-based C4ISR systems modernisation services over the next ten years that replace the previous GIC frameworks. Serco also secured a place on a similar ID/IQ framework but which it was not previously on the predecessor contract; this covers C4I Testing, Integration and Installation (CTII) services for the Carrier and Air Integration Program Office (PMW 750).

The progress on contract awards of the businesses recently acquired have also been pleasing. These include for NSBU the $162m contract to continue the support to the US Navy's Amphibious Warfare Program Office (PMS 377) and the $43m five-year contract to deliver design and engineering services for the US Navy's next generation of unmanned and small surface combatant vessels; and for BTP, a $49m five-year contract for system engineering technical services on the Submarine High Data Rate (SubHDR) program.

Of existing work where an extension or rebid will be required at some point before the end of 2022, there are around 25 contracts with annual revenue of over £5m within the Americas Division; in aggregate, these represent around 40% of the current level of annual revenue for the Division. Those coming up for rebid or extension in 2020 include the Federal Aviation Administration's (FAA) Contract Tower (FCT) Program; in 2021, the Anti-Terrorism/Force Protection (ATFP) framework contract for the US Naval Facilities Command and our support to support services at the 5 Wing Canadian Forces Base in Goose Bay; and in 2022, resecuring a position on the successor framework for CANES. Of the NSBU business, it has a number of contract option periods, extensions or rebids to secure, including in 2020 its support to the US Navy Surface Warfare Directorate and in 2021 to the Shipbuilding Command for surface ships.

Our Pipeline of major new bid opportunities due for decision within the next 24 months includes a broad spread of defence support functions, including those added with the NSBU acquisition, as well as others such as air traffic control support within our Transport business. Our Citizen Services business unit has also had a number of wins during the year, and building further the Pipeline in this area also remains a target.

AsPac

Serco operates in Australia, New Zealand and Hong Kong in the Asia Pacific region, providing services in each of the Justice, Immigration, Defence, Health, Transport and Citizen Services sectors. The AsPac Division accounts for 19% of the reported revenue for the Group.

Revenue for 2019 was £621.4m (2018: £548.2m), an increase of 13% in reported currency. In Australian dollars, the main currency for operations of the Division, revenue for the year was equivalent to approximately A$1,137m (2018: A$980m). The weakening of local currency against Sterling reduced revenue by £15m or 3%; the organic change at constant currency was therefore growth of 16%, or £88m. The largest contributor to this growth was the start of operations on 1 July 2019 of the AHSC defence garrison healthcare services contract in Australia. There was also strong growth in our Citizen Services operations, including further expanding our support to the Department of Human Services and Australia's National Disability Insurance Agency, together with new contact centre services to the Victoria Police Assistance Line for non-emergency incidents. There was also an increase in workload in Immigration Services.

Underlying Trading Profit, excluding the effect of IFRS16 adoption, was £31.1m (2018: £26.8m), representing a margin of 5.0% (2018: 4.9%) and an increase of 16%; excluding the adverse currency movement of £0.9m, the increase at constant currency was 19%. The improvement in profitability includes the benefit of the growth in our Citizen Services operations, as well as the AHSC contract moving to its full operational stage quicker than anticipated, with profitability in the second half of the year more than offsetting the transition costs mainly incurred in the first half.

Within Underlying Trading Profit there was £3m of OCP utilisation required to offset the loss-making operations in Hong Kong (2018: £5m). Contract & Balance Sheet Review adjustments were £nil (2018: £13.7m net credit), therefore Trading Profit, taking into account the beneficial effect of IFRS16 implementation of £0.2m (2018: n/a), was £31.3m (2018: £40.5m).

AsPac represented around £1.1bn or 20% of the Group's order intake. The largest was the AHSC contract for the provision of healthcare services personnel at defence garrisons across Australia, which was valued at AU$1.01bn (around £560m) over the initial six-year term; working as a sub-contractor to BUPA, Serco will source and manage more than 1,200 professional healthcare staff to support the delivery of on-base integrated health care to over 80,000 Australian Defence Force members and reservists across Australia. A further new contract was the AU$115m seven-year contract to operate Adelaide Remand Centre on behalf of the South Australia Department for Correctional Services. Important extensions were also secured during the year, including the two-year extension for Australian immigration services with an estimated value of £0.4bn, and South Queensland Correctional Centre also for two years. Serco was also successful in our rebid for the Victorian Department of Justice and Community Safety to continue operating the road traffic camera program across the State. The one rebid of note that was lost in 2019 is that for transport management of the Tsing Sha Control Area in Hong Kong which had annual revenue of around £20m but was an onerous contract and therefore does not impact UTP.

Of existing work where an extension or rebid will be required at some point before the end of 2022, there are around 10 contracts with annual revenue of over £5m within the AsPac Division; in aggregate, these represent well over half of the current level of annual revenue for the Division; this high proportion reflects that the Australia onshore immigration services contract requires further extension or rebid again at the end of 2021, with this accounting for around 30% of current Divisional revenue. Others that will require extending or rebidding in 2020 are the Australian Department of Human Services framework contract, while Fiona Stanley Hospital, Acacia Prison, South Queensland Correctional Centre and the Tax Office framework contract all become potentially due in 2021. In October 2019, AsPac responded to the tender for the Royal Australian Navy contracts to replace to the existing Fleet Marine Services contracts (to be known as the Defence Marine Support Services (DMSS) contracts). The DMSS contacts awards are anticipated to be announced in the first half of 2020. Serco's current Fleet Marine Services contract will continue to operate until 30 September 2021.

As set out above, the largest opportunity in our Pipeline of major new bid opportunities at the start of 2019 was won - defence health support in Australia. A number of other opportunities were either lost or removed from the Pipeline during the year. Rebuilding the Pipeline saw progress in the second half with a small number of opportunities added across the Justice & Immigration, Defence and Citizen Services sectors, with further progress across these and the Transport and Health sectors anticipated in 2020.

Middle East

Operations in the Middle East Division include Transport, Defence, Health and Citizen Services, with the region accounting for approximately 11% of the Group's reported revenue.

Revenue for 2019 was £349.6m (2018: £342.3m), an increase of 2% in reported currency. The strengthening of local currency against Sterling increased revenue by £15m or 4%; the organic change at constant currency was therefore a decline of 2%. There was growth from expanded services at the Dubai Metro and from the new contracts for fire and rescue services at King Fahd International Airport (KFIA), support services at Dr. Soliman Fakeeh Hospital (DSFH) and advisory services to Mashroat in Saudi Arabia. These were offset by reduced revenue on the rebid of the MELABS contract providing defence base logistics and support services, the loss of the Bahrain air navigation services contract and a reduction in our Saudi rail operations.

Underlying Trading Profit, excluding the effect of IFRS16 adoption, was £13.6m (2018: £21.5m), representing a margin of 3.9% (2018: 6.3%) and a decline of 37%; excluding the favourable currency movement of £0.4m, the decline at constant currency was 39%. As expected, this decline was driven by the significant reduction in margins on the MELABS contract, following the successful rebid which has extended the life of the contract for a further five years including option periods. There are no OCP contracts in the Division and therefore no OCP utilisation within Underlying Trading Profit. There were no Contract & Balance Sheet Review adjustments in the latest or prior year. Trading Profit, after the beneficial effect of IFRS16 implementation of £0.3m (2018: n/a), was therefore £13.9m (2018: £21.5m).

The Middle East represented £0.2bn of the Group's order intake. Included in the 2018 order intake following receipt of a letter of intent was the two-year extension to continue operating and maintaining the Dubai Metro until September 2021. Intake in the year included new contracts for advisory services to Mashroat (Saudi Arabia's National Program to Support the Management of Projects in Public Entities), facilities management and patient-facing services to DSFH in Jeddah, and several other facilities management contracts in Abu Dhabi. During the year Serco also secured further contract extensions for our Air Navigation Services (ANS) support in Dubai and Baghdad.

Of existing work where an extension or rebid will be required at some point before the end of 2022, there are around 15 contracts with annual revenue of over £5m within the Middle East Division; in aggregate, these represent well over half of the current level of annual revenue for the Division. The relatively high proportion reflects that the Dubai Metro contract becomes due for rebid in September 2021, with this accounting for around 30% of current Divisional revenue. Further extensions or rebids will also be required for each of the Dubai and Baghdad ANS contracts, together with the MELABS and Saudi rail operations.

Our Pipeline of major new bid opportunities in the Middle East includes a small number in the Transport sector. The Pipeline remains significantly lower than in prior years, and effort is ongoing to rebuild it across all Serco's sectors of operation in the region. We still believe that the dynamism and ambition of governments in the GCC offers the opportunity to deliver truly innovative and world-leading services. Therefore, we have recently established a new ExperienceLab, mirroring what we have in the UK, for user-centred design to deliver exciting improvements to existing and new customers in 2020.

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.

While there are ongoing actions to deliver savings and improve efficiencies of our central functions, in 2019 there were some areas of investment and increases in costs which resulted in overall corporate costs at the Underlying Trading Profit level that were £5.4m higher at £45.5m (2018: £40.1m).

The Group operates a large number of long-term contracts at different phases of their contract life cycle. Within the Group's portfolio, there are a small number of contracts where the balance of risks and opportunities indicates that they might be onerous if transformation initiatives or contract changes are not successful. The Group has concluded that these contracts do not require an onerous contract provision on an individual basis. Following the individual contract reviews, the Group has also undertaken a top down assessment which assumes that, whilst the contracts may not be onerous on an individual basis, as a portfolio there is a risk that at least some of the transformation programmes or customer negotiations required to avoid a contract loss, will not be fully successful, and it is more likely than not that one or more of these contracts will be onerous. Therefore, in considering the Group's overall onerous contract provision, the Group has made a best estimate of the provision required to take into consideration this portfolio risk. As a result, the risk of OCPs and the monitoring of individual contracts for indicators remains a critical estimate for the Group. The amount recognised in the year is £6.2m at the Trading Profit level within the Corporate costs segment, which after this charge is therefore £51.7m (2018: £40.1m).

Finance Review

For the year ended 31 December 2019	Underlying £m	Non underlying items £m	Trading £m	Amortisation and impairment of intangibles arising on acquisition £m	Statutory pre exceptional £m	Exceptional items £m	Statutory £m
Revenue	3,248.4	-	3,248.4	-	3,248.4	-	3,248.4
Cost of sales	(2,941.5)	13.2	(2,928.3)	-	(2,928.3)	-	(2,928.3)
Gross profit	306.9	13.2	320.1	-	320.1	-	320.1
Administrative expenses	(214.2)	-	(214.2)	(7.5)	(221.7)	(23.4)	(245.1)
Share of profits in joint ventures and associates, net of interest and tax	27.5	-	27.5	-	27.5	-	27.5
Profit before interest and tax	120.2	13.2	133.4	(7.5)	125.9	(23.4)	102.5
Margin	3.7%		4.1%		3.9%		3.2%
Net finance costs	(21.8)	-	(21.8)	-	(21.8)	-	(21.8)
Profit before tax	98.4	13.2	111.6	(7.5)	104.1	(23.4)	80.7
Tax charge	(24.4)	(4.5)	(28.9)	1.5	(27.4)	(2.7)	(30.1)
Effective tax rate	(24.8%)		(25.9%)		(26.3%)		(37.3%)
Profit / (loss) for the period	74.0	8.7	82.7	(6.0)	76.7	(26.1)	50.6
Minority interest	0.2		0.2		0.2		0.2
Earnings per share - basic (pence)	6.31		7.05		6.54		4.31
Earnings per share - diluted (pence)	6.16		6.89		6.39		4.21

For the year ended 31 December 2018	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	2,836.8	-	2,836.8	-	2,836.8	-	2,836.8
Cost of sales	(2,570.2)	23.6	(2,546.6)	-	(2,546.6)	-	(2,546.6)
Gross profit	266.6	23.6	290.2	-	290.2	-	290.2
Administrative expenses	(202.3)	-	(202.3)	(4.3)	(206.6)	(31.9)	(238.5)
Share of profits in joint ventures and associates, net of interest and tax	28.8	-	28.8	-	28.8	-	28.8
Profit before interest and tax	93.1	23.6	116.7	(4.3)	112.4	(31.9)	80.5
Margin	3.3%		4.1%		4.0%		2.8%
Net finance costs	(13.9)	-	(13.9)	-	(13.9)	7.5	(6.4)
Profit before tax	79.2	23.6	102.8	(4.3)	98.5	(24.4)	74.1
Tax charge	(20.6)	8.7	(11.9)	3.1	(8.8)	2.1	(6.7)
Effective tax rate	(26.0%)		(11.6%)		(8.9%)		(9.0%)
Profit / (loss) for the period	58.6	32.3	90.9	(1.2)	89.7 7	(22.3)	67.4
Minority interest	0.0		0.0		0.0		0.0
Earnings per share - basic (pence)	5.36		8.31		8.20		6.16
Earnings per share - diluted (pence)	5.21		8.08		7.97		5.99

Alternative Performance Measures (APMs) and other related definitions

Overview

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

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

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

With effect from 1 January 2019, the Group has applied IFRS16 Leases in the preparation of its financial results. The prior period financial information has not been restated under IFRS16 in accordance with the modified retrospective approach to transition taken by the Group. This approach has been taken as it most closely aligns to the full retrospective approach without requiring an extensive review of historical changes to lease agreements within the Group. The following APMs have been redefined to take into consideration the impact of IFRS16 and to ensure they continue to be useful measures for investors and readers of the accounts, and the impact of the definition change has been illustrated within the Finance Review: Free Cash Flow; Trading Cash Flow and Invested Capital. A new APM has also been introduced which has been termed Adjusted Net Debt, the definition of which is provided below.

Certain APMs for the current period have been provided on a basis consistent with the accounting standards applied for the prior period to illustrate the impact of IFRS16 and to assist with comparability. This information has been provided at the end of this Finance Review.

The methodology applied to calculating the APMs has not changed during the year for any measure other than those outlined above.

Alternative revenue measures

Reported revenue at constant currency

Reported revenue, as shown on the Group's Consolidated Income Statement on page 39, reflects revenue translated at the average exchange rates for the period. In order to provide a comparable movement on the previous year's results, reported revenue is recalculated by translating non-Sterling values for the year to 31 December 2019 into Sterling at the average exchange rate for the year ended 31 December 2018.

For the year ended 31 December	2019 £m
Reported revenue at constant currency	3,206.2
Foreign exchange differences	42.2
Reported revenue at reported currency	3,248.4

Organic Revenue at constant currency

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

There are three acquisitions excluded for the calculation of Organic Revenue in the year to 31 December 2019:

· The acquisition of 100% of the issued share capital of BTP Systems, LLC (BTP) on 26 January 2018.

· The acquisition of six UK health facilities management contracts which were transferred from Carillion plc between June 2018 and August 2018.

· The acquisition of the Naval Systems Business Unit (NSBU) from Alion Science and Technology Corporation on 1 August 2019.

An adjustment is required for one disposal:

· The disposal of certain contracts within the Anglia Support Partnership on 31 October 2018.

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

For the year ended 31 December	2019 £m
Organic Revenue at constant currency	3,014.1
Foreign exchange differences	34.5
Organic Revenue at reported currency	3,048.6
Impact of any relevant acquisitions or disposals	199.8
Reported revenue at reported currency	3,248.4

For the year ended 31 December	2018 £m
Organic Revenue at reported currency	2,784.5
Impact of any relevant acquisitions or disposals	52.3
Reported revenue at reported currency	2,836.8

Revenue plus share of joint ventures and associates

Reported revenue, as shown on the Group's Consolidated Income Statement on page 39, excludes the Group's share of revenue from joint ventures and associates, with Serco's share of profits in joint ventures and associates (net of interest and tax) consolidated within reported operating profit as a single line further down the Consolidated Income Statement. The alternative measure includes the share of joint ventures and associates for the benefit of reflecting the overall change in scale of the Group's ongoing operations, which is particularly relevant for evaluating Serco's presence in market sectors such as Defence and Transport. The alternative measure allows the performance of the joint venture and associate operations themselves, and their impact on the Group as a whole, to be evaluated on measures other than just the post-tax result.

For the year ended 31 December	2019 £m	2018 £m
Revenue plus share of joint ventures and associates	3,643.0	3,211.9
Exclude share of revenue from joint ventures and associates	(394.6)	(375.1)
Reported revenue	3,248.4	2,836.8

Underlying Trading Profit (UTP)

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

For the year ended 31 December	2019 £m	2018 £m
Underlying Trading Profit	120.2	93.1
Non-underlying items:
OCP charges and releases	0.8	12.8
Other Contract & Balance Sheet Review adjustments and one-time items	12.4	10.8
Total non-underlying items	13.2	23.6
Trading Profit	133.4	116.7
Operating exceptional items	(23.4)	(31.9)
Amortisation and impairment of intangibles arising on acquisition	(7.5)	(4.3)
Operating profit	102.5	80.5

Charges and releases on all Onerous Contract Provisions (OCPs) that arose during the 2014 Contract & Balance Sheet Review are excluded from UTP in the current and prior years. Charges associated with the creation of new OCPs identified are included within UTP to the extent that they are not considered sufficiently material to require separate disclosure on an individual basis. OCPs reflect the future multiple year cost of delivering onerous contracts and do not reflect only the current cost of operating the contract in the latest individual year. It should be noted that, as for operating profit, UTP benefits from OCP utilisation of £53.6m in 2019 (2018: £51.8m). The utilisation, which neutralises the in-year losses on previously identified onerous contracts, consists of £12.7m accelerated utilisation associated with the impairment of right of use assets on onerous contracts created during the period, in accordance with IFRS16, and £40.9m against other contract losses. In addition, an amount of £3.8m in respect of impairment of right of use assets was recognised within underlying profit.

Revisions to accounting estimates and judgements which arose during the 2014 Contract & Balance Sheet Review are reported alongside other one-time items where the impact of an individual item is material. Items in 2019 which were recorded within this category included the impairment of assets created in accordance with IFRS16 on the Caledonian Sleepers contract for which the provision had been fully utilised, the receipt of an insurance claim for costs previously reported outside of UTP recognised in the 2014 Contract & Balance Sheet Review and monies in respect of the DFRP settlement amounting to £9.6m.

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

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

The non-underlying column in the summary income statement on page 22 includes the tax impact of the above items and tax items that, in themselves, are considered to be non-underlying. Further detail of such items is provided in the tax section below.

Trading Profit

The Group uses Trading Profit as an alternative measure to operating profit, as shown on the Group's Consolidated Income Statement on page 39, by making two adjustments.

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

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.

UTP at constant currency

UTP disclosed above has been translated at the average foreign exchange rates for the year. In order to provide a comparable movement on the previous year's results, UTP is recalculated by translating non-Sterling values for the year to 31 December 2019 into Sterling at the average exchange rate for the year ended 31 December 2018.

For the year ended 31 December	2019 £m
Underlying Trading Profit at constant currency	116.5
Foreign exchange differences	3.7
Underlying Trading Profit at reported currency	120.2

Alternative Earnings Per Share (EPS) measures

For the year ended 31 December	2019 pence	2018 pence
Underlying EPS, basic	6.31	5.36
Net impact of non-underlying items and amortisation and impairment of intangibles arising on acquisition	0.23	2.84
EPS before exceptional items, basic	6.54	8.20
Impact of exceptional items	(2.23)	(2.04)
Reported EPS, basic	4.31	6.16

For the year ended 31 December	2019 pence	2018 pence
Underlying EPS, diluted	6.16	5.21
Net impact of non-underlying items and amortisation and impairment of intangibles arising on acquisition	0.23	2.76
EPS before exceptional items, diluted	6.39	7.97
Impact of exceptional items	(2.18)	(1.98)
Reported EPS, diluted	4.21	5.99

EPS before exceptional items

EPS, as shown on the Group's Consolidated Income Statement on page 39, includes exceptional items charged or credited to the income statement in the year. EPS before exceptional items aids consistency with historical operating performance.

Underlying EPS

Reflecting the same adjustments made to operating profit to calculate UTP as described above and including the related tax effects of each adjustment and any other non-underlying tax adjustments as described in the tax charge section below, an alternative measure of EPS is presented. This aids consistency with historical results and enables performance to be evaluated before the unusual or one-time effects described above. The full reconciliation between statutory EPS and Underlying EPS is provided in the summary income statements on page 22.

Alternative cash flow and Net Debt measures

Free Cash Flow (FCF)

We present an alternative measure for cash flow to reflect cash flow from operating activities before exceptional items, which is the measure shown on the Consolidated Cash Flow Statement on page 43. This IFRS measure is adjusted to include dividends we receive from joint ventures and associates and deducting net interest paid, the capital element of lease payments and net capital expenditure on tangible and intangible asset purchases. This is a change to the definition applied in the prior year, where the capital element of finance leases was excluded from FCF. The adjustment has been made following the implementation of IFRS16, under which all leases, excluding short term and low value leases, are accounted for as lease liabilities under the new standard and cash payments associated with the lease liabilities include a capital and interest component. The previous definition of FCF would result in the capital component of leases being excluded from FCF which is not considered to be reflective of the operating cash flow of the Group.

For the year ended 31 December	2019 £m	2018 (*restated) £m
Free Cash Flow	62.0	16.3
Exclude dividends from joint ventures and associates	(25.4)	(29.7)
Exclude net interest paid	21.0	16.1
Exclude capitalised finance costs paid	1.2	2.0
Exclude capital element of lease repayments	70.2	8.7
Exclude proceeds received from exercise of share options	(0.2)	-
Exclude purchase of intangible and tangible assets net of proceeds from disposal	23.3	29.5
Cash flow from operating activities before exceptional items	152.1	42.9
Exceptional operating cash flows	(49.2)	(40.2)
Cash flow from operating activities	102.9	2.7

* Following the implementation of IFRS16 Leases , the definition of Free Cash Flow has been amended to include the capital element of lease payments in 2018.

For the year ended 31 December	2019 £m	2018 £m
Free Cash Flow under previous definition	132.2	25.0
Include capital element of lease payments	(70.2)	(8.7)
Free Cash Flow	62.0	16.3

The high Free Cash Flow in 2019 under the previous definition excludes the cash payments associated with operating leases which are cash outflows associated with a combination of capital and interest payments under IFRS16 Leases . This supports the rationale behind the change in definition for Free Cash Flow adopted in 2019.

UTP cash conversion

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

For the year ended 31 December	2019 £m	2018 ( *restated ) £m
Free Cash Flow	62.0	16.3
Add back:
Tax paid	31.2	10.6
Non-cash R&D expenditure	0.1	0.1
Net interest paid	21.0	16.1
Capitalised finance costs paid	1.2	2.0
Trading Cash Flow	115.5	45.1
Underlying Trading Profit	120.2	93.1
Underlying Trading Profit cash conversion	96%	48%

* Following the implementation of IFRS16 Leases , the definition of Free Cash Flow has been amended to include the capital element of lease payments in 2018.

Net Debt and Adjusted Net Debt

We present an alternative measure to bring together the various funding sources that are included on the Group's Consolidated Balance Sheet on page 42 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 recognised under IFRS16 and therefore the Group has introduced the alternative measure of Adjusted Net Debt which excludes all lease liabilities recognised under IFRS16 for the year ended 31 December 2019. For the year ended 31 December 2018, liabilities for leases previously categorised as finance leases are excluded in arriving at Adjusted Net Debt.

The Adjusted Net Debt measure has been 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 IFRS16. Principally as a result of the Asylum Accommodation and Support Services Contract (AASC), the Group has entered into a significant number of leases which contain a termination option. The use of Adjusted Net Debt removes the volatility that would result from estimations of lease periods and the recognition of liabilities associated with such leases where the Group has the right to cancel the lease and hence the corresponding obligation. Though the intention is not to exercise the options to cancel the leases, it is available unlike other debt obligations.

For the year ended 31 December	2019 £m	2018 £m
Cash and cash equivalents	89.5	62.5
Loans payable	(305.0)	(239.5)
Lease liabilities	(369.9)	(14.8)
Derivatives relating to Net Debt	1.0	3.8
Net Debt	(584.4)	(188.0)
Add back: Lease liabilities	369.9	14.8
Adjusted Net Debt	(214.5)	(173.2)

Pre-tax Return on Invested Capital (ROIC)

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 year and a two-point average of the opening and closing balance sheets. The composition of Invested Capital and calculation of ROIC are summarised in the table below.

The definition of Invested Capital has been adjusted from the prior year to exclude right of use assets recognised under IFRS16 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 within the Group, which would previously have been classified as operating leases, where termination options exist and commitments for expenditure are in future years. The impact of the change in the alternative performance measure has been set out below. In the prior year, only finance lease assets have been removed as no right of use assets existed for operating leases prior to the adoption of IFRS16.

For the year ended 31 December	2019 £m	2018 ( *restated ) £m
ROIC excluding right of use assets
Non-current assets
Goodwill	671.2	579.6
Other intangible assets	96.5	63.7
Property, plant and equipment	47.3	44.3
Interest in joint ventures and associates	23.6	20.6
Trade and other receivables	26.5	30.3
Current assets
Inventory	18.3	22.9
Contract assets, trade and other receivables	609.2	543.8
Total invested capital assets	1,492.6	1,305.2
Current liabilities
Contract liabilities, trade and other payables	(555.8)	(494.0)
Non-current liabilities
Contract liabilities, trade and other payables	(72.7)	(109.9)
Total invested capital liabilities	(628.5)	(603.9)
Invested Capital	864.1	701.3
Two-point average of opening and closing Invested Capital	782.7	686.3
Trading Profit	133.4	116.7
ROIC%	17.0%	17.0%
Underlying Trading Profit	120.2	93.1
Underlying ROIC%	15.4%	13.6%

* The ROIC calculation at 31 December 2018 has been restated to exclude right of use assets. The measure at 31 December 2018 has been adjusted from that disclosed within the 30 June 2019 Stock Exchange Announcement so the 31 December 2017 balance sheet, used in the two-point average, is in accordance with IFRS15. For reference, using the same principles for the calculation as at 30 June 2018 yields a ROIC of 7.9%.

For the year ended 31 December	2019 £m	2018 ( *restated ) £m
ROIC including right of use assets
Invested Capital including right of use assets	1,209.4	725.4
Impact of including right of use assets	(345.3)	(24.1)
Invested Capital	864.1	701.3
ROIC% including right of use assets	13.8%	16.4%
Impact of including right of use assets	3.2%	0.6%
ROIC%	17.0%	17.0%
Underlying ROIC% including right of use assets	12.4%	13.1%
Impact of including right of use assets	3.0%	0.5%
Underlying ROIC%	15.4%	13.6%

Overview of financial performance

Revenue

Reported revenue increased by 14.5% in the year to £3,248.4m (2018: £2,836.8m), a 13.0% increase in constant currency. Organic revenue growth at constant currency was 8.2%.

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

Trading Profit

Trading Profit for the year was £133.4m (2018: £116.7m).

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

Underlying Trading Profit

UTP was £120.2m ( 2018: £93.1m), up 29.1%. At constant currency, UTP was £116.5m, up 25.1%.

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

Excluded from UTP were net releases from OCPs of £0.8m (2018: net releases of £12.8m) following the detailed reassessment undertaken as part of the budgeting process. Also excluded from UTP were net releases and additional profits of £12.4m (2018: net releases and additional profits of £10.8m) relating to items identified during the 2014 Contract & Balance Sheet Review, and other one-time items.

The cumulative to date improvement to Trading Profit as a result of OCP charges and releases and adjustments to items identified during the 2014 Contract & Balance Sheet Review is within 2% of the 2014 total charge to Trading Profit arising from the review.

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

Joint ventures and associates - share of results

In 2019, the most significant joint ventures and associates in terms of scale of operations were AWE Management Limited and Merseyrail Services Holding Company Limited, with dividends received of £17.6m (2018: £20.0m) and £7.8m (2018: £8.7m) respectively. Total revenues generated by these businesses were £1,065.4m (2018: £1,024.7m) and £177.9m (2018: £160.8m) respectively.

While the revenues and individual line items are not consolidated in the Group 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	2019 £m	2018 £m
Revenue	394.6	375.1
Operating profit before exceptional items	33.8	34.6
Net investment revenue	0.3	0.3
Income tax expense	(6.6)	(6.1)
Profit after tax before exceptional charge	27.5	28.8
Exceptional pension charge (see exceptional items below)	-	(0.3)
Profit after tax	27.5	28.5
Dividends received from joint ventures and associates	25.4	29.7

Revenue across both of the Group's material joint ventures has increased during the year due to changes in the volumes transacted by the underlying contracts. Profitability on both remained consistent with the prior year.

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	2019 £m	2018 £m
Exceptional items arising
Exceptional loss on disposal of subsidiaries and operations	-	(0.5)
Other exceptional operating items
Restructuring costs	(12.8)	(32.3)
Increase in onerous lease provision	-	(1.8)
Costs associated with SFO investigation	(25.2)	0.4
Reversal of impairment of interest in joint venture and related loan balances	-	0.8
Reversal of impairment on loan balances	-	13.9
Cost of Guaranteed Minimum Pension equalisation	-	(9.6)
Release of/(increase in) other provisions and other items	19.3	(2.8)
Costs associated with the acquisition of Naval Systems Business Unit	(4.7)	-
Other exceptional operating items	(23.4)	(31.4)
Exceptional operating items	(23.4)	(31.9)
Exceptional finance income	-	7.5
Exceptional tax	(2.7)	2.1
Total operating and financing exceptional items net of tax	(26.1)	(22.3)

Other exceptional operating items

The Group is incurring costs in relation to restructuring programmes resulting from the Strategy Review. These costs include redundancy payments, provisions (including onerous leases), external advisory fees and other incremental costs. Due to the nature and scale of the impact of the transformation phase of the Strategy Review, the incremental costs associated with this programme are considered to be exceptional. Costs associated with the restructuring programme resulting from the Strategy Review must meet the following criteria: that they are directly linked to the implementation of the Strategy Review; they are incremental costs as a result of the activity; and they are non business as usual costs. In 2019, a charge of £12.8m (2018: £32.3m) arose in relation to the restructuring programme resulting from the Strategy Review. The Strategy Review is discussed in more detail in the Group's Strategic Report which forms part of the Consolidated Annual Report and Accounts. The transformation activities associated with this are complete and, as such, all exceptional restructuring costs related to this programme have ended in 2019. Non-exceptional restructuring charges are incurred by the business as part of normal operational activity, which in the year totalled £8.9m (2018: £6.3m) and were included within operating profit before exceptional items.

There was an exceptional charge totalling £25.2m (2018: credit of £0.4m) associated with the SFO's investigation and the programme of Corporate Renewal. These costs have historically been treated as exceptional and consistent treatment is applied in 2019. During the year the Group paid £22.9m in penalties and legal costs associated with the SFO's investigation. The final judgement was provided on 4 July 2019. The credit in 2018 reflects the recovery of costs from the Group's insurance providers. The remaining £2.3m relates to legal costs incurred by the Group in respect of the investigation.

In 2018, an exceptional charge of £9.6m was recorded to recognise the Group's obligations associated with equalising the Guaranteed Minimum Pension (GMP) payments between male and female employees for the Group's defined benefit pension schemes following a High Court ruling made in October 2018. The Serco Pension and Life Assurance Scheme (SPLAS) recorded the largest charge being £9.0m. There was no equivalent charge in 2019.

The decrease in other provisions and other items of £19.3m (2018: increase of £2.8m) predominantly relates to a commercial dispute which was settled in 2019. The treatment of the reduction as exceptional is consistent with the recognition of the original charge associated with the same matter in 2014.

The Group completed the acquisition of the Naval Systems Business Unit (NSBU) from Alion Science and Technology Corporation in 2019. The acquisition achieved final regulatory approvals and completed in August 2019. The transaction and implementation costs of £4.7m have been treated as exceptional in line with the Group's accounting policy.

An exceptional profit of £13.9m was recognised in 2018 for the settlement of consideration associated with the sale of Serco GmbH in 2012 through the offsetting of outstanding loan balances, the receivable of which had been impaired. An exceptional loss on disposal of £27.7m was recorded in 2012 in respect of the sale. No such transactions took place in 2019.

Exceptional finance costs

There were no exceptional finance costs in the year ended 31 December 2019. During 2018, part of the consideration for the sale of the Group's private sector BPO business in 2015 was a loan note with a face value of £30m accruing compound interest of 7%. The receivable associated with this loan note was recorded at a fair value of £19.5m. The discount on the loan note was unwound through the Group's net finance cost on an annual basis. During October 2018, the Intelenet business was sold and therefore repayment of the loan note was triggered resulting in a gain of £7.5m. As this gain was outside the normal financing arrangements of the Group and significant in size it was recorded as exceptional finance income.

Exceptional tax

Exceptional tax for the year was a charge of £2.7m (2018: credit of £2.1m) which arises on exceptional items within operating profit. This charge arises mainly in connection with the decrease in provisions in respect of commercial disputes and legal claims for which a tax credit had been recorded when the provisions were originally recognised. This charge is partially offset by tax deductions in respect of the global restructuring programme and in the US on acquisition costs.

No tax credit arises on the exceptional charge associated with the costs in connection with the SFO investigation.

Pre-exceptional finance costs and investment revenue

Investment revenue of £2.7m (2018: £4.3m) includes interest accruing on net retirement benefit assets of £2.1m (2018: £0.8m), interest earned on deposits and other receivables of £0.5m (2018: £2.3m) and the movement in discounting of other receivables of £0.1m (2018: £1.2m). The decrease in the year is the result of the repayment of the loan note, as noted above, which was previously accruing interest and did so for nine months during 2018. No such interest income arose during 2019.

Finance costs of £24.5m (2018: £18.2m) includes interest incurred on the USPP loans and the Revolving Credit Facility of £13.9m (2018: £13.8m), facility fees and other charges of £1.7m (2018: £3.1m), lease interest payable of £6.9m (2018: £0.6m) which has increased as a result of the adoption of IFRS16 Leases, the movement in discount on provisions of £1.2m (2018: £0.5m) and a loss for foreign exchange on financing activities of £0.8m (2018: £0.2m).

Tax

Tax charge

Underlying tax

In 2019 we recognised a tax charge of £24.4m on underlying trading profits after finance costs. The effective tax rate (24.8%) is slightly lower than in 2018 (26.0%). This is due to a relative reduction in permanent disallowable items which is only partially offset by the geographic mix of where profits have been made, notably the substantial increase in profits in the US.

Pre-exceptional tax

We recognised a tax charge of £27.4m (2018: £8.8m) on pre-exceptional profits which includes underlying tax (£24.4m), tax credit from amortisation of intangibles arising on acquisition of £1.5m and a £4.5m charge arising on non-underlying items. This £4.5m charge consists of the tax impact on non-underlying items together with tax items, that are in themselves considered to be non-underlying:

· The tax on non-underlying items which consists of Contract and Balance Sheet Review adjustments and other material one-time items during the period, totalled a charge of £2.6m reflecting the impact of current or future tax charges (2018: £3.2m charge).

· During the current period we have recognised an additional £0.8m of deferred tax asset in relation to UK losses to reflect the improved forecast taxable income of our UK operations (2018: £2.9m).

· Generally, movements in the valuation of the Group's defined benefit pension schemes and the associated deferred tax impact are reported in the Statement of Comprehensive Income (SOCI) and do not flow through the income statement, therefore do not impact profit before tax or the tax charge. However, the net amount of deferred tax recognised in the balance sheet relates to both the pension accounting and other timing differences, such as recoverable losses. As the net deferred tax balance sheet position is at the maximum level supported by future profit forecasts, the decrease in the deferred tax liability associated with the pension scheme (with the benefit reported in the SOCI) leads to a corresponding decrease in the deferred tax asset to match the future profit forecasts. Such a decrease in the deferred tax asset therefore leads to a charge to tax in the income statement. Where deferred tax charges or releases are the result of movements in the pension scheme valuations rather than trading activity, these are excluded from the calculation of tax on underlying profit and the underlying effective tax rate. These amounted to £2.7m charge for 2019 (2018: £9.0m credit).

The tax rate on profits before exceptional items, at 26.3%, is higher than the UK standard corporation tax rate of 19%. This is due to the impact of the absence of any deferred tax credit for current year losses incurred, predominantly in the UK, and the impact of higher rates of tax on profits arising on our international operations which is only partially offset by the impact of our joint ventures whose post-tax results are included in our pre-tax profits. Our tax charge in future years could continue to be materially impacted by our accounting for UK deferred taxes. To the extent that future UK tax losses are incurred and are not recognised, our effective tax rate will be driven higher than prevailing standard corporation tax rates.

Exceptional tax

Analysis of exceptional tax is provided in the Exceptional items section above.

Contingent tax assets

At 31 December 2019, the Group has gross estimated unrecognised deferred tax of £1.1bn (tax effected £195m asset), which are potentially available to offset against future taxable income. These principally relate to tax trading losses of £900m. Of these tax losses, £760m have arisen in the UK business (tax effected £129m).

A £21.1m UK tax asset has been recognised at 31 December 2019 (2018: £20.3m) on the basis of forecast utilisation against future taxable income.

Taxes paid

Net corporate income tax of £31.2m (2018: £10.6m) was paid during the year, relating primarily to our operations in AsPac of £19.4m (2018: £8.7m), North America of £12.1m (2018: nil), Europe of £1.1m (2018: £4.1m) and Middle East of £1.1m (2018: £1.1m). The Group's UK operations have transferred tax losses to its profitable joint ventures and associates giving a cash tax inflow in the UK of £2.5m (2018: £3.3m).

The amount of tax paid (£31.2m) differs from the tax charge in the period (£30.1m) mainly due to the effect of future expected cash tax outflows for which a charge has been taken in the current period. In addition, taxes paid/received from Tax Authorities can arise in later periods to the associated tax charge/credit and also there is a time lag on receipts of cash from joint ventures and associates for losses transferred to them.

Further detail is shown below of taxes that have been paid during the year.

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 Group. In order 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 2019, Serco globally contributed £625.7m of tax to government in the jurisdictions in which we operate.

Taxes by category

For the year ended 31 December 2019	Taxes borne £m	Taxes collected £m	Total £m
Corporation tax	33.5	-	33.5
VAT and similar	9.6	173.0	182.6
People taxes	109.6	291.9	401.5
Other taxes	7.6	0.5	8.1
Total	160.3	465.4	625.7

Taxes by region

For the year ended 31 December 2019	Taxes borne £m	Taxes collected £m	Total £m
UK & Europe	80.8	251.1	331.9
AsPac	37.9	131.6	169.5
Americas	39.1	79.6	118.7
Middle East	2.5	3.1	5.6
Total	160.3	465.4	625.7

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 £3.78 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 £2.90 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

The Board is therefore recommending the payment of a final dividend in respect of the 2019 financial year of 1.0p, aligned to the recommended dividend and outlook as described in the Chief Executive's Review. The dividend, subject to shareholder approval at the Annual General Meeting on 14 May 2020, would be paid on 5 June 2020.

Share count and EPS

The weighted average number of shares for EPS purposes was 1,171.4m for the year ended 31 December 2019 (2018: 1,094.4m) and diluted weighted average number of shares was 1,199.0m (2018: 1,125.4m).

In May 2019, the company completed a placement of 111,216,400 new ordinary shares of 2p each raising net proceeds of £138.7m (2018: nil). Additionally, in March 2019, 13,600,000 shares were issued to the Employee Share Ownership Trust to satisfy awards under the Group's share award schemes.

Basic EPS before exceptional items was 6.54p per share (2018: 8.20p); including the impact of exceptional items, Basic EPS was 4.31p (2018: 6.16p). Basic Underlying EPS was 6.31p per share (2018: 5.36p).

Diluted EPS before exceptional items was 6.39p per share (2018: 7.97p); including the impact of exceptional items, Diluted EPS was 4.21p (2018: 5.99p). Diluted Underlying EPS was 6.16p per share (2018: 5.21p).

Cash flows

The UTP of £120.2m (2018: £93.1m) converts into a trading cash inflow of £115.5m (2018 restated: £45.1m). The improvement in 2019 cash conversion reflects the increase in profitability from revenue growth and cost efficiencies. In 2019, operating profit for the year has increased by £22.0m, the working capital outflow was £0.1m (2018: £21.6m) and OCP utilisation was £53.6m (2018: £51.8m), although in 2019, £12.7m of the utilisation was not related to a cash cost but rather was related to the impairment of right of use assets created on adoption of IFRS16 within onerous contracts.

The table below shows the operating profit and FCF reconciled to movements in Net Debt. FCF for the year was an inflow of £62.0m compared to £16.3m in 2018. The improvement in FCF is largely as a result of improved trading cash inflows as discussed above. Offsetting the improvement in trading cash inflows is an increase in tax outflows of £20.6m principally arising in our AsPac and Americas operations as described above.

The movement in Adjusted Net Debt is an increase of £41.3m in 2019, a reconciliation of which is provided at the bottom of the following table. The movement includes a net inflow of £138.7m from the placement of 111.2m new shares in May 2019 and exceptional items of £49.2m (2018: £19.2m).

The net cash outflow on acquisition includes the net cash outflow on the acquisition of NSBU of £183.9m and £9.3m of deferred consideration paid in respect of historic acquisitions. In addition, £4.7m of acquisition related costs associated with the NSBU acquisition were recognised as exceptional in the year.

Exceptional cash outflows are higher than the exceptional income statement charge largely due to the provision release of £19.4m seen in the income statement which was a non-cash item.

For the year ended 31 December	2019 £m	2018 (*restated) £m
Operating profit	102.5	80.5
Remove exceptional items	23.4	31.9
Operating profit before exceptional items	125.9	112.4
Less: profit from joint ventures and associates	(27.5)	(28.8)
Movement in provisions	(43.1)	(68.1)
Depreciation, amortisation and impairment of leased property, plant and equipment and intangible assets	75.6	6.8
Depreciation, amortisation and impairment of owned property, plant and equipment and intangible assets	43.3	36.4
Other non-cash movements	9.3	16.5
Operating cash inflow before movements in working capital, exceptional items and tax	183.5	75.2
Working capital movements	(0.1)	(21.6)
Tax paid	(31.2)	(10.6)
Non-cash R&D expenditure	(0.1)	(0.1)
Cash flow from operating activities before exceptional items	152.1	42.9
Dividends from joint ventures and associates	25.4	29.7
Interest received	0.4	0.6
Interest paid	(21.4)	(16.7)
Capital element of lease repayments	(70.2)	(8.7)
Capitalised finance costs paid	(1.2)	(2.0)
Purchase of intangible and tangible assets net of proceeds from disposals	(23.3)	(29.5)
Proceeds received from exercise of share options	0.2	-
Free Cash Flow	62.0	16.3
Net cash outflow on acquisition and disposal of subsidiaries	(193.2)	(31.3)
Issue of share capital	138.7	-
Other movements on investment balances	0.2	(0.3)
Capitalisation and amortisation of loan costs	0.1	1.3
Unwind of discounting and capitalisation of interest on loans receivable	-	3.0
Exceptional items	(49.2)	(19.2)
Cash movements on hedging instruments	(2.0)	0.2
Foreign exchange gain/(loss) on Adjusted Net Debt	2.1	(22.3)
Movement in Adjusted Net Debt	(41.3)	(52.3)
Opening Adjusted Net Debt	(173.2)	(120.9)
Closing Adjusted Net Debt	(214.5)	(173.2)
Lease liabilities	(369.9)	(14.8)
Closing Net Debt at 31 December	(584.4)	(188.0)

* Following the implementation of IFRS16 Leases, the definition of Free Cash Flow has been amended to exclude the capital element of lease payments. In addition, proceeds from the exercise of share options has been included within Free Cash Flow.

Net Debt

As at 31 December	2019 £m	2018 £m
Cash and cash equivalents	89.5	62.5
Loans payable	(305.0)	(239.5)
Lease liabilities	(369.9)	(14.8)
Derivatives relating to Net Debt	1.0	3.8
Net Debt	(584.4)	(188.0)
Exclude Lease Liabilities	369.9	14.8
Adjusted Net Debt	(214.5)	(173.2)

Average Adjusted Net Debt as calculated on a daily basis for the year ended 31 December 2019 was £231.0m (2018 restated: £218.7m). Peak Adjusted Net Debt was £356.8m (2018 restated: £292.0m).

Treasury operations and risk management

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

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

Liquidity and funding

As at 31 December 2019, the Group had committed funding of £508m (2018: £492m), comprising £213m of private placement notes, a £45m acquisition loan facility which was fully drawn and a £250m revolving credit facility (RCF), of which £200m was undrawn. In addition, during December 2019, the Group cancelled its receivables financing facility of £30m (2018: facility of £30m which was unutilised).

The Group's RCF provides £250m of committed funding for five years from the arrangement date in December 2018.

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 2019, 99% of the Group's Adjusted Net Debt was at fixed rates.

Foreign exchange risk

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

Credit risk

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

Debt covenants

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

Following the refinancing in December 2018, the debt covenants have been amended to include the impact of IFRS15. The covenants continue to exclude the future impact of IFRS16 on the Group's results.

For the year ended 31 December	2019 £m	2018 £m
Operating profit before exceptional items	125.9	112.4
Remove: Amortisation and impairment of intangibles arising on acquisition	7.5	4.3
Trading Profit	133.4	116.7
Exclude: Share of joint venture post-tax profits	(27.5)	(28.8)
Include: Dividends from joint ventures	25.4	29.7
Add back: Net non-exceptional charges to OCPs	7.2	-
Add back: Depreciation, amortisation and impairment of owned property, plant and equipment and non-acquisition intangible assets	35.8	32.1
Add back: Depreciation, amortisation and impairment of property, plant and equipment and non-acquisition intangible assets held under finance leases - in accordance with IAS17 Leases	5.8	6.8
Add back: Foreign exchange credit on investing and financing arrangements	(0.8)	(0.2)
Add back: Share based payment expense	11.6	14.7
Other covenant adjustments to EBITDA	9.8	-
Covenant EBITDA	200.7	171.0
Net finance costs	21.8	13.9
Exclude: Net interest receivable on retirement benefit obligations	2.1	0.8
Exclude: Movement in discount on other debtors	0.1	1.2
Exclude: Foreign exchange on investing and financing arrangements	(0.8)	(0.2)
Add back: Movement in discount on provisions	(1.2)	(0.5)
Other covenant adjustments to net finance costs resulting from IFRS16	(6.6)	-
Covenant net finance costs	15.4	15.2
Adjusted net debt	214.5	173.2
Obligations under finance leases - in accordance with IAS17 Leases	8.9	14.8
Recourse Net Debt	223.4	188.0
Exclude: Disposal vendor loan note, encumbered cash and other adjustments	4.1	2.3
Covenant adjustment for average FX rates	7.6	(8.8)
CTNB	235.1	181.5
CTNB / covenant EBITDA (not to exceed 3.5x)	1.17x	1.06x
Covenant EBITDA / covenant net finance costs (at least 3.0x)	13.0x	11.2x

Net assets summary

As at 31 December	2019 £m	2018 £m
Non-current assets
Goodwill	671.2	579.6
Other intangible assets	96.5	67.3
Property, plant and equipment	392.6	64.8
Other non-current assets	50.1	51.0
Deferred tax assets	63.9	60.9
Retirement benefit assets	78.3	85.8
	1,352.6	909.4
Current assets
Inventories	18.3	22.9
Contract assets, trade receivables and other current assets	612.2	551.5
Current tax assets	6.8	7.3
Cash and cash equivalents	89.5	62.5
Total current assets	726.8	644.2
Total assets	2,079.4	1,553.6
Current liabilities
Contract liabilities, trade payables and other current liabilities	(557.7)	(497.7)
Current tax liabilities	(18.7)	(29.2)
Provisions	(58.4)	(120.1)
Lease obligations	(84.6)	(5.7)
Loans	(56.1)	(21.9)
Total current liabilities	(775.5)	(674.6)
Non-current liabilities
Contract liabilities, trade payables and other non-current liabilities	(72.7)	(109.9)
Deferred tax liabilities	(26.7)	(21.4)
Provisions	(103.4)	(119.3)
Lease obligations	(285.3)	(9.1)
Loans	(248.9)	(217.6)
Retirement benefit obligations	(24.0)	(14.9)
	(761.0)	(492.2)
Total liabilities	(1,536.5)	(1,166.8)
Net assets	542.9	386.8

At 31 December 2019 the balance sheet had net assets of £542.9m, a movement of £156.1m from the closing net asset position of £386.8m as at 31 December 2018. The increase in net assets is mainly due to the following movements:

· A decrease in provisions of £77.6m. Further details on provision movements is provided below.

· Adjusted Net Debt increased by £41.3m. Further details of these movements are provided in the cash flow and Net Debt sections above.

· An increase in property, plant and equipment of £327.8m, which includes right of use assets with a net book value of £345.3m at 31 December 2019 following the adoption of IFRS16 Leases, although this is offset by a combined increase in lease liabilities of £355.1m. Of the total increase in the lease liability, £78.9m is recognised in current liabilities which has contributed to the increase in net current liabilities to £48.7m.

· An increase in goodwill and intangibles of £115.3m and £52.6m respectively as a result of the acquisition of NSBU, offset by movements in exchange rates and amortisation of intangibles charged in the year.

Provisions

The total of current and non-current provisions has decreased by £77.6m since 31 December 2018. The movement is predominantly due to:

· A decrease in onerous contract provisions of £65.6m.

· A £19m net release of other provisions excluded from UTP as the provisions related to items created as an exceptional cost.

· £7m net charges on end of contract employee related provisions and other items, none of which were individually material.

Movements in onerous contract provisions since the 31 December 2018 balance sheet date, are as follows:

	Onerous Contract Provisions £m
At 1 January 2019	82.1
Opening adjustment - IFRS16	(13.3)
Charged to the income statement during the year - trading	10.6
Released to the income statement - trading	(9.6)
Utilisation during the year	(53.6)
Unwinding of discount	0.2
Foreign exchange	0.1
At 31 December 2019	16.5

The balance of OCPs at 31 December 2019 was £16.5m (2018: £82.1m). OCP balances are subject to ongoing review and a full bottom-up assessment of the forecasts that form the basis of the OCPs is conducted as part of the annual budgeting process. The net non-exceptional charge to OCPs was £1.0m (2018: £12.8m release) and utilisation was £53.6m (2018: £51.8m).

In 2019, the release from OCPs is reflective of the Group's ability to forecast the final years of contracts which are nearing completion. Additional charges of £10.6m (2018: £3.4m) have been made in respect of future losses on new and existing onerous contract provisions to reflect the updated forecasts and releases of £9.6m (2018: £16.2m) as settlements are agreed and contracts near completion. 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 IAS37.

Acquisitions

On 1 August 2019, the Group acquired the Naval Systems Business Unit and a small number of related contracting entities (collectively, 'NSBU'), from Alion Science & Technology Corporation. Serco acquired the net assets of the business as well as the Alion Canada and Alion IPS legal entities. The acquired business contributed £109.8m of revenue and £8.1m of operating profit before exceptional items to the Group's results during the year to 31 December 2019. As a result of the acquisition, Alion Canada, now known as Serco Canada Marine, and Alion IPS are 100% owned, indirect subsidiaries of Serco Group plc.

NSBU is a leading provider of naval design, systems engineering, as well as production and lifecycle support services to the US Navy, US Army and Royal Canadian Navy. The combined business will be a top tier supplier of services to the US Navy and increases our exposure to US Navy fleet expansion, which is one of the fastest-growing areas of public procurement. The US Navy has announced plans to increase the fleet from 280 to 355 ships by 2034, and we see a long-term and growing demand for the capabilities that the combination of Serco and NSBU will be able to provide.

The total annual revenue of NSBU in 2020 is expected to be around $370m (£285m) and the estimated operating profit before exceptional items, including an appropriate allocation of charges for shared support services and fully allocated overheads, of around $27m (£20m).

IFRS16

A new leasing standard, IFRS16 Leases was adopted by the Group with effect from 1 January 2019. IFRS16 requires the recognition of a lease liability and corresponding right of use asset for any lease not covered by a low-value or short-term exemption.

The following table illustrates the impact which IFRS16 has had on the results for the year ended 31 December 2019 for key Alternative Performance Measures. This has been provided to assist the reader in understanding the business performance outside of changes to accounting standards.

No restatement has been made to the results for the year ended 31 December 2018 in accordance with the modified retrospective approach to transition adopted by the Group.

	As reported 31 December 2019	Impact of IFRS16 31 December 2019	APM pre-IFRS16 31 December 2019	31 December 2018
Underlying Trading Profit (£m)	120.2	1.2	119.0	93.1
Trading Profit (£m)	133.4	2.3	131.1	116.7
Operating Profit (£m)	102.5	2.3	100.2	80.5
Net Finance Costs (£m)	21.8	6.6	15.2	6.4
Profit Before Tax (£m)	80.7	(4.3)	85.0	74.1
Diluted Underlying EPS (p)	6.16	(0.46)	6.62	5.21
Net Debt (£m)	584.4	360.9	223.5	188.0

Serious Fraud Office Investigation

On 4 July 2019, Serco Geografix Ltd, a wholly owned subsidiary, received judicial approval of a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO). This ruling concluded the SFO's investigation into Serco companies announced in November 2013. As part of the DPA, the Group has paid a fine of £19.2m during the year and also paid SFO investigation costs of £3.7m.

The Group has received a claim seeking damages for alleged losses following the reduction in Serco's share price in 2013. 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 is subject to a number of significant uncertainties and, therefore, it is not possible to assess the quantum of any such litigation as at the date of this disclosure.

Financial Statements

Consolidated Income Statement

For the year ended 31 December

	2019 £m	2018 £m
Revenue	3,248.4	2,836.8
Cost of sales	(2,928.3)	(2,546.6)
Gross profit	320.1	290.2
Administrative expenses
Other general and administrative expenses	(214.2)	(202.3)
Exceptional loss on disposal of subsidiaries and operations	-	(0.5)
Other exceptional operating items	(23.4)	(31.4)
Other expenses - amortisation and impairment of intangibles arising on acquisition	(7.5)	(4.3)
Total administrative expenses	(245.1)	(238.5)
Share of profits in joint ventures and associates, net of interest and tax	27.5	28.8
Operating profit	102.5	80.5
Operating profit before exceptional items	125.9	112.4
Investment revenue	2.7	4.3
Finance costs	(24.5)	(18.2)
Exceptional finance income	-	7.5
Total net finance costs	(21.8)	(6.4)
Profit before tax	80.7	74.1
Profit before tax and exceptional items	104.1	98.5
Tax on profit before exceptional items	(27.4)	(8.8)
Exceptional tax	(2.7)	2.1
Tax charge	(30.1)	(6.7)
Profit for the year	50.6	67.4
Attributable to:
Equity owners of the Company	50.4	67.4
Non controlling interests	0.2	-
Earnings per share (EPS)
Basic EPS	4.31p	6.16p
Diluted EPS	4.21p	5.99p

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

Consolidated Statement of Comprehensive Income

For the year ended 31 December

	2019 £m	2018 £m
Profit for the year	50.6	67.4

Other comprehensive income for the year:

Items that will not be reclassified subsequently to profit or loss:
Net actuarial (loss)/gain on defined benefit pension schemes*	(20.3)	52.1
Actuarial gain/(loss) on reimbursable rights*	3.2	(0.2)
Tax relating to items not reclassified*	2.7	(9.2)
Share of other comprehensive income in joint ventures and associates	1.3	2.0

Items that may be reclassified subsequently to profit or loss:
Net exchange loss on translation of foreign operations**	(33.3)	(5.3)
Fair value (loss)/gain on cash flow hedges during the year**	(0.1)	0.6
Total other comprehensive (loss)/income for the year	(46.5)	40.0

Total comprehensive income for the year	4.1	107.4
Attributable to:
Equity owners of the Company	4.0	107.3
Non controlling interest	0.1	0.1

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

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

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

Consolidated Statement of Changes in Equity

	Share capital £m	Share premium account £m	Capital redemption reserve £m	Retained earnings £m	Retirement benefit obligations reserve £m	Share based payment reserve £m	Own shares reserve £m	Hedging and translation reserve £m	Total shareholders' equity £m	Non controlling interest £m
At 1 January 2018	22.0	327.9	0.1	41.8	(180.1)	88.3	(46.1)	10.1	264.0	1.3

Total comprehensive income for the year	-	-	-	69.3	42.7	-	-	(4.7)	107.3	0.1

Shares transferred to option holders on exercise of share options	-	-	-	-	-	(28.0)	27.4	-	(0.6)	-

Expense in relation to share based payments	-	-	-	-	-	14.7	-	-	14.7	-

At 1 January 2019	22.0	327.9	0.1	111.1	(137.4)	75.0	(18.7)	5.4	385.4	1.4

Opening balance adjustment - IFRS16 (note 2)	-	-	-	3.0	-	-	-	-	3.0	-

Total comprehensive income for the year	-	-	-	51.8	(14.4)	-	-	(33.4)	4.0	0.1

Issue of share capital	2.5	135.0	-	-	-	-	(0.3)	-	137.2	-

Shares transferred to option holders on exercise of share options	-	-	-	-	-	(14.4)	14.6	-	0.2	-

Expense in relation to share based payments	-	-	-	-	-	11.6	-	-	11.6	-

At 31 December 2019	24.5	462.9	0.1	165.9	(151.8)	72.2	(4.4)	(28.0)	541.4	1.5

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

Consolidated Balance Sheet

	At 31 December 2019 £m	At 31 December 2018 £m
Non current assets
Goodwill	671.2	579.6
Other intangible assets	96.5	67.3
Property, plant and equipment	392.6	64.8
Interests in joint ventures and associates	23.6	20.6
Trade and other receivables	26.5	30.3
Derivative financial instruments	-	0.1
Deferred tax assets	63.9	60.9
Retirement benefit assets	78.3	85.8
	1,352.6	909.4
Current assets
Inventories	18.3	22.9
Contract assets	293.5	244.3
Trade and other receivables	315.7	299.5
Current tax assets	6.8	7.3
Cash and cash equivalents	89.5	62.5
Derivative financial instruments	3.0	7.7
	726.8	644.2
Total assets	2,079.4	1,553.6
Current liabilities
Contract liabilities	(66.8)	(74.3)
Trade and other payables	(489.0)	(419.7)
Derivative financial instruments	(1.9)	(3.7)
Current tax liabilities	(18.7)	(29.2)
Provisions	(58.4)	(120.1)
Lease obligations	(84.6)	(5.7)
Loans	(56.1)	(21.9)
	(775.5)	(674.6)
Non current liabilities
Contract liabilities	(58.2)	(86.6)
Trade and other payables	(14.5)	(23.3)
Deferred tax liabilities	(26.7)	(21.4)
Provisions	(103.4)	(119.3)
Lease obligations	(285.3)	(9.1)
Loans	(248.9)	(217.6)
Retirement benefit obligations	(24.0)	(14.9)
	(761.0)	(492.2)
Total liabilities	(1,536.5)	(1,166.8)
Net assets	542.9	386.8
Equity
Share capital	24.5	22.0
Share premium account	462.9	327.9
Capital redemption reserve	0.1	0.1
Retained earnings	165.9	111.1
Retirement benefit obligations reserve	(151.8)	(137.4)
Share based payment reserve	72.2	75.0
Own shares reserve	(4.4)	(18.7)
Hedging and translation reserve	(28.0)	5.4
Equity attributable to owners of the Company	541.4	385.4
Non controlling interest	1.5	1.4
Total equity	542.9	386.8

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

The financial statements were approved by the Board of Directors on 25 February 2020 and signed on its behalf by:

Rupert Soames Angus Cockburn
Group Chief Executive Officer Group Chief Financial Officer

Consolidated Cash Flow Statement

For the year ended 31 December

	2019 m	2018 £m
Net cash inflow from operating activities before exceptional items	152.1	42.9
Exceptional items	(49.2)	(40.2)
Net cash inflow from operating activities	102.9	2.7
Investing activities
Interest received	0.4	0.6
Increase/(decrease) in security deposits	0.2	(0.3)
Dividends received from joint ventures and associates	25.4	29.7
Proceeds from disposal of property, plant and equipment	1.0	5.3
Proceeds from disposal of intangible assets	-	0.5
Net cash inflow on disposal of subsidiaries and operations	-	1.5
Acquisition of subsidiaries, net of cash acquired	(193.2)	(32.8)
Proceeds from loans receivable	-	29.9
Exceptional finance income received	-	7.5
Purchase of other intangible assets	(6.8)	(8.9)
Purchase of property, plant and equipment	(17.5)	(26.4)
Net cash (outflow)/inflow from investing activities	(190.5)	6.6
Financing activities
Interest paid	(21.4)	(16.7)
Capitalised finance costs paid	(1.2)	(2.0)
Advances/(repayment) of loans	72.3	(31.3)
Capital element of lease repayments	(70.2)	(8.7)
Cash movements on hedging instruments	(2.0)	0.2
Issue of share capital	138.7	-
Proceeds received from exercise of share options	0.2	-
Net cash inflow/(outflow) from financing activities	116.4	(58.5)
Net increase/(decrease) in cash and cash equivalents	28.8	(49.2)
Cash and cash equivalents at beginning of year	62.5	112.1
Net exchange loss	(1.8)	(0.4)
Cash and cash equivalents at end of year	89.5	62.5

The accompanying notes form an integral part of the condensed consolidated 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 2019 or 2018, but is derived from those accounts. Statutory accounts for 2018 have been delivered to the registrar of companies, and those for 2019 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 Financial Reporting Standards adopted for use in the European Union (IFRS). 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 2020 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

The Directors have a reasonable expectation that the Company and the Group will be able to operate within the level of available facilities and cash for the foreseeable future, and accordingly believe that it is appropriate to prepare the financial statements on a going concern basis.

In assessing the basis of preparation of the financial statements for the year ended 31 December 2019, 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 Directors have undertaken a rigorous assessment of going concern and liquidity, taking into account financial forecasts, which indicate sufficient capacity in our financing facilities and associated covenants to support the Group. In order to satisfy themselves that they have adequate resources for the future, the Directors have reviewed the Group's existing debt levels, the committed funding and liquidity positions under our debt covenants, and our ability to generate cash from trading activities and working capital requirements.

The Group's current principal debt facilities as at 31 December 2019 comprised a £250m revolving credit facility, a three year term acquisition facility of £45m and £213m of US private placement notes. As at 31 December 2019, the Group had £508m of committed credit facilities and committed headroom of £286m. In undertaking this review the Directors have considered the business plans which provide financial projections for the foreseeable future. For the purposes of this review, we consider that to be the period ending 30 June 2021.

Adoption of new and revised standards

IFRS16 Leases (effective 1 January 2019), specifies how to recognise, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognise assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset is of a low value. Lessors continue to classify leases as operating or finance, with the IFRS16 approach to lessor accounting remaining substantially unchanged from its predecessor, IAS 17.

Under the applicable transition rules a lessee shall either apply IFRS16 with full retrospective effect or alternatively not restate comparative information but recognise the cumulative effect of initially applying IFRS16 as an adjustment to opening equity at the date of initial application, subject to the Group's application of the following expedients:

No reassessment is required as to whether a contract is, or contains, a lease at the date of initial application.

No reassessment is required for:

o leases with a lease term end date within one year of the date of initial application; or

o leases for low value assets, which the Group considers to be those with an initial cost value less than £5,000 except for circumstances where those assets form part of a bundle of leased assets accounted for as a single lease contract.

The Group has adopted the modified retrospective transition approach and as such the valuation of the right of use asset at 1 January 2019 is calculated as if the lease had always existed and hence the net book value of the asset on 1 January 2019 is based on the assumption of straight line amortisation.

The lease liability at 1 January 2019 is calculated as the present value of future payments in relation to the lease, discounted at the applicable incremental borrowing rate.

The impact for the Group of adopting IFRS16 is as follows:

	As at 1 January
	2019
	£m
Retained earnings at 31 December 2018	111.1
Lease liability recognised	(129.1)
Right of use asset recognised, net of impairments	104.2
Impact of IFRS16 on opening provisions	12.5
Impact of IFRS16 on other creditors	10.6
Deferred tax asset recognised	5.1
Adjustment to retained earnings due to the implementation of IFRS16	3.3
Impact of IFRS16 on interest in joint ventures at 1 January 2019	(0.3)
Retained earnings at 1 January 2019	114.1

The impact of IFRS16 on the Group's income statement is to increase finance costs and improve trading profit as lease costs are replaced with a lower depreciation charge. The impact to 2019 is outlined in the Divisional Reviews on pages 16-21 and to key metrics in the Finance Review on page 38.

In calculating the lease liability to be recognised on transition, the Group used a weighted average incremental borrowing rate on 1 January 2019 of 3.50%. Applying this weighted average incremental borrowing rate to the operating lease commitments recognised as at 31 December 2018 gives a liability of £187.2m. This differs from the lease liability recognised as a result of transitioning to IFRS16 for the following reasons:

	£m
Minimum lease payments under non-cancellable operating leases recognised in accordance with IAS17 Leases as at 31 December 2018:
Within one year	73.2
Between one and five years	95.1
After five years	22.1
	190.4
Finance leases	14.8
Operating lease commitments discounted at the weighted average incremental borrowing rate	187.2
Less: leases ending within 12 months of the transition date to IFRS16 covered by the practical expedient	(44.8)
Less: leases included in the operating lease commitment not meeting the recognition criteria of IFRS16	(13.3)
Lease liability on transition to IFRS16	143.9

The implementation of IFRS16 Leases has required the Group to make a number of judgements and estimates. The key judgements applied relate to the likelihood of lease extension options being exercised, the certainty of the exercise of termination options and the identification of leases embedded within other contracts. The key estimates used in assessing the impact of adopting the new standard are the incremental borrowing rates applied in calculating the present value of future lease payments to identify the lease liability at 1 January 2019.

In addition to the areas where a financial impact has been identified as a result of adoption of IFRS16 as identified above, there are certain accounting policies which are new or change existing policies applied by the Group and may have an impact on the future financial performance of the Group. The policies in these areas to be adopted by the Group are set out below:

(i) Lease amendments. Where changes in a lease occur, this will trigger a reassessment of the lease liability. Changes in the lease liability will be recognised via an adjustment to the right of use asset. However, if the carrying amount of the right-of-use asset is reduced to zero and there is a further reduction in the measurement of the lease liability, any remaining amount of the remeasurement will be recognised in profit or loss.

(ii) Lease incentives. Where a lease incentive is received prior to the commencement of a lease, the amount is offset against the right of use asset at inception. Where a lease includes a period or periods of reduced or free rentals, these are included in the calculation of the present value of the lease liability on inception.

(iii) Variable lease payments. Where a contract to lease an asset has a pricing mechanism that allows for changes after the commencement date, other than those that change simply due to the passage of time, it is considered to have variable lease payments. These payments will depend on an index or rate and are included in the calculated lease liability at the lease commencement date according to the rate or index as at that date.

(iv) Sub-leases. Where a group entity leases an asset and this asset is subsequently leased to another entity, this is considered to be a sub-lease if the original head lease remains in place. In this instance the entity which has entered into the head lease is acting as both a lessee and a lessor simultaneously. As a result, the head lease is accounted for in accordance with the group's lease accounting policy. When acting as a lessor, there is a requirement to determine whether the sub-lease is an operating lease or a finance lease, with the accounting following this determination.

(v) Separate lease and non-lease components. Lease contracts can often contain elements related to the use of an asset and elements that are unrelated, for example where a property lease also includes a charge for insurance or maintenance. The lease component and the associated non-lease component are accounted for as a single lease component.

(vi) Lease terminations. Where a lease is terminated before the end of the lease term the right of use asset is disposed of with the carrying value being charged to the income statement whilst the lease liability is extinguished from the balance sheet resulting in a credit to the income statement. The net charge or credit to the income statement is added to any cost of exiting the lease to result in a profit or loss on lease termination.

As an interpretation, IFRIC23 Uncertainty over Income Tax Treatments clarifies the application of the recognition and measurement criteria of IAS12 when there is uncertainty over income tax treatments yet to be accepted by tax authorities. The interpretation had an effective date of 1 January 2019 so is reflected in the Group's financial statements for the period ended 31 December 2019. Application of this interpretation did not have a significant 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 above, management has made the following judgements that have the most significant effect on the amounts recognised in the 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 measurement of a provision booked, is linked to the complexity of the underlying contract and the form of service delivery. Due to the level of uncertainty and combination of variables associated with those estimates there is a significant risk that there could be material adjustment in respect of onerous contract provisions within the next financial year.

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 matters dependent on the behaviour of the customer, such as a decision to extend a contract where it has the unilateral right to do so.

· The outcome of open claims made by or against a customer regarding contractual performance.

· The ability of suppliers to deliver their contractual obligations on time and on budget.

In the current year, an amount of £2.5m was charged to historic provisions, and releases of £9.6m have been made. One new OCP was recognised during the year with the charge being £1.9m. Further details are provided in the Finance Review within the Strategic Report. All of these revisions have resulted from triggering events in the current year, either through changes in contractual positions or changes in circumstances which could not have been reasonably foreseen at the previous balance sheet date. To mitigate the level of uncertainty in making these estimates Management regularly compares actual performance of the contracts against previous forecasts and considers whether there have been any changes to significant judgements. A detailed bottom up review of the provisions is performed as part of the Group's formal annual budgeting process.

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. Discount rates used 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.

During the year, the Group's existing OCPs have continued to be utilised with the closing balance being significantly lower than at the prior year-end. The Group does not expect to enter into new OCPs, however given the nature of the Group's operations, there is an inherent risk that a contract can become onerous. The Group operates a large number of long-term contracts at different phases of their contract life cycle. Within the Group's portfolio, there are a small number of contracts where the balance of risks and opportunities indicates that they might be onerous if transformation initiatives or contract changes are not successful. The Group has concluded that these contracts do not require an onerous contract provision on an individual basis. Following the individual contract reviews, the Group has also undertaken a top down assessment which assumes that, whilst the contracts may not be onerous on an individual basis, as a portfolio there is a risk that at least some of the transformation programmes or customer negotiations required to avoid a contract loss, will not be fully successful, and it is more likely than not that one or more of these contracts will be onerous. Therefore, in considering the Group's overall onerous contract provision, the Group has made a best estimate of the provision required to take into consideration this portfolio risk. As a result, the risk of OCPs and the monitoring of individual contracts for indicators remains a critical estimate for the Group. The amount recognised in the year is £6.2m at the Trading Profit level within the Corporate costs segment, which after this charge is therefore £51.7m (2018: £40.1m).

Impairment of assets

Identifying whether there are indicators of impairment for assets involves a high level of judgement and a good understanding of the drivers of value behind the asset. At each reporting period an assessment is performed in order to determine whether there are any such indicators, which involves considering the performance of our business and any significant changes to the markets in which we operate.

We seek to mitigate the risk associated with this judgement by putting in place processes and guidance for the finance community and internal review procedures.

Determining whether assets with impairment indicators require an actual impairment involves an estimation of the expected value in use of the asset (or 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, both of which involve considerable judgement. The future cash flows are derived from approved forecasts, with the key assumptions being revenue growth, margins and cash conversion rates. Discount rates are calculated with reference to the specific risks associated with the assets and are based on advice provided by external experts. Our calculation of discount rates are performed based on a risk free rate of interest appropriate to the geographic location of the cash flows related to the asset being tested, which is subsequently adjusted to factor in local market risks and risks specific to Serco and the asset itself. Discount rates used for internal purposes are post tax rates, however for the purpose of impairment testing in accordance with IAS36 Impairment of Assets we calculate a pre tax rate based on post tax targets.

A key area of focus in recent years has been in the impairment testing of goodwill as a result of the pressure on the results of the Group. However, no impairment of goodwill was noted in the year ended 31 December 2019.

Current tax

Liabilities for tax contingencies require management judgement and estimates in respect of tax audits and also tax exposures in each of the jurisdictions in which we operate. Management is also required to make an estimate of the current tax liability together with an assessment of the temporary differences that arise as a consequence of different accounting and tax treatments. Key judgement areas include the correct allocation of profits and losses between the countries in which we operate and the pricing of intercompany services. Where management conclude that a tax position is uncertain, a current tax liability is held for anticipated taxes that are considered probable based on the current information available.

These liabilities can be built up over a long period of time but the ultimate resolution of tax exposures usually occurs at a point in time, and given the inherent uncertainties in assessing the outcomes of these exposures, these estimates are prone to change in future periods. It is not currently possible to estimate the timing of potential cash outflow, but on resolution, to the extent this differs from the liability held, this will be reflected through the tax charge/(credit) which could be material for that period to the extent that the outcomes differ from the current estimates. Each potential liability and contingency is revisited on an annual basis and adjusted to reflect any changes in positions taken by the company, local tax audits, the expiry of the statute of limitations following the passage of time and any change in the broader tax environment.

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 and other pension scheme arrangements are covered in note 31.

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 following principles:

· The asset recognised for the Serco Pension and Life Assurance Scheme is equal to the full surplus that will ultimately be available to the Group as a future refund.

· No foreign exchange item is shown in the disclosures as the non UK liabilities are not material.

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

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

Critical accounting judgements

Use of Alternative Performance Measures: Operating profit before exceptional items

IAS1 requires material items to be disclosed separately in a way that enables users to assess the quality of a company's profitability. In practice, these are commonly referred to as 'exceptional' items, but this is not a concept defined by IFRS and therefore there is a level of judgement involved in arriving at an Alternative Performance Measure which excludes such exceptional items. We consider items which are material and outside of the normal operating practice of the company to be suitable for separate presentation. There is a level of judgement required in determining which items are exceptional on a consistent basis and require separate disclosure. Further details can be seen in note 7.

The segmental analysis of operations in note 3 includes the additional performance measure of Trading Profit on operations which is reconciled to reported operating profit in that note. The Group uses Trading Profit as an alternative measure to reported operating profit by making several adjustments. Firstly, Trading Profit excludes exceptional items, being those we consider material and outside of the normal operating practice of the company to be suitable of separate presentation and detailed explanation. Secondly, amortisation and impairment of intangibles arising on acquisitions are excluded, because these charges are based on judgments 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 CODM reviews the segmental analysis for operations.

I nvestigation by the Serious Fraud Office

On 4 July 2019, Serco Geografix Ltd, a wholly owned subsidiary, received judicial approval of a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO). This ruling concludes the SFO's investigation into Serco companies announced in November 2013. As part of the DPA, the Group has paid a fine of £19.2m during the year and also paid SFO investigation costs of £3.7m. As at the end of 2019, this is no longer a critical accounting judgement.

Claim for losses in respect of the 2013 share price reduction

Deferred tax

Deferred tax assets are recognised for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilised. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits. Recognition has been based on forecast future taxable profits.

Further details on taxes are disclosed in note 16.

3. Segmental information

The Group's operating segments reflecting the information reported to the Board in 2019 under IFRS8 Operating Segments are as set out below.

Reportable segments	Operating segments
UK & Europe	Services for sectors including Citizen Services, Defence, Health, 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, Justice & Immigration, Health and Transport in the Asia Pacific region including Australia, New Zealand and Hong Kong
Middle East	Services for sectors including Defence, Health and Transport in the Middle East region
Corporate	Central and head office costs

Each operating segment is focused on a narrow group of customers in a specific geographic region and is run by a local management team which report directly to the 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 operating segment level in these financial statements. The accounting policies of the reportable segments are the same as the Group's accounting policies described in note 2 to the Group's consolidated financial statements.

Information about major customers

The Group has four major governmental customers which each represent more than 5% of Group revenues. The customers' revenues were £1,043.3m (2018: £1,113.1m) for the UK Government within the UK & Europe segment, £734.9m (2018: £522.8m) for the US Government within the Americas segment, £597.5m (2018: £498.7m) for the Australian Government within the AsPac segment and £255.5m (2018: £232.9m) for the Government of the United Arab Emirates within the Middle East segment.

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

Year ended 31 December 2019	UK&E m	Americas £m	AsPac m	Middle East £m	Corporate £m	Total £m
Revenue	1,361.7	915.7	621.4	349.6	-	3,248.4
Result
Trading profit/(loss) from operations*	48.2	91.7	31.2	13.9	(51.6)	133.4
Amortisation and impairment of intangibles arising on acquisition	(1.2)	(6.2)	(0.1)	-	-	(7.5)
Operating profit/(loss) before exceptional items	47.0	85.5	31.1	13.9	(51.6)	125.9
Other exceptional operating items**	(24.8)	15.3	(3.0)	-	(10.9)	(23.4)
Operating profit/(loss)	22.2	100.8	28.1	13.9	(62.5)	102.5
Investment revenue						2.7
Finance costs						(24.5)
Profit before tax						80.7
Tax charge						(27.4)
Tax on exceptional items						(2.7)
Profit for the year from operations						50.6

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

** Exceptional restructuring costs incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business.

Year ended 31 December 2019	UK&E m	Americas £m	AsPac m	Middle East £m	Corporate £m	Total £m
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax	27.3	-	0.2	-	-	27.5
Depreciation of plant, property and equipment	(37.3)	(17.4)	(9.0)	(4.7)	(6.0)	(74.4)
Impairment of plant, property and equipment	(18.9)	-	-	-	-	(18.9)
Total depreciation and impairment of plant, property and equipment	(56.2)	(17.4)	(9.0)	(4.7)	(6.0)	(93.3)
Amortisation of intangible assets arising on acquisition	(1.2)	(6.2)	(0.1)	-	-	(7.5)
Amortisation of other intangible assets	(0.3)	(1.2)	(4.8)	(0.4)	(11.4)	(18.1)
Total amortisation and impairment of intangible assets	(1.5)	(7.4)	(4.9)	(0.4)	(11.4)	(25.6)
Segment assets
Interests in joint ventures and associates	22.4	-	0.8	0.4	-	23.6
Other segment assets***	645.4	756.3	227.3	132.0	131.6	1,892.6
Total segment assets	667.8	756.3	228.1	132.4	131.6	1,916.2
Unallocated assets						163.2
Consolidated total assets						2,079.4
Segment liabilities
Segment liabilities *^/**	(536.3)	(232.8)	(151.8)	(103.0)	(160.3)	(1,184.2)
Unallocated liabilities						(352.3)
Consolidated total liabilities						(1,536.5)

*** 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.

**** Following the adoption of IFRS16 Leases all recognised lease liabilities are included within segment liabilities. Previously, finance lease liabilities were considered to be unallocated liabilities.

Year ended 31 December 2018	UK&E m	Americas £m	AsPac m	Middle East £m	Corporate £m	Total £m
Revenue	1,300.7	645.6	548.2	342.3	-	2,836.8
Result
Trading profit/(loss) from operations*	51.6	43.2	40.5	21.5	(40.1)	116.7
Amortisation and impairment of intangibles arising on acquisition	(0.5)	(3.2)	(0.6)	-	-	(4.3)
Operating profit/(loss) before exceptional items	51.1	40.0	39.9	21.5	(40.1)	112.4
Exceptional loss on disposal of subsidiaries and operations	(0.5)	-	-	-	-	(0.5)
Other exceptional operating items**	(11.0)	(2.8)	(4.5)	-	(13.1)	(31.4)
Operating profit/(loss)	39.6	37.2	35.4	21.5	(53.2)	80.5
Investment revenue						4.3
Finance costs						(18.2)
Other gains						7.5
Profit before tax						74.1
Tax charge						(8.8)
Tax on exceptional items						2.1
Profit for the year from operations						67.4

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

** Exceptional restructuring costs incurred by the Corporate segment are not allocated to other segments. Such items may represent costs that will benefit the wider business.

Year ended 31 December 2018	UK&E m	Americas £m	AsPac m	Middle East £m	Corporate £m	Total £m
Supplementary information
Share of profits in joint ventures and associates, net of interest and tax	28.6	-	0.2	-	-	28.8
Depreciation of plant, property and equipment	(11.4)	(3.3)	(2.5)	(0.7)	(1.6)	(19.5)
Impairment of plant, property and equipment	(0.7)	-	-	-	-	(0.7)
Total depreciation and impairment of plant, property and equipment	(12.1)	(3.3)	(2.5)	(0.7)	(1.6)	(20.2)
Amortisation of intangible assets arising on acquisition	(0.5)	(3.2)	(0.6)	-	-	(4.3)
Amortisation of other intangible assets	(0.4)	(1.5)	(4.9)	(0.3)	(11.5)	(18.6)
Exceptional impairment of other intangible assets	(0.1)	-	-	-	-	(0.1)
Total amortisation and impairment of intangible assets	(1.0)	(4.7)	(5.5)	(0.3)	(11.5)	(23.0)
Segment assets
Interests in joint ventures and associates	19.6	-	0.6	0.4	-	20.6
Other segment assets***	487.6	426.4	222.1	123.4	135.0	1,394.5
Total segment assets	507.2	426.4	222.7	123.8	135.0	1,415.1
Unallocated assets						138.5
Consolidated total assets						1,553.6
Segment liabilities
Segment liabilities***	(339.4)	(130.3)	(152.1)	(93.6)	(142.8)	(858.2)
Unallocated liabilities						(308.6)
Consolidated total liabilities						(1,166.8)

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

4. Joint ventures and associates

AWE Management Limited (AWEML) and Merseyrail Services Holding Company Limited (MSHCL) were the only equity accounted entities which were material to the Group during the year or prior year. Dividends of £17.6m (2018: £ 20.0m ) and £7.8m (2018: £ 8.7 m) respectively were received from these companies in the year.

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

31 December 2019

Summarised financial information	AWEML (100% of results) m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates* £m	Group portion of other joint venture arrangements and associates* £m	Total £m
Revenue	1,065.4	177.9	350.0	44.6	394.6
Operating profit	95.4	18.9	32.7	1.1	33.8
Net investment revenue	0.8	0.2	0.3	-	0.3
Income tax charge	(18.8)	(3.8)	(6.4)	(0.2)	(6.6)
Profit from operations	77.4	15.3	26.6	0.9	27.5
Other comprehensive income	-	2.5	1.3	-	1.3
Total comprehensive income	77.4	17.8	27.9	0.9	28.8
Non current assets	510.0	23.2	136.6	2.4	139.0
Current assets	186.8	64.6	78.1	18.7	96.8
Current liabilities	(163.0)	(48.4)	(64.1)	(14.7)	(78.8)
Non current liabilities	(509.3)	(12.7)	(131.2)	(2.2)	(133.4)
Net assets	24.5	26.7	19.4	4.2	23.6
Proportion of group ownership	24.5%	50.0%	-	-	-
Carrying amount of investment	6.0	13.4	19.4	4.2	23.6

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

	AWEML (100% of results) m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates* £m	Group portion of other joint venture arrangements and associates* £m	Total £m
Cash and cash equivalents	101.3	39.9	44.8	7.4	52.2
Current financial liabilities excluding trade and other payables and provisions	(7.6)	(7.3)	(5.6)	(0.2)	(5.8)
Non current financial liabilities excluding trade and other payables and provisions	(0.1)	(12.5)	(6.3)	(2.3)	(8.6)
Depreciation and amortisation	-	(1.6)	(0.8)	(0.9)	(1.7)
Interest income	0.8	0.2	0.3	-	0.3

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

The Group's share of liabilities within joint ventures is £212.2m. Of this, an amount of £124.8m relates to a defined benefit pension obligation, against which Serco is fully indemnified, and a further £69.6m is trade and other payables which arise as part of the day to day operations carried out by those entities. The Group has no material exposure to third party debt or other financing arrangements within any of its joint ventures and associates.

The financial statements of MSHCL are for a period which is different from that of the Group, being for the 52 week period ended 4 January 2020 (2018: 52 week period ended 5 January 2019). The 52 week period reflects the joint venture's internal reporting structure and is sufficiently close so as to not require adjustment to match that of the Group.

Certain employees of the groups headed by AWEML and MSHCL are members of sponsored defined benefit pension schemes. Given the significance of the schemes to understanding the position of the entities, the following key disclosures are made:

Main assumptions: 2019	AWEML	MSHCL
Rate of salary increases (%)	2.1%	3.1%
Inflation assumption (CPI %)	2.1%	2.2%
Discount rate (%)	2.1%	2.1%
Post-retirement mortality:
Current male industrial pensioners at 65 (years)	22.9	N/A
Future male industrial pensioners at 65 (years)	25.0	N/A

Retirement benefit funding position (100% of results)	£m	£m
Present value of scheme liabilities	(2,213.6)	(374.5)
Fair value of scheme assets	1,716.6	218.5
Net amount recognised	(497.0)	(156.0)
Members' share of deficit	-	62.4
Franchise adjustment*	-	93.6
Related asset, right to reimbursement	497.0	-
Net retirement benefit obligation	-	-

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

AWEML is not liable for any deficiency in the defined benefit pension scheme under current contractual arrangements. The deficit reflected in the financial statements of MSHCL covers only that portion of the deficit that is expected to be funded over the term of the franchise arrangement the entity operates under. In addition, the defined benefit position reflects an adjustment in respect of funding required to be provided by employees.

31 December 2018

Summarised financial information		AWEML (100% of results) m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates* £m		Group portion of other joint venture arrangements and associates* £m		Total £m
Revenue		1,024.7	160.8	331.5		43.6		375.1
Operating profit before exceptional items		100.4	17.1	33.2		1.4		34.6
Exceptional items		-	(0.6)	(0.3)		-		(0.3)
Operating profit		100.4	16.5	32.9		1.4		34.3
Net investment revenue		0.6	0.2	0.2		0.1		0.3
Income tax (charge)/credit		(18.6)	(3.3)	(6.2)		0.1		(6.1)
Profit from operations		82.4	13.4	26.9		1.6		28.5
Profit from operations before exceptional items	82.4		14.0	27.2	1.6		28.8
Other comprehensive income		-	4.1	2.0		-		2.0
Total comprehensive income		82.4	17.5	28.9		1.6		30.5
Non current assets		518.5	8.0	131.0		2.6		133.6
Current assets		210.1	45.7	74.3		15.4		89.7
Current liabilities		(190.6)	(28.0)	(60.7)		(12.5)		(73.2)
Non current liabilities		(517.6)	(0.8)	(127.2)		(2.3)		(129.5)
Net assets		20.4	24.9	17.4		3.2		20.6
Proportion of group ownership		24.5%	50.0%	-		-		-
Carrying amount of investment		5.0	12.4	17.4		3.2		20.6

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

	AWEML (100% of results) m	MSHCL (100% of results) £m	Group portion of material joint ventures and associates* £m	Group portion of other joint venture arrangements and associates* £m	Total £m
Cash and cash equivalents	98.1	34.3	41.2	5.1	46.3
Current financial liabilities excluding trade and other payables and provisions	(9.7)	(2.0)	(3.4)	(0.2)	(3.6)
Non current financial liabilities excluding trade and other payables and provisions	-	-	-	(2.3)	(2.3)
Depreciation and amortisation	-	(2.0)	(1.0)	(1.0)	(2.0)
Interest income	0.6	0.2	0.2	0.1	0.3

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

In 2018, the cost associated with the Group's share of MSHCL's obligation in respect of the equalisation of guaranteed minimum pension (GMP) payments was recorded as exceptional to ensure consistent treatment across all defined benefit pension schemes the Group is liable for. There was no equivalent charge in 2019. More information is provided in note 11.

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

Main assumptions: 2018	AWEML	MSHCL
Rate of salary increases	2.2%	3.1%
Inflation assumption (CPI)	2.2%	2.2%
Discount rate	3.0%	2.9%
Post-retirement mortality:
Current male industrial pensioners at 65 (years)	23.0	N/A
Future male industrial pensioners at 65 (years)	25.6	N/A
Retirement benefit funding position (100% of results)	AWEML £m	MSHCL (**restated) £m
Present value of scheme liabilities	(2,030.4)	(290.3)
Fair value of scheme assets	1,512.8	193.3
Net amount recognised	(517.6)	(97.0)
Members' share of deficit	-	38.8
Franchise adjustment*	-	58.2
Related asset, right to reimbursement	517.6	-
Net retirement benefit obligation	-	-

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

** An adjustment has been made to the relative amounts of the Members' share of deficit and the Franchise adjustment for MSHCL as at 31 December 2018. The amounts previously disclosed had been transposed meaning the Members' share of deficit was incorrectly disclosed as £58.2m and the Franchise adjustment was incorrectly disclosed as £38.8m.

5. Acquisitions

On 1 August 2019, the Group acquired the Naval Systems Business Unit and a small number of related contracting entities (collectively, 'NSBU'), from Alion Science & Technology Corporation. Serco acquired the net assets of the business as well as the Alion Canada and Alion IPS legal entities. The acquired business contributed £109.8m of revenue and £7.2m of operating profit before exceptional items to the Group's results during the year to 31 December 2019. As a result of the acquisition, Alion Canada, now known as Serco Canada Marine, and Alion IPS are 100% owned, indirect subsidiaries of Serco Group plc.

The total consideration payable in relation to the acquisition of NSBU was £186.3m.

		Fair value NSBU £m
Goodwill		115.3
Acquisition related intangible assets		52.6
Property, plant and equipment		3.6
Trade and other receivables		46.6
Cash and cash equivalents		0.4
Deferred tax asset		0.9
Trade and other payables		(30.7)
Deferred tax liability		(2.4)
Acquisition date fair value of consideration transferred		186.3
Satisfied by:
Cash		184.3
Deferred consideration - working capital adjustment		2.0
Total consideration		186.3

The net cash outflow as a result of acquisitions made during the year was £197.9m made up of £184.3m consideration paid on the acquisition of NSBU, costs related to the acquisition of NSBU of £4.7m, consideration related to historic acquisitions of £9.3m and £0.4m of cash acquired.

Goodwill on the acquisition of NSBU represents the premium associated with taking over the operations which are considered to enhance Serco's ability to deliver in the growth areas of US Navy fleet expansion within our US Defence business. The acquisition is considered to be accretive to the Group's financial performance. All goodwill on the acquisition is deductible for tax purposes over fifteen years. Future US tax deductions will be available for £76.0m of acquired goodwill. The acquisition related intangible represents customer relationships which have been valued using our best estimate of forecast cashflows discounted to present value.

Based on estimates made of the full year impact of the acquisition of NSBU, had the acquisition taken place on 1 January 2019, Group revenue and operating profit before exceptional items for the period would have increased by approximately £153m and £10m respectively, taking total Group revenue to £3,401m and total Group operating profit before exceptional items to £136m.

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

	£m
Net cash outflow on acquisition of NSBU	183.9
Deferred consideration paid in respect of historic acquisition:
Clarence Correctional Centre	8.0
Anglia Support Partnership	1.3
Net cash outflow arising in the year on acquisitions	193.2
Exceptional acquisition related costs - NSBU	4.7
Net cash impact in the year on acquisitions	197.9

Costs associated with the acquisition of NSBU which were not directly related to the issue of shares or arrangement of the acquisition facility are shown as exceptional costs in the Consolidated Income Statement for the year. The total acquisition related costs recognised in exceptional items for the year ended 31 December 2019 was £4.7m.

6. Revenue from contracts with customers

Revenue

Information regarding the Group's major customers and a segmental analysis of revenue is provided in note 4.

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 2019	UK&E m	Americas £m	AsPac m	Middle East £m	Total £m
Key sectors
Defence	215.9	575.5	89.5	28.1	909.0
Justice & Immigration	311.9	-	279.6	-	591.5
Transport	143.5	99.7	19.7	215.3	478.2
Health	259.9	-	94.8	30.2	384.9
Citizen Services	430.5	240.5	137.8	76.0	884.8
	1,361.7	915.7	621.4	349.6	3,248.4
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous periods	3.3	-	(0.4)	-	2.9
Revenue recognised at a point in time	19.0	-	2.6	-	21.6
Products and services transferred over time	1,339.4	915.7	619.2	349.6	3,223.9
	1,361.7	915.7	621.4	349.6	3,248.4

Year ended 31 December 2018 (restated*)	UK&E m	Americas £m	AsPac m	Middle East £m	Total £m
Key sectors
Defence	213.5	337.6	56.2	40.8	648.1
Justice & Immigration	269.8	-	271.4	-	541.2
Transport	141.6	90.2	18.3	204.6	454.7
Health	232.4	-	96.4	28.5	357.3
Citizen Services	443.4	217.8	105.9	68.4	835.5
	1,300.7	645.6	548.2	342.3	2,836.8
Timing of revenue recognition
Revenue recognised from performance obligations satisfied in previous periods	1.6	-	3.2	-	4.8
Revenue recognised at a point in time	38.9	-	1.8	-	40.7
Products and services transferred over time	1,260.2	645.6	543.2	342.3	2,791.3
	1,300.7	645.6	548.2	342.3	2,836.8

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. The Group has not taken the practical expedient in IFRS15.121 not to disclose information about performance obligations that have original expected durations of one year or less and therefore no consideration from contracts with customers is excluded from the amounts included below. Forecast variable revenue is included only to the extent that it is measurable and highly probable that a significant reversal will not occur.

	UK&E m	Americas £m	AsPac m	Middle East £m	Total £m
Within 1 year (2020)	1,149.4	592.9	559.6	297.3	2,599.2
Between 2 - 5 years (2021 - 2024)	3,507.8	173.1	1,097.6	294.9	5,073.4
5 years and beyond (2025+)	4,648.5	-	1,571.7	173.5	6,393.7
	9,305.7	766.0	3,228.9	765.7	14,066.3

7. Exceptional items

Other exceptional operating items

For the year ended 31 December	2019 £m	2018 £m
Exceptional items arising
Exceptional loss on disposal of subsidiaries and operations	-	(0.5)
Other exceptional operating items
Restructuring costs	(12.8)	(32.3)
Increase in onerous lease provision	-	(1.8)
Costs associated with SFO investigation	(25.2)	0.4
Reversal of impairment of interest in joint venture and related loan balances	-	0.8
Reversal of impairment on loan balances	-	13.9
Cost of Guaranteed Minimum Pension equalisation	-	(9.6)
Release of/(increase in) other provisions and other items	19.3	(2.8)
Cost associated with the acquisition of Naval Systems Business Unit	(4.7)	-
Other exceptional operating items	(23.4)	(31.4)
Exceptional operating items	(23.4)	(31.9)
Exceptional finance income	-	7.5
Exceptional tax	(2.7)	2.1
Total operating and financing exceptional items net of tax	(26.1)	(22.3)

Exceptional loss on disposals

There were no material disposals of operations in 2019 (2018: none).

Other exceptional operating items

The Group is incurring costs in relation to restructuring programmes resulting from the Strategy Review. These costs include redundancy payments, provisions (including onerous leases), external advisory fees and other incremental costs. Due to the nature and scale of the impact of the transformation phase of the Strategy Review, the incremental costs associated with this programme are considered to be exceptional. Costs associated with the restructuring programme resulting from the Strategy Review must meet the following criteria: that they are directly linked to the implementation of the Strategy Review; they are incremental costs as a result of the activity; and they are non business as usual costs. In 2019, a charge of £12.8m (2018: £32.3m) arose in relation to the restructuring programme resulting from the Strategy Review . The Strategy Review is discussed in more detail in the Group's Strategic Report which forms part of the Consolidated Annual Report and Accounts. The transformation activities associated with this are complete and, as such, all exceptional restructuring costs related to this programme have ended in 2019. Non-exceptional restructuring charges are incurred by the business as part of normal operational activity, which in the year totalled £8.9m (2018: £6.3m) and were included within operating profit before exceptional items .

There was an exceptional charge totalling £25.2m (2018: credit of £0.4m) associated with the SFO's investigation and the programme of Corporate Renewal. These costs have historically been treated as exceptional and consistent treatment is applied in 2019. During the year, the Group paid £22.9m in penalties and legal costs associated with the SFO's investigation. The final judgement was provided on 4 July 2019. The credit in 2018 reflects the recovery of costs from the Group's insurance providers. The remaining £2.3m relates to legal costs incurred by the Group in respect of the investigation.

The Group completed the acquisition of the Naval Systems Business Unit (NSBU) from Alion Science and Technology in 2019. The acquisition achieved final regulatory approvals and completed in August 2019. The transaction and implementation costs of £4.7m have been treated as exceptional costs in line with the Group's accounting policy.

Exceptional finance costs

There were no exceptional finance costs in the year ended 31 December 2019. During 2018, part of the consideration for the sale of the Group's private sector BPO business in 2015, was a loan note with a face value of £30m accruing compound interest of 7%. The receivable associated with this loan note was recorded at a fair value of £19.5m. The discount on the loan note had been unwinding through the Group's net finance cost on an annual basis. During October 2018, the Intelenet business was sold and therefore repayment of the loan note was triggered resulting in a gain of £7.5m. As this gain was outside the normal financing arrangements of the Group and significant in size it was recorded as exceptional finance income.

Exceptional tax

Exceptional tax for the year was a charge of £2.7m (2018: £2.1m credit) which arises on exceptional items within operating profit. This charge arises mainly in connection with the decrease in provisions in respect of commercial disputes and legal claims for which a tax credit had been recorded when the provisions were originally recognised. This charge is offset by tax deductions in respect of the global restructuring programme and in the US on acquisition costs.

No tax credit arises on the exceptional charge associated with the costs in connection with the SFO investigation.

8. Investment revenue

Year ended 31 December	2019 m	2018 £m
Interest receivable on other loans and deposits	0.5	2.3
Net interest receivable on retirement benefit obligations (note 31)	2.1	0.8
Movement in discount on other debtors	0.1	1.2
	2.7	4.3

9. Finance costs

Year ended 31 December	2019 m	2018 £m
Interest payable on lease liabilities	6.9	0.6
Interest payable on other loans	13.9	13.8
Facility fees and other charges	1.7	3.1
Movement in discount on provisions	1.2	0.5
	23.7	18.0
Foreign exchange on financing activities	0.8	0.2
	24.5	18.2

10. Tax

10 (a) Income tax recognised in the income statement

Year ended 31 December	Before exceptional items 2019 m	Exceptional items 2019 £m	Total 2019 £m	Before exceptional items 2018 m	Exceptional items 2018 £m	Total 2018 £m
Current income tax
Current income tax charge/(credit)	22.7	(1.1)	21.6	23.6	(1.4)	22.2
Adjustments in respect of prior years	(0.2)	-	(0.2)	(0.9)	-	(0.9)
Deferred tax
Current year charge / (credit)	4.7	3.8	8.5	(13.8)	(0.7)	(14.5)
Adjustments in respect of prior years	0.2	-	0.2	(0.1)	-	(0.1)
	27.4	2.7	30.1	8.8	(2.1)	6.7

The tax expense for the year can be reconciled to the profit in the consolidated income statement as follows:

Year ended 31 December	Before exceptional items 2019 £m	Exceptional items 2019 £m	Total 2019 £m	Before exceptional items 2018 £m	Exceptional items 2018 £m	Total 2018 £m
Profit before tax	104.1	(23.4)	80.7	98.5	(24.4)	74.1
Tax calculated at a rate of 19.00% (2018: 19.00%)	19.7	(4.4)	15.3	18.7	(4.6)	14.1
Expenses not deductible for tax purposes*	0.9	4.4	5.3	5.3	-	5.3
UK unprovided deferred tax**	3.5	2.1	5.6	(7.5)	3.5	(4.0)
Other unprovided deferred tax	3.0	-	3.0	2.5	-	2.5
Effect of the use of unrecognised tax losses	-	-	-	(0.3)	-	(0.3)
Impact of changes in statutory tax rates on current income tax	(0.2)	-	(0.2)	1.7	-	1.7
Overseas rate differences	5.9	0.6	6.5	7.3	(0.7)	6.6
Statutory tax benefits	(0.2)	-	(0.2)	-	-	-
Other non taxable income	(3.1)	-	(3.1)	(2.5)	(0.4)	(2.9)
Adjustments in respect of prior years	-	-	-	(1.0)	-	(1.0)
Adjustments in respect of deferred tax on pensions	3.0	-	3.0	(10.1)	-	(10.1)
Adjustments in respect of equity accounted investments	(5.1)	-	(5.1)	(5.3)	0.1	(5.2)
Tax charge	27.4	2.7	30.1	8.8	(2.1)	6.7

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

** Arises due to timing differences between when an amount is recognised in the income statement and when the amount is subject to UK tax. In the current year, the Group has received tax credits for amounts which have been charged to the income statement in previous periods in connection with items such as fixed assets. Additional tax credit is recognised in relation to brought forward losses as shown in the deferred tax note below. UK unprovided deferred tax in relation to exceptional items relates to amounts which have been charged to the income statement in the current period for which no tax credit has yet been taken, for items such as restructuring costs.

The income tax charge for the year is based on the UK statutory rate of corporation tax for the period of 19.00% (2018:19.00%). 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	2019 £m	2018 £m
Current tax
Taken to retirement benefit obligations reserve	-	-
Deferred tax
Relating to cash flow hedges	0.1	-
Taken to retirement benefit obligations reserve	2.7	(9.2)
	2.8	(9.2)

11. Deferred tax

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

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

	2019 £m	2018 £m
At 1 January - asset	(39.5)	(39.3)
IFRS16 restatement	(5.1)	-
Opening asset restated	(44.6)	(39.3)
Income statement charge/(credit)	8.7	(14.7)
Items recognised in equity and in other comprehensive income	(2.8)	9.2
Arising on acquisition	1.5	2.3
Exchange differences	-	3.0
At 31 December - asset	(37.2)	(39.5)

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

	Temporary differences on assets/intangibles m	Share based payment and employee benefits £m	Retirement benefit schemes £m	OCPs m	Derivative financial instruments £m	Tax losses £m	Other temporary differences £m	Total £m
At 1 January 2019	24.6	(13.7)	9.9	(7.4)	-	(20.6)	(32.3)	(39.5)
IFRS16 restatement	(5.1)	-	-	-	-	-	-	(5.1)
Opening asset restated	19.5	(13.7)	9.9	(7.4)	-	(20.6)	(32.3)	(44.6)
Charged/(credited) to income statement (note 15a)	4.1	(1.6)	(0.4)	5.4	-	(0.4)	1.6	8.7
Items recognised in equity and in other comprehensive income (note 15b)	-	-	(2.7)	-	(0.1)	-	-	(2.8)
Arising on acquisition	2.4	(0.9)	-	-		-	-	1.5
Exchange differences	(1.6)	0.6	-	0.1	0.1	-	0.8	-
At 31 December 2019	24.4	(15.6)	6.8	(1.9)	-	(21.0)	(29.9)	(37.2)

Of the amount credited to the income statement, £nil ( 2018: credit of £0.1m) has been taken to cost of sales in respect of the R&D Expenditure credit.

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

	Temporary differences on assets/intangibles £m	Share based payment and employee benefits £m	Retirement benefit schemes £m	OCPs m	Tax losses £m	Other temporary differences £m	Total m
At 1 January 2018	25.8	(12.2)	2.5	(7.9)	(18.7)	(28.8)	(39.3)
(Credited)/charged to income statement (note 15a)	(4.7)	(1.8)	(1.7)	0.8	(1.9)	(5.4)	(14.7)
Items recognised in equity and in other comprehensive income (note 15b)	-	-	9.2	-	-	-	9.2
Arising on acquisition	2.3	-	-	-	-	-	2.3
Exchange differences	1.2	0.3	(0.1)	(0.3)	-	1.9	3.0
At 31 December 2018	24.6	(13.7)	9.9	(7.4)	(20.6)	(32.3)	(39.5)

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 is the analysis of the deferred tax balances (after offset) for financial reporting purposes:

	2019 £m	2018 £m
Deferred tax liabilities	26.7	21.4
Deferred tax assets	(63.9)	(60.9)
	(37.2)	(39.5)

As at the balance sheet date, the UK has a potential deferred tax asset of £180.8m (2018: £168.8m) available for offset against future profits. A deferred tax asset has currently been recognised of £21.1m (2018: £20.3m). Recognition has been based on forecast future taxable profits. No deferred tax asset has been recognised in respect of the remaining asset (net £159.7m) based on current forecasts; additional asset recognition is contingent on further improvement in the UK profit forecast. Measures enacted during 2016 cut the future tax rate from April 2020 from 19% to 17%. These measures will reduce the Group's future current tax charge accordingly. The deferred tax balance at 31 December 2019 has been calculated reflecting the reduced rate.

Losses of £0.1m (2018: £0.2m) expire within 5 years, losses of £0.1m (2018 £0.1m) expire within 6-10 years, losses of £0.7m (2018 £0.7m) expire within 20 years and losses of £1,063.9m (2018 £1,015.2m) may be carried forward indefinitely.

12. Earnings per share

Basic and diluted earnings per ordinary share (EPS) have been calculated in accordance with IAS33 Earnings per Share.

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

Number of shares	2019 millions	2018 Millions
Weighted average number of ordinary shares for the purpose of basic EPS	1,171.4	1,094.4
Effect of dilutive potential ordinary shares: Share options	27.6	31.0
Weighted average number of ordinary shares for the purpose of diluted EPS	1,199.0	1,125.4

At 31 December 2019 options over nil (2018: 145,238) shares were excluded from the weighted average number of shares used for calculating diluted earnings per share in accordance with IFRS2 Share Based Payment because their exercise price was above the average share price for the year and they were, therefore, anti-dilutive.

Earnings per share

Basic EPS	Earnings 2019 £m	Per share amount 2019 pence	Earnings 2018 £m	Per share amount 2018 Pence
Earnings for the purpose of basic EPS	50.4	4.31	67.4	6.16
Effect of dilutive potential ordinary shares	-	(0.10)	-	(0.17)
Diluted EPS	50.4	4.21	67.4	5.99

Basic EPS excluding exceptional items
Earnings for the purpose of basic EPS	50.4	4.31	67.4	6.16
Add back exceptional items	23.4	2.00	24.4	2.23
Add back tax on exceptional items	2.7	0.23	(2.1)	(0.19)
Earnings excluding exceptional items for the purpose of basic EPS	76.5	6.54	89.7	8.20
Effect of dilutive potential ordinary shares	-	(0.15)	-	(0.23)
Excluding exceptional items, diluted	76.5	6.39	89.7	7.97

13. Goodwill

					Cost £m		Accumulated impairment losses m		Carrying amount £m
At 1 January 2018					878.0		(326.7)		551.3
Exchange differences					24.4		(12.9)		11.5
Acquisitions					16.8		-		16.8
At 1 January 2019					919.2		(339.6)		579.6
Exchange differences					(31.5)		7.8		(23.7)
Acquisitions					115.3		-		115.3
At 31 December 2019					1,003.0		(331.8)		671.2
	Goodwill balance 1 January 2019 £m	Additions 2019 £m	Exchange differences 2019 m	Impairment 2019 £m		Goodwill balance 31 December 2019 £m		Headroom on impairment analysis 2019 m		Headroom on impairment analysis 2018 £m
UK & Europe	184.3	-	(1.1)	-		183.2		799.2		593.6
Americas	278.9	115.3	(18.1)	-		376.1		420.3		159.4
AsPac	105.9	-	(4.2)	-		101.7		162.7		307.8
Middle East	10.5	-	(0.3)	-		10.2		63.3		57.9
	579.6	115.3	(23.7)	-		671.2		1,445.5		1,118.7

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

Included above is the detail of the headroom on the 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. The increase in headroom compared to 2018 is predominantly due to a reduction in discounts rates in 2019 and additionally from higher forecast cashflows partially offset by an increase in underlying assets.

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

	Discount rate 2019 %	Discount rate 2018 %	Terminal growth rates 2019 %	Terminal growth rates 2018 %
UK & Europe	9.4	10.0	1.7	2.0
Americas	10.4	10.6	2.2	2.4
AsPac	9.7	10.0	2.3	2.4
Middle East	11.9	11.8	1.8	2.5

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.

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 senior 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.

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.

Sensitivity analysis

Sensitivity analysis has been performed for each key assumption, a 1% movement in discount rates and a 1% movement in terminal growth rates are considered to be reasonably possible. No impairment results from these changes being made to the key assumptions either individually or in combination.

In the CGU with the lowest and most sensitive headroom, a reduction in short term growth rates of approximately 50% would be required to reduce the headroom to nil.

14. Lease obligations

Amounts payable under leases	Minimum lease payments 2019 £m	Minimum lease payments 2018 £m
Within one year	93.3	6.1
Between one and five years	226.5	8.6
After five years	69.7	0.9
	389.5	15.6
Less: future finance charges	(19.6)	(0.8)
Present value of lease obligations	369.9	14.8
Less: amount due for settlement within one year (shown within current liabilities)	(84.6)	(5.7)
Amount due for settlement after one year	285.3	9.1

On 1 January 2019, the Group implemented IFRS16 Leases, replacing IAS17 Leases. In applying the modified retrospective approach to transition, comparative financial information has not been restated. As a result, the amounts shown as being payable under leases in the table above as at 31 December 2018 represent amounts payable on leases that were classified as finance leases in accordance with IAS17.

The Directors estimate that the fair value of the Group's lease obligations approximates their carrying amount. The Group uses leases in the delivery of its contractual obligations and the services required to support the delivery of those contracts, including administrative functions. There are no material future cash flows relating to leases in place as at 31 December 2019 that are not reflected in the minimum lease payments disclosed above and the Group does not have any leases to which it is contracted but which are not yet reflected in the minimum lease payments.

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

15. 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 2019 £m	Opening adjustment - IFRS16** £m	Cash flow £m	Acquisitions* £m	Exchange differences £m	Non cash movements £m	At 31 December 2019 m
Loans payable	(239.5)	-	(72.3)	-	6.7	0.1	(305.0)
Lease obligations	(14.8)	(129.1)	70.2	-	4.7	(300.9)	(369.9)
Liabilities arising from financing activities	(254.3)	(129.1)	(2.1)	-	11.4	(300.8)	(674.9)
Cash and cash equivalents	62.5	-	28.4	0.4	(1.8)	-	89.5
Derivatives relating to Net Debt	3.8	-	-	-	(2.8)	-	1.0
Net Debt	(188.0)	(129.1)	26.3	0.4	6.8	(300.8)	(584.4)

** The opening Net Debt balance has been adjusted to include lease liabilities recognised on the adoption of IFRS16 Leases.

	At 1 January 2018 £m	Cash flow £m	Acquisitions* £m	Exchange differences £m	Non cash movements £m	At 31 December 2018 £m
Loans payable	(271.5)	33.3	-	(12.9)	11.6	(239.5)
Lease obligations	(20.2)	8.7	-	0.1	(3.4)	(14.8)
Liabilities arising from financing activities	(291.7)	42.0	-	(12.8)	8.2	(254.3)
Cash and cash equivalents	112.1	(50.4)	1.2	(0.4)	-	62.5
Loan receivables	25.7	(37.4)	-	-	11.7	-
Derivatives relating to Net Debt	12.8	-	-	(9.0)	-	3.8
Net Debt	(141.1)	(45.8)	1.2	(22.2)	19.9	(188.0)

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

16. Provisions

	Employee related £m	Property m	Contract £m	Other m	Total £m
At 1 January 2019	59.5	12.4	82.1	85.4	239.4
Opening adjustment - IFRS16 (note 2)	-	0.8	(13.3)	-	(12.5)
Charged to income statement - exceptional	0.4	-	-	-	0.4
Charged to income statement - other	18.2	2.1	10.6	12.9	43.8
Released to income statement - exceptional	(0.3)	-	-	(19.1)	(19.4)
Released to income statement - other	(1.1)	(1.9)	(9.6)	(4.8)	(17.4)
Utilised during the year	(12.4)	(1.1)	(53.6)	(4.0)	(71.1)
Unwinding of discount	-	1.1	0.2	-	1.3
Exchange differences	(2.2)	(0.1)	0.1	(0.5)	(2.7)
At 31 December 2019	62.1	13.3	16.5	69.9	161.8
Analysed as:
Current	8.7	6.7	15.9	27.1	58.4
Non-current	53.4	6.6	0.6	42.8	103.4
	62.1	13.3	16.5	69.9	161.8

Contract provisions relate to onerous contracts which will be utilised over the life of each individual contract. 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. The individual provisions are discounted where the impact is assessed to be significant. Discount rates used 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. In 2019, the release from OCPs is reflective of the Group's ability to forecast the final years of contracts which are nearing completion. Additional charges of £10.6m (2018: £3.4m) have been made in respect of future losses on new and existing onerous contract provisions to reflect the updated forecasts as settlements are agreed and contracts near completion. The additional charges represent certain operational issues and the associated risks which arise as a result.

A full analysis is performed at least annually of the future profitability of all contracts with marginal performances and of the balance sheet items directly linked to these contracts.

Due to the significant size of the balance and the inherent level of uncertainty over the amount and timing of the related cash flows upon which onerous contract provisions are based, if the expected operational performance varies from the best estimates made at the year end, a material change in estimate may be required. The key drivers behind operational performance is the level of activity required to be serviced, which is often directed by the actions of the UK Government, and the efficiency of Group employees and resources.

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

The majority of property provisions relate to leased properties and are associated with the requirement to return properties to either their original condition, or to enact specific improvement activities in advance of exiting the lease. Dilapidations associated with leased properties are held as a provision until such time as they fall due, with the longest running lease ending in April 2039.

Other provisions are held for indemnities given on disposed businesses, legal and other costs that the Group expects to incur over an extended period, in respect of past events. These costs are based on past experience of similar items and other known factors and represent management's best estimate of the likely outcome and will be utilised with reference to the specific facts and circumstances. The timing of utilisation is dependent on future events which could occur within the next twelve months or over a longer period with the majority expected to be settled by 31 March 2023. The exceptional release has been recorded in respect of a commercial dispute which was settled in 2019. T he treatment as exceptional is consistent with the recognition of the original charge associated with the same matter in 2014.

17. Contingent liabilities

The Company has guaranteed overdrafts, finance leases, and bonding facilities of its joint ventures and associates up to a maximum value of £4.3m (2018: £4.3m). The actual commitment outstanding at 31 December 2019 was £4.3m (2018: £4.3m).

The Company and its subsidiaries have 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 2019 was £257.5m (2018: £225.3m).

The Group has received a claim seeking damages for alleged losses following the reduction in Serco's share price in 2013. 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 is subject to a number of significant uncertainties and, therefore, it is not possible to reliably assess the quantum of any such litigation as at the date of this disclosure.

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

18. Defined benefit schemes

Characteristics

The Group contributes to defined benefit schemes for qualifying employees of its subsidiaries in the UK and Europe. The normal contributions expected to be paid during the financial year ending 31 December 2020 are £12.7m (2019: £4.9m).

Among our non-contract specific schemes, the largest is the Serco Pension and Life Assurance Scheme (SPLAS). The most recent full actuarial valuation of this scheme was undertaken as at 5 April 2018 and resulted in an actuarially assessed deficit of £26.0m for funding purposes. Pension obligations are valued separately for accounting and funding purposes and there is often a material difference between these valuations. As at 31 December 2019 the estimated actuarial deficit of SPLAS was £27.0m (2018: £27.8m) based on the actuarial assessment on the funding basis whereas the accounting valuation resulted in an asset of £78.3m (2018: £85.8m). 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. A revised schedule of contributions for SPLAS was agreed during 2019, with 30.8% of pensionable salaries due to be paid from 1 November 2019, changing to 30.3% from 1 November 2020. The schedule of contributions also determined that additional shortfall contributions were required - a total of £5.2m of these have already been made, with further amounts of £4m due in both March 2020 and March 2021 then £1.7m for the years 2022 to 2028.

Events in the year

In June 2019, the company and the Trustees of SPLAS finalised the 2018 valuation. This led to a new schedule of contributions. Following a 60-day consultation, most active SPLAS members agreed to a small increase in their own contributions, enabling a reduction in employer contributions.

Values recognised in total comprehensive income in the year

The amounts recognised in the financial statements for the year are analysed as follows:

Recognised in the income statement	Contract specific 2019 £m	Non contract specific 2019 £m	Total 2019 £m
Current service cost - employer	1.1	3.2	4.3
Past service cost	0.2	1.2	1.4
Administrative expenses and taxes	-	2.0	2.0
Recognised in arriving at operating profit after exceptionals	1.3	6.4	7.7
Interest income on scheme assets - employer	(0.4)	(37.5)	(37.9)
Interest on franchise adjustment	(0.1)	-	(0.1)
Interest cost on scheme liabilities - employer	0.5	35.4	35.9
Finance income	-	(2.1)	(2.1)
Included within the SOCI	Contract specific 2019 £m	Non contract specific 2019 £m	Total 2019 £m
Actual return on scheme assets	2.8	125.3	128.1
Less: interest income on scheme assets	(0.5)	(37.6)	(38.1)
	2.3	87.7	90.0
Effect of changes in demographic assumptions	(0.7)	40.6	39.9
Effect of changes in financial assumptions	(4.8)	(143.8)	(148.6)
Effect of experience adjustments	-	(1.6)	(1.6)
Remeasurements	(3.2)	(17.1)	(20.3)
Change in franchise adjustment	2.0	-	2.0
Change in members' share	1.1	0.1	1.2
Actuarial profit on reimbursable rights	3.1	0.1	3.2
Total pension gain recognised in the SOCI	(0.1)	(17.0)	(17.1)

Recognised in the income statement	Contract specific 2018 £m	Non contract specific 2018 £m	Total 2018 £m
Current service cost - employer	1.1	4.6	5.7
Past service cost	-	9.3	9.3
Administrative expenses and taxes	-	3.9	3.9
Recognised in arriving at operating profit	1.1	17.8	18.9
Interest income on scheme assets - employer	(0.4)	(33.3)	(33.7)
Interest on franchise adjustment	(0.1)	-	(0.1)
Interest cost on scheme liabilities - employer	0.4	32.6	33.0
Finance income	(0.1)	(0.7)	(0.8)

Included within the SOCI	Contract specific 2018 £m	Non contract specific 2018 (restated*) £m	Total 2018 (restated*) £m
Actual return on scheme assets	(0.5)	40.7	40.2
Less: interest income on scheme assets	(0.4)	(33.4)	(33.8)
	(0.9)	7.3	6.4
Effect of changes in demographic assumptions	-	(48.9)	(48.9)
Effect of changes in financial assumptions	1.7	74.0	75.7
Effect of experience adjustments	-	18.9	18.9
Remeasurements	0.8	51.3	52.1
Change in members' share	(0.3)	0.1	(0.2)
Actuarial losses on reimbursable rights	(0.3)	0.1	(0.2)
Total pension gain recognised in the SOCI	0.5	51.4	51.9

* For the year ended 31 December 2018 a reassessment of the causes of changes in the liability associated with the SPLAS scheme Identified that the previously disclosed effect of experience adjustments contained a component that related to a change in demographic assumptions. There is no impact on the closing liability associated with the SPLAS scheme and no Impact on the Group's gross or net pension assets or obligations.

Balance sheet values

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

Scheme assets at fair value	Contract specific 2019 £m	Non contract specific 2019 £m	Total 2019 £m
Equities	10.8	43.9	54.7
Bonds except LDIs	4.1	298.1	302.2
LDIs	-	447.4	447.4
Property	1.7	-	1.7
Cash and other	4.1	5.1	9.2
Annuity policies	-	614.0	614.0
Fair value of scheme assets	20.7	1,408.5	1,429.2
Present value of scheme liabilities	(31.1)	(1,353.4)	(1,384.5)
Net amount recognised	(10.4)	55.1	44.7
Franchise adjustment*	5.8	-	5.8
Members' share of deficit	3.8	-	3.8
Net retirement benefit asset	(0.8)	55.1	54.3
Net pension liability	(0.8)	(23.2)	(24.0)
Net pension asset	-	78.3	78.3
Net retirement benefit asset	(0.8)	55.1	54.3
Deferred tax liabilities	-	(9.2)	(9.2)
Net retirement benefit asset (after tax)	(0.8)	45.9	45.1

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

Scheme assets at fair value	Contract specific 2018 £m	Non contract specific 2018 £m	Total 2018 £m
Equities	9.7	39.9	49.6
Bonds except LDIs	3.8	93.4	97.2
LDIs	-	580.7	580.7
Property	1.2	-	1.2
Cash and other	2.9	8.7	11.6
Private debt mandates	-	11.4	11.4
Annuity policies	-	600.2	600.2
Fair value of scheme assets	17.6	1,334.3	1,351.9
Present value of scheme liabilities	(23.8)	(1,263.2)	(1,287.0)
Net amount recognised	(6.2)	71.1	64.9
Franchise adjustment*	3.7	-	3.7
Members' share of deficit	2.3	-	2.3
Net retirement benefit asset	(0.2)	71.1	70.9
Net pension liability	(0.2)	(14.7)	(14.9)
Net pension asset	-	85.8	85.8
Net retirement benefit asset	(0.2)	71.1	70.9
Deferred tax liabilities	-	(9.9)	(9.9)
Net retirement benefit asset (after tax)	(0.2)	61.2	61.0

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

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

As required by IAS19, the Group has considered the extent to which the pension plan assets should be classified in accordance with the fair value hierarchy of IFRS13. Virtually all equity and debt instruments have quoted prices in active markets. Annuity policies, private debt mandates and property assets can be classified as Level 3 instruments, and LDIs are classified as Level 2.

Actuarial assumptions: SPLAS

The assumptions set out below are for SPLAS, which reflects 91% of total liabilities and 94% 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 has updated its approach to setting RPI and CPI inflation assumptions in light of the RPI reform proposals published on the 4th September 2019 by the UK Chancellor and UK Statistics Authority.

The Group continued to set RPI inflation in line with the market break even expectations less an inflation risk premium. The inflation risk premium has been increased from 0.2% at 31 December 2018 to 0.4% at 31 December 2019, reflecting an allowance for additional market distortions caused by the RPI reform proposals. For CPI, the Group reduced the assumed difference between the RPI and CPI by 0.4% to an average of 0.6% per annum.

The estimated impact of the change in the methodology is an approximately £20m increase in the defined benefit obligation in respect of the SPLAS scheme.

The average duration of the benefit obligation at the end of the reporting period is 16.8 years (2018: 16.1 years).

Main assumptions	2019 %	2018 %
Rate of salary increases	2.70	2.80
Rate of increase in pensions in payment	2.20 (CPI) and 3.00 (RPI)	2.20 (CPI) and 3.00 (RPI)
Rate of increase in deferred pensions	2.30 (CPI) and 3.30 (RPI)	2.30 (CPI) and 3.30 (RPI)
Inflation assumption	2.20 (CPI) and 3.20 (RPI)	2.30 (CPI) and 3.30 (RPI)
Discount rate	2.10	2.90

Post retirement mortality	2019 years	2018 years
Current pensioners at 65 - male	21.6	22.6
Current pensioners at 65 - female	24.1	25.1
Future pensioners at 65 - male	23.8	24.4
Future pensioners at 65 - female	26.2	27.0

Sensitivity analysis is provided below, based on reasonably possible changes of the assumptions occurring at the end of the reporting period, assuming all other assumptions are held constant. The sensitivities have been derived in the same manner as the defined benefit obligation as at 31 December 2019 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 2019 is calculated on the actuarial assumptions agreed as at that date. The sensitivities are calculated by changing each assumption in turn following the methodology above with all other things held constant. The change in the defined benefit obligation from updating the single assumption represents the impact of that assumption on the calculation of the defined benefit obligation.

(Increase)/decrease in defined benefit obligation	2019 £m	2018 £m
Discount rate - 0.5% increase	(108.5)	(102.8)
Discount rate - 0.5% decrease	122.9	112.2
Inflation - 0.5% increase	88.9	66.9
Inflation - 0.5% decrease	(83.3)	(64.7)
Rate of salary increase - 0.5% increase	3.2	2.4
Rate of salary increase - 0.5% decrease	(3.1)	(2.3)
Mortality - one-year age rating	48.6	39.9

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

Assumptions in respect of the expected return on scheme assets are required when calculating the franchise adjustment for the contract-specific plans. These assumptions are based on market expectations of returns over the life of the related obligation. Due consideration has been given to current market conditions as at 31 December 2019 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% (2018: 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.

19. 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 2019 m	Current outstanding at 31 December 2019 m	Non current outstanding at 31 December 2019 m
Sale of goods and services
Joint ventures	1.3	0.1	-
Associates	8.4	0.5	-
Other
Dividends received - joint ventures	7.8	-	-
Dividends received - associates	17.6	-	-
Receivable from consortium for tax - joint ventures	4.4	4.8	-
Total	39.5	5.4	-

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.

	Transactions 2018 m	Current outstanding at 31 December 2018 m	Non current outstanding at 31 December 2018 m
Sale of goods and services
Joint ventures	0.4	0.1	-
Associates	7.3	0.6	-
Other
Dividends received - joint ventures	9.7	-	-
Dividends received - associates	20.0	-	-
Receivable from consortium for tax - joint ventures	4.8	5.3	-
Total	42.2	6.0	-

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 IAS24 Related Party Disclosures:

	2019 m	2018 £m
Short-term employee benefits	8.9	9.5
Share based payment expense	5.3	5.3
	14.2	14.8

The key management personnel comprise the Executive Directors, Non-Executive Directors and members of the Executive Committee (2019: 17 individuals, 2018: 17 individuals).

Aggregate directors' remuneration

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

	2019 m	2018 £m
Salaries, fees, bonuses and benefits in kind	3.9	4.0
Amounts receivable under long-term incentive schemes	3.0	3.1
Gains on exercise of share options	5.1	1.8
	12.0	8.9

None of the directors are members of the company's defined benefit pension scheme.

One director is a member of the money purchase scheme.

20. Notes to the consolidated cash flow statement

Year ended 31 December	2019 Before exceptional items £m	2019 Exceptional items £m	2019 Total m	2018 Before exceptional items £m	2018 Exceptional items £m	2018 Total £m
Operating profit for the year	125.9	(23.4)	102.5	112.4	(31.9)	80.5
Adjustments for:
Share of profits in joint ventures and associates	(27.5)	-	(27.5)	(28.8)	-	(28.8)
Share based payment expense	11.6	-	11.6	14.7	-	14.7
Impairment of property, plant and equipment	18.9	-	18.9	0.7	-	0.7
Impairment of intangible assets	-	-	-	0.1	-	0.1
Depreciation of property, plant and equipment	74.4	-	74.4	19.5	-	19.5
Amortisation of intangible assets	25.6	-	25.6	22.9	-	22.9
Exceptional loss on disposal of subsidiaries and operations	-	-	-	-	0.5	0.5
Reversal of impairment on loan balances	-	-	-	-	(13.9)	(13.9)
Profit on early termination of leases	(0.9)	-	(0.9)	-	-	-
(Profit)/loss on disposal of property, plant and equipment	(0.6)	-	(0.6)	0.5	-	0.5
Loss on disposal of intangible assets	0.4	-	0.4	1.5	-	1.5
Exceptional Interest in JV	-	-	-	-	0.3	0.3
Decrease in provisions	(43.1)	(20.5)	(63.6)	(68.1)	(13.8)	(81.9)
Other non cash movements	(1.2)	-	(1.2)	(0.2)	-	(0.2)
Total non cash items	57.6	(20.5)	37.1	(37.2)	(26.9)	(64.1)
Operating cash inflow/(outflow) before movements in working capital	183.5	(43.9)	139.6	75.2	(58.8)	16.4
Decrease/(increase) in inventories	4.4	-	4.4	(5.0)	-	(5.0)
(Increase)/decrease in receivables	(36.7)	-	(36.7)	(22.9)	0.4	(22.5)
Increase/(decrease) in payables	32.2	(5.3)	26.9	6.3	18.2	24.5
Movements in working capital	(0.1)	(5.3)	(5.4)	(21.6)	18.6	(3.0)
Cash generated by operations	183.4	(49.2)	134.2	53.6	(40.2)	13.4
Tax paid	(31.2)	-	(31.2)	(10.6)	-	(10.6)
Non cash R&D expenditure	(0.1)	-	(0.1)	(0.1)	-	(0.1)
Net cash inflow/(outflow) from operating activities	152.1	(49.2)	102.9	42.9	(40.2)	2.7

Additions to property, plant and equipment during the year amounting to £304.3m (2018: £3.6m) were financed by new leases.

21. Post balance sheet events

Subsequent to the year-end, the Board has recommended the payment of a final dividend in respect of the year ended 31 December 2019 of 1.0p. 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 financial statements.

Following the balance sheet date the UK formally left the European Union, which happened as expected following the result of the General Election in December 2019. The transition period is expected to end on 31 December 2020 and the current shape of the economic and political partnership between the UK and EU is not known. Notwithstanding this, as outlined in the Chief Executive's review on page 13 the Group's direct exposure to Brexit is small as Serco neither exports nor imports to any significant degree; our business in continental Europe is conducted through long-established local subsidiaries, and we employ relatively few continental European citizens in the UK.

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 2019

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 2019 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 2019 were approved by the board on 25 February 2020.

Our audit of those financial statements is complete and we signed our auditor's report on 25 February 2020. 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 judgment, 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 £5.0 million.

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 below. No additional work in relation to key audit matters has been undertaken for the purpose of this report.

The impact of uncertainties due to Britain exiting the European Union on our audit Assessment of riskvs.prior year: Unchanged
Therisk	Our response
Unprecedented levels of uncertainty All audits assess and challenge the reasonableness of estimates, in particular as described in Recoverability of group goodwill and of parent's investment in subsidiaries below, and related disclosures and the appropriateness of the going concern basis of preparation of the financial statements (see below). All of these depend on assessments of the future economic environment and the Group's future prospects and performance. In addition, we are required to consider the other information presented in the Annual Report including the principal risks disclosure and the viability statement and to consider the directors' statement that the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy. Brexit is one of the most significant economic events for the UK and its effects are subject to unprecedented levels of uncertainty of consequences, with the full range of possible effects unknown.	We developed a standardised firm-wide approach to the consideration of the uncertainties arising from Brexit in planning and performing our audits. Our procedures included: · Our Brexit knowledge: We considered the directors' assessment of Brexit-related sources of risk for the Group's business and financial resources compared with our own understanding of the risks. We considered the directors' plans to take action to mitigate the risks. · Sensitivity analysis: When addressing Recoverability of group goodwill and of parent's investment in subsidiaries and other areas that depend on forecasts, we compared the directors' sensitivity analysis to our assessment of the full range of reasonably possible scenarios resulting from Brexit uncertainty and, where forecast cash flows are required to be discounted, considered adjustments to discount rates for the level of remaining uncertainty. · Assessing transparency: As well as assessing individual disclosures as part of our procedures on Recoverability of group goodwill and of parent's investment in subsidiaries we considered all of the Brexit related disclosures together, including those in the strategic report, comparing the overall picture against our understanding of the risks. Our findings As reported under Recoverability of group goodwill and of parent's investment in subsidiaries, Valuation of acquired intangibles, we found the resulting estimates and related disclosures of the carrying value of goodwill and disclosures in relation to going concern to be balanced (2018: balanced). However, no audit should be expected to predict the unknowable factors or all possible future implications for a Group and this is particularly the case in relation to Brexit.

Revenue and margin recognition

Revenue £3,248.4m (2018: £2,836.8m), operating profit £102.5m (2018: £80.5m) and Onerous Contract Provisions £16.5m (2018: £82.1m)

Assessment of riskvs.prior year: Unchanged

Refer to note 2 Critical accounting judgements and key sources of estimation uncertainty and note 16 Provisions

Therisk

Our response

Accounting application

Revenue is the most material account in the financial statements and is considered to be a main driver of results, and as such had the greatest effect on our allocation of resources in planning and completing the audit.

In addition, the contractual arrangements that underpin themeasurementand recognitionofrevenuebytheGroup canbecomplex,withjudgementsinvolved in theassessmentofcurrentand estimation offuturefinancial performanceofthosecontracts.

Our key areas of focus have been:

· Interpretations of termsand conditionsinrelationtotherequired serviceobligationsinaccordancewithcontractual arrangements;

· The identification of performance obligations within contracts and the allocation of revenue and costs to performanceobligationswheremultipledeliverablesexist;

· Assessment of the stage ofcompletionby reference to the estimate of costtocomplete,wherethe input method ofaccounting isused to determine percentage completion;

· Consideration of theGroup'sperformanceagainstcontractual obligationsand theimpactonrevenue (including variable revenue)andcostsofdelivery; and

· The recognition and recoverability assessments of contract related assets, including thoserecognised asdirectincremental costsprior toservicecommencement, are reliant on the estimation of future profitability of the contract.

Subjective estimate

Where an onerous contract provision is required, judgement is required in assessing thelevel of provision,including estimatedcost to completetakingintoaccountcontractual obligationstotheend of thecontract,extensionperiodsand customernegotiations.

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

Our audit procedures included:

Contracts were selected forsubstantiveauditproceduresbasedon qualitativefactors,suchascommercial complexity,andquantitativefactors,suchasfinancial significanceand profitabilitythat weconsidered to beindicativeof risk. Ouraudittesting forthecontractsselected included thefollowing:

· Assessing application: We inspected customer contracts to assessthemethod ofrevenuerecognition to determine that it is in accordance with IFRS 15, 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 theGrouptounderstand thesupport and assess the positionprovided inrespect of keycontractjudgementsand onerouscontractprovisions.

· Tests of details: We inspected customer contracts for the sample which we selected for testing and where applicable, obtained evidence of correspondence with customers and third parties,ininstanceswherecontractual variationsand claimshavearisen,to informourassessment of therevenue (including variable revenue)andcosts recorded up to thebalancesheetdate.

· Test of details: We assessed a sample of unbilled revenue against documents such as post year end invoices or purchase orders, or customer agreements for the work performed

· Site visits and enquiry: We met with contract management and Business Unit management teams responsible for the contracts we selected for testing as well as attending a sample 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. We also visited a number of key contract locations to observe the contract operations and meet with contract delivery teams to further assess the operational performance. For onerousand potentiallyonerouscontractsidentified throughapplication of quantitative or qualitativeselectioncriteria,our proceduresalsoincluded:

· Benchmarking assumptions: We compared contract level forecast revenuesand costs to the Group's annual budgetsandlonger-term forecastsapproved bythedirectors. Wechallenged keyassumptionsmadebytheGroupinpreparing theseforecasts,including thoseinrelationtorevenuegrowthand costreductions, checking toexternal evidencewherepossibleand assessing against business plans.

Our sector experience: We assessed the contractual terms and conditions to identify the key obligations of the contract and compare these with common industry risk factors to inform our challenge of completeness of forecast costs and cost accruals recorded at the balance sheet date. For a specific contract we used our own major project specialists to assess the reasonableness of the contract projections.

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

• Test of details: for contracts assessed as potentially onerous, we compared the allocation of central costs to the group's policy and challenged the underlying assumptions using our understanding of the contract operations.

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

• Assessing application: We assessed whether these had been recognised in accordance with the Group's accounting policy and relevant accounting standards.

• Comparing valuations: We inspected actual and forecast contractual cash flows and profits to assess whether these supported the carrying value of the assets.

• Historical comparisons: We inspected the underlying contracts to inform our assessment of the forecast cash flows, and compared actual cash flows to forecasts to assess reasonableness.

• Independent reperformance: We compared the amortisation period with the duration of the contract and checked that the amortisation had been calculated correctly.

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

Our findings

We found no material errors in the group's application of its revenue accounting policy (2018: no material errors). We found the resulting estimate of onerous contract provision to be balanced (2018: balanced).

Recoverability of group goodwill andof parent's investmentin subsidiaries Group:£671.2m (2018: £579.6m)

Assessment of riskvs.prior year: reduced

Refer to note 13 Goodwill

The risk

Our response

Forecast-based valuation

Goodwill in theGroupand thecarrying amountof theparentCompany'sinvestmentsinsubsidiaries aresignificantand atriskof irrecoverabilitydueto uncertaintyregarding forecast contract extensions andnewcontractwins.

The estimated recoverable amount of thesebalances through value in usecalculations is subjective due to theinherentuncertaintyinvolved inforecastingand discounting futurecashflows. We considered the risk of recoverability of the goodwill to have reduced due to the re-organisation of cash generating units (CGUs) in the last year and consequently the higher levels of headroom of the value in use of the business compared to the carrying amounts.

The CGUs which were mostsensitiveto adeteriorationin thedivision's cash flow projectionsor anincreaseindiscountrate were the AsPac CGU and Middle East CGU. As at year end 31 December 2019, the AsPac CGU has headroom of £169m and Middle East has headroom of £77m.

The effect of these matters is that, as part of our risk assessment, we determined that the value in use of goodwill and value in use of investments in subsidiaries have a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (note 13) disclose the sensitivity for goodwill estimated by the Group.

Our procedures included:

· Benchmarking assumptions: With the assistance of our valuation specialists, wechallenged thegrowth rateand discountrateforeachCGUused in thevaluein usecalculationbycomparing certain of thekey inputs to these assumptionstoexternaldata (such as bond yields and gearing). Wechallenged forecast assumptionsaround newcontractwins or extensions,contractattrition as well ascostreductions on existing contracts.

· Historical comparisons: We compared current year actual cash flows to historic forecasts to assess the historical accuracy of the forecasts in the impairment model and we have also compared forecast cash flows against budgets.

· Sensitivity analysis: We tested the sensitivity of impairment calculations to changes in key underlying assumptions, which were discount rate and terminal growth rate for all CGUs. For CGUs that had the lowest headroom, which were: AsPac and Middle East, we challenged the projected win probabilities (including contract extensions) on key contracts within the pipeline and sensitised the five year cash flow forecasts by reducing new wins and extensions within the pipeline.

· Comparing valuations: We considered whether theforecastcashflowassumptionsused in thevaluein usecalculation wereconsistentwiththeassumptionsusedto calculatetheexpected loss ononerouscontractprovisions,therecognitionof deferred tax assetsandtheDirectors'assessmentof going concernand viability.

· Assessing transparency: We also assessed whether theGroup'sdisclosuresaboutthesensitivityofoutcomesreflected therisksinherentin thevaluationofgoodwill.

Our findings:

We found the Group's assessment that there is no impairment of the carrying amount of the Group's goodwill and of parent's investment in subsidiaries to be balanced (2018: balanced), and the related sensitivity disclosures to be proportionate (2018: proportionate).

Classification of Exceptional Items £23.4m (2018: £ 31.9m)

Assessment of riskvs.prior year: unchanged

Refer to note 2 Critical accounting judgements and key sources of estimation uncertainty and note 7 Exceptional items

The risk

Our response

Presentation appropriateness

Significant judgement is involved in determining the classification of costs and income as exceptional items in the financial statements. We consider this area to be particularly susceptible to the generic risk of management bias.

Our procedures included:

· Assessing principle : We assessed the Group's accounting policies and principles for recognised elements of costs and income as exceptional.

· Assessing application : We assessed the classification of items selected by the Group as exceptional against the Group policy. We inspected accounting papers prepared by the Group to understand the key factors considered and judgements made. We also evaluated whether other material items should be classified as exceptional items in line with the Group's policy.

· Consistency of Application : We compared the classification of exceptional items where these relate to, or bear similar characteristics to, historical items to check that these are treated in a consistent manner.

· Assessing transparency : We also assessed whether the Group's disclosures regarding the classification of exceptional items appropriately reflects the judgements made.

Our findings:

In determining the presentation of profit or loss items as exceptional under the Group's accounting policy, there is room for judgement. We found that the Group's judgement was balanced (2018: balanced).

Valuation of acquired intangibles (£52.6 million)

A new key audit matter identified in 2019. Refer to note 5 Acquisitions

The risk

Our response

Forecast-based valuation

The Group has recognised significant customer relationship intangible assets as part of the NSBU acquisition. There is inherent uncertainty involved in forecasting the cash flows of the acquired businesses and discounting them to the present day, which determines the fair value of the intangibles at the acquisition date.

The effect of these matters is that, as part of our risk assessment, we determined that the fair value of the acquired intangibles 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.

Our procedures included:

· Test of details: For the businesses acquired in the year (NSBU's US and Canadian businesses), we compared the forecast revenue and profit margins, used as the basis for the calculation of the fair value of the acquired intangibles at the acquisition date, with the forecasts included in the due diligence reports obtained prior to the acquisition, current year performance of the business and current forecasts.

· Our sector experience: We compared the identified intangible assets with our expectation of the categories of assets we would expect based on similar acquisitions in the industry.

· Assessing valuer's credentials: We assessed the competence and objectivity of the external experts who prepared the due diligence reports used to support the valuation methodology and assumptions used within the forecasts.

· Our valuation expertise: We used our internal specialists to assess the reasonableness of valuation methodologies used and to benchmark key assumptions used in setting the discount rate to market data. We also compared the discount rate set by the Group with our own expectations of an appropriate discount rate.

· Sensitivity analysis: We calculated the impact of increasing and decreasing certain key assumptions on the valuation of the acquired intangible assets.

Our findings:

As a result of our work we found the valuation of the acquired intangible assets to be balanced.

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, London E14 5GL

25 February 2020

Forward looking statements:

This announcement contains statements which are, or may be deemed to be, "forward-looking statements" which are prospective in nature. All statements other than statements of historical fact are forward-looking statements. Generally, words such as "expect", "anticipate", "may", "could", "should", "will", "aspire", "aim", "plan", "target", "goal", "ambition", "intend" and similar expressions identify forward-looking statements. By their nature, these forward-looking statements are subject to a number of known and unknown risks, uncertainties and contingencies, and actual results and events could differ materially from those currently being anticipated as reflected in such statements. Factors which may cause future outcomes to differ from those foreseen or implied in forward-looking statements include, but are not limited to: general economic conditions and business conditions in Serco's markets; contracts awarded to Serco; customers' acceptance of Serco's products and services; operational problems; the actions of competitors, trading partners, creditors, rating agencies and others; the success or otherwise of partnering; changes in laws and governmental regulations; regulatory or legal actions, including the types of enforcement action pursued and the nature of remedies sought or imposed; the receipt of relevant third party and/or regulatory approvals; exchange rate fluctuations; the development and use of new technology; changes in public expectations and other changes to business conditions; wars and acts of terrorism; and cyber-attacks. Many of these factors are beyond Serco's control or influence. These forward-looking statements speak only as of the date of this announcement and have not been audited or otherwise independently verified. Past performance should not be taken as an indication or guarantee of future results and no representation or warranty, express or implied, is made regarding future performance. Except as required by any applicable law or regulation, Serco expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward looking statements contained in this announcement to reflect any change in Serco's expectations or any change in events, conditions or circumstances on which any such statement is based after the date of this announcement, or to keep current any other information contained in this announcement. Accordingly, undue reliance should not be placed on the forward-looking statements.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

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